nep-cba New Economics Papers
on Central Banking
Issue of 2014‒10‒13
fifteen papers chosen by
Maria Semenova
Higher School of Economics

  1. Ex Ante Capital Position, Changes in the Different Components of Regulatory Capital and Bank Risk By B. Camara; L. Lepetit; A. Tarazi
  2. Monetary Policy as a Carry Trade By Marvin Goodfriend
  3. Liquidity Traps and Monetary Policy: Managing a Credit Crunch By Buera, Francisco J.; Nicolini, Juan Pablo
  4. The Exchange Rate as an Instrument at Zero Interest Rates: The Case of the Czech Republic By Michal Franta; Tomas Holub; Petr Kral; Ivana Kubicova; Katerina Smidkova; Borek Vasicek
  5. Developing an underlying inflation gauge for China By Marlene Amstad; Ye Huan; Guonan Ma
  6. Optimal Monetary Policy Rules under Imperfect Commitment: Reconciling Theory with Evidence By KARA Hakan
  7. From Policy Rate to Bank Lending Rates: The Chilean Banking Industry By BERSTEIN Solange; FUENTES Rodrigo
  8. Fear of Floating and Exchange Rate Pass-Through to Inflation in Egypt By Hoda SELIM
  9. Banking regulation and supervision in the next 10 years and their unintended consequences By D. Nouy
  10. Real options and bank bailouts: How uncertainty affects optimal bank bailout policy By VERMEULEN, Glen; KORT, Peter
  11. Inflation Targeting in Brazil: Constructing Credibility under Exchange Rate Volatility By MINELLA André; DE FREITAS Paulo Springer; GOLDFAJN Ilan; KFOURY MUINHOS Marcelo
  12. Monetary Authorities and Exchange Rate Volatility: Turkey and other Cases By Harald SCHMIDBAUER; Ece DEMIREL
  13. What Matters Most in the Design of Stress Tests? Evidence from U.S. and the Europe By Bertrand Candelon; Amadou N. R. Sy
  14. Measuring Systemic Risk in a Post-Crisis World By O. de Bandt; J.-C. Héam; C. Labonne; S. Tavolaro
  15. Estimating the risk of joint defaults: an application to central bank collateralized lending operations By Dariusz Gatarek; Juliusz Jabłecki

  1. By: B. Camara; L. Lepetit; A. Tarazi
    Abstract: We investigate the impact of changes in capital of European banks on their risk-taking behavior from 1992 to 2006, a time period covering the Basel I capital requirements. We specifically focus on the initial level and type of regulatory capital banks hold. First, we assume that risk changes depend on banks' ex ante regulatory capital position. Second, we consider the impact of an increase in each component of regulatory capital on banks? risk changes. We find that, for highly capitalized, adequately capitalized and strongly undercapitalized banks, an increase in equity or in subordinated debt positively affects risk. Moderately undercapitalized banks tend to invest in less risky assets when their equity ratio increases but not when they improve their capital position by extending hybrid capital or subordinated debt. On the whole, our conclusions support the need to implement more explicit thresholds to classify European banks according to their capital ratios but also to clearly distinguish pure equity from hybrid and subordinated instruments.
    Keywords: Bank Risk, Bank Capital, Capital regulation, European banks.
    JEL: G21 G28
    Date: 2013
  2. By: Marvin Goodfriend (Friends of Allan Meltzer Professor of Economics, Tepper School of Business, Carnegie Mellon University (E-mail: marvingd@
    Abstract: Quantitative monetary policy at the zero interest bound should be understood as a gbond market carry trade.h Net interest earnings on the front end of the monetary carry trade should be retained-to guard against the central bank having to create reserves (or borrow) to pay interest on reserves or managed liabilities on the back end, and to show that interest expenses are paid for in large part by earnings from the front end. In the United States, the Federal Reserve balance sheet reflects the front end of a carry trade in that by the end of 2014, about $3 trillion of reserves paying 0.25% will finance (carry) a like quantity of security holdings averaging 10 years or more in maturity earning 2.5%. The Fed has long asserted independent authority to retain net interest income thought necessary as surplus capital against prospective exposures on its balance sheet. The Fed recognizes that the retention of net interest earnings to build up surplus capital incurs no resource cost for the Treasury or taxpayers. Yet, the Fed has chosen not to build up surplus capital against the carry trade exposure and risk on its balance sheet, jeopardizing the operational credibility of monetary policy for price stability.
    Keywords: bond market carry trade, Federal Reserve surplus capital, Federal Reserve Treasury remittances, inflation objective, interest on reserves, monetary policy at the zero interest bound, term premium
    JEL: E31 E43 E52 E58 E63
    Date: 2014–09
  3. By: Buera, Francisco J. (Federal Reserve Bank of Chicago); Nicolini, Juan Pablo (Federal Reserve Bank of Minneapolis)
    Abstract: We study a model with heterogeneous producers that face collateral and cash-in-advance constraints. These two frictions give rise to a nontrivial financial market in a monetary economy. A tightening of the collateral constraint results in a recession generated by a credit crunch. The model can be used to study the effects on the main macroeconomic variables, and on the welfare of each individual of alternative monetary and fiscal policies following the credit crunch. The model reproduces several features of the recent financial crisis, such as the persistent negative real interest rates, the prolonged period at the zero bound for the nominal interest rate, and the collapse in investment and low inflation in spite of the very large increases in liquidity adopted by the government. The policy implications are in sharp contrast to the prevalent view in most central banks, which is based on the New Keynesian explanation of the liquidity trap.
    Keywords: Liquidity trap; Credit crunch; Collateral constraings; Monetary policy; Ricardian equivalence;
    JEL: E44 E52 E58 E63
    Date: 2014–07–18
  4. By: Michal Franta; Tomas Holub; Petr Kral; Ivana Kubicova; Katerina Smidkova; Borek Vasicek
    Abstract: This study examines the use of the exchange rate by the Czech National Bank as a monetary policy instrument at the zero lower bound on interest rates. It provides a review of the economic literature on unconventional monetary policy instruments and particularly on the possibility of using the exchange rate. It explains the CNB’s reasons for further easing monetary policy and for choosing the exchange rate instrument and its specific level, and discusses its expected benefits in the case of the Czech Republic. It also explains why the CNB ultimately decided to transparently declare a one-sided exchange rate commitment with potentially unlimited foreign exchange interventions. The article concludes by assessing the impacts of the exchange rate weakening on the Czech economy to date, as compared to what the CNB had expected, and by describing the public debate of the CNB’s action and related changes in its communication strategy.
    Keywords: Asymmetric exchange rate commitment, deflation, exchange rate, foreign exchange interventions, inflation expectations, monetary policy, unconventional instruments, zero lower bound
    JEL: E31 E37 E58 F31
    Date: 2014–09
  5. By: Marlene Amstad; Ye Huan; Guonan Ma
    Abstract: The headline consumer price inflation (CPI) is often considered too noisy, narrowly defined, and/or slowly available for policymaking. On the other hand, traditional core inflation measures may reduce volatility but do not address other issues and may even exclude important information. This paper develops a new underlying inflation gauge (UIG) for China which differentiates between trend and noise, is available daily and uses a broad set of variables that potentially influence inflation. Its construction follows the works at other major central banks, adopts the methodology of a dynamic factor model that extracts the lower frequency components as developed by Forni et al. (2000) and draws on the experience of the People's Bank of China in modelling inflation. The paper is the first application of this type of dynamic factor model for inflation to any large emerging market economy. Our UIG for China is less noisy but still closely tracks the headline CPI. It does not suffer from the excess volatility reduction that plagues traditional core inflation measures and instead provides additional information. Finally, when forecasting the headline CPI, our UIG for China outperforms traditional core measures over different samples.
    Keywords: Inflation, Dynamic Factor Models, Core Inflation, Monetary Policy, Forecasting, China
    Date: 2014–09
  6. By: KARA Hakan
  7. By: BERSTEIN Solange; FUENTES Rodrigo
  8. By: Hoda SELIM
  9. By: D. Nouy
    Abstract: In the paper, we deal with the unexpected effects of new regulations and supervision and provide recommendations to ensure their effectiveness. New regulations essentially aim at strengthening the solvency and the liquidity of financial institutions. However, some technical aspects of these regulations, particularly regarding the effect on deleveraging, the use of a non-risk weighted leverage ratio and regulatory arbitrage require continuous monitoring. In addition, banking supervision is evolving toward more intrusive approach, more stress test exercises and an increasing role of macro prudential supervision. These changes in supervisory approach also require an efficient management of communication in order to avoid market overreaction and banks? ex ante inefficient behaviour. Supervisors have to anticipate and manage these unintended effects. The European Banking Union will help address these challenges by setting a single supervisory mechanism, a single resolution mechanism and a single deposit insurance scheme.
