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on Central Banking |
| By: | Roman Horváth; Dan Vaško |
| Abstract: | We develop a comprehensive index of the transparency of central banks regarding their policy framework to promote financial stability for 110 countries from 2000 to 2011 and examine the determinants and effects of this transparency. We find that the degree of transparency increased in the 2000s, though it still varied greatly across the countries in our study. Our regression results suggest that more developed countries exhibit greater transparency, that episodes of high financial stress have a negative effect on transparency and that the legal origin matters, too. Importantly, we find that transparency regarding the level of financial stability is strongly affected by monetary policy transparency. The central banks that have a transparent monetary policy are more likely to show increased transparency in their framework for financial stability. Our results also suggest a non-linear effect of central bank financial stability transparency on financial stress. Unless the financial sector experiences severe distress, greater transparency is beneficial for financial stability. |
| Keywords: | financial stability, transparency, central banks |
| JEL: | E52 E58 |
| Date: | 2013–03 |
| URL: | http://d.repec.org/n?u=RePEc:wsr:wpaper:y:2013:i:113&r=cba |
| By: | Tsvetomira Tsenova |
| Abstract: | This paper compares the effectiveness, efficiency and robustness of standard and non-standard monetary policy tools, such as the banks’ refinancing interest rate, penalty interest rate on deposit facility holdings and minimum reserve requirements on attracted deposits. The assessment is performed on the basis of a numerically evaluated open economy general equilibrium model for macro-prudential analysis where optimal decisions by internationally linked banks are key determinants of international financial flows and wider economic outcomes. Banks differ in terms of balance sheet endowments and risk preferences, and take decisions rationally and competitively. Default risk, borrowing and lending are endogenous results of individual decisions of private agents (banks and households), as well as systemic outcomes of market interaction. |
| Keywords: | Banking, Monetary Policy, Non-standard Instruments, Macro-Prudential Policies, Financial Stability, Contingency Planning |
| JEL: | C68 D58 E44 E51 E52 E58 G21 |
| Date: | 2013–03 |
| URL: | http://d.repec.org/n?u=RePEc:wsr:wpaper:y:2013:i:110&r=cba |
| By: | Xisong Jin; Francisco Nadal De Simone |
| Abstract: | This study proposes a novel framework which combines marginal probabilities of default estimated from a structural credit risk model with the consistent information multivariate density optimization (CIMDO) methodology of Segoviano, and the generalized dynamic factor model (GDFM) supplemented by a dynamic t-copula. The framework models banks? default dependence explicitly and captures the time-varying non-linearities and feedback effects typical of financial markets. It measures banking systemic credit risk in three forms: (1) credit risk common to all banks; (2) credit risk in the banking system conditional on distress on a specific bank or combinations of banks and; (3) the buildup of banking system vulnerabilities over time which may unravel disorderly. In addition, the estimates of the common components of the banking sector short-term and conditional forward default measures contain early warning features, and the identification of their drivers is useful for macroprudential policy. Finally, the framework produces robust outof-sample forecasts of the banking systemic credit risk measures. This paper advances the agenda of making macroprudential policy operational. |
| Keywords: | financial stability; procyclicality, macroprudential policy; credit risk; early warning indicators; default probability, non-linearities, generalized dynamic factor model; dynamic copulas; GARCH |
| JEL: | C30 E44 G1 |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:bcl:bclwop:bclwp082&r=cba |
| By: | d'Albis, Hippolyte; Augeraud-Véron, Emmanuelle; Hupkes, Hermen Jan |
| Abstract: | This paper analyses the dynamic consequences of interest rate feedback rules in a flexible-price model where money enters the utility function. Two alternative rules are considered based on past or predicted inflation rates. The main feature is to consider inflation rates that are selected over a bounded time horizon. We prove that if the Central Bank’s forecast horizon is not too long, an active and forward-looking monetary policy is not destabilizing: the equilibrium trajectory is unique and monotonic. This is an advantage with respect to active and backward-looking policies that are shown to lead to a unique but fluctuating dynamic. |
| Keywords: | Interest Rate Rules, Indeterminacy, Functionnal Equations |
| JEL: | E31 E43 E52 |
| Date: | 2013–03–07 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:45424&r=cba |
| By: | Oganesyan, Gayane |
| Abstract: | This paper analyzes whether the Lender of Last Resort function has changed in consequence of the recent Global Financial Crisis. The unprecedented emergency actions of the Federal Reserve, European Central Bank and the Bank of England are analyzed in terms of Walter Bagehot's traditional Lender of Last Resort doctrine. The central banks' actions are compared to identify the extensions and paint a general picture of the modern and much more comprehensive Lender of Last Resort function, which includes provision of liquidity and collateral, lowering interest rates and expansionary monetary policy, loosening collateral standards, supporting critical institutions, opening special liquidity facilities that target specific markets or groups of agents, and becoming market maker of last resort and buyer of last resort. The Lender of Last Resort function has been found to have changed. -- |
| Keywords: | Lender of Last Resort,Walter Bagehot's Lombard Street,penalty rate,secure collateral,solvency and illiquidity,monetary policy,Federal Reserve Bank,European Central Bank,Bank of England,Market Maker of Last Resort,quantitative easing,Buyer of Last Resort |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:ipewps:192013&r=cba |
