|
on Central Banking |
| By: | Hernando Vargas; Pamela Cardozo |
| Abstract: | We analyse three models to determine the conditions under which reserve requirements are used as a part of an optimal monetary policy framework in an inflation targeting regime. In all cases the Central Bank (CB) minimizes an objective function that depends on deviations of inflation from its target, the output gap and deviations of reserve requirements from its optimal long term level. In a closed economy model we find that optimal monetary policy implies setting reserve requirements at their long term level, while adjusting the policy interest rate to face macroeconomic shocks. Reserve requirements are included in an optimal monetary policy response in an open economy model with the same CB objective function and in a closed economy model in which the CB objective function includes financial stability. The relevance, magnitude and direction of the movements of reserve requirements depend on the parameters of the economy and the shocks that affect it. |
| Keywords: | Reserve Requirements, Inflation Targeting, Monetary Policy. Classification JEL: E51, E52, E58. |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:bdr:borrec:716i&r=cba |
| By: | Daniel L. Thornton |
| Abstract: | Since the late 1980s the Fed has implemented monetary policy by adjusting its target for the overnight federal funds rate. Money’s role in monetary policy has been tertiary, at best. Indeed, several influential economists have suggested that money is irrelevant for monetary policy. They suggest that central banks can control inflation by (i) controlling a very short-term nominal interest rate and (ii) influencing financial market participants’ expectation of the future policy rate in order to exert greater control over longer-term rates. I offer an alternative perspective: namely, that money is essential for the central bank’s control over the price level and that the monetary authority’s control over interest rates is exaggerated. |
| Keywords: | Monetary policy ; Money ; Federal funds rate |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2012-020&r=cba |
| By: | Lieven Baele (Finance Department, CentER, and Netspar, Tilburg University); Geert Bekaert (Graduate School of Business, Columbia University, and NBER); Seonghoon Cho (School of Economics, Yonsei University); Koen Inghelbrecht (Department Financial Economics, Ghent University, and Finance Department, University College Ghent); Antonio Moreno (Department of Economics, University of Navarra) |
| Abstract: | We estimate a New-Keynesian macro model accommodating regime-switching behavior in monetary policy and in macro shocks. Key to our estimation strategy is the use of survey-based expectations for inflation and output. Output and inflation shocks shift to the low volatility regime around 1985 and 1990, respectively. However, we also identify multiple shifts between accommodating and active monetary policy regimes, which play an as important role as shock volatility in driving the volatility of the macro variables. We provide new estimates of the onset and demise of the Great Moderation and quantify the relative role played by macro-shocks and monetary policy. The estimated rational expectations model exhibits indeterminacy in the mean square stability sense, mainly because monetary policy is excessively passive. |
| Keywords: | Monetary Policy, Regime-Switching, Survey Expectations, New-Keynesian Models, Great Moderation, Macr |
| JEL: | E31 E32 E52 E58 C42 C53 |
| Date: | 2012–07–31 |
| URL: | http://d.repec.org/n?u=RePEc:una:unccee:wp0312&r=cba |
| By: | Roman Horváth (Charles University, Prague and IOS, Regensburg); Kateřina Šmídková; Jan Zápal |
| Abstract: | We assess whether the voting records of central bank boards are informative about future monetary policy using data on five inflation targeting countries (the Czech Republic, Hungary, Poland, Sweden and the United Kingdom). We find that in all countries the voting records, namely the difference between the average voted-for and actually implemented policy rate, signal future monetary policy, making a case for publishing the records. This result holds even if we control for the financial market expectations; include the voting records from the period covering the current global financial crisis and examine the differences in timing and style of the voting record announcements. |
| Keywords: | monetary policy, voting record, transparency, collective decision-making |
| JEL: | D78 E52 E58 |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:ost:wpaper:316&r=cba |
| By: | Nicholas Apergis (University of Piraeus); Stephen M. Miller (University of Nevada, Las Vegas and University of Connecticut); Effrosyni Alevizopoulou (University of Piraeus) |
| Abstract: | The monetary authorities affect the macroeconomic activity through various channels of influence. This paper examines the bank lending channel, which considers how central bank actions affect deposits, loan supply, and real spending. The monetary authorities influence deposits and loan supplies through its main indicator of policy, the real short-term interest rate. This paper employs the endogenously determined target interest rate emanating from the central bank’s monetary policy rule to examine the operation of the bank lending channel. Furthermore, it examines whether different bank-specific characteristics affect how European banks react to monetary shocks. That is, do sounder banks react more to the monetary policy rule than less-sound banks. In addition, inflation and output expectations alter the central bank’s decision for its target interest rate, which, in turn, affect the banking system’s deposits and loan supply. Robustness tests, using additional control variables, (i.e., the growth rate of consumption, the ratio loans to total deposits, and the growth rate of total deposits) support the previous results. |
| Keywords: | Monetary policy rules, bank lending channel, European banks, GMM methodology |
| JEL: | G21 E52 C33 |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:uct:uconnp:2012-10&r=cba |
| By: | Ansgar Belke; Jens Klose |
