nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2024‒03‒25
nineteen papers chosen by
Georg Man,

  1. Determinants of Zombie Banks in Emerging Markets and Developing Economies By Torsten Wezel; Hannah Sheldon; Zhengwei Fu
  2. Determinants of Non-Performing Assets of Commercial Banks in India By K. Ravirajan; K. R. Shanmugam
  3. Do “Too-Big-To-Fail” Banks Receive Preferential Treatment in Bailouts? Surprising Results from a Cross-Country Analysis By Allen N. Berger; Simona Nistor; Steven Ongena; Sergey Tsyplakov
  4. European banks are not immune to national elections By Fungáčová, Zuzana; Kerola, Eeva; Weill, Laurent
  5. Measuring Macroeconomic Tail Risk By Roberto Marfe; Julien Penasse
  6. Financial Fragility Indexes for Latin American Countries By Martinez Ventura, Constanza; Cizek, Pavel; Benink, Harald
  7. Macroprudential Policies beyond Banking: The Case of Borrower-Based Measures By Huizinga, Harry
  8. The Secular Decline of Bank Balance Sheet Lending By Greg Buchak; Gregor Matvos; Tomasz Piskorski; Amit Seru
  9. Decomposing Large Banks’ Systemic Trading Losses By Radoslav Raykov
  10. Dynamic Equity Slope By Matthijs Breugem; Stefano Colonnello; Roberto Marfe; Francesca Zucchi
  11. Consumption Disconnect Redux By Melone, Alessandro
  12. The Cost of Money is Part of the Cost of Living: New Evidence on the Consumer Sentiment Anomaly By Marijn A. Bolhuis; Judd N. L. Cramer; Karl Oskar Schulz; Lawrence H. Summers
  13. Passive and Proactive Motivations of Cash Holdings By Ryosuke Fujitani; Masazumi Hattori; Tomohide Mineyama
  14. Spillover Effects of US Monetary Policy on Emerging Markets Amidst Uncertainty By Povilas Lastauskas; Anh Dinh Minh Nguyen
  15. Tin the thick of it: an interim assessment of monetary policy transmission to credit conditions By Margherita Bottero; Antonio M. Conti
  16. Price-Level Determination Under the Gold Standard By Jesús Fernández-Villaverde; Daniel R. Sanches
  17. Un réexamen de l’effet de seuil de la dette publique sur la croissance économique en Afrique subsaharienne By TOGBENU, Fo-kossi Edem; Kadanga, Mayo Takémsi Norris
  18. Does Climate Change Affect Firms’ Innovative Capacity in Developing Countries? By Bao-We-Wal Bambe; Jean-Louis Combes; Pascale Combes Motel; Chantale Riziki Oweggi
  19. Financing instruments and challenges for innovation in the EU: Panel evidence from the SAFE survey By Mitra, Alessio; Di Girolamo, Valentina; Canton, Erik

  1. By: Torsten Wezel; Hannah Sheldon; Zhengwei Fu
    Abstract: While deeply undercapitalized banks have been shown to misallocate credit to weak firms, the drivers of such zombie banks are less researched, particularly across countries. To furnish empirical evidence, we compile a dataset of undercapitalized banks from emerging markets and developing economies. We classify zombie banks as those not receiving remedial treatment by owners or regulators or, alternatively, remaining chronically undercapitalized. Using logit regressions, we find that country-specific factors are more influential for zombie status than bank characteristics, alhough some become significant when disaggreating by region. The paper’s overall findings imply the need for a proper regulatory framework and an effective resolution regime to deal with zombie banks more decisively.
