nep-cba New Economics Papers
on Central Banking
Issue of 2013‒05‒05
nine papers chosen by
Maria Semenova
Higher School of Economics

  1. Central Banking in Making during the Post-crisis World and the Policy-Mix of the Central Bank of the Republic of Turkey By Akcelik, Yasin; Aysan, Ahmet Faruk; Oduncu, Arif
  2. The Effects of Additional Monetary Tightening on Exchange Rates By Ermişoğlu, Ergun; Akçelik, Yasin; Oduncu, Arif; Taşkın, Temel
  3. Looking ahead to Basel 3: Italian banks on the move By Francesco Cannata; Marco Bevilacqua; Simone Enrico Casellina; Luca Serafini; Gianluca Trevisan
  4. Structural bank regulation initiatives: approaches and implications By Leonardo Gambacorta; Adrian Van Rixtel
  5. Basel 2.5: potential benefits and unintended consequences By Giovanni Pepe
  6. Should Central Bank respond to the Changes in the Loan to Collateral Value Ratio and in the House Prices? By Tatiana Damjanovic; Sarunas Girdenas
  7. Monetary policy delegation and equilibrium coordination By Andrew P. Blake; Tatiana Kirsanova; Tony Yates
  8. Macroeconomic Determinants of the Credit Risk in the Banking System: The Case of the GIPSI By Vítor Castro
  9. What causes banking crises? An empirical investigation for the world economy By Le, Vo Phuong Mai; Meenagh, David; Minford, Patrick; Ou, Zhirong