| Abstract: | We propose an alternative way of estimating Taylor reaction functions if the zero-lower-bound on nominal interest rates is binding. This approach relies on tackling the real rather than the nominal interest rate. So if the nominal rate is (close to) zero central banks can influence the inflation expectations via quantitative easing. The unobservable inflation expectations are estimated with a state-space model that additionally generates a time-varying series for the equilibrium real interest rate and the potential output - both needed for estimations of Taylor reaction functions. We test our approach for the ECB and the Fed within the recent crisis. We add other explanatory variables to this modified Taylor reaction function and show that there are substantial differences between the estimated reaction coefficients in the pre- and crisis era for both central banks. While the central banks on both sides of the Atlantic act less inertially, put a smaller weight on the inflation gap, money growth and the risk spread, the response to asset price inflation becomes more pronounced during the crisis. However, the central banks diverge in their response to the output gap and credit growth. |
| Keywords: | Zero-lower-bound; Federal Reserve; European Central Bank; equilibrium real interest rate; Taylor rule |
| JEL: | E43 E52 E58 |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:rwi:repape:0343&r=cba |
| By: | Hippolyte d'Albis (Centre d'Economie de la Sorbonne - Paris School of Economics); Emmanuelle Augeraud-Véron (MIA - Université de la Rochelle); Hermen Jan Hupkes (Department of Mathematics - University of Missouri - Columbia) |
| Abstract: | This paper proposes conditions for the existence and uniqueness of solutions to systems of differential equations with delays or advances in which some variables are non-predetermined. An application to the issue of optimal interest rate policy is then develop in a flexible-price model where money enters the utility function. Central banks have the choice between a rule that depends on past inflation rates or one that depends on predicted interest rates. When inflation rates are selected over a bounded time interval, the problem is characterized by a system of delay or advanced differential equations. We then prove that if the central bank's forecast horizon is not too long, an active and forward-looking monetary policy is not too destabilizing : the equilibrium trajectory is unique and monotonic. |
| Keywords: | Interest rate rules, indeterminacy, functionnal differential equations. |
| JEL: | E52 E21 E63 |
| Date: | 2012–06 |
| URL: | http://d.repec.org/n?u=RePEc:mse:cesdoc:12051&r=cba |
| By: | Csávás, Csaba; Erhart, Szilárd; Naszódi, Anna; Pintér, Klára |
| Abstract: | There is ample empirical evidence in the literature for the positive effect of central bank transparency on the economy. The main channel is that transparency reduces the uncertainty regarding future monetary policy and thereby it helps agents to make better investment, and saving decisions. In this paper, we document how the degree of transparency of central banks in Central and Eastern Europe has changed during periods of financial stress, and we argue that during the recent financial crisis central banks became less transparent. We investigate also how these changes affected the uncertainty in these economies, measured by the degree of disagreement across professional forecasters over the future short-term and long-term interest rates and also by their forecast accuracy. |
| Keywords: | central banking; transparency; financial crises; survey expectations; forecasting |
| JEL: | E58 E44 E47 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:40335&r=cba |
| By: | Paul Levine (University of Surrey); Joseph Pearlman (Loughborough University); Bo Yang (University of Surrey) |
| Abstract: | This paper examines the implications of imperfect information (II) for optimal monetary policy with a consistent set of informational assumptions for the modeller and the private sector an assumption we term the informational consistency. We use an estimated simple NK model from Levine et al. (2012), where the assumption of symmetric II information significantly improves the fit of the model to US data to assess the welfare costs of II under commitment, discretion and simple Taylor-type rules. Our main results are: first, common to all information sets we find significant welfare gains from commitment only with a zero-lower bound constraint on the interest rate. Second, optimized rules take the form of a price level rule, or something very close across all information cases. Third, the combination of limited information and a lack of commitment can be particulary serious for welfare. At the same time we find that II with lags introduces a 'tying ones hands' effect on the policymaker that may improve welfare under discretion. Finally, the impulse response functions under our most extreme imperfect information assumption (output and inflation observed with a two-quarter delay) exhibit hump-shaped behaviour and the fiscal multiplier is significantly enhanced in this case. |
| JEL: | C11 C52 E12 E32 |
| Date: | 2012–08 |
| URL: | http://d.repec.org/n?u=RePEc:sur:surrec:1012&r=cba |
| By: | Christopher Otrok (Department of Economics, University of Missouri-Columbia); Gianluca Benigno; Huigang Chen; Alessandro Rebucci; Eric R. Young |
| Abstract: | This paper studies monetary and macro-prudential policies in a simple model with both a nominal rigidity and a financial friction that give rise to price and financial stability objectives. We find that lowering the degree of nominal rigidity or increasing the strength of the interest rate response to inflation is always welfare increasing in the model, despite a tradeoff between price and financial stability that we document. Even though crises become more severe as the economy moves toward price flexibility, the cost of the nominal rigidity is always higher than the cost of the financial friction in welfare terms in the model. We also find that macro-prudential policy implemented by augmenting traditional monetary policy with a reaction to debt is always welfare increasing despite making crises more severe. In contrast, implementing macro-prudential policy with a separate tax on debt is always welfare decreasing despite making crises relatively less severe. The key difference lies in the behaviour of the nominal exchange rate, that is more depreciated in the economy with the tax on debt and increases the initial debt burden. |
| Keywords: | Financial Frictions, Financial Crises, Financial Stability, Macro-Prudential Policies, Nominal Rigidities, Monetary Policy. |
| JEL: | E52 F37 F41 |
| Date: | 2012–07–24 |
| URL: | http://d.repec.org/n?u=RePEc:umc:wpaper:1208&r=cba |
| By: | Petreski, Marjan; Jovanovic, Branimir |
