nep-cba New Economics Papers
on Central Banking
Issue of 2015‒01‒26
27 papers chosen by
Maria Semenova
Higher School of Economics

  1. The dilemma of central bank transparency By Stephen Hansen; Michael McMahon; Andrea Prat
  2. Reputation and Liquidity Traps By Taisuke Nakata
  3. Does Social Trust Speed up Reforms? The Case of Central-Bank Independence By Berggren, Niclas; Daunfelt, Sven-Olof; Hellström, Jörgen
  4. Central Bank Credibility: An Historical and Quantitative Exploration By Michael D. Bordo; Pierre L. Siklos
  5. Effectiveness and transmission of the ECB’s balance sheet policies By Jef Boeckx; Maarten Dossche; Gert Peersman
  6. Trilemmas and trade-offs: living with financial globalisation By Maurice Obstfeld
  7. The coevolution of money markets and monetary policy, 1815-2008 By Jobst, Clemens; Ugolini, Stefano
  8. Lessons for monetary policy from the euro-area crisis By C.A.E Goodhart
  9. Lend out IOU: A Model of Money Creation by Banks and Central Banking By Tianxi Wang
  10. What drives the demand of monetary financial institutions for domestic government bonds? Empirical evidence on the impact of Basel II and Basel III By Lang, Michael; Schröder, Michael
  11. Spillovers from United States Monetary Policy on Emerging Markets: Different This Time? By Jiaqian Chen; Tommaso Mancini Griffoli; Ratna Sahay
  12. Development and application of the monetary rule for the base interest rate of the National Bank of Ukraine By Savchenko, Taras; Kozmenko, Serhiy; Piontkovska, Yanina
  13. The Dynamic Effects of Interest Rates and Reserve Requirements By Pérez-Forero, Fernando; Vega, Marco
  14. China’s financial crisis – the role of banks and monetary policy By Le, Vo Phuong Mai; Matthews, Kent; Meenagh, David; Minford, Patrick; Xiao, Zhiguo
  15. How the euro crisis evolved and how to avoid another: EMU, fiscal policy and credit ratings By Vito Polito; Michael Wickens
  16. The European crisis in the context of the history of previous financial crises By Michael Bordo; Harold James
  17. Do contractionary monetary policy shocks expand shadow banking? By Nelson, Benjamin; Pinter, Gabor; Theodoridis, Konstantinos
  18. Domestic and Multilateral Effects of Capital Controls in Emerging Markets By Gurnain Pasricha; Matteo Falagiarda; Martin Bijsterbosch; Joshua Aizenman
  19. The determinants of regulatory responses to risks from financial innovation: Survey evidence from G20 By Ivan Diaz-Rainey; John Ashton; Maz Yap; Murat Genc; Rosalind Whiting
  20. Regulatory Independence – It’s not Just about Institutionss By Gordon Menzies
  21. Post-Crisis Slow Recovery and Monetary Policy By Daisuke Ikeda; Takushi Kurozumi
  22. When does a central bank's balance sheet require fiscal support? By Christopher Sims; Marco Del Negro
  23. The effects of capital on bank lending in EU large banks – The role of procyclicality, income smoothing, regulations and supervision By Malgorzata Olszak; Mateusz Pipien; Sylwia Roszkowska; Iwona Kowalska
  24. What predicts financial (in)stability? A Bayesian approach By Eidenberger, Judith; Neudorfer, Benjamin; Sigmund, Michael; Stein, Ingrid
  25. The impact of Basel III on trade finance: The potential unintended consequences of the leverage ratio By Auboin, Marc; Blengini, Isabella
  26. Market sentiments and the sovereign debt crisis in the Eurozone By De Grauwe, Paul; Ji, Yuemei
  27. Systemic risk and banking regulation: some facts on the new regulatory framework By Michele Bonollo; Irene Crimaldi; Andrea Flori; Fabio Pammolli; Massimo Riccaboni

  1. By: Stephen Hansen; Michael McMahon; Andrea Prat
    Abstract: If central banks publish the transcripts of their internal policy debates, will discussions be enhanced or inhibited? Michael McMahon and colleagues use tools from computational linguistics to analyse the positive and negative effects of transparency on deliberations of the monetary policymakers at the US Federal Reserve.
    Keywords: Monetary policy, deliberation, FOMC, transparency, career concerns
    JEL: E52 E58 D78
    Date: 2015–01
  2. By: Taisuke Nakata (Federal Reserve Board)
    Abstract: Can the central bank credibly commit to keeping the nominal interest rate low for an extended period of time in the aftermath of a deep recession? By analyzing credible plans in a sticky-price economy with occasionally binding zero lower bound constraints, I find that the answer is yes if contractionary shocks hit the economy with sufficient frequency. In the best credible plan, if the central bank reneges on the promise of low policy rates, it will lose reputation and the private sector will not believe such promises in future recessions. When the shock hits the economy suffi- ciently frequently, the incentive to maintain reputation outweighs the short-run incentive to close consumption and inflation gaps, keeping the central bank on the originally announced path of low nominal interest rates.
    Keywords: Commitment, Credible Policy, Forward Guidance, Liquidity Trap, Reputation, Sustainable Plan, Time Consistency, Trigger Strategy, Zero Lower Bound.
    JEL: E32 E52 E61 E62 E63
    Date: 2013–03
  3. By: Berggren, Niclas (Research Institute of Industrial Economics (IFN)); Daunfelt, Sven-Olof (HUI Research and Dalarna University); Hellström, Jörgen (Umeå University)
    Abstract: Many countries have undertaken central-bank independence reforms, but the years of implementation differ. What explains such differences in timing? This is of interest more broadly, as it sheds light on factors that matter for the speed at which economic reforms come about. We study a rich set of potential determinants, both economic and political, but put special focus on a cultural factor, social trust. We find empirical support for an inverse u-shape: Countries with low and high social trust implemented their reforms earlier than countries with intermediate levels. We make use of two factors to explain this pattern: the need to undertake reform (which is more urgent in countries with low social trust) and the ability to undertake reform (which is greater in countries with high social trust).
    Keywords: Central banks; Independence; Social trust; Inflation; Monetary policy; Reform
    JEL: E52 E58 P48 Z13
    Date: 2015–01–08
  4. By: Michael D. Bordo; Pierre L. Siklos
    Abstract: In this paper we provide empirical measures of central bank credibility and augment these with historical narratives from eleven countries. To the extent we are able to apply reliable institutional information we can also indirectly assess their role in influencing the credibility of the monetary authority. We focus on measures of inflation expectations, the mean reversion properties of inflation, and indicators of exchange rate risk. In addition we place some emphasis on whether credibility is particularly vulnerable during financial crises, whether its evolution is a function of the type of crisis or its kind (i.e., currency, banking, sovereign debt crises). We find credibility changes over time are frequent and can be significant. Nevertheless, no robust empirical connection between the size of an economic shock (e.g., the Great Depression) and loss of credibility is found. Second, the frequency with which the world economy experiences economic and financial crises, institutional factors (i.e., the quality of governance) plays an important role in preventing a loss of credibility. Third, credibility shocks are dependent on the type of monetary policy regime in place. Finally, credibility is most affected by whether the shock can be associated with policy errors.
    JEL: C32 C36 E31 E58 N10
    Date: 2015–01
  5. By: Jef Boeckx (Research Department, NBB); Maarten Dossche (Research Department, NBB, ECB); Gert Peersman (Ghent University)
    Abstract: We estimate the effects of exogenous innovations to the balance sheet of the ECB since the start of the financial crisis within a structural VAR framework. An expansionary balance sheet shock stimulates bank lending, stabilizes financial markets, and has a positive impact on economic activity and prices. The effects on bank lending and output turn out to be smaller in the member countries that have been more affected by the financial crisis, in particular those countries where the banking system is less well-capitalized.
