nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2024‒02‒19
25 papers chosen by
Georg Man,

  1. Fueling or Following Growth? Causal Effects of Capital Inflows on Recipient Economies By Mr. Nicolas End
  2. Determinants of FDI flows to Sub-Saharan Africa: Does economic development play a role? By Mukosa Chakufyali; Christine S. Makanza
  3. Measuring the Contribution of International Remittances to Household Expenditures and Economic Output: A Micro–Macro Analysis for the Philippines By Kikkawa, Aiko; Gaspar, Raymond; Kim, Kijin; Mariasingham, Mahinthan J.; Zamora, Christian Marvin
  4. Dynamics of productive investment and gaps between the United States and EU countries By Hanzl-Weiss, Doris; Stehrer, Robert
  5. A Statistical Field Perspective on Capital Allocation and Accumulation: Individual dynamics By Pierre Gosselin; A\"ileen Lotz
  6. Relationship Lending: Characteristics and Real Effects By Miguel Acosta-Henao; Sangeeta Pratap; Manuel Taboada
  7. SME Relationship Banking and Loan Contracting: Survey-based Evidence from China By Lu, Shun; Glushenkova, Marina; Huang, Wei; Matthews, Kent
  8. BFinancial Development, Overbanking, and Bank Failures During the Great Depression: New Evidence from Italy By Marco Molteni
  9. Financial Development, Corruption and Shadow Economy:Evidence from MENA Countries By Houda Haffoudhi; Brahim Guizani
  10. Non-bank lenders to SMEs as a source of financial stability risk – a balance sheet assessment By Moloney, Kitty; O'Gorman, Paraic; O’Sullivan, Max; Reddan, Paul
  11. Do non-bank lenders mitigate credit supply shocks? Evidence from a major bank exit By McCann, Fergal; McGeever, Niall; Peia, Oana
  12. The City of Glasgow Bank failure and the case for liability reform By Goodhart, C. A. E.; Postel-Vinay, Natacha
  13. Distributional income effects of banking regulation in Europe By Brausewetter, Lars; Ludolph, Melina
  14. Government-Sponsored Mortgage Securitization and Financial Crises By Wayne Passmore; Roger Sparks
  15. Sovereign Debt Issuance and Selective Default By Paczos, Wojtek; Shakhnov,
  16. Imperfect Financial Markets and the Cyclicality of Social Spending By Froemel, Maren; Paczos, Wojtek
  17. Price stability and debt sustainability under endogenous trend growth By Schmöller, Michaela; McClung, Nigel
  18. U.S. Monetary Policy Spillovers to Middle East and Central Asia: Shocks, Fundamentals, and Propagations By Giovanni Ugazio; Weining Xin
  19. Effects of Monetary Policy Frameworks on Stock Market Volatilities: An Empirical Study of Global Economies By Lee, King Fuei
  20. Equilibrium Data Mining and Data Abundance By Jérome Dugast; Thierry Foucault
  21. A Field Guide to Monetary Policy Implementation Issues in a New World with CBDC, Stablecoin, and Narrow Banks By James A. Clouse
  22. Privilege Lost? The Rise and Fall of a Dominant Global Currency By Kai Arvai; Nuno Coimbra
  23. Maldives: Financial Sector Assessment Program-Technical Note on Bank Stress Testing and Climate Risk Analysis By International Monetary Fund
  24. Flooded credit markets: physical climate risk and small business lending By Barbaglia, Luca; Fatica, Serena; Rho, Caterina
  25. Local Banks and flood risk: the case of Germany By Pagano, Andrea; Bellia, Mario; Di Girolamo, Francesca; Papadopoulos, Georgios

  1. By: Mr. Nicolas End
    Abstract: Identifying the causal impact of capital inflows on growth and development has been a perennial challenge. This paper proposes a new way to investigate the effect of capital flows on recipient emerging and developing economies, using shift-share instruments and correcting for indirect flows. It finds a significantly beneficial effect of loan and bond inflows on economic performance, which materializes after a few years. It also finds some confirmation that the absorptive capacity of recipient economies depends on their fundamentals.