| Abstract: | Any attempt to model monetary policy in China has to take into account two ‘specifics’ of the Chinese monetary policy: the reliance on several operational instruments, both quantitative (open market operations, discount rate, reserve requirement) and qualitative (selective credit allowances, window guidance etc.), as well as the combined strategy pursued by the People’s Bank of China, i.e. the two intermediate targets - the exchange rate and the money growth. In this paper we analyze monetary policy in China using a small, three-equation New Keynesian model, considering these issues as follows: first, the qualitative instruments are estimated by using the Kalman filter, as no data on them exist. Then, a monetary-policy index is created as a weighted average of the quantitative and the qualitative instruments, which is in turn included in the model instead of the interest rate. Finally, the two intermediate targets (monetary growth and exchange rate) are included in the monetary-policy rule. Our results suggest that monetary authorities in China consider stabilizing inflation and output gap when making their decisions. Intermediate targets, in particular the growth of the monetary aggregates, appear to be important determinants of the monetary-policy behaviour, implying that their omission might be a serious drawback of any analysis. We also find that omitting the qualitative instruments can lead to wrong conclusions about monetary-policy conduct. |
| Keywords: | New Keynesian model; China; monetary policy |
| JEL: | E43 E12 E52 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:40497&r=cba |
| By: | Kornél Kisgergely (Ministry for National Economy (Hungary)) |
| Abstract: | This paper empirically tests whether monetary policy can have a perverse effect on aggregate demand in emerging economies, because of short-term speculative inflows. For this purpose, a bayesian VAR is estimated on a panel of six major emerging countries. Monetary and risk shocks are identified by imposing only very mild restrictions. It is found that a positive interest rate shock results in a persistent decline in production and inflation. The net foreign asset position even improves in most of the countries. Thus no large net inflows are observed and there is no sign of a perverse effect on aggregate demand. More interestingly, central banks loosen interest rate policy significantly and persistently in the face of a capital inflow shock, possibly to dampen the immediate disinflationary effect of the appreciation and/or to protect balance sheets from exchange rate volatility. In some specifications this results in overheating (positive industrial production gap and inflation) in the medium-term. Thus central banks might amplify the effect of risk premium shocks by cutting interest rates–rather than raising them—when capital flows in. |
| Keywords: | carry trade, monetary policy, emerging markets |
| JEL: | C11 C33 C54 E44 E58 F32 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:mnb:wpaper:2012/3&r=cba |
| By: | Samuel G. Hanson; Jeremy C. Stein |
| Abstract: | Changes in monetary policy have surprisingly strong effects on forward real rates in the distant future. A 100 basis-point increase in the 2-year nominal yield on an FOMC announcement day is associated with a 42 basis-point increase in the 10-year forward real rate. This finding is at odds with standard macro models based on sticky nominal prices, which imply that monetary policy cannot move real rates over a horizon longer than that over which all prices in the economy can readjust. Rather, the responsiveness of long-term real rates to monetary shocks appears to reflect changes in term premia. One mechanism that may generate such variation in term premia is based on demand effects coming from "yield-oriented" investors. We find some evidence supportive of this channel. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2012-46&r=cba |
| By: | Serhan Cevik; Katerina Teksoz |
| Abstract: | This paper empirically investigates the effectiveness of monetary policy transmission in the Gulf Cooperation Council (GCC) countries using a structural vector autoregressive model. The results indicate that the interest rate and bank lending channels are relatively effective in influencing non-hydrocarbon output and consumer prices, while the exchange rate channel does not appear to play an important role as a monetary transmission mechanism because of the pegged exchange rate regimes. The empirical analysis suggests that policy measures and structural reforms - strengthening financial intermediation and facilitating the development of liquid domestic capital markets - would advance the effectiveness of monetary transmission mechanisms in the GCC countries. |
| Keywords: | Monetary policy , Inflation , Interest rates on loans , Currency pegs , Bank credit , Economic growth , Economic conditions , Cooperation Council for the Arab States of the Gulf , |
| Date: | 2012–07–26 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:12/191&r=cba |
| By: | Robert Kollmann |
| Abstract: | This paper estimates a two-country model with a global bank, using U.S. and Euro area (EA) data, and Bayesian methods. The estimated model matches key U.S. and EA business cycle statistics. Empirically, a model version with a bank capital requirement outperforms a structure without such a constraint. A loan loss originating in one country triggers a global output reduction. Banking shocks matter more for EA macro variables than for U.S. real activity. During the Great Recession (2007–09), banking shocks accounted for about 20 percent of the fall in U.S. and EA GDP, and for more than half of the fall in EA investment and employment. |
| Keywords: | International finance ; Financial markets |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:120&r=cba |
| By: | Roman Horvath; Jakub Seidler; Laurent Weill |
| Abstract: | This paper examines the relation between banks' capital and liquidity creation. This issue is of interest to determine the potential impact of higher capital requirements for banks on their liquidity creation, which may have particular importance with new Basel III reform demanding from banks higher capital. We perform Granger-causality tests in a dynamic GMM panel estimator framework on an exhaustive dataset of Czech banks from 2000 to 2010. We observe a strong expansion of liquidity creation during the full period, which was slowed by the financial crisis, and was mainly driven by large banks. We show that capital is found to negatively Granger-cause liquidity creation but also observe that liquidity creation Granger-causes capital reduction. These findings support the view that Basel III reforms demanding higher capital can reduce liquidity creation, but also that greater liquidity creation can have a detrimental impact by reducing bank solvency. We thus show that there might be a trade-off between the benefits of financial stability induced by stronger capital requirements and those of increased liquidity creation of banking sector. |
