The outburst of the euro area sovereign debt crisis made evident the feedback loop between the sovereigns and the banks. The aim of this paper is to analyze whether the feedback loop has receded after the implementation by the European authorities of a number of monetary and regulatory policy measures. Our econometric exercises focus on the short and long-term dimensions of the feedback loop. Results reveal, for peripheral countries, a moderate decrease in the short-run feedback loop and a more pronounced decline of the long-run feedback counterpart. Despite this two-fold reduction in the feedback loop, our analysis shows that it has not disappeared. This calls for the need to adopt a number of additional policy and private sector measures.
{"title":"The Sovereign-Bank Feedback Loop: Did European Policies Alleviate It?","authors":"J. Arnal, Antonio Moreno","doi":"10.2139/ssrn.3131935","DOIUrl":"https://doi.org/10.2139/ssrn.3131935","url":null,"abstract":"The outburst of the euro area sovereign debt crisis made evident the feedback loop between the sovereigns and the banks. The aim of this paper is to analyze whether the feedback loop has receded after the implementation by the European authorities of a number of monetary and regulatory policy measures. Our econometric exercises focus on the short and long-term dimensions of the feedback loop. Results reveal, for peripheral countries, a moderate decrease in the short-run feedback loop and a more pronounced decline of the long-run feedback counterpart. Despite this two-fold reduction in the feedback loop, our analysis shows that it has not disappeared. This calls for the need to adopt a number of additional policy and private sector measures.","PeriodicalId":344099,"journal":{"name":"ERN: Banking & Monetary Policy (Topic)","volume":"11 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2018-02-27","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"121565917","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In state-of-the-art New Keynesian model firms are monopolistically competitive and prices are sticky. However, the average markup resulting from the monopolistic competition is usually assumed away either by production subsidy or by the zero-inflation steady state. Also, in models of an open economy the same level of price stickiness is assumed for both countries. In this paper I study the optimal rate of inflation in a two country model keeping the average markup and allowing price stickiness to differ between countries. There are two channels that govern the optimal rate of inflation. First, with local currencies an inflation tax is partly imposed on the foreign country, so it is optimal to inflate. Second, the average markup constitutes a cost of holding money so it is optimal to deflate, to compensate this cost. The paper has four novel findings: 1) in the local currencies regime the first motive dominates and the optimal inflation is positive. 2) In a monetary union the first motive is absent and the optimal inflation is negative and below the Friedman rule. 3) A monetary union improves global welfare even when stickiness is different in two countries. However, when this difference is large, only one country (the one with higher stickiness) benefits from the integration. 4) A monetary union can be welfare improving for each of both countries, if a transfer is introduced from the more sticky to the more flexible country of (depending on the parameters up to) 2% of its GDP.
{"title":"Optimal Inflation, Average Markups and Asymmetric Sticky Prices","authors":"Wojtek Paczos","doi":"10.2139/ssrn.3128306","DOIUrl":"https://doi.org/10.2139/ssrn.3128306","url":null,"abstract":"In state-of-the-art New Keynesian model firms are monopolistically competitive and prices are sticky. However, the average markup resulting from the monopolistic competition is usually assumed away either by production subsidy or by the zero-inflation steady state. Also, in models of an open economy the same level of price stickiness is assumed for both countries. In this paper I study the optimal rate of inflation in a two country model keeping the average markup and allowing price stickiness to differ between countries. There are two channels that govern the optimal rate of inflation. First, with local currencies an inflation tax is partly imposed on the foreign country, so it is optimal to inflate. Second, the average markup constitutes a cost of holding money so it is optimal to deflate, to compensate this cost. The paper has four novel findings: 1) in the local currencies regime the first motive dominates and the optimal inflation is positive. 2) In a monetary union the first motive is absent and the optimal inflation is negative and below the Friedman rule. 3) A monetary union improves global welfare even when stickiness is different in two countries. However, when this difference is large, only one country (the one with higher stickiness) benefits from the integration. 4) A monetary union can be welfare improving for each of both countries, if a transfer is introduced from the more sticky to the more flexible country of (depending on the parameters up to) 2% of its GDP.","PeriodicalId":344099,"journal":{"name":"ERN: Banking & Monetary Policy (Topic)","volume":"73 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2018-02-12","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"130123052","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Default correlation is a key driver of credit risk. In the Basel regulatory framework it is measured by the asset value correlation parameter. Though past studies suggest that the parameter is over-calibrated for mortgages — generally the largest asset class on banks’ balance sheets — they do not take into account bias arising from small samples or non-Gaussian risk factors. Adjusting for these biases using a non-Gaussian, non-linear state space model I find that the Basel calibration is appropriate for UK and US mortgages. This model also forecasts mortgage default rates accurately and parsimoniously. The model generates value-at-risk estimates for future mortgage default rates, which can be used to inform stress-testing and macroprudential policy.