    Keywords: Capital flows; economic growth; shift-share instrument
    Date: 2024–01–19
  2. By: Mukosa Chakufyali (School of Economics, University of Cape Town); Christine S. Makanza (School of Economics, University of Cape Town)
    Abstract: There is a disparity in the trends of Foreign Direct Investment (FDI) flows to Sub- Saharan Africa (SSA) across nations at different stages of economic development, thereby indicating that economic development could play a role in attracting FDI to the region. This study assesses whether economic development plays a key role in attracting FDI to SSA, and examines whether the determinants of FDI differ across nations at different stages of economic development. The study constructs a panel dataset consisting of twenty-seven Sub-Saharan African (SSA(n)) nations, separated into higher and lower income nations, for the period 2000-2019. Both static and dynamic panel regression analysis is conducted, where the dynamic model is estimated using a system of Generalised Method of Moments (GMM) procedure, whereas static panel analysis is conducted using fixed effects and random effects models. A dummy variable is included to represent economic development. The dummy was created by assessing each nations country classification by income level, according to the World Bank, in each year included in the analysis, and not by taking a nations classification at the end-point of the analysis, as end-point classification is likely to lead to a misclassification of nations that have transitioned from lower to higher income nations throughout the period under investigation. The full sample regression results found the dummy variable to be strongly significant, thereby supporting the claim that economic development does play a role in attracting FDI to SSA. Additional factors identified to be key drivers of FDI to SSA include inflation, FDI flows in the previous period, and trade openness. A comparison of the determinants of FDI across lower and higher income SSA(n) nations indicates that the determinants of FDI differs across nations at different stages of economic development. The factors that attract FDI to higher income SSA(n) nations are inflation, and government effectiveness, whereas the factors that attract FDI to lower income SSA(n) nations are lagged FDI flows, inflation, and trade openness.
    Date: 2023
  3. By: Kikkawa, Aiko (Asian Development Bank); Gaspar, Raymond (Asian Development Bank); Kim, Kijin (Asian Development Bank); Mariasingham, Mahinthan J. (Asian Development Bank); Zamora, Christian Marvin (Asian Development Bank)
    Abstract: The macroeconomic studies that assess the contribution of international remittances to the origin countries of migrants use a different definition of remittances than the microeconomic literature that examines the impact at the household and community levels. This study overcomes this difference in definition by integrating household expenditure data into the input-output analysis. Using the 2018 Family Income and Expenditure Surveys (FIES) of the Philippines, we find that remittance-financed household consumption and investment totaled ₱742.2 billion ($14.1 billion) and contributed 3.5% of the country’s total output, 3.4% of gross domestic product (GDP), and 3.7% of total employment in 2018. We note that the largest value added is accruing to the manufacturing sector as it accounts for more than a third of remittance recipients’ spending basket followed by the trade and agriculture, forestry, and fisheries sectors, which are closely linked to the manufacturing industry. The international remittances income reported by households is less than half (43.8%) of the ₱1.7 trillion ($32.2 billion) aggregate international remittances reported by the central bank in the same year based on the balance of payments definition.
    Keywords: international remittance; household expenditure; micro–macro analysis; Philippines
    JEL: C67 D12 F24
    Date: 2024–02–02
  4. By: Hanzl-Weiss, Doris; Stehrer, Robert
    Abstract: This report offers a detailed documentation and assessment of the differences in real productive investment between the United States and EU countries, focusing especially on the period 2013-2019. The analysis is based on capital stock and gross fixed capital formation (GFCF) data taken from Eurostat and the recent EU KLEMS releases, which provide comparable data for the US. The study considers various measures: investment gaps (defined as the difference in investment rates); the growth of real GFCF; and the accumulation of stocks. It documents differences in trends and in asset-type composition, as well as variations across the different EU countries. The study thus brings the existing literature up to date and adds investment dynamics to the discussion. The findings indicate the existence of a gap in productive investment in the period since the onset of the global financial crisis (caused largely by lower rates of investment, specifically in tangible information and communication technology and intangible assets) and gaps for larger EU member states. When we consider investment dynamics, we find more robust growth rates in productive investment in the EU than in the US over this period; however, again investment was lower in telecommunications equipment and software and databases. Since growth rates in the EU27 and the US have been similar since 2013, the EU27 has been unable to catch the US up in terms of capital accumulation. However, these results are sensitive to the application of asset price deflators: when US deflators are applied to the EU27, the differences are much less significant.