    Keywords: unconventional monetary policy, ECB blance sheet, euro area, VAR
    JEL: C32 E30 E44 E51 E52
    Date: 2014–12
  6. By: Maurice Obstfeld
    Abstract: This paper evaluates the capacity of emerging market economies (EMEs) to moderate the domestic impact of global financial and monetary forces through their own monetary policies. Those EMEs that are able to exploit a flexible exchange rate are far better positioned than those that devote monetary policy to fixing the rate - a reflection of the classical monetary policy trilemma. However, exchange rate changes alone do not insulate economies from foreign financial and monetary shocks. While potentially a potent source of economic benefits, financial globalisation does have a downside for economic management. It worsens the trade-offs monetary policy faces in navigating among multiple domestic objectives. This drawback of globalisation raises the marginal value of additional tools of macroeconomic and financial policy. Unfortunately, the availability of such tools is constrained by a financial policy trilemma that is distinct from the monetary trilemma. This second trilemma posits the incompatibility of national responsibility for financial policy, international financial integration and financial stability.
    Keywords: policy trilemma, financial stability, financial globalisation, international policy transmission
    Date: 2015–01
  7. By: Jobst, Clemens; Ugolini, Stefano
    Abstract: Money market structures shape monetary policy design, but the way central banks perform their operations also has an impact on the evolution of money markets. This is important, because microeconomic differences in the way the same macroeconomic policy is implemented may be non-neutral. In this paper, we take a panel approach in order to investigate both directions of causality. Thanks to three newly-collected datasets covering ten countries over two centuries, we ask (1) where, (2) how, and (3) with what results interaction between money markets and central banks has taken place. Our findings allow establishing a periodization singling out phases of convergence and divergence. They also suggest that exogenous factors – by changing both money market structures and monetary policy targets – may impact coevolution from both directions. This makes sensible theoretical treatment of the interaction between central bank policy and market structures a particularly complex endeavor. JEL Classification: E52, G15, N20
    Keywords: central banking, monetary policy implementation, money markets
    Date: 2014–12
  8. By: C.A.E Goodhart (London School of Economics)
    Abstract: The earlier 2007/8 financial crisis generated the main lessons for monetary policy, notably that price stability does not necessarily guarantee financial stability. Nevertheless, the on-going Eurozone crisis has pointed to further lessons, notably that a single currency covering diverse states does need a Banking Union; and to problems of zero risk-weighting for sovereign debts. Without such a Banking Union, economic divergences between the Eurozone states have continued and look likely to persist.
    Keywords: Price stability; financial stability; banking union; zero lower-bound
    JEL: E52 E44 F36 G01
    Date: 2013–07
  9. By: Tianxi Wang
    Abstract: This paper considers the efficiency of money creation by banks and the principles of the central bank issuance to improve over it. The ability to issue deposit liability as a means of payment enlarges banks lending capacities and subjects them to fiercer competition. In curcumstances where banks issue too much money, interest-rate policy may help. In circumstances of a credit crunch, quantitative- easing policy helps, under which the central bank lends its issues to all banks. These issues are unbacked by taxation and purely nominal. The optimal quantity of the central bank's lending is unique and implements the first-best allocation.
    Date: 2014–10–23
  10. By: Lang, Michael; Schröder, Michael
    Abstract: This paper examines the treatment of sovereign debt exposure within the Basel framework and measures the impact of bank regulation on the demand of Monetary Financial Institutions (MFI) for marketable sovereign debt. Our results suggest that bank regulation has a significant positive impact on MFI demand for domestic government securities. The results are representative for the MFI in the euro zone. They remain highly robust and significant after controlling for other influential factors and potential endogeneity.
    Keywords: Monetary Financial Institutions,Financial sector regulation,Sovereign bond holdings,Investment incentives
    JEL: G11 G21 G28
    Date: 2014
  11. By: Jiaqian Chen; Tommaso Mancini Griffoli; Ratna Sahay
    Abstract: The impact of monetary policy in large advanced countries on emerging market economies—dubbed spillovers—is hotly debated in global and national policy circles. When the U.S. resorted to unconventional monetary policy, spillovers on asset prices and capital flows were significant, though remained smaller in countries with better fundamentals. This was not because monetary policy shocks changed (in size, sign or impact on stance). In fact, the traditional signaling channel of monetary policy continued to play the leading role in transmitting shocks, relative to other channels, affecting longer-term bond yields. Instead, we find that larger spillovers stem more from structural factors, such as the use of new instruments (asset purchases). We obtain these results by developing a new methodology to extract, separate, and interpret U.S. monetary policy shocks.
    Keywords: Monetary policy;Spillovers;United States;Emerging markets;Capital flows;Regression analysis;monetary policy announcements, unconventional monetary policies, spillovers, capital flows, equity markets, bond markets, exchange rates, emerging markets.
    Date: 2014–12–24
  12. By: Savchenko, Taras; Kozmenko, Serhiy; Piontkovska, Yanina
    Abstract: The paper studies methodological approaches to the formation of monetary policy rules for the base interest rate of the National Bank of Ukraine demonstrating the expediency of their development on the basis of the spread-adjusted Tay- lor rule. It carries out the assessment of equilibrium values for the rule’s parameters by using a modified Hodrick- Prescott filter as well as the identification of the possible parameters of the monetary rule and the estimation of their coefficients through the development of multivariate regression models.
    Keywords: monetary policy rule, spread-adjusted Taylor rule, central bank, monetary market, inflation targeting
    JEL: E52 E58
    Date: 2014
  13. By: Pérez-Forero, Fernando (Banco Central de Reserva del Perú); Vega, Marco (Banco Central de Reserva del Perú)
    Abstract: This paper quantifies the dynamic macroeconomic effects derived from both; shocks to conventional monetary policy and shocks to reserve requirement ratios applied to bank deposits in Peru. The analysis tackles reserve requirements on domestic as well as foreign currency deposits. Structural Vector Autoregressive (SVAR) models are identified through a mixture of zero and sign restrictions for the period 1995-2013. Contractionary monetary policy shocks generate a negative effect on aggregate credit and a positive effect on bank spreads between loan and deposit rates. Likewise, shocks to the two reserve requirement ratios produce a negative effect on aggregate credit in their corresponding currencies and a mild effect on both aggregate real economic activity and the price level. We consider possible mechanisms that may help explain the dynamic effects uncovered in the paper.
    Keywords: Monetary Policy, Interest Rates, Reserve Requirements, Sign Restrictions
    JEL: E43 E51 E52
    Date: 2014–12
  14. By: Le, Vo Phuong Mai (Cardiff Business School); Matthews, Kent (Cardiff Business School); Meenagh, David (Cardiff Business School); Minford, Patrick (Cardiff Business School); Xiao, Zhiguo
    Abstract: This paper develops a model of the Chinese economy using a DSGE framework that accommodates a banking sector and money. The model is used to shed light on the period of the recent period of financial crisis. It differs from other applications in the use of indirect inference to estimate and test the fitted model. We find that the main shocks that hit China in the crisis were international and that domestic banking shocks were unimportant. Officially mandated bank lending and government spending were used to supplement monetary policy to aggressively offset shocks to demand. An analysis of the frequency of crises shows that crises occur on average about every half-century, with about a third accompanied by financial crises. We find that monetary policy can be used more vigorously to stabilise the economy, making direct banking controls and fiscal activism unnecessary.
    Keywords: DSGE model; Financial Frictions; China; Crises; Indirect Inference; Money; Credit
    JEL: E3 E44 E52 C1
    Date: 2015–01
  15. By: Vito Polito (Cardiff University); Michael Wickens (Cardiff University and University of York)
    Abstract: This paper argues that the crisis was an outcome of EMU: setting a common monetary policy for countries with different initial inflation rates. The crisis countries were those with high inflation rates which then had negative real interest rates and consequently over-borrowed. Current policy discussions focus on crisis measures: fiscal, banking and political union, not avoiding another crisis. This paper suggests two ways to avoid a future crisis: offset an inappropriate monetary policy using fiscal policy; markets could better price loan rates by taking into account default risk. The paper shows that neither was done prior to the crisis.
    Keywords: fiscal union; monetary and fiscal policy; credit ratings; default risk
    JEL: E52 E62 H63 H68
    Date: 2013–07
  16. By: Michael Bordo (Rutgers University); Harold James (Princeton University)
    Abstract: There are some striking similarities between the pre 1914 gold standard and EMU today. Both arrangements are based on fixed exchange rates, monetary and fiscal orthodoxy. Each regime gave easy access by financially underdeveloped peripheral countries to capital from the core countries. But the gold standard was a contingent rule—in the case of an emergency like a major war or a serious financial crisis --a country could temporarily devalue its currency. The EMU has no such safety valve. Capital flows in both regimes fueled asset price booms via the banking system ending in major crises in the peripheral countries. But not having the escape clause has meant that present day Greece and other peripheral European countries have suffered much greater economic harm than did Argentina in the Baring Crisis of 1890.