| Keywords: | Bank capital, liquidity creation. |
| Date: | 2012–06 |
| URL: | http://d.repec.org/n?u=RePEc:cnb:wpaper:2012/05&r=cba |
| By: | Leo de Haan; Jan Willem van den End |
| Abstract: | We investigate 62 Dutch banks’ liquidity behaviour between January 2004 and March 2010, when these banks were subject to a liquidity regulation that is very similar to Basel III’s Liquidity Coverage Ratio (LCR). We find that most banks hold more liquid assets against their stock of liquid liabilities, such as demand deposits, than strictly required under the regulation. More solvent banks hold fewer liquid assets against their stock of liquid liabilities, suggesting an interaction between capital and liquidity buffers. However, this interaction turns out to be weaker during a crisis. Although not required, some banks consider cash flows scheduled beyond one month ahead when setting liquidity asset holdings, but they seldom look further ahead than one year. |
| Keywords: | Banks; Liquidity; Regulation |
| JEL: | G21 G28 G32 |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:346&r=cba |
| By: | Luca Guerrieri; Matteo Iacoviello; Raoul Minetti |
| Abstract: | This paper studies the international propagation of sovereign debt default. We posit a two-country economy where capital constrained banks grant loans to firms and invest in bonds issued by the domestic and the foreign government. The model economy is calibrated to data from Europe, with the two countries representing the Periphery (Greece, Italy, Portugal and Spain) and the Core, respectively. Large contractionary shocks in the Periphery trigger sovereign default. We find sizable spillover effects of default from Periphery to the Core through a drop in the volume of credit extended by the banking sector. |
| JEL: | F4 G21 H63 |
| Date: | 2012–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18303&r=cba |
| By: | Luc Laeven; Fabian Valencia |
| Abstract: | We update the widely used banking crises database by Laeven and Valencia (2008, 2010) with new information on recent and ongoing crises, including updated information on policy responses and outcomes (i.e. fiscal costs, output losses, and increases in public debt). We also update our dating of sovereign debt and currency crises. The database includes all systemic banking, currency, and sovereign debt crises during the period 1970-2011. The data show some striking differences in policy responses between advanced and emerging economies as well as many similarities between past and ongoing crises. |
| Keywords: | Banking crisis , Databases , Deposit insurance , Developed countries , Emerging markets , Financial crisis , Fiscal policy , Monetary policy , Sovereign debt , |
| Date: | 2012–06–22 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:12/163&r=cba |
| By: | Bosma, Jakob; Koetter, Michael; Wedow, Michael |
| Abstract: | We identify the connections between financial institutions from different sectors of the financial industry based on joint extreme movements in credit default swap (CDS) spreads. First, we estimate pairwise co-crash probabilities (CCP) to identify significant connections among 193 international financial institutions and explain CCPs with shared country and/or sectoral origin indicators. Second, we use network centrality measures to identify systemically important financial institutions. Third, we test if bailouts stabilized network neighbors and thus this financial system. Financial firms from the same sector and country are most likely significantly connected. Inter-sector and intra-sector connectivity across countries also increase the likelihood of significant links. Central network indicators based on significant CCPs identify many institutions that failed during the 2007/2008 crisis. Excess equity returns in response to bank bailouts are overall negative and significantly lower for connected banks. -- |
| Keywords: | Extreme Value Theory,CDS Spreads,Systemic Institutions,Network Stability |
| JEL: | C14 G14 G21 H12 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:162012&r=cba |
| By: | Yung Chul Park (Asian Development Bank Institute (ADBI)); Charles Wyplosz |
| Abstract: | This paper reviews some of the current debates on the reform of the international monetary system. Despite its deficiencies, the United States (US) dollar will remain the dominant currency and Special Drawing Rights (SDR) cannot serve as either an international medium of exchange or a reserve currency. The International Monetary Fund (IMF) has changed its position to accept capital controls under certain circumstances. Refining control instruments better tuned to present day markets may bring about greater acceptance. The 2008–2009 global financial crisis has dimmed much of the earlier hope for the multilateralized Chiang Mai Initiative. The currency swap arrangements portend a new form of international cooperation. Finally, for the Group of Twenty (G20) to matter, the systemically important countries need to ensure the stability of their financial systems and economies. |
| Keywords: | International monetary reforms, International monetary system, IMF, SDR, capital control, currency swap, financial system |
| JEL: | F32 F33 F42 |
| Date: | 2012–06 |
| URL: | http://d.repec.org/n?u=RePEc:eab:financ:23313&r=cba |
| By: | Manuk Ghazanchyan; Nils O Maehle; Olumuyiwa Adedeji; Janet Gale Stotsky |
| Abstract: | This study examines the relationship between the foreign exchange regime and macroeconomic performance in Eastern Africa. The study focuses on seven countries, five of which decisively liberalized their foreign exchange regimes. The study assesses the relationship between (i) growth and various determinants, including the exchange regime, the real exchange rate, and current account liberalization; and (ii) inflation and various determinants, including lagged inflation, the nominal exchange rate, the exchange regime, and liberalization. We find that in our sample, for the determinants of growth, investment and the real exchange rate are significant determinants but not the exchange regime or liberalization; and for inflation, the lagged inflation rate, nominal exchange rate, and the de facto regime are significant. Exchange rate pass-through is limited. |
| Keywords: | Economic growth , East Africa , Exchange rate regimes , Foreign exchange , |
| Date: | 2012–06–07 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:12/148&r=cba |
| By: | Jihad Dagher; Kazim Kazimov |