    Keywords: Productive investment, investment gap, investment dynamics, European Union, US
    JEL: E22
    Date: 2024
  5. By: Pierre Gosselin (IF); A\"ileen Lotz
    Abstract: We have shown, in a series of articles, that a classical description of a large number of economic agents can be replaced by a statistical fields formalism. To better understand the accumulation and allocation of capital among different sectors, the present paper applies this statistical fields description to a large number of heterogeneous agents divided into two groups. The first group is composed of a large number of firms in different sectors that collectively own the entire physical capital. The second group, investors, holds the entire financial capital and allocates it between firms across sectors according to investment preferences, expected returns, and stock prices variations on financial markets. In return, firms pay dividends to their investors. Financial capital is thus a function of dividends and stock valuations, whereas physical capital is a function of the total capital allocated by the financial sector. Whereas our previous work focused on the background fields that describe potential long-term equilibria, here we compute the transition functions of individual agents and study their probabilistic dynamics in the background field, as a function of their initial state. We show that capital accumulation depends on various factors. The probability associated with each firm's trajectories is the result of several contradictory effects: the firm tends to shift towards sectors with the greatest long-term return, but must take into account the impact of its shift on its attractiveness for investors throughout its trajectory. Since this trajectory depends largely on the average capital of transition sectors, a firm's attractiveness during its relocation depends on the relative level of capital in those sectors. Thus, an under-capitalized firm reaching a high-capital sector will experience a loss of attractiveness, and subsequently, in investors. Moreover, the firm must also consider the effects of competition in the intermediate sectors. An under-capitalized firm will tend to be ousted out towards sectors with lower average capital, while an over-capitalized firm will tend to shift towards higher averagecapital sectors. For investors, capital allocation depends on their short and long-term returns. These returns are not independent: in the short-term, returns are composed of both the firm's dividends and the increase in its stock prices. In the long-term, returns are based on the firm's growth expectations, but also, indirectly, on expectations of higher stock prices. Investors' capital allocation directly depends on the volatility of stock prices and {\ldots}rms'dividends. Investors will tend to reallocate their capital to maximize their short and long-term returns. The higher their level of capital, the stronger the reallocation will be.
    Date: 2023–11
  6. By: Miguel Acosta-Henao; Sangeeta Pratap; Manuel Taboada
    Abstract: We evaluate the mechanisms behind relationship lending and its macroeconomic consequences. Using confidential credit registry data merged with firm tax records in Chile, we find that a closer relationship with a bank gives firms access to more credit at better terms. More productive and larger firms have closer relationships with banks. We build a dynamic model of firm behavior where firms choose their relationship status jointly with investment and borrowing decisions. Calibrating the model to Chilean data, we find that borrowing in relationships allows for greater screening and monitoring of firms, provides implicit guarantees to other creditors and necessitates a lower amount of collateral. More productive firms select into relationships, and relationship lending allows for larger loans at lower interest rates. Counterfactual experiments indicate that the effects of relationship lending are large. Extending these benefits to all firms results in an increase of almost 30 percent in aggregate output, capital and TFP.
    Date: 2023–11
  7. By: Lu, Shun (Nottingham University Business School China, University of Nottingham Ningbo, China); Glushenkova, Marina (Nottingham University Business School China, University of Nottingham Ningbo, China); Huang, Wei (Nottingham University Business School China, University of Nottingham Ningbo, China,); Matthews, Kent (Cardiff Business School)
    Abstract: This study explores the impact of relationship banking on the financial constraints and loan conditions of small and medium-sized enterprises (SMEs) in China. Our research contributes to the literature in several ways. First, we examine both the financial costs and loan benefits associated with SME relationship banking, extending the scope of existing literature. Second, our study is unique in its focus on micro-enterprises, rather than large-scale listed companies in China. Lastly, we enhance the quality of the analysis by using direct measures of firms’ spending on bank relationships and their financial constraints, drawn from a recent survey on SMEs in China. Our findings are twofold. On one hand, bank relationship spending significantly reduces financial constraints for SMEs by facilitating access to loans. On the other hand, while this spending enables SMEs to secure more bank credit and longer-term loans, it also results in higher interest rates, increased guarantee requirements, and overall dissatisfaction with loan services. Our research provides new insights into the role of 'guanxi' in China's credit market and its consequences.