{"title":"Mortgages: Estimating Default Correlation and Forecasting Default Risk","authors":"","doi":"10.2139/ssrn.3135271","DOIUrl":"https://doi.org/10.2139/ssrn.3135271","url":null,"abstract":"Default correlation is a key driver of credit risk. In the Basel regulatory framework it is measured by the asset value correlation parameter. Though past studies suggest that the parameter is over-calibrated for mortgages — generally the largest asset class on banks’ balance sheets — they do not take into account bias arising from small samples or non-Gaussian risk factors. Adjusting for these biases using a non-Gaussian, non-linear state space model I find that the Basel calibration is appropriate for UK and US mortgages. This model also forecasts mortgage default rates accurately and parsimoniously. The model generates value-at-risk estimates for future mortgage default rates, which can be used to inform stress-testing and macroprudential policy.","PeriodicalId":344099,"journal":{"name":"ERN: Banking & Monetary Policy (Topic)","volume":"7 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2018-02-09","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"126454210","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Interbanking rates were, until recently, based on judgmental estimates of borrowing costs. We interpret this as a cheap-talk game that allowed banks to communicate nonverifiable information about their opportunity cost to potential counterparties. Under normal market conditions there is a welfare maximizing equilibrium where banks truthfully disclose their borrowing cost, but, in times of financial stress, only “coarse” equilibria survive. We take this prediction to the data and show that banks round more frequently if the risk of the bank increases. Rounding is also more frequent for the more liquid short-term rates and certain benchmark maturities. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.
{"title":"Cheap Talk and Strategic Rounding in Libor Submissions","authors":"Ángel Hernando-Veciana, Michael Tröge","doi":"10.2139/ssrn.3155046","DOIUrl":"https://doi.org/10.2139/ssrn.3155046","url":null,"abstract":"\u0000 Interbanking rates were, until recently, based on judgmental estimates of borrowing costs. We interpret this as a cheap-talk game that allowed banks to communicate nonverifiable information about their opportunity cost to potential counterparties. Under normal market conditions there is a welfare maximizing equilibrium where banks truthfully disclose their borrowing cost, but, in times of financial stress, only “coarse” equilibria survive. We take this prediction to the data and show that banks round more frequently if the risk of the bank increases. Rounding is also more frequent for the more liquid short-term rates and certain benchmark maturities.\u0000 Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.","PeriodicalId":344099,"journal":{"name":"ERN: Banking & Monetary Policy (Topic)","volume":"143 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2018-02-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"132993870","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper is a review of Danmarks Nationalbank's recent analysis of the prospects of implementing a Central Bank Digital Currency (CBDC) in Denmark. We concur with Nationalbanken's conclusion that CBDC does not add efficiency or further functionality to existing payment solutions. We argue, however, that their analysis fails to take into account the potentials for increased financial stability given the fact that CBDC carries no credit risk. We also find that Nationalbanken's dismissal of CBDC on the grounds that it does not provide new monetary policy tools, since interest rates are bound by the fixed exchange rate regime, fails to consider the value of CBDC in the event of a future crisis. Finally, we argue that the Nationalbanken's views may reflect a primary concern with the preservation of the existing banking sector in its current form over and above the needs of the general public.