    Keywords: Banks; Capital Requirements; Financial Crises
    Date: 2024–02–23
  2. By: K. Ravirajan (Research Scholar (Corresponding Author), Madras School of Economics, Gandhi Mandapam Road, Chennai-600 025 (India)); K. R. Shanmugam (Director and Professor, Madras School of Economics, Gandhi Mandapam Road, Chennai)
    Abstract: Banks’ credit growth continues to decelerate in India due to huge non-performing assets (NPAs) overhangs in banks. This study empirically analyzes the determinants of NPAs of scheduled commercial banks in India during 2009-2020, using the panel data methodology. Results indicate that the excessive credit growth in the past increased the surge in the current NPAS. The economic slowdown also aggravates loan delinquencies in Indian commercial banks. While higher priority sector lending creates higher loan delinquencies, higher banks size and higher profitability reduce it. This study suggests that counter capital buffer, dynamic provisioning and a sound credit appraisal NPA will improve the financial stability and monetary policy effectiveness. We hope that these findings are useful for policymakers, bankers and other stakeholders to make appropriate strategies to resolve the NPA issue is India.
    Keywords: Bank credit, non-performing assets/loans, panel regression, Indian banking sector
    JEL: C23 E51 G11 G21
    Date: 2023–11
  3. By: Allen N. Berger (University of South Carolina - Darla Moore School of Business); Simona Nistor (Babes-Bolyai University - Department of Finance); Steven Ongena (University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; NTNU Business School; Centre for Economic Policy Research (CEPR)); Sergey Tsyplakov (University of South Carolina - Darla Moore School of Business)
    Abstract: Regulators more often bail out “Too-Big-To-Fail” banks than others, but this may not imply preferential treatment as commonly believed. Bailouts are complex dynamic processes involving more than one-time aid, so harsh treatments elsewhere in the process may counter the benefits of the higher likelihood of bailouts for these banks. Using bailout data from 22 European countries we find relatively harsh treatment for Globally-Systemically Important Banks. Regulators bail out G SIBs at later stages of financial deterioration, impose stronger restrictions, and withdraw aid after less significant recoveries. We explain these findings using cross-country data on supervisory powers, political connections, and national culture.
    Keywords: Banks, Bailouts, Too-Big-To-Fail, European Union, G-SIBs
    JEL: G21 G28
    Date: 2024–02
  4. By: Fungáčová, Zuzana; Kerola, Eeva; Weill, Laurent
    Abstract: We investigate whether European banks adjust their loan prices and volumes of new lending in the months running up to major national elections. Using a unique dataset that draws on data covering some 250 banksin 19 Eurozone countries from 2010 to 2020 at monthly frequency, and that includes lending amounts and interest rates on new lending, we find that European banks increase loan rates for corporate and housing loans ahead of elections. This supports the view that loan pricing changes of European banks are driven by the electoral uncertainty inherent to the democratic election process. We find that the impact of elections is more pronounced for small banks, as well as obtain some evidence that elections affect the credit supply of banks. Our findings suggest that the occurrence of elections is affecting the behavior of European banks.
    Keywords: bank, lending, politics, elections, political uncertainty, loan pricing
    JEL: C51 E37 E44 F34
    Date: 2024
  5. By: Roberto Marfe; Julien Penasse
    Abstract: This paper estimates consumption and GDP tail risk dynamics over the long run (1900{ 2020). Our predictive approach circumvents the scarcity of large macroeconomic crises by exploiting a rich information set covering 42 countries. This exible approach does not require asset price information and can thus serve as a benchmark to evaluate the empirical validity of rare disasters models. Our estimates covary with asset prices and forecast future stock returns, in line with theory. A calibration disciplined by our estimates supports the prediction that macroeconomic tail risk drives the equity premium.
    Keywords: rare disasters, equity premium, return predictability
    Date: 2024
  6. By: Martinez Ventura, Constanza (Tilburg University, Center For Economic Research); Cizek, Pavel (Tilburg University, Center For Economic Research); Benink, Harald (Tilburg University, Center For Economic Research)
    Keywords: financial vulnerabilities; political budget cycles; business cycles; empirical mode decomposition
    Date: 2024
  7. By: Huizinga, Harry (Tilburg University, School of Economics and Management)
    Date: 2023
  8. By: Greg Buchak; Gregor Matvos; Tomasz Piskorski; Amit Seru
    Abstract: The traditional model of bank-led financial intermediation, where banks issue demandable deposits to savers and make informationally sensitive loans to borrowers, has seen a dramatic decline since 1970s. Instead, private credit is increasingly intermediated through arms-length transactions, such as securitization. This paper documents these trends, explores their causes, and discusses their implications for the financial system and regulation. We document that the balance sheet share of overall private lending has declined from 60% in 1970 to 35% in 2023, while the deposit share of savings has declined from 22% to 13%. Additionally, the share of loans as a percentage of bank assets has fallen from 70% to 55%. We develop a structural model to explore whether technological improvements in securitization, shifts in saver preferences away from deposits, and changes in implicit subsidies and costs of bank activities can explain these shifts. Declines in securitization cost account for changes in aggregate lending quantities. Savers, rather than borrowers, are the main drivers of bank balance sheet size. Implicit banks’ costs and subsidies explain shifting bank balance sheet composition. Together, these forces explain the fall in the overall share of informationally sensitive bank lending in credit intermediation. We conclude by examining how these shifts impact the financial sector’s sensitivity to macroprudential regulation. While raising capital requirements or liquidity requirements decreases lending in both early (1960s) and recent (2020’s) scenarios, the effect is less pronounced in the later period due to the reduced role of bank balance sheets in credit intermediation. The substitution of bank balance sheet loans with debt securities in response to these policies explains why we observe only a fairly modest decline in aggregate lending despite a large contraction of bank balance sheet lending. Overall, we find that the intermediation sector has undergone significant transformation, with implications for macroprudential policy and financial regulation.
    JEL: E50 G2 G20 G21 G22 G23 G24 G28 G29 L50
    Date: 2024–02
  9. By: Radoslav Raykov
    Abstract: Do banks realize simultaneous trading losses because they invest in the same assets, or because different assets are subject to the same macro shocks? This paper decomposes the comovements of bank trading losses into two orthogonal channels: portfolio overlap and common shocks. While portfolio overlap generates strong comovements, I find that the sensitivity to common shocks from non-overlapping assets is larger. This sensitivity operates through two sub-channels: the short-long interest rate correlation and the stock-bond correlation, driven by macroeconomic factors. This reveals a new trade-off whereby reductions in portfolio overlap can increase the comovement of trading losses by adding exposures to macro shocks.
    Keywords: Financial institutions; Financial stability
    JEL: G10 G11 G20
    Date: 2024–03
  10. By: Matthijs Breugem; Stefano Colonnello; Roberto Marfe; Francesca Zucchi
    Abstract: This paper empirically documents that expected growth volatility is a key driver of the equity term structure dynamics. A general equilibrium model jointly explains four important patterns: (i) a potentially negative unconditional equity term premium, (ii) countercyclical equity term premia, (iii) procyclical equity yields, and (iv) premia to value and growth claims respectively increasing and at with the horizon. The eco- nomic mechanism hinges on the interaction between heteroscedastic long-run growth| which leads to countercyclical risk premia|and homoscedastic short-term shocks under limited market participation|which produce sizable risk premia to short-term cash ows. The equity slope dynamics hold irrespective of the sign of its unconditional average.
    Keywords: Term Structure of Equity, Price Dynamics, General Equilibrium, Ex-pected Growth Volatility
    Date: 2024
  11. By: Melone, Alessandro (Ohio State U)
    Abstract: Several papers show that the apparent disconnect between stock returns and consumption growth is due to mismeasurement in standard consumption data, and propose to use new consumption measures instead. This paper finds that standard consumption is valuable for asset pricing if one focuses on consumption levels rather than growth. I analytically show that, when consumption levels contain a permanent and a transitory component, the latter--dubbed the consumption gap--should predict returns if the time series consumption-based model is valid. A simulated economy demonstrates that the relationship between expected returns and the consumption gap is robust to mismeasurement of consumption. Empirically, the consumption gap forecasts stock returns in-and out-of-sample at horizons from one quarter to five years, even after controlling for alternative popular predictors. This predictability generates significant economic value from the perspective of a mean variance investor. Finally, I use the cross-section of stocks to construct a heuristic stochastic discount factor that displays properties consistent with benchmark macro-finance models.
    JEL: C22 E32 E44 G12
    Date: 2023–06
  12. By: Marijn A. Bolhuis; Judd N. L. Cramer; Karl Oskar Schulz; Lawrence H. Summers
    Abstract: Unemployment is low and inflation is falling, but consumer sentiment remains depressed. This has confounded economists, who historically rely on these two variables to gauge how consumers feel about the economy. We propose that borrowing costs, which have grown at rates they had not reached in decades, do much to explain this gap. The cost of money is not currently included in traditional price indexes, indicating a disconnect between the measures favored by economists and the effective costs borne by consumers. We show that the lows in US consumer sentiment that cannot be explained by unemployment and official inflation are strongly correlated with borrowing costs and consumer credit supply. Concerns over borrowing costs, which have historically tracked the cost of money, are at their highest levels since the Volcker-era. We then develop alternative measures of inflation that include borrowing costs and can account for almost three quarters of the gap in US consumer sentiment in 2023. Global evidence shows that consumer sentiment gaps across countries are also strongly correlated with changes in interest rates. Proposed U.S.-specific factors do not find much supportive evidence abroad.
    JEL: D14 E30 E31 E43 E52 G51 R31
    Date: 2024–02
  13. By: Ryosuke Fujitani; Masazumi Hattori; Tomohide Mineyama
    Abstract: We present a novel fact called the ``V-shaped relationship'' between firms' growth opportunities and cash holdings. Specifically, cash holdings are positively correlated with growth opportunities in firms experiencing positive growth but negatively correlated with those facing adverse growth opportunities. This divergent link suggests that the motivation for cash holdings varies between these two types of firms. To account for this V-shaped relationship, we develop a new numerical model in which a manager optimally determines the levels of investment and cash holdings in response to shocks that affect the corporate production process. A unique aspect of this model is that it incorporates the dual motives of cash holdings: cash serves as a cushion against an adverse shock and simultaneously allows the provision of agile money, thereby seizing a growth opportunity. Considering these passive and proactive motives for cash holdings enables the model to replicate the V-shaped link. Furthermore, we investigate the rise in corporate cash holdings in recent decades through the model and find that tighter borrowing constraints and lower interest rates after the global financial crisis account for more than 60% of the rise in corporate cash holdings.
    Date: 2024–03
  14. By: Povilas Lastauskas; Anh Dinh Minh Nguyen
    Abstract: This paper examines the impact of US monetary policy tightening on emerging markets, distinguishing between direct and indirect spillover effects using the global vector autoregression with stochastic volatility covering 32 countries. The paper demonstrates that an increase in the US interest rate significantly reduces output for emerging markets, leading to larger, more prolonged, and persistent declines. Such an impact is further intensified by global trade integration, causing a sharper yet slightly quicker rebounding output drop. The spillover effects are significantly amplified when US monetary policy tightening is accompanied by an increase in monetary policy uncertainty. Finally, emerging markets exhibit considerable heterogeneity in their responses to US monetary policy shocks.
    Date: 2024–02
  15. By: Margherita Bottero (Bank of Italy); Antonio M. Conti (Bank of Italy)
    Abstract: We use a thick modelling approach to assess the transmission of the unprecedented ECB’s monetary policy hiking cycle, which started in July 2022, to the cost of credit to euro area and Italian non-financial corporations. We uncover two findings. First, the range of forecasts obtained via this approach is wide; simple projections based only on a common trend between reference and lending rates fall in the lower part of it. Second, borrower riskiness emerges in the current juncture as a key driver in explaining the evolution of lending rates, improving substantially forecasts’ accuracy. We also quantify the additional upward risks on lending rates that may stem from unexpected tensions related to sudden outflows of retail deposits and the reduction of the Eurosystem’s balance sheet. Finally, we assess the impact of an adverse credit supply shock on output and inflation dynamics using a Bayesian VAR. The overall results of the paper support the conclusion that a large amount of the effects of monetary tightening is still in the pipeline.
    Keywords: monetary policy transmission, bank lending channel, credit supply, thick modelling, VAR
    JEL: E51 E52 E32 E37 C32
    Date: 2023–10
  16. By: Jesús Fernández-Villaverde; Daniel R. Sanches
    Abstract: We present a micro-founded monetary model of a small open economy to examine the behavior of money, prices, and output under the gold standard. In particular, we formally analyze Hume’s celebrated price-specie flow mechanism. Our framework incorporates the influence of international trade on the money supply in the Home country through gold flows. In the short run, a positive correlation exists between the quantity of money and the price level. Additionally, we demonstrate that money is non-neutral during the transition to the steady state, which has implications for welfare. While the gold standard exposes the Home country to short-term fluctuations in money, prices, and output caused by external shocks, it ensures long-term price stability as the quantity of money and prices only temporarily deviate from their steady-state levels. We discuss the importance of policy coordination for achieving efficiency under the gold standard and consider the role of fiat money in this environment. We also develop a version of the model with two large economies.
    Keywords: Gold standard; specie flows; non-neutrality of money; long-run price stability; inelastic money supply
    JEL: E42 E58 G21
    Date: 2024–02–29
  17. By: TOGBENU, Fo-kossi Edem; Kadanga, Mayo Takémsi Norris
    Abstract: Our study aims to reexamine the relationship between public debt and economic growth in Sub-Saharan African countries over the period from 2000 to 2020. To achieve this, we have chosen to use a dynamic panel threshold model, recently developed by Seo and Shin (2016), to address various estimation issues, including reverse causality and endogeneity. Furthermore, differences among Sub-Saharan African countries in terms of development level, natural resource intensity, institutional quality, and the level of illicit financial flows are examined. The results reveal a U-shaped relationship between public debt and economic growth, indicating the existence of an optimal level of public debt at 58% of GDP for the entire sample. For the group of countries characterized by more developed economies, rich in natural resources in the region with a satisfactory Human Development Index (HDI), relatively better institutional quality, and higher illicit financial flows, a debt threshold of 74% is estimated. In contrast, for the group of countries characterized by lower dependence on natural resources, a lower HDI, less favorable institutional quality, and lower illicit financial flows, a debt threshold is estimated at 47%, significantly lower. These results highlight the diversity of optimal public debt thresholds based on the specific characteristics of Sub-Saharan African countries.
    Keywords: Public debt, economic growth, dynamic panel, Sub-Saharan Africa
    JEL: C33 H63
    Date: 2024–03–13
  18. By: Bao-We-Wal Bambe; Jean-Louis Combes; Pascale Combes Motel; Chantale Riziki Oweggi
    Abstract: We investigate the impact of climate change on firms’ investment in research and development (R&D) in developing countries. The paper relies on two contrasting hypotheses. In the first hypothesis, we speculate an optimistic situation where climate change could induce firms to spend on R&D to both reduce their environmental impact and curb the effects of future climate shocks. In the second hypothesis, we propose a pessimistic scenario where climate change would reduce firms’ incentives to invest in R&D. This second hypothesis would mainly be due to tighter conditions for access to finance from lenders, given the increased uncertainty about the firm’s future returns in the face of climate change. The empirical results support the second scenario, small firms being more severely affected. Furthermore, we examine the underlying mechanisms and identify financial access as the key channel through which climate change reduces R&D investment.
    Keywords: Climate change • Firm innovation • Developing Countries
    JEL: D22 O3 Q54
    Date: 2024–02
  19. By: Mitra, Alessio; Di Girolamo, Valentina; Canton, Erik
    Abstract: This paper studies the firm-level drivers of product, process, organisation and marketing innovation in the EU with panel data from 2009 to 2021. Employing conditional logit and linear probability models we investigate how firms’ characteristics, firms’ sources of financing, and firm perception of different challenges influence their likelihood to innovate. In line with the academic literature, we find that firms’ size and profit level improve firms’ innovation performance, while firms’ age decreases it. We also observe that the effectiveness of different financing instruments varies considerably depending on whether the company is pursuing product, process, organisation or marketing innovation. Finally, innovative firms more frequently report access to finance and regulations as important challenges for their future, while the relevance of other challenges (e.g. the availability of skilled staff or finding customers) varies depending on what type of innovation activities companies are engaged in.
    Keywords: Access to finance, Financing instruments, Innovation challenges, Firm innovation
    JEL: G20 G23 O30
    Date: 2023

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