    Keywords: SME Financing, Relationship Banking, China, Financial Constraints
    JEL: G21 L14 O53
    Date: 2024–01
  8. By: Marco Molteni (Geneva Graduate Institute and University of Oxford)
    Abstract: This paper employs quantitative and qualitative methods to examine the link between overbanking, banking competition, and financial distress during the interwar period in Europe, focusing on Italy as a case study. Econometric analysis on bank balance sheet data and a systematic review of contemporary printed sources show that banks experiencing distress had opened many branches and were operating in areas with harsher competition. Poor managerial choices had led banks to face higher operational costs, pushing them towards more remunerative but riskier activities. The 1920s saw a profound transformation of the Italian banking system, with extensive branch expansion and cut-throat competition for deposits. This work argues that such changes in the banking system’s structure made it more fragile, exposing it more to the negative effects of the international crisis following the New York Stock Exchange crash in 1929. Available evidence on other European countries suggests that Italy was not an isolated case. The study contributes to the literature on banking crises during the Great Depression and on the relationship between banking competition and financial stability.
    Keywords: overbanking, banking competition, banking crises, Great Depression, branch banking, Italy, interwar period
    JEL: N14 N24 G01 G21 G32
    Date: 2024–01
  9. By: Houda Haffoudhi (Université de Gabes); Brahim Guizani (École Supérieure de la Statistique et de l’Analyse de l’Information, 6 Rue des Métiers)
    Abstract: This paper examines the relationship between financial development (FD), corruption, and the size of shadow economies in the MENA region from 1996 to 2018. An important contribution is the study of how FD and corruption can interplay to affect informality. Several pooled regressions are run on the entire sample and various subsamples in order to understand the heterogeneity that might exist among countries. Even after addressing the potential endogeneity problem of the variables, we find robust results showing that increases in corruption and FD reduce the size of the informal sector. Therefore, corruption plays the role of “greasing the wheels” in the Middle East and North Africa (MENA) region. Moreover, these two dimensions are substitutable in relation to the unofficial economy; the marginal impact of increasing along one dimension is higher when the other dimension is low. The subsample analysis reveals that the impacts of FD and corruption can be remarkably different between low-corruption and highly corrupt countries. Interestingly, the statistical significance of these two factors vanishes for the high-income countries. Obviously, the efforts against informality in the MENA region are multidimensional and dynamic. Further, at each stage of economic, financial, and institutional development, new factors may appear and gain importance.
    Date: 2023–12–20
  10. By: Moloney, Kitty (Central Bank of Ireland); O'Gorman, Paraic (Central Bank of Ireland); O’Sullivan, Max (Central Bank of Ireland); Reddan, Paul (Central Bank of Ireland)
    Abstract: In this Note we focus on non-banks lending to small and medium-sized enterprises (SMEs). Understanding how non-bank lenders (NBLs) to SMEs fund themselves and the interconnections they have with other entities helps us to assess the lenders’ resilience and how their activities may impact the real economy. We find they have significant interconnections with European banks and other international financial entities, as well as with European parent non-financial companies (NFCs). We also present an activity-based taxonomy of NBLs to SMEs containing three main categories. Asset Finance Providers mainly receive funding through their (European) parent companies. Specialist Property and General Lenders rely on a mix of market-based sources of funding and the banking sector, and often borrow through variable rate loans. We suggest that Specialist Property Lenders are the most important category from a financial stability perspective as they are lending to a systemically important sector of the Irish economy, are specialist lenders (increasing concentration risk) and appear to be more sensitive to current financial conditions.
    Date: 2023–12
  11. By: McCann, Fergal (Central Bank of Ireland); McGeever, Niall (Central Bank of Ireland); Peia, Oana (University College Dublin)
    Abstract: We study the transmission of credit supply shocks to firms by exploiting the unexpected exit of the third-largest lender in the Irish business lending market in 2020 and a unique matched firm-lender dataset that covers both banks and nonbank financial institutions. We find that borrowers of the exiting bank receive less credit along both the extensive and intensive margin in the period after the announcement, highlighting that credit supply is not perfectly substitutable across lenders. However, we show that this negative credit supply shock is partly mitigated by non-bank lenders. Borrowers of the exiting bank are more likely to borrow from non-banks following the shock, with the effects driven by business loan facilities, and stronger among riskier firms.