    Keywords: Gold Standard; Gold Exchange Standard; Debt Crisis; Euro
    JEL: F33
    Date: 2013–07
  17. By: Nelson, Benjamin (Bank of England); Pinter, Gabor (Bank of England); Theodoridis, Konstantinos (
    Abstract: Using vector autoregressive models with either constant or time-varying parameters and stochastic volatility for the United States, we find that a contractionary monetary policy shock has a persistent negative impact on the asset growth of commercial banks, but increases the asset growth of shadow banks and securitisation activity. To explain this ‘waterbed’ effect, we propose a standard New Keynesian model featuring both commercial and shadow banking, and we show that the model comes close to explaining the empirical results. Our findings cast doubt on the idea that monetary policy can usefully ‘get in all the cracks’ of the financial sector in a uniform way.
    Keywords: Monetary policy; financial intermediaries; shadow banking; VAR; DSGE
    JEL: E43 E52 G21
    Date: 2015–01–16
  18. By: Gurnain Pasricha; Matteo Falagiarda; Martin Bijsterbosch; Joshua Aizenman
    Abstract: This paper assesses the effects of capital controls in emerging market economies (EMEs) during 2001-2011, focusing on cross-country spillovers of changes in these controls. We use a novel dataset on weighted changes in capital controls (and currency-based measures) in 18 major EMEs. We first use panel VARs to test for effectiveness of own capital controls which take into account the endogeneity of such controls. Next, using near-VARs, we provide new evidence of multilateral effects of capital controls of the BRICS. Our results suggest a limited domestic impact of capital controls. Outflow easing measures do not have a significant impact on any of the variables in the model. Inflow tightening measures increase monetary policy autonomy (measured by the covered interest differential), but at the cost of a more appreciated exchange rate. These measures are therefore not effective in allowing EMEs to choose a trilemma configuration with a de-facto closed capital account, larger monetary policy autonomy and a weaker exchange rate. We do not find a clear difference between countries with extensive and long-standing capital controls (India and China) and other countries. Capital control actions in BRICS (Brazil, Russia, India, China and South Africa) had significant spillovers to other EMEs during the 2000s in particular via exchange rates. Multilateral effects were more important among the BRICS than between the BRICS and other, smaller EMEs, particularly in the pre-global financial crisis period. They were more significant in the aftermath of the global financial crisis than before the crisis. This change stems in particular from the fact that spillovers from capital flow policies in BRICS countries to non-BRICS became more significant in the post-global financial crisis period. These results are robust to various specifications of our models.
    JEL: F32 F41 F42
    Date: 2015–01
  19. By: Ivan Diaz-Rainey (University of Otago); John Ashton (Bangor University); Maz Yap (University of Otago); Murat Genc (University of Otago); Rosalind Whiting (University of Otago)
    Abstract: We explore the factors that shape the extent and scope of the response of G20 countries to a Financial Stability Board (FSB) recommendation aimed at mitigating the risks from financial innovation. Using a formal content analysis of the FSBÕs Implementation Monitoring Network Surveys, we develop an index of disclosed strength of regulatory responses. We find that G20 countries have displayed large interpretive differences, little forward planning and have emphasized regulatory capabilities over firm capabilities when addressing the recommendation. Countries with strong central banks, more concentrated regulatory structures and bank-based financial systems responded more robustly, while countries with a large financial sector were marginally associated with a weaker response. The latter suggests that financial sector lobbying has weakened regulatory responses.