  1. By: Akcelik, Yasin; Aysan, Ahmet Faruk; Oduncu, Arif
    Abstract: After the global crisis, one of the most important lessons learned for the Central Banks has appeared to be the vital importance of financial stability along with the price stability. Hence, finding solutions to how to incorporate the financial stability objective in the implementation of the monetary policy without diluting the price-stability objective has started to be heavily discussed by the academics and policy makers. Accordingly, it has started to be debated that using only short-term interest rates as the main policy tool may not be enough to maintain the price stability and the financial stability at the same time. Interest rates that provide price stability and financial stability can be different and this necessitates the central banks to use multiple policy tools. In view of this, the Central Bank of the Republic of Turkey adopted a new monetary policy framework called the new policy mix in which multiple tools are employed to achieve multiple objectives. In this framework, required reserves ratios, weekly repo rates, interest rate corridor, funding strategy and other macro prudential tools are jointly used as complementary tools for the credit, interest rate and liquidity policies to achieve the price and the financial stability objectives concurrently. This new monetary policy adopted in Turkey also provides an interesting case study to assess how a country came up with novel policies to account for its country specific characteristics.
    Keywords: Central banking, Policy-mix, Global financial crisis, Financial Stability
    JEL: E44 E52 E58
    Date: 2013–04
  2. By: Ermişoğlu, Ergun; Akçelik, Yasin; Oduncu, Arif; Taşkın, Temel
    Abstract: Since the global financial crisis, Central Banks have used various policy tools to sustain financial stability besides price stability. Additional Monetary Tightening is one of these tools that the Central Bank of the Republic of Turkey used in 2011-2012. The effects of this tool on the exchange rate are the main theme of this paper. Our analysis indicates that additional monetary tightening has a significant role in reducing volatility in the exchange rate. It is also shown that during the days of additional tightening Turkish Lira appreciated against the emerging market currencies.
    Keywords: Additional Monetary Tightening, Turkish Lira, Exchange Rates, Central Bank of the Republic of Turkey’s New Policy Mix, GARCH
    JEL: C12 C58 E52 E58
    Date: 2013–02
  3. By: Francesco Cannata (Bank of Italy); Marco Bevilacqua (Bank of Italy); Simone Enrico Casellina (Bank of Italy); Luca Serafini (Bank of Italy); Gianluca Trevisan (Bank of Italy)
    Abstract: In December 2010 the Basel Committee on Banking Supervision published a set of new regulations for banks in response to the financial crisis. This paper aims at evaluating the possible effects of the new framework on banks’ available regulatory capital and risk-weighted assets and assessing their positioning with respect to future leverage and liquidity constraints. The evidence, based on the data collected from a representative sample of 13 Italian banking groups updated to 30 June 2012, show that capital and liquidity positions relatively to the Basel 3 targets have improved considerably over the last two years. Furthermore, compared to banks in other jurisdictions, Italian intermediaries are likely to be less affected by the reform, due to a business model more focused on credit intermediation. Importantly, the estimates cannot be interpreted as a forecast of capital and liquidity needs as they do not incorporate any assumption about future balance-sheet items or banks’ reactions to the changing regulatory and economic environment.
    Keywords: Basel 3, QIS, impact assessment, bank, capital, liquidity
    JEL: G21 G28
    Date: 2013–04
  4. By: Leonardo Gambacorta; Adrian Van Rixtel
    Abstract: The paper examines the basic rationale and features of the proposals adopted to separate specific investment and commercial banking activities (Volcker rule, Vickers and Liikanen proposals). In particular, it focuses on the likely implications of such initiatives for: (i) financial stability and systemic risk; (ii) banks' business models; and (iii) the international activities of global banks.
    Keywords: regulation, bank business models, systemic risk, economies of scale, economies of scope, too big to fail
    Date: 2013–04
  5. By: Giovanni Pepe (Bank of Italy)
    Abstract: Since 1996 the Basel risk-weighting regime has been based on the distinction between the trading and the banking book. For a long time credit items have been weighted less strictly if held in the trading book, on the assumption that they are easy to hedge or sell. The Great Financial Crisis made evident that banks declared a trading intent on positions that proved difficult or impossible to sell quickly. The Basel 2.5 package was developed in 2009 to better align trading and banking books’ capital treatments. Working on a number of hypothetical portfolios I show that the new rules fell short of reaching their target and instead merely reversed the incentives. A model bank can now achieve a material capital saving by allocating its credit securities to the banking book, irrespective of its real intention or capability of holding them until maturity. The advantage of doing so is particularly pronounced when the incremental investment increases the concentration profile of the trading book, as usually happens for exposures towards banks’ home government. Moreover, in these cases trading book requirements are exposed to powerful cliff-edge effects triggered by rating changes.
    Keywords: Basel 2.5, trading book, market risk, risk-weighted-assets, capital arbitrage
    JEL: G18 G21 G28
    Date: 2013–04
  6. By: Tatiana Damjanovic (Department of Economics, University of Exeter); Sarunas Girdenas (Department of Economics, University of Exeter)
    Abstract: We study optimal policy in a New Keynesian model at zero bound interest rate where households use cash alongside with house equity borrowing to conduct transactions. The amount of borrowing is limited by a collateral constraint. When either the loan to value ratio declines or house prices fall we observe decrease in the money multiplier. We argue that the central bank should respond to the fall in the money multiplier and therefore to the reduction in house prices or in the loan to collateral value ratio. We also find that optimal monetary policy generates large and more persistent fall in the money multiplier in response to drop in the loan to collateral value ratio.
    Keywords: optimal monetary policy, money supply, money multiplier, loan to value ratio, collateral constraint, house prices, zero bound interest rate.
    JEL: E44 E51 E52 E58
    Date: 2013
  7. By: Andrew P. Blake; Tatiana Kirsanova; Tony Yates
    Abstract: This paper revisits the argument that the stabilisation bias that arises under discretionary monetary policy can be reduced if policy is delegated to a policymaker with redesigned objectives. We study four delegation schemes: price level targeting, interest rate smoothing, speed limits and straight conservatism. These can all increase social welfare in models with a unique discretionary equilibrium. We investigate how these schemes perform in a model with capital accumulation where uniqueness does not necessarily apply. We discuss how multiplicity arises and demonstrate that no delegation scheme is able to eliminate all potential bad equilibria. Price level targeting has two interesting features. It can create a new equilibrium that is welfare dominated, but it can also alter equilibrium stability properties and make coordination on the best equilibrium more likely.
    Keywords: Time Consistency, Discretion, Multiple Equilibria, Policy Delegation
    JEL: E31 E52 E58 E61 C61
    Date: 2013–04
  8. By: Vítor Castro (University of Coimbra, GEMF and NIPE, Portugal)
    Abstract: In this paper, we analyse the link between the macroeconomic developments and the banking credit risk in a particular group of countries – Greece, Ireland, Portugal, Spain and Italy (GIPSI) – recently affected by unfavourable economic and financial conditions. Employing dynamic panel data approaches to these five countries over the period 1997q1-2011q3, we conclude that the banking credit risk is significantly affected by the macroeconomic environment: the credit risk increases when GDP growth and the share and housing price indices decrease and rises when the unemployment rate, interest rate, and credit growth increase; it is also positively affected by an appreciation of the real exchange rate; moreover, we observe a substantial increase in the credit risk during the recent financial crisis period. Several robustness tests with different estimators have also confirmed these results. The findings of this paper indicate that all policy measures that can be implemented to promote growth, employment, productivity and competitiveness and to reduce external and public debt in these countries are fundamental to stabilize their economies.
    Keywords: Credit risk; Macroeconomic factors; Banking system; GIPSI; Panel data.
    JEL: C23 G21 F41
    Date: 2013–03
  9. By: Le, Vo Phuong Mai (Cardiff Business School); Meenagh, David (Cardiff Business School); Minford, Patrick (Cardiff Business School); Ou, Zhirong (Cardiff Business School)
    Abstract: We add the Bernanke-Gertler-Gilchrist model to a world model consisting of the US, the Eurozone and the Rest of the World in order to explore the causes of the banking crisis. We test the model against linear-detrended data and reestimate it by indirect inference; the resulting model passes the Wald test only on outputs in the two countries. We then extract the model's implied residuals on unfiltered data to replicate how the model predicts the crisis. Banking shocks worsen the crisis but 'traditional' shocks explain the bulk of the crisis; the non-stationarity of the productivity shocks plays a key role. Crises occur when there is a 'run' of bad shocks; based on this sample Great Recessions occur on average once every quarter century. Financial shocks on their own, even when extreme, do not cause crises - provided the government acts swiftly to counteract such a shock as happened in this sample.
    Date: 2013–03

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