    Keywords: credit supply, non-bank lending, banking relationships.
    JEL: G21 G23 G30 G32
    Date: 2023–10
  12. By: Goodhart, C. A. E.; Postel-Vinay, Natacha
    Abstract: The City of Glasgow Bank failure in 1878, which led to large numbers of shareholders becoming insolvent, generated great public concern about their plight, and led directly to the 1879 Companies Act, which paved the way for the adoption of limited liability for all shareholders. In this paper, we focus on the question of why the opportunity was not taken to distinguish between the appropriate liability for ‘insiders, ’ i.e. those with direct access to information and power over decisions, as contrasted with ‘outsiders.’ We record that such issues were raised and discussed at the time, and we report why proposals for any such graded liability were turned down. We argue that the reasons for rejecting graded liability for insiders were overstated, both then and subsequently. While we believe that the case for such graded liability needs reconsideration, it does remain a complex matter, as discussed in Section 4.
    Keywords: corporate governance; limited liability; bank risk-taking; financial regulation; financial crises; senior management regime; banks; banking
    JEL: G21 G28 G30 G32 G39 N23 K22 K29 L20
    Date: 2024–02–01
  13. By: Brausewetter, Lars; Ludolph, Melina
    Abstract: We study the impact of stricter and more harmonized banking regulation along the income distribution using household survey data for 25 EU countries. Exploiting country-level heterogeneity in the implementation of European Banking Union directives allows us to control for confounders and identify effects. Our results show that these regulatory reforms aimed at increasing financial system resilience affected households heterogeneously. More stringent regulation reduces income growth for low-income households due to employment exits. Yet it tends to increase growth rates at the top of the distribution both for employee and self-employed income.
    Keywords: distributional effects, EU-SILC microdata, financial regulation, income inequality
    JEL: D31 G21 G28 G50
    Date: 2023
  14. By: Wayne Passmore; Roger Sparks
    Abstract: This paper analyzes a model of the mortgage market, considering scenarios with and without government-sponsored mortgage securitization. Conventional wisdom says that securitization, by fostering diversification and creating a “safe†asset in the form of mortgage-backed security (MBS), will reduce risk and enhance liquidity, thereby mitigating financial crises. We construct a strategic-game framework to model the interaction between the securitizer and banks. In this framework, the securitizer initiates the process by setting the MBS contract terms, which includes the guaranteed rate and the criterion that qualifies a mortgage for securitization. The bank then selects which qualifying mortgages to exchange for the MBS. Our investigation leads to a key result: government-sponsored securitization, somewhat counterintuitively, is more likely to exacerbate the severity and frequency of financial crises.
    Keywords: Financial Crises; Government Sponsored; Mortgage Market; Mortgage-backed securities (MBS); Securitization
    Date: 2024–01–19
  15. By: Paczos, Wojtek (Cardiff Business School); Shakhnov, (†University of Surrey)
    Abstract: Sovereigns issue debt on both domestic and foreign markets and the two debts are uncorrelated in the data. Sovereigns default mostly selectively. We propose a theory to rationalize these observations. A government chooses the optimal combination of two debts to smooth consumption, which is subject to output shock and volatile tax distortions. In equilibrium, it mostly relies on domestic debt to smooth the tax wedge and on foreign debt to smooth the output shock. Issuing either debt is less costly than raising taxes, but it is subject to default risk due to the government’s limited commitment. A quantitative, calibrated model with two shocks and two debts replicates well debt-to-GDP ratios, default frequencies, cyclical properties of emerging economies and behavior of aggregates around default episodes.
    Keywords: sovereign debt, selective default, debt composition
    JEL: F34 G15 H63
    Date: 2024–02
  16. By: Froemel, Maren (Bank of England); Paczos, Wojtek (Cardiff Business School)
    Abstract: This paper explores the link between default risk and fiscal procyclicality. We show that countries with higher sovereign risk have a more procyclical fiscal expenditure policy, which is driven mostly by transfers. We build a small open economy model with income inequality, social transfers, and default risk to rationalize this fact. Without default risk transfers are countercyclical, inequality is procyclical, and external debt is used to smooth distortionary taxation. With default risk, transfers account for most of fiscal adjustment because taxation becomes costly for the government. Transfers become procyclical and inequality worsens during times when risk premia are high. We confirm the predictions of the model in the data: in recessions in economies with default risk, transfers take the bigger burden relative to government consumption, whereas the opposite is true in economies with low default risk.