| By: | Bénassy-quéré, A.; Roussellet, A. |
| Abstract: | We provide a first attempt to include o?-balance sheet, implicit insurance to SIFIs into a consistent assessment of fiscal sustainability, for 27 countries of the European Union. We first calculate tax gaps a la Blanchard (1990) and Blanchard et al. (1990). We then introduce two alternative measures of implicit o?-balance sheet liabilities related to the risk of a systemic bank crisis. The first one relies on microeconomic data at the bank level. The second one is based on econometric estimations of the probability and the cost of a systemic banking crisis. The former approach provides an upper evaluation of the fiscal cost of systemic banking crises, whereas the latter one provides a lower one. Hence we believe that the combined use of these two methodologies helps to gauge the range of fiscal risk. |
| Keywords: | Fiscal sustainability, tax gap, systemic banking risk, off-balance sheet liabilities. |
| JEL: | H21 H23 J41 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:428&r=cba |
| By: | Darne, O.; Levy-Rueff, O.; Pop, A. |
| Abstract: | We propose a rigorous and flexible methodological framework to select and calibrate initial shocks to be used in bank stress test scenarios based on statistical techniques for detecting outliers in time series of risk factors. Our approach allows us to characterize not only the magnitude, but also the persistence of the initial shock. The stress testing exercises regularly conducted by supervisors distinguish between two types of shocks, transitory and permanent. One of the main advantages of our framework, particularly relevant as regards the calibration of transitory shocks, is that it allows considering various reverting patterns for the stressed variables and informs the choice of the appropriate stress horizon. We illustrate the proposed methodology by implementing outlier detection algorithms to several time series of (macro)economic and financial variables typically used in bank stress testing. |
| Keywords: | Stress testing; Stress scenarios; Financial crises; Macroprudential regulation. |
| JEL: | G28 G32 G20 C15 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:426&r=cba |
| By: | P. Manasse; R. Savona; M. Vezzoli |
| Abstract: | This paper employs a recent statistical algorithm (CRAGGING) in order to build an early warning model for banking crises in emerging markets. We perturb our data set many times and create “artificial” samples from which we estimated our model, so that, by construction, it is flexible enough to be applied to new data for out-of-sample prediction. We find that, out of a large number (540) of candidate explanatory variables, from macroeconomic to balance sheet indicators of the countries’ financial sector, we can accurately predict banking crises by just a handful of variables. Using data over the period from 1980 to 2010, the model identifies two basic types of banking crises in emerging markets: a “Latin American type”, resulting from the combination of a (past) credit boom, a flight from domestic assets, and high levels of interest rates on deposits; and an “Asian type”, which is characterized by an investment boom financed by banks’ foreign debt. We compare our model to other models obtained using more traditional techniques, a Stepwise Logit, a Classification Tree, and an “Average” model, and we find that our model strongly dominates the others in terms of out-of-sample predictive power. |
| JEL: | E44 G01 G21 |
| Date: | 2013–03 |
| URL: | http://d.repec.org/n?u=RePEc:bol:bodewp:wp872&r=cba |
| By: | Moore, Kyle; Zhou, Chen |
| Abstract: | This paper empirically analyzes the determinants of banks' systemic importance. In constructing a measure on the systemic importance of financial institutions we find that size is a leading determinant. This confirms the usual "Too big to fail'' argument. Nevertheless, banks with size above a sufficiently high level have equal systemic importance. In addition to size, we find that the extent to which banks engage in non-traditional banking activities is also positively related to banks' systemic importance. Therefore, in addition to ``Too big to fail", systemically important financial institutions can also be identified by a "Too non-traditional to fail" principle. |
| Keywords: | Too-big-to-fail, systemic importance, systemic risk, non-traditional banking, extreme value theory |
| JEL: | G01 G2 G28 |
| Date: | 2013–02–23 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:45589&r=cba |
| By: | Michiel Bijlsma; Gijsbert T. J. Zwart |
| Abstract: | We compare the structure of the financial sectors of the EU27, Japan and the United States, looking at a set of 23 indicators. We find a large variation within the European Union in the structure of the financial sector. Using principal components analysis, we identify robust groups of EU countries. One group consists of the eastern European members that entered the EU more recently.These have substantially smaller financial sectors than the old member states. A second group can be classified as market-based (MBEU) and the third group is more bank-based (BBEU). We compare US, MBEU, BBEU, Eastern EU and Japan with the following main results. First, the groups within Europe are geographically related. Second, in many indicators, MBEU countries are closer to the (market-based) US, while BBEU countries more closely resemble Japan. Paradoxically, however, market-based EU countries also have large banking sectors. Banks in market-based countries have larger cross-border assets and liabilities, and derive a larger fraction of their income from fees, rather than interest income, than banks in bank-based countries. Finally, for most indicators, the ordering of groups of countries is quite stable over time, but while the crisis has had no impact on the relative ordering of the groups, it has slightly widened the gap between the US and all EU regions insome respects. We also find that during the crisis, substitution between market-based and bank-based sources of finance occurred in the US, and to a lesser extent in MBEU and BBEU countries. |
| Date: | 2013–03 |
| URL: | http://d.repec.org/n?u=RePEc:bre:wpaper:774&r=cba |