{"title":"Who Should Make Kroner? - A Review of Danmarks Nationalbank's Analysis of CBDC","authors":"Ole Bjerg, R. Nielsen","doi":"10.2139/ssrn.3124816","DOIUrl":"https://doi.org/10.2139/ssrn.3124816","url":null,"abstract":"This paper is a review of Danmarks Nationalbank's recent analysis of the prospects of implementing a Central Bank Digital Currency (CBDC) in Denmark. We concur with Nationalbanken's conclusion that CBDC does not add efficiency or further functionality to existing payment solutions. We argue, however, that their analysis fails to take into account the potentials for increased financial stability given the fact that CBDC carries no credit risk. We also find that Nationalbanken's dismissal of CBDC on the grounds that it does not provide new monetary policy tools, since interest rates are bound by the fixed exchange rate regime, fails to consider the value of CBDC in the event of a future crisis. Finally, we argue that the Nationalbanken's views may reflect a primary concern with the preservation of the existing banking sector in its current form over and above the needs of the general public.","PeriodicalId":344099,"journal":{"name":"ERN: Banking & Monetary Policy (Topic)","volume":"28 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2018-02-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"132628574","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Large-scale asset programmes aim to impact the real economy through the financial system. The ECB has focused much of its policies on safe assets. An intended channel of transmission of this type of programme is the “portfolio rebalancing channel”, whereby investors are influenced to shift their investments away from such safe assets towards assets with higher expected returns, including lending to households and firms. We examine the portfolio rebalancing channel around the ECB’s asset purchase program (APP). We exploit cross-sectional heterogeneity in the impact of APP on the valuation of the financial portfolio held by different sectors of the European economy. Overall, our results provide evidence of an active portfolio rebalancing channel. In more vulnerable countries, where macroeconomic unbalances and relatively high risk premia remain, APP was mostly reflected into a rebalancing towards riskier securities. In less vulnerable countries, where constraints on loan demand and supply are less significant, the rebalancing was observed mostly in terms of bank loans. Examining large European banks, we confirm similar geographical differences. JEL Classification: E44, E51, G21
{"title":"Portfolio Rebalancing and the Transmission of Large-Scale Asset Programmes: Evidence from the Euro Area","authors":"Ugo Albertazzi, Bo Becker, Miguel Boucinha","doi":"10.2139/ssrn.3116084","DOIUrl":"https://doi.org/10.2139/ssrn.3116084","url":null,"abstract":"Large-scale asset programmes aim to impact the real economy through the financial system. The ECB has focused much of its policies on safe assets. An intended channel of transmission of this type of programme is the “portfolio rebalancing channel”, whereby investors are influenced to shift their investments away from such safe assets towards assets with higher expected returns, including lending to households and firms. We examine the portfolio rebalancing channel around the ECB’s asset purchase program (APP). We exploit cross-sectional heterogeneity in the impact of APP on the valuation of the financial portfolio held by different sectors of the European economy. Overall, our results provide evidence of an active portfolio rebalancing channel. In more vulnerable countries, where macroeconomic unbalances and relatively high risk premia remain, APP was mostly reflected into a rebalancing towards riskier securities. In less vulnerable countries, where constraints on loan demand and supply are less significant, the rebalancing was observed mostly in terms of bank loans. Examining large European banks, we confirm similar geographical differences. JEL Classification: E44, E51, G21","PeriodicalId":344099,"journal":{"name":"ERN: Banking & Monetary Policy (Topic)","volume":"105 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2018-01-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"124786384","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper examines the effects of monetary policy announcements, made by the Reserve Bank of Australia, on the stock price volatility of Australian commercial banks. The results suggest that the announcements of the new target cash rate increase the volatility of Australian banking stocks. In contrast, the release of the explanatory meeting minutes is not associated with any dominant impact on stock price volatility. We find that the volatility is greater during the Global Financial Crisis (GFC). However, both types of events—the announcements of the target cash rate and the releases of the explanatory meeting minutes—are not generally associated with higher volatility of banking stock prices during the GFC.
{"title":"The Impact of Monetary Policy Announcements on the Volatility of Australian Banking Stock Prices","authors":"Nathan J. Atwood, Sigitas Karpavičius","doi":"10.2139/ssrn.3589011","DOIUrl":"https://doi.org/10.2139/ssrn.3589011","url":null,"abstract":"This paper examines the effects of monetary policy announcements, made by the Reserve Bank of Australia, on the stock price volatility of Australian commercial banks. The results suggest that the announcements of the new target cash rate increase the volatility of Australian banking stocks. In contrast, the release of the explanatory meeting minutes is not associated with any dominant impact on stock price volatility. We find that the volatility is greater during the Global Financial Crisis (GFC). However, both types of events—the announcements of the target cash rate and the releases of the explanatory meeting minutes—are not generally associated with higher volatility of banking stock prices during the GFC.","PeriodicalId":344099,"journal":{"name":"ERN: Banking & Monetary Policy (Topic)","volume":"35 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2018-01-17","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"130258735","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The paper aims at introducing an in-depth analysis of Banks Corporate Governance in the after-crisis regulatory environment, going through theoretical and methodological specifications for starting an economic analysis of the post-crisis stream of reforms in the financial system, especially in the Eurozone. In a nutshell, this research has two main purposes: on the one hand, assess whether departures from standard corporate governance paradigms in banks are desirable; on the other hand, shed light on the impact of the rules on the resolution of distressed institutions on governance mechanisms. To achieve those goals, the paper carries out a survey the literature about Bank Governance and Bail-in Regulation in a functional manner to introduce the unexplored link between the new resolution regime and Corporate Governance, focusing the governance role of bail-inable creditors, as “potential residual claimers”. The literature review is supplemented and enriched by the necessary theoretical tools to properly set a Law & Economic analysis, both for what concerns specific agency relationships between corporate constituencies and the nature of financial regulation and bank insolvency. The paper concludes that the after-crisis reforms, and the bail-in regulation, in particular, represent the cornerstone for a new understanding of the relationship between corporate constituencies of banks. Moreover, the links between governance-related issues and the effectiveness of resolution mechanisms constitute a solid argument in favor of a positive role of Corporate Governance in addressing individual as well as systemic stability issues.