    Keywords: fiscal policy, default risk, income inequality, redistribution, emerging markets
    JEL: E62 F34 F41
    Date: 2024–01
  17. By: Schmöller, Michaela; McClung, Nigel
    Abstract: This paper studies price stability and debt sustainability when the real rate exceeds trend growth (r > g) in a New Keynesian model with endogenous technology growth through R&D. Under debt-stabilizing ("passive") fiscal policy the Taylor principle is not sufficient for determinacy. Instead, monetary policy should at least aim to raise r − g with persistent inflation in order to stabilize the expectations of households, firms and innovators. Endogenous growth provides a self-financing mechanism for deficits under active fiscal policy; growth provides some backing for the public debt, which reduces the need for debt-stabilizing inflation when current fiscal deficits are not backed by future fiscal surpluses. Because growth creates some fiscal space, a monetary policy that adheres to the Taylor principle combined with active fiscal policy can yield a unique stable equilibrium, provided that the policy permits r−g to fall with inflation.
    Keywords: Public Debt, Inflation, Monetary-Fiscal Interaction, Fiscal Theory of the Price Level, Endogenous Growth
    JEL: E31 E52 E62 E24 O42
    Date: 2024
  18. By: Giovanni Ugazio; Weining Xin
    Abstract: We empirically examine U.S. monetary policy spillovers to the Middle East and Central Asia (ME & CA) region by decomposing U.S. interest rates changes into two orthogonal shocks: the pure monetary policy shock and the information news shock. Using a sample of 16 ME & CA countries, we find that when interest rates increase, the two shocks have opposite spillovers on the region. Tightening driven by contractionary monetary policy shocks hinders growth, while tightening driven by positive information news shocks boosts growth despite higher interest rates. Countries with weaker fundamentals face more negative spillovers from contractionary monetary policy shocks but may sometimes benefit more from positive information news shocks. Moreover, high oil prices mitigate both spillovers for oil exporters while global risk appetite amplifies both spillovers. Finally, we estimate a large degree of heterogeneity in the impact of the 2022 U.S. tightening cycle on ME & CA countries, with oil exporters with stronger fundamentals withstanding well the shock and oil importers with weaker fundamentals being hit the most.
    Keywords: U.S. monetary policy; spillovers; fundamentals; oil prices
    Date: 2024–01–19
  19. By: Lee, King Fuei
    Abstract: This study investigates the relationship between monetary policy frameworks and stock market volatilities across countries. Using a novel classification framework by Cobham (2021), we study 84 countries across the world over the period of 1984 to 2017. We find that countries that maintain a fixed exchange rate peg tend to experience higher levels of stock market volatility, while countries adopting flexible inflation-targeting policies tend to exhibit lower levels of stock market volatilities. Additionally, the stock markets of countries operating under monetary policies characterized by unstructured discretion tend to be more volatile, while those operating with well-structured discretion tend to be more stable. Our results also suggest that while the choice of monetary policy framework is an important determinant of stock market volatility, it is not the only factor driving it. As such, policymakers should carefully consider the implications of different monetary policy frameworks when designing monetary policy, and take a holistic approach to financial stability that incorporates a range of factors beyond just monetary policy frameworks.
    Keywords: Monetary Policy Frameworks, Stock Market Volatility, Exchange Regimes, Inflation-Targeting
    JEL: E42 G10
    Date: 2023–12
  20. By: Jérome Dugast (DRM - Dauphine Recherches en Management - Université Paris Dauphine-PSL - PSL - Université Paris sciences et lettres - CNRS - Centre National de la Recherche Scientifique); Thierry Foucault (GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC - HEC Paris - Ecole des Hautes Etudes Commerciales - CNRS - Centre National de la Recherche Scientifique)
    Abstract: We study, using a noisy rational expectations framework, how the availability of new data to forecast asset payoffs ("data abundance") affect the capital allocated to quantitative asset managers ("data miners") relative to other active asset managers, the mean and the cross-sectional dispersion of their performance, and price informativeness. Data miners search for predictors of asset payoffs and trade when they find one with a sufficiently high precision. Data abundance raises the precision of the best predictors. Yet, it eventually induces data miners to lower the bar for their signal precision. Then, their performance becomes more dispersed, and they receive less capital. Overall, data abundance is both a catalyst and an impediment to the rise of quant funds.