    Keywords: inancial innovation,financial regulation,Global Financial Crisis,G20, Financial Stability Board
    JEL: G01 G18 G20 G28
    Date: 2015–01
  20. By: Gordon Menzies (Economics Discipline Group, University of Technology, Sydney)
    Abstract: Financial regulators perform inter alia a quality control function, as they search for recession-generating flaws in the financial system. Some groupings of regulations operate more or less independently to other groupings, as is the case when different agents – not necessarily different institutions – examining the same regulatory issues or monitor the same behaviours independently. We refer to these clusters as Independent Dimensions of Regulation (IDRs). They may appear inefficient if the same issue is explored repeatedly. However, statistical independence in this context can rapidly reduce the probability of crises. If quality control regulations are dependent, policymakers should make them more independent.
    Keywords: banking; regulation; monitoring; financial crises
    JEL: G01 G18 G28
    Date: 2014–12–01
  21. By: Daisuke Ikeda (Institute for Monetary and Economic Studies, Bank of Japan.); Takushi Kurozumi (Institute for Monetary and Economic Studies, Bank of Japan.)
    Abstract: In the aftermath of the recent financial crisis and subsequent recession, slow recoveries have been observed and slowdowns in total factor productivity (TFP) growth have been measured in many economies. This paper develops a model that can describe a slow recovery resulting from an adverse financial shock in the presence of an endogenous mechanism of TFP growth, and examines how monetary policy should react to the financial shock in terms of social welfare. It is shown that in the face of the financial shocks, a welfare-maximizing monetary policy rule features a strong response to output, and the welfare gain from output stabilization is much more substantial than in the model where TFP growth is exogenously given. Moreover, compared with the welfare-maximizing rule, a strict inflation or price-level targeting rule induces a sizable welfare loss because it has no response to output, whereas a nominal GDP growth or level targeting rule performs well, although it causes high interest-rate volatility. In the presence of the endogenous TFP growth mechanism, it is crucial to take into account a welfare loss from a permanent decline in consumption caused by a slowdown in TFP growth.
    Keywords: Financial shock; Endogenous TFP growth; Slow recovery; Monetary policy; Welfare cost of business cycle
    JEL: E52 O33
    Date: 2014–12
  22. By: Christopher Sims (Princeton University); Marco Del Negro (Federal Reserve Bank of New York)
    Abstract: A central bank whose assets and liabilities are both nominal cannot produce a uniquely determined price level, no matter what policies it adopts, unless it is backed by a treasury with the power to tax. If it is so backed, the backing need not be visible in equilibrium; it can be a commitment by the treasury to act in circumstances that do not occur in equilibrium, and the action required in those circumstances need not be large. A central bank, though, can require fiscal transfers on the equilibrium path even when fiscal backing makes the price level unique. The likelihood of its needing such transfers increases when its balance sheet expands and when the duration of its assets diverges from that of its interest-bearing liabilities. The need for such transfers also depends on the strictness of its control of inflation and on the nature of demand for its non-interest bearing liabilities. A model calibrated to the current situation of the US Federal Reserve System suggests that the need for transfers is unlikely to arise, even if the Fed’s net worth at market value temporarily becomes negative.
    Date: 2014
  23. By: Malgorzata Olszak (University of Warsaw, Faculty of Management); Mateusz Pipien (Cracow University of Economics, Economic Institute, National Bank of Poland); Sylwia Roszkowska (Faculty of Economic and Social Sciences, University of £ódŸ, National Bank of Poland); Iwona Kowalska (University of Warsaw, Faculty of Management)
    Abstract: This paper aims to find out what is the impact of bank capital ratios on loan supply in the EU and what factors explain potential diversity of this impact. Applying Blundell and Bond (1998) two step GMM estimator, we show that, in the EU context, the role of capital ratio for loan growth is stronger than previous literature has found for other countries. Our study sheds some light on whether procyclicality of loan loss provisions and income smoothing with loan loss provisions contribute to procyclical impact of capital ratio on loan growth. We document that loan growth of banks that have more procyclical loan loss provisions and that engage less in income smoothing is more sensitive to capital ratios. This sensitivity is slightly increased in this sample of banks during contractions. Moreover, more restrictive regulations and more stringent official supervision reduce the magnitude of effect of capital ratio on bank lending. Taken together, our results suggest that capital ratios are important determinant of lending in EU large banks.