    Keywords: Basel III, CRD IV, regulatory arbitrage, stress test, macro prudential supervision, Banking Union.
    JEL: G21 G23 G28
    Date: 2013
  10. By: VERMEULEN, Glen; KORT, Peter
    Abstract: This paper develops a real options consistent bailout decision rule that speci?es under which conditions it is optimal to liquidate or bail out a bank based on the amount of liquidity it creates. Due to its construction, the rule incorporates the option value of waiting stemming from the irreversibility of liquidation and bailout decisions and the possibility to delay. We apply the rule to various cases in order to evaluate the quality of bank bailout policy in the EU-15. The main contribution however lies in the ?first-ever application of real options analysis to the ?field of bank bailout policy.
    Date: 2014–09
  11. By: MINELLA André; DE FREITAS Paulo Springer; GOLDFAJN Ilan; KFOURY MUINHOS Marcelo
  13. By: Bertrand Candelon; Amadou N. R. Sy
    Abstract: In the aftermath of the global financial crisis, supervisors in Europe and the U.S. have undertaken a series of bank stress tests to restore market confidence. In this paper we use event study methods to compare the market impact of all U.S. and EU-wide stress tests performed from 2009 to 2013. We find that, typically, the publication of stress test results has a positive impact on stressed banks’ returns. However, while the 2009 U.S. stress test had a large and positive impact on stressed banks, the impact of subsequent U.S. exercises decreased over time. Contrary to anecdotal evidence, we find that the 2011 EU exercise is the only EU-wide stress test that resulted in a significant negative market reaction. Comparing EU-wide stress tests among themselves and with U.S. stress tests highlights the importance of the governance of the stress tests. Governance turns out to be more important for the success of stress tests than technical elements, such as the minimum capital adequacy threshold or the level of disclosure of bank-by-bank data.
    Keywords: financial stability, macro-prudential, stress tests, financial stability
    JEL: G21 G28 G20
    Date: 2014–09–30
  14. By: O. de Bandt; J.-C. Héam; C. Labonne; S. Tavolaro
    Abstract: In response to the very large number of quantitative indicators that have been put forward to measure the level of systemic risk since the start of the subprime crisis, the paper surveys the different indicators available in the economic and financial literature. It distinguishes between (i) indicators related to institutions, based either on market data or regulatory/accounting data; (ii) indicators addressing risks in financial markets and infrastructures; (iii) indicators measuring interconnections and network effects - where research is currently very active-; and (iv) comprehensive indicators. All these indicators are critically assessed and ways forward for a better understanding of systemic risk are suggested.
    Keywords: systemic risk, market data, balance sheet data, regulatory data, financial network, funding liquidity.
    JEL: G2 G3 E44
    Date: 2013
  15. By: Dariusz Gatarek (HVB Unicredit; Systems Research Institute, Polish Academy of Sciences); Juliusz Jabłecki (Faculty of Economic Sciences Warsaw University; Narodowy Bank Polski / Instytut Ekonomiczny)
    Abstract: Central bank lending to commercial banks is typically collateralized which reduces central bank’s credit risk exposure to “double default events” when the counterparty and the issuer of the underlying collateral asset both default in a short period of time. This paper presents a simple model for correlated defaults which are the key drivers of residual credit risk in central bank’s repo portfolios. In the model default times of counterparties and collateral issuers are determined by idiosyncratic and systematic factors, whereby a name defaults if it is struck by either factor for the first time. The novelty of our approach lies in representing systematic factors as increasing sequences of random variables. Such a setting allows to build a rich dependence structure that is free of the flaws inherent in the Gaussian copula-based approaches currently regarded as state of the art solutions for central banks.
    Keywords: joint defaults, collateralized lending, residual credit risk
    JEL: G12 G13
    Date: 2014

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