    Keywords: Big Data, Active Asset Management, Data Mining, Price Informativeness
    Date: 2023–05–04
  21. By: James A. Clouse
    Abstract: This paper develops an analytical framework aimed at shedding light on the implications of the evolution of financial market structure for monetary policy implementation and transmission. The basic model builds on that developed in Chen et. al. (2014) which, in turn, draws inspiration from the pioneering work of Tobin (1969) and Gurley and Shaw (1960). The paper focuses, in particular, on the implications of introducing new types of fixed-rate financial assets in the financial system including retail and wholesale central bank digital currency (CBDC), stablecoins issued by narrow nonbanks, and deposits issued by narrow banks. The analysis also provides a crude way of capturing some of the effects of bank capital and liquidity regulation on financial intermediation and monetary policy implementation. Perhaps the most important conclusion is that the introduction of new fixed-rate assets by the Federal Reserve or by other financial intermediaries can have significant effects on equilibrium interest rates and patterns of financial intermediation and may also affect the potency of monetary policy tools. These effects are most pronounced when new financial assets are close substitutes for existing financial assets.
    Keywords: Bank Regulation; Financial Innovation; Monetary Policy Implementation; Monetary policy
    JEL: E40 E42 E43 E44 E50 E52
    Date: 2024–01–16
  22. By: Kai Arvai; Nuno Coimbra
    Abstract: How does a country obtain the status of a safe haven with a dominant global currency? This paper argues that size matters: as a country becomes larger and more diversified, the underlying shock process of the economy becomes less variable. Shocks that can drive a government to default become less likely, implying lower default probability, lower interest rates and higher debt-to-GDP. Furthermore, the larger a country’s share in the supply of global safe assets, the more liquid and attractive its bonds are for investors. If the dominant currency country grows less than the rest of the world, its status as a safe haven erodes and interest rate differentials decline. This could explain the recent evidence of shrinking US return differentials on its cross-border bond portfolios.
    Keywords: Dominant Currency, Safe Assets, US Dollar, Default
    JEL: E42 F02 F33 N10
    Date: 2023
  23. By: International Monetary Fund
    Abstract: A systemic vulnerability analysis and stress tests were conducted as part of the Maldives FSAP. The vulnerability analysis and stress tests were based on quarterly aggregate balance sheet supervisory data for the eight banks in Maldives as of December 2022. Identified vulnerabilities were subjected to hypothetical extreme but plausible scenarios that were informed by the Risk Assessment Matrix. Risks analyzed were credit risk, liquidity risk and market risk. Credit risks materialized as non-performing loans and pressure on pre-provision income, liquidity risks as deposit outflows, and market risks as changes in interest and exchange rates.
    Date: 2024–01–19
  24. By: Barbaglia, Luca (European Commission); Fatica, Serena (European Commission); Rho, Caterina (European Commission)
    Abstract: We document that European banks charge higher interest rates on loans granted to firms in areas at high risk of flooding. At 6 basis points, the average risk premium is rather small, and does not adequately reflect the deterioration of loan performance in the aftermath of flood episodes, however. Firms in flooded counties are more likely to default on their loans than non-disaster firms. Floods reduce securitised credit in the local markets, suggesting that physical risks associated with climate change are borne within the banking sector.
    Keywords: climate change, loan default, loan pricing, natural disasters
    JEL: C55 G21 Q51 Q54
    Date: 2023–11
  25. By: Pagano, Andrea (European Commission); Bellia, Mario (European Commission); Di Girolamo, Francesca (European Commission); Papadopoulos, Georgios (European Commission)
    Abstract: This paper uses a simulation model to evaluate the effects of river flooding events occurring within Germany on regional' banks. Under a 1.5 degrees Celcius increase in temperature, the impact is overall rather small, even accounting for the devaluation of loans exposed to floods. However, under a 3 degrees Celcius increase, bank losses can reach 1% of total assets. We show that the implementation of adaptation solutions would be successful in keeping risks at the current level.
    Keywords: Physical risk, river flood events, dynamic balance sheet, banking crisis
    JEL: C15 G2 Q54
    Date: 2023–11

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