    Keywords: loan supply, capital crunch, procyclicality of loan loss provisions, income smoothing, bank regulation, bank supervision
    JEL: E32 G21 G28 G32
    Date: 2014–12
  24. By: Eidenberger, Judith; Neudorfer, Benjamin; Sigmund, Michael; Stein, Ingrid
    Abstract: This paper contributes to the literature on early warning indicators by applying a Bayesian model averaging approach. Our analysis, based on Austrian data, is carried out in two steps: First, we construct a quarterly financial stress index (AFSI) quantifying the level of stress in the Austrian financial system. Second, we examine the predictive power of various indicators, as measured by their ability to forecast the AFSI. Our approach allows us to investigate a large number of indicators. The results show that excessive credit growth and high returns of banks' stocks are the best early warning indicators. Unstable funding (as measured by the loan to deposit ratio) also has a high predictive power.
    Keywords: financial crisis,early warning indicators,government policy and regulation,financial stress index
    JEL: G01 G28
    Date: 2014
  25. By: Auboin, Marc; Blengini, Isabella
    Abstract: Trade finance, particularly in the form of short-term, self-liquidating letters of credit and the like, has received relatively favourable treatment regarding capital adequacy and liquidity under Basel III, the new international prudential framework. However, concerns have been expressed over the potential "unintended consequences" of applying the newly created leverage ratio to these instruments, notably for developing countries' trade. This paper offers a relatively simple model approach showing the conditions under which the initially proposed 100% leverage tax on non-leveraged activities such as letters of credit would reduce their natural attractiveness relative to higher-risk, less collateralized assets, which may stand in the balance sheet of banks. Under these conditions, the model shows that leverage ratio may nullify in part the effect of the low capital ratio that is commensurate to the low risk of such instruments. The decision by the Basel committee on 12 January 2014 to reduce the leverage ratio seems to be justified by the analytical framework developed in this paper.
    Keywords: trade financing,cooperation with international financial institutions,prudential supervision and trade
    JEL: E44 F13 F34 F36 O19 G21 G32
    Date: 2014
  26. By: De Grauwe, Paul; Ji, Yuemei
    Abstract: In this paper we test two theories of the determination of the government bond spreads in a monetary union. The first one is based on the efficient market theory. According to this theory, the surging spreads observed from 2010 to the middle of 2012 were the result of deteriorating fundamentals (e.g. domestic government debt, external debt, competitiveness, etc.). The second theory recognizes that collective movements of fear and panic can have dramatic effects on spreads. These movements can drive the spreads away from underlying fundamentals, very much like in the stock markets prices can be gripped by a bubble pushing them far away from underlying fundamentals. The implication of that theory is that while fundamentals cannot be ignored, there is a special role for the central bank that has to provide liquidity in times of market panic, so as to avoid that countries are pushed into a bad equilibrium. We tested these theories and concluded that there is strong evidence for the second theory. The policy implications are that the role of the ECB as lender of last resort in the government bond markets is an important one. The recent attempts by the German Constitutional Court risk undermining this role and by the same token the stability of the Eurozone.
    Date: 2015
  27. By: Michele Bonollo (Credito trevigiano; IMT Lucca Institute for Advanced Studies); Irene Crimaldi (IMT Lucca Institute for Advanced Studies); Andrea Flori (IMT Lucca Institute for Advanced Studies); Fabio Pammolli (IMT Lucca Institute for Advanced Studies); Massimo Riccaboni (IMT Lucca Institute for Advanced Studies)
    Abstract: The recent financial crisis highlighted the relevant role of the systemic effects of banks’ defaults on the stability of the whole financial system. In this work we draw an organic picture of the current regulations, moving from the definitions of systemic risk to the issues concerning data availability. We show how a more detailed flow of data on traded deals might shed light on some systemic risk features taken into account only partially in the past. In particular, we analyse how the new regulatory framework allows regulators to describe OTC derivatives markets according to more detailed partitions, thus depicting a more realistic picture of the system. Finally, we suggest to study sub-markets illiquidity conditions to consider possible spill over effects which might lead to a worsening for the entire system.
    Keywords: Systemic Risk, OTC Derivatives Market, Basel Regulations, European Market Infrastructure Regulation, Trade Repositories
    JEL: G01 G18 G21
    Date: 2015–01

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