| Abstract: | We examine the impact of banks’ exposure to market liquidity shocks through wholesale funding on their supply of credit during the financial crisis in the United States. We focus on mortgage lending to minimize the impact of confounding demand factors that could potentially be large when comparing banks’ overall lending across heterogeneous categories of credit. The disaggregated data on mortgage applications that we use allows us to study the time variations in banks’ decisions to grant mortgage loans, while controlling for bank, borrower, and regional characteristics. The wealth of data also allows us to carry out matching exercises that eliminate imbalances in observable applicant characteristics between wholesale and retail banks, as well as various other robustness tests. We find that banks that were more reliant on wholesale funding curtailed their credit significantly more than retail-funded banks during the crisis. The demand for mortgage credit, on the other hand, declined evenly across wholesale and retail banks. To understand the aggregate implications of our findings, we exploit the heterogeneity in mortgage funding across U.S. Metropolitan Statistical Areas (MSAs) and find that wholesale funding was a strong and significant predictor of a sharper decline in overall mortgage credit at the MSA level. |
| Keywords: | Bank credit , Banking sector , Credit demand , Credit risk , Financial crisis , Global Financial Crisis 2008-2009 , Loans , Supply , |
| Date: | 2012–06–13 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:12/155&r=cba |
| By: | Helmut Stix |
| Abstract: | The paper analyzes why households in transition economies prefer to hold sizeable shares of their assets in cash at home rather than in banks. Using survey data from ten Central, Eastern and Southeastern European countries, I document the relevance of this behavior and show that cash preferences cannot be fully explained by whether people are banked or unbanked. The analysis reveals that a lack of trust in banks, memories of past banking crises and weak tax enforcement are important factors. Moreover, cash preferences are stronger in dollarized economies where a “safe” foreign currency serves as a store of value. JEL classification: E41, O16, G11, D12, P34 |
| Keywords: | Cash demand, cash hoarding, household finance, trust in banks, social capital, dollarization |
| Date: | 2012–07–27 |
| URL: | http://d.repec.org/n?u=RePEc:onb:oenbwp:178&r=cba |
| By: | Blakespoor, Elizabeth (Stanford University); Linsmeier, Thomas J. (Financial Accounting Standards Board); Petroni, Kathy (MI State University); Shakespeare, Catherine (University of MI) |
| Abstract: | Many have argued that financial statements created under an accounting model that measures financial instruments at fair value would not fairly represent a bank's business model. In this study we examine whether financial statements using fair values for financial instruments better describe banks' credit risk than less fair-value-based financial statements. Specifically, we assess the extent to which leverage ratios that are derived using financial instruments measured along a fair value continuum are associated with various measures of credit risk. Our leverage ratios include financial instruments measured at 1) fair value; 2) US GAAP mixed-attribute values; and 3) Tier 1 bank capital values. The credit risk measures we consider are bond yield spreads and future bank failure. We find that leverage measured using the fair values of financial instruments explains significantly more variation in bond yield spreads and bank failure than the other less fair-value-based leverage ratios in both univariate and multivariate analyses. We also find that the fair value of loans and secondarily deposits appear to be the primary sources of incremental explanatory power. |
| Date: | 2012–06 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:stabus:2107&r=cba |
| By: | Gianluca Benigno; Huigang Chen; Christopher Otrok; Alessandro Rebucci; Eric R. Young |
| Abstract: | In the aftermath of the global financial crisis, a new policy paradigm has emerged in which old-fashioned policies such as capital controls and other government distortions have become part of the standard policy toolkit (the so-called macro-prudential policies). On the wave of this seemingly unanimous policy consensus, a new strand of theoretical literature contends that capital controls are welfare enhancing and can be justified rigorously because of second-best considerations. Within the same theoretical framework adopted in this fast-growing literature, we show that a credible commitment to support the exchange rate in crisis times always welfare-dominates prudential capital controls as it can achieve the first best unconstrained allocation. In this benchmark economy, prudential capital controls are optimal only when the set of policy tools is restricted so that they are the only policy instrument available. |
| Keywords: | Capital controls, exchange rate policy, financial frictions, financial crises, financial stability, optimal taxation, prudential policies, planning problem |
| JEL: | E52 F37 F41 |
| Date: | 2012–08 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepdps:dp1160&r=cba |
| By: | Christopher Otrok (Department of Economics, University of Missouri-Columbia); Gianluca Benigno; Huigang Chen; Alessandro Rebucci; Eric R. Young |
| Abstract: | In the aftermath of the global Â…nancial crisis, a new policy paradigm has emerged in which old-fashioned policies such as capital controls and other government distortions have become part of the standard policy toolkit (the so-called macro-prudential policies). On the wave of this seemingly unanimous policy consensus, a new strand of theoretical literature contends that capital controls are welfare enhancing and can be justified rigorously because of second-best considerations. Within the same theoretical framework adopted in this fast-growing literature, we show that a credible commitment to support the exchange rate in crisis times always welfare-dominates prudential capital controls as it can achieve the first best unconstrained allocation. In this benchmark economy, prudential capital controls are optimal only when the set of policy tools is restricted so that they are the only policy instrument available. |
| Keywords: | Capital Controls, Exchange Rate Policy, Financial Frictions, Financial Crises, Financial Stability, Optimal Taxation, Prudential Policies, Planning Problem. |
| JEL: | E52 F37 F41 |
| Date: | 2012–08–01 |
| URL: | http://d.repec.org/n?u=RePEc:umc:wpaper:1209&r=cba |
| By: | Tiago Severo |