{"title":"Law & Economics of Banks Corporate Governance in the Bail-In Era","authors":"Edoardo D. Martino","doi":"10.2139/ssrn.3100703","DOIUrl":"https://doi.org/10.2139/ssrn.3100703","url":null,"abstract":"The paper aims at introducing an in-depth analysis of Banks Corporate Governance in the after-crisis regulatory environment, going through theoretical and methodological specifications for starting an economic analysis of the post-crisis stream of reforms in the financial system, especially in the Eurozone. \u0000In a nutshell, this research has two main purposes: on the one hand, assess whether departures from standard corporate governance paradigms in banks are desirable; on the other hand, shed light on the impact of the rules on the resolution of distressed institutions on governance mechanisms. \u0000To achieve those goals, the paper carries out a survey the literature about Bank Governance and Bail-in Regulation in a functional manner to introduce the unexplored link between the new resolution regime and Corporate Governance, focusing the governance role of bail-inable creditors, as “potential residual claimers”. The literature review is supplemented and enriched by the necessary theoretical tools to properly set a Law & Economic analysis, both for what concerns specific agency relationships between corporate constituencies and the nature of financial regulation and bank insolvency. \u0000The paper concludes that the after-crisis reforms, and the bail-in regulation, in particular, represent the cornerstone for a new understanding of the relationship between corporate constituencies of banks. Moreover, the links between governance-related issues and the effectiveness of resolution mechanisms constitute a solid argument in favor of a positive role of Corporate Governance in addressing individual as well as systemic stability issues.","PeriodicalId":344099,"journal":{"name":"ERN: Banking & Monetary Policy (Topic)","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2018-01-12","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"129261079","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Monies are typically categorized as commodity or fiat, depending on whether the item in question is intrinsically worthless. In the case of bitcoin, it is not so clear. I consider the superficial subjective value argument often put forward by non-monetary economists and a more sophisticated payments technology argument. After dismissing both, I argue that there are two reasonable views on the value of bitcoin. One might claim bitcoin lacks intrinsic worth, in which case its value depends on foresight and coordination. Alternatively, one might claim that bitcoin has intrinsic worth, even if no one else accepts it, because some users have peculiar preferences. In either case, the existence of bitcoin calls into question the practical relevance of the regression theorem.
{"title":"Is Bitcoin Intrinsically Worthless?","authors":"William J. Luther","doi":"10.2139/ssrn.3000068","DOIUrl":"https://doi.org/10.2139/ssrn.3000068","url":null,"abstract":"Monies are typically categorized as commodity or fiat, depending on whether the item in question is intrinsically worthless. In the case of bitcoin, it is not so clear. I consider the superficial subjective value argument often put forward by non-monetary economists and a more sophisticated payments technology argument. After dismissing both, I argue that there are two reasonable views on the value of bitcoin. One might claim bitcoin lacks intrinsic worth, in which case its value depends on foresight and coordination. Alternatively, one might claim that bitcoin has intrinsic worth, even if no one else accepts it, because some users have peculiar preferences. In either case, the existence of bitcoin calls into question the practical relevance of the regression theorem.","PeriodicalId":344099,"journal":{"name":"ERN: Banking & Monetary Policy (Topic)","volume":"72 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2018-01-02","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115399399","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
I investigate the implications of government interventions and regulatory reform on too-big-too-fail expectations in the European banking sector. Evidence from stock returns over the period 1993 to 2016 suggests that large European banks have long benefitted and continue to benefit from implicit government guarantees. I document that investors are willing to accept lower risk-adjusted returns for large bank stocks relative to small bank stocks, because they anticipate that governments absorb part of these stocks’ downside risk during financial crises. Recent regulatory reform introducing bail-in and a common standardized resolution framework for European banks were successful in reducing implicit guarantees at first, but became less credible after the effective implementation of these rules came into question in early 2016.
{"title":"Are European Banks Still Too-Big-to-Fail? The Impact of Government Interventions and Regulatory Reform on Bailout Expectations in the EU","authors":"Lea Borchert","doi":"10.2139/ssrn.3098296","DOIUrl":"https://doi.org/10.2139/ssrn.3098296","url":null,"abstract":"I investigate the implications of government interventions and regulatory reform on too-big-too-fail expectations in the European banking sector. Evidence from stock returns over the period 1993 to 2016 suggests that large European banks have long benefitted and continue to benefit from implicit government guarantees. I document that investors are willing to accept lower risk-adjusted returns for large bank stocks relative to small bank stocks, because they anticipate that governments absorