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on International Finance |
| By: | João Tovar Jalles; André Teixeira |
| Abstract: | This paper explores the impact of fiscal consolidations on banking behavior, focusing on efficiency and stability. Using a panel dataset covering 194 countries from 1989 to 2020 and employing local projection methods, we find that fiscal consolidations improve bank stability at the expense of efficiency. The decline in efficiency is attributed to reduced operational income, while stability gains stem from improved asset quality and bolstered capital adequacy. The effects are heterogeneous: consolidations have a more substantial negative impact on efficiency in advanced economies, while stability improvements are more pronounced in emerging markets. The size and composition of fiscal adjustments also matter: tax-based consolidations favor stability more than expenditure-based ones. Robustness checks with alternative definitions of fiscal consolidations and non-linear models confirm these findings. The findings emphasize the importance of tailoring fiscal consolidations to country-specific factors to balance stability and efficiency in the banking sector. |
| Keywords: | fiscal consolidations, bank efficiency, financial stability, tax-based adjustments, panel data, local projections. |
| JEL: | C23 G21 H3 E62 F34 |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:ise:remwps:wp03702025 |
| By: | Behn, Markus; Claessens, Stijn; Gambacorta, Leonardo; Reghezza, Alessio |
| Abstract: | We investigate the interaction between monetary and macroprudential policy in affecting banks’ lending and risk-taking behaviour using rich euro area credit registry data and exploiting a unique setting that combined a sharp and unexpected monetary tightening with a wave of macroprudential tightening initiated before. While, for the average bank, required capital buffer increases did not significantly reduce lending additionally during the monetary tightening, for those banks that became capital-constrained lending fell by about 1.3-1.8 percentage points more for existing credit relationships and new bank-firm relationships were 2.5-4.4 percentage points less likely to be established, both relative to better-capitalized banks. In addition, such banks were more reluctant to pass higher policy interest rates on to their borrowers and took fewer risks, with a greater reduction in the LTV ratio for newly originated loans, and less reliance on risky assets, such as commercial real estate, as collateral. Our analysis shows that when calibrating monetary and macroprudential policies, it is crucial to account for the effects of policy interactions and the role of bank heterogeneity. JEL Classification: E5, E51, G18, G21 |
| Keywords: | bank lending, macroprudential policy, monetary policy, risk-taking |
| Date: | 2025–03 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253043 |
| By: | Matthias Burgert; Tobias Cwik; Joséphine Molleyres; Barbara Rudolf; Jörn Tenhofen |
| Abstract: | Obtaining reliable estimates of the natural rate of interest, r*, and understanding its drivers is key for assessing long-run trends in real interest rates. In turn, this plays a role in assessing the stance of monetary policy. Against this backdrop, we discuss the evolution of real interest rates in Switzerland and present a portfolio of models used by the Swiss National Bank (SNB) to estimate r* as well as investigate its drivers. Moreover, we discuss the implications of the r* estimates for monetary policy. We find that, consistent with the evolution of real interest rates globally and in Switzerland, all model estimates point to a significant decline in r* since the mid-1980s. Also, r* is lower in Switzerland than abroad. Potential output growth as well as global factors related to the demand for and supply of safe and liquid assets (i.e., the convenience yield) and to demographics (as reflected in the discount factor) appear to be important drivers of the downward trend in r*. However, generally speaking, r* estimates are subject to sizeable model and statistical uncertainty. Concerning policy implications for Switzerland, we argue that while estimates of r* provide an important piece of information for monetary policy, other factors, such as the exchange rate, are also key determinants of monetary conditions for a small open economy such as Switzerland. |
| Keywords: | Natural rate of interest, Demographics, Productivity growth, Monetary policy |
| JEL: | E52 E43 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:snb:snbecs:2025-14 |
| By: | Lorenzo Garlanda-Longueville |
| Abstract: | Hong Kong has been China’s largest net banking creditor from 2009 to 2023, with an important decline starting in 2015. This paper presents an explanation for this decline and assess the impact of Chinese and US monetary policy on international positions between China and Hong Kong during this period, using a local projection approach. Our results indicate that a large part of the decline in the level of outstanding amounts can be attributed to the People’s Bank of China’s (PBoC) accommodative monetary policy and its direct consequence: the narrowing of the spread between Chinese interest rates and those of advanced countries. We explain this development by yield-seeking behavior on the part of international banks resident in Hong Kong. In line with recent literature on the transmission of Chinese monetary policy, we show that the PBoC now operates fully within a market interest rate logic and no longer through purely quantitative instruments (quotas, credit controls and reserve requirements). Finally, our results indicate that the effect of Chinese monetary policy on Hong Kong’s international banking assets is stronger than that of Fed policy, despite the currency peg to the dollar. |
| Keywords: | International Banking, Hong Kong, China, Monetary Policy |
| JEL: | E52 G21 F34 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:drm:wpaper:2025-16 |
| By: | Corpus, John Paul; Cassimon, Danny |
| Abstract: | We examine the effect of net capital inflows on industrialization in the ASEAN-4 countries of Indonesia, Malaysia, Philippines, and Thailand. Using panel data covering 1980–2018, we estimate the influence of both aggregate and disaggregated net capital inflows on the manufacturing sector’s share in employment and real output. We find that aggregate net capital inflows have a negative influence on the manufacturing share of employment. Disaggregating capital inflows reveals that the negative effects emanate from non-FDI inflows, particularly portfolio investment and portfolio debt inflows. Meanwhile, FDI inflows have a positive effect on the manufacturing share of output. Our findings are consistent with existing evidence on the effects of aggregate capital inflows and non-FDI inflows on the manufacturing sector. We make a novel contribution for the ASEAN-4 by tracing the negative effects of non-FDI inflows to portfolio investment and portfolio debt, and uncovering the positive ffect of FDI on manufacturing’s output share. Our findings imply that policymakers in developing countries must pay attention to the influence that capital inflows exert on structural change and their industrialization efforts. |
| Keywords: | capital inflows, structural change, premature deindustrialization, ASEAN-4 |
| Date: | 2025–03 |
| URL: | https://d.repec.org/n?u=RePEc:iob:wpaper:2025.05 |