| Abstract: | I construct a systemic liquidity risk index (SLRI) from data on violations of arbitrage relationships across several asset classes between 2004 and 2010. Then I test whether the equity returns of 53 global banks were exposed to this liquidity risk factor. Results show that the level of bank returns is not directly affected by the SLRI, but their volatility increases when liquidity conditions deteriorate. I do not find a strong association between bank size and exposure to the SLRI - measured as the sensitivity of volatility to the index. Surprisingly, exposure to systemic liquidity risk is positively associated with the Net Stable Funding Ratio (NSFR). The link between equity volatility and the SLRI allows me to calculate the cost that would be borne by public authorities for providing liquidity support to the financial sector. I use this information to estimate a liquidity insurance premium that could be paid by individual banks in order to cover for that social cost. |
| Date: | 2012–07–27 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:12/194&r=cba |
| By: | Gustavo Adler |
| Abstract: | Large fiscal financing needs, both in advanced and emerging market economies, have often been met by borrowing heavily from domestic banks. As public debt approached sustainability limits in a number of countries, however, high bank exposure to sovereign risk created a fragile inter-dependence between fiscal and bank solvency. This paper presents a simple model of twin (sovereign and banking) crisis that stresses how this interdependence creates conditions conducive to a self-fulfilling crisis. |
| Keywords: | Banks , Financial crisis , Fiscal risk , Public debt , Sovereign debt , |
| Date: | 2012–07–06 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:12/178&r=cba |
| By: | Gersbach, Hans; Rochet, Jean-Charles |
| Abstract: | We provide a rationale for imposing counter-cyclical capital ratios on banks. In our simple model, bankers cannot pledge the entire future revenues to investors, which limits borrowing in good and bad times. Complete markets do not sufficiently stabilize credit fluctuations, as banks allocate too much borrowing capacity to good states and too little to bad states. As a consequence, bank credit, output, capital prices or wages are excessively volatile. Imposing a (stricter) capital ratio in good states corrects the misallocation of the borrowing capacity, increases expected output and can be beneficial to all agents in the economy. Although in our economy, all agents are risk-neutral, counter-cyclical capital ratios are an effective stabilization tool. To ensure this effectiveness, capital ratios have to be based on ex ante equity capital, as classical capital ratios can be bypassed. |
| Keywords: | Complete Markets; Credit Fluctuations; Macroprudential Regulation; Misallocation of Borrowing Capacity |
| JEL: | D86 G21 G28 |
| Date: | 2012–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9077&r=cba |
| By: | Masayuki Susai (Nagasaki University); Yushi Yoshida (Faculty of Economics, Kyushu Sangyo University) |
| Abstract: | We investigate the intra-day effect of interventions in both the post- global crisis and pre-crisis periods by the Bank of Japan (BOJ) in foreign exchange markets using limit order data at intra-day high frequency. First, we find that the relationship between order flow and market return in dollar/yen exchange markets breaks down following unexpected and very high volumes of offer/sell orders by BOJ interventions. Then, a simple methodology of using large recursive residual is proposed to detect the exact timing of interventions. Second, the dataset allows measuring how long an individual limit order stays in the market. With the measured lifetime of limit orders, we find interventions, detected by the proposed methodology, significantly reduce the life-time of limit order in the market. By applying the same methodology on non-intervention days, we find no such evidence on the life-time of limit orders although large recursive residuals are also pervasive in non-intervention days. |
| Keywords: | the Bank of Japan; Central bank interventions; Foreign exchange market; Life time of limit order; Order flow. |
| JEL: | F31 G12 G14 G15 E58 |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:kyu:dpaper:56&r=cba |
| By: | Mohamed Azzim Gulamhussen (University of Lisbon); Carlos Pinheiro (Caixa Geral de Depositos); Alberto Franco Pozzolo (Università degli Studi del Molise, MoFiR, CASMeF and Centro Studi Luca d\'Agliano) |
| Abstract: | The recent financial crisis has clearly shown that the relationship between bank internationalization and risk is complex. Multinational banks can benefit from portfolio diversification, reducing their overall riskiness, but this effect can be offset by incentives going in the opposite direction, leading them to take on excessive risks. Since both effects are grounded on solid theoretical arguments, the answer of what is the actual relationship between bank internationalization and risk is left to the empirical analysis. In this paper, we study such relationship in the period leading to the financial crisis of 2007-2008. For a sample of 384 listed banks from 56 countries, we calculate two measures of risk for the period from 2001 to 2007 – the expected default frequency (EDF), a market-based and forward-looking indicator, and the Z-score, a balance-sheet-based and backward-looking measure – and relate them to their degree of internationalization. We find robust evidence that international diversification increases bank risk. |
| Keywords: | Banks, Risks, Multinational Banking, Economic Integration, Market structure |
| JEL: | G21 G32 F23 F36 L22 |
| Date: | 2012–07–16 |
| URL: | http://d.repec.org/n?u=RePEc:csl:devewp:332&r=cba |
| By: | Marco Bardoscia |
| Abstract: | Operational risk is the risk relative to monetary losses caused by failures of bank internal processes due to heterogeneous causes. A dynamical model including both spontaneous generation of losses and generation via interactions between different processes is presented; the efforts made by the bank to avoid the occurrence of losses is also taken into account. Under certain hypotheses, the model can be exactly solved and, in principle, the solution can be exploited to estimate most of the model parameters from real data. The forecasting power of the model is also investigated and proved to be surprisingly remarkable. |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1207.6186&r=cba |
| By: | Fabien Tripier (LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - Université de Nantes : EA4272) |
| Abstract: | In view of the recent proposals on banking reform in the wake of the recent global economic crisis, this paper identifies some efficiency gains associated with narrow banking using an approach based on search theory. It is herein shown that the optimal allocation of resources can be decentralised through competition between narrow banks (which take deposits from households) and finance houses (which make loans to entrepreneurs), whereas such a decentralisation is not feasible for commercial banks (which both take deposits and make loans). When a non-financial agent (such as a household) bargains with a commercial bank, it succeeds in appropriating a share of the value associated with the financial services provided to other non-financial agents (such as entrepreneurs) because commercial banks are affected by search frictions on both the loan and credit markets. This cross-market sharing prevents commercial banks from sharing the value of financial services with non-financial agents efficiently, and can be the origin of credit rationing and multiple equilibria. Because the use of narrow banking suppresses this cross-market sharing, it makes the competitive equilibrium efficient. |
| Keywords: | Banking; Matching; Bargaining; Multiple Equilibria |
| Date: | 2012–07–19 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-00719386&r=cba |
| By: | Iman van Lelyveld; Daan in 't Veld |
| Abstract: | This paper investigates the network structure of interbank markets, which has proved to be important for financial stability during the crisis. First, we describe and map the interbank network in the Netherlands, an exception in the literature because of its small and open banking environment. Secondly, we follow recent analyses of interbank markets of Germany and Italy in estimating the Core Periphery model, using data for the Netherlands instead. We find a significant Core Periphery structure and discuss model selection. The overall analysis opens up new opportunities for systemic risk assessments of the interbank market, especially as more granular data is becoming available for the eurozone. |
| Keywords: | Interbank networks; Core-periphery; loan intermediation |
| JEL: | G10 G21 L14 |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:348&r=cba |
| By: | Love, Inessa; Peria, Maria Soledad Martinez |
| Abstract: | Combining multi-year, firm-level surveys with country-level panel data for 53 countries, the authors explore the impact of bank competition on firms'access to finance. They find that low competition, as measured by high values of the Lerner index, diminishes firms'access to finance, while commonly-used bank concentration measures are not robust predictors of firms'access to finance. In addition, they find that the impact of competition on access to finance depends on the environment that banks operate in. Some features of the environment, such as greater financial development and better credit information, can mitigate the damaging impact of low competition. But other characteristics, such as high government bank ownership, can exacerbate the negative effect. |
| Keywords: | Access to Finance,Banks&Banking Reform,Debt Markets,Economic Theory&Research,Environmental Economics&Policies |
| Date: | 2012–08–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:6163&r=cba |
| By: | Alessandro Spelta; Tanya Araujo |
| Abstract: | We study the international interbank market through a geometrical and a topological analysis of empirical data. The geometrical analysis of the time series of cross-country liabilities shows that the systematic information of the interbank international market is contained in a space of small dimension, from which a topological characterization could be conveniently carried out. Weighted and complete networks of nancial linkages across countries are developed, for which continuous clustering, degree centrality and closeness centrality are computed. The behavior of these topological coecients reveals an important modication acting in the nancial linkages in the period 1997-2011. Here we show that, besides the generalized clustering increase, there is a persistent increment in the degree of connectivity and in the closeness centrality of some countries. These countries seem to correspond to critical locations where tax policies might provide opportunities to shift debts. Such critical locations highlight the role that specic countries play in the network structure and helps to situates the turbulent period that has been characterizing the global nancial system since the Summer 2007 as the counterpart of a larger structural change going on for a more than one decade. |
| Keywords: | Cross-border exposures, interbank networks, nancial linkages, debt shifting |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:ise:isegwp:wp192012&r=cba |
| By: | Dominique Guegan (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris); Bertrand Hassani (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon Sorbonne, BPCE - BPCE) |
| Abstract: | Following Banking Committee on Banking Supervision, operational risk quantification is based on the Basel matrix which enables sorting incidents. In this paper, we deeply analyze these incidents and propose strategies for carrying out the supervisory guidelines proposed by the regulators. The objectives are as follows. On the first hand, banks need to provide a univariate capital charge for each cell of the Basel matrix. On the other hand, banks need also to provide a global capital charge corresponding to the whole matrix taking into account dependences. This paper proposes several solutions and attracts the regulators and managers attention on two crucial points : the granularity and the risk measures. |
| Keywords: | Operational risks; Loss Distribution Function; risk measures; EVT; Vine copula |
| Date: | 2012–07–31 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-00722029&r=cba |
| By: | Ugo Panizza; Jean-Louis Arcand; Enrico Berkes |
| Abstract: | This paper examines whether there is a threshold above which financial development no longer has a positive effect on economic growth. We use different empirical approaches to show that there can indeed be "too much" finance. In particular, our results suggest that finance starts having a negative effect on output growth when credit to the private sector reaches 100% of GDP. We show that our results are consistent with the "vanishing effect" of financial development and that they are not driven by output volatility, banking crises, low institutional quality, or by differences in bank regulation and supervision. |
| Keywords: | Cross country analysis , Development , Economic growth , Financial sector , Financial systems , |
| Date: | 2012–06–20 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:12/161&r=cba |
| By: | Andre Lucas (VU University Amsterdam, and Duisenberg school of finance); Bastiaan Verhoef (Royal Bank of Scotland) |
| Abstract: | We investigate the effect of model specification on the aggregation of (correlated) market and credit risk. We focus on the functional form linking systematic credit risk drivers to default probabilities. Examples include the normal based probit link function for typical structural models, or the exponential (Poisson) link function for typical reduced form models. We first show analytically how model specification impacts 'diversification benefits' for aggregated market and credit risk. The specification effect can lead to Value-at-Risk (VaR) reductions in the range of 3 percent to 47 percent, particularly at high confidence level VaRs. We also illustrate the effects using a fully calibrated empirical model for US data. The empirical effects corroborate our analytic results. |
| Keywords: | risk aggregation; credit risk; market risk; link function; diversification; reduced form models; structural models |
| JEL: | G32 G21 C58 |
| Date: | 2012–05–31 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20120057&r=cba |
| By: | Sue Lewis; Flore-Anne Messy |
| Abstract: | Savings and investments by individuals are important both for personal financial well-being and for economic growth. Many governments try to encourage their citizens to save more, or to save more appropriately, by preferring formal institutions to informal saving and by promoting more diversification. However, there are considerable barriers to saving, including limited access to financial markets by some groups, complexity of financial products and information asymmetries. Knowledge and understanding of saving and investment concepts is particularly low in many countries. In addition, there are behavioural and cultural factors which may limit people’s propensity to save. As a consequence, policy makers have developed several strategies to influence whether and how individuals save. Policy responses typically involve a combination of prudential regulation and consumer protection legislation, financial incentives, financial education and awareness initiatives, as well as behavioural techniques to encourage people into sound saving decisions.<P>Education financière, épargne et investissement : Vue d'ensemble<BR>L’épargne et les investissements des particuliers sont importants, à la fois pour le bien-être financier personnel et pour la croissance économique. De nombreux pays s’efforcent d’encourager leurs citoyens à épargner davantage ou mieux, en préconisant des structures officielles plutôt qu’une épargne informelle et en favorisant une plus grande diversification. Il existe toutefois des obstacles considérables à l’épargne, notamment l’accès limité de certains groupes aux marchés financiers, la complexité des produits financiers et les asymétries d’information. La connaissance et la compréhension des notions d’épargne et d’investissement sont particulièrement faibles dans de nombreux pays. En outre, des facteurs comportementaux et culturels peuvent limiter la propension des ménages à épargner. Par conséquent, les responsables publiques élaborent diverses stratégies visant à influer sur l’épargne des particuliers. Les mesures prises associent en général réglementation prudentielle et législation en matière de protection des consommateurs, de même que des incitations financières, des programmes d’éducation financière et de sensibilisation, et des techniques comportementales encourageant les particuliers à prendre des décisions appropriées en matière d’épargne. |
| Keywords: | investment, saving, financial education, financial literacy, consumer protection, investissement, épargne, éducation financière, connaissance financière, protection des consommateurs |
| JEL: | D14 D18 E21 I28 |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:oec:dafaad:22-en&r=cba |
| By: | Edouard Challe (Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X, Banque de France - -); Benoit Monjon (Centre de recherche de la Banque de France - Banque de France); Xavier Ragot (Centre de recherche de la Banque de France - Banque de France, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - Ecole des Ponts ParisTech - Ecole Normale Supérieure de Paris - ENS Paris - INRA) |
| Abstract: | We analyse the risk-taking behaviour of heterogenous intermediaries that are protected by limited liability and choose both their amount of leverage and the risk exposure of their portfolio. Due the opacity of the financial sector, outside providers of funds cannot distinguishing "prudent" intermediaries from those "imprudent" ones that voluntarily hold high-risk portfolios and expose themselves to the risk of bankrupcy. We show how the number of imprudent intermediaries is determined in equilibrium jointly with the interest rate, and how both ultimately depend on the cross-sectional distribution of intermediaries'capital. One implication of our analysis is that an exogenous increase in the supply of funds to the intermediary sector (following, e.g., capital inflows) lowers interest rates and raises the number of imprudent intermediaries (the risk-taking channel of low interest rates). Another one is that easy financing may lead an increasing number of intermediaries to gamble for resurection following a bad shock to the sector's capital, again raising economywide systemic risk (the gambling-for-resurection channel of falling equity). |
| Keywords: | Risk shifting; Portfolio correlation; Systemic risk; Financial opacity. |
| Date: | 2012–07–23 |
| URL: | http://d.repec.org/n?u=RePEc:hal:psewpa:hal-00719952&r=cba |
| By: | Veysov, Alexander |
| Abstract: | This paper is to provide literature review on traditional financial system classification and offer and alternative classification of financial systems. Conventional wisdom holds that there are basically 2 types of financial systems – bank-based and market-based. But modern research points to the fact that such opinion may be quite biased. We consider several functions of financial system (not only financing, but corporate governance and information dissemination) and construct a database of financial metrics and institutional variables is order to conduct cluster-analysis. Our findings include: dichotomy does not hold; institutional environment is a key driver of financial system development; commodity exporters have inadequately low institutional development level. |
| Keywords: | financial system; classification; cluster analysis; alternative classification |
| JEL: | E6 |
| Date: | 2012–07–21 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:40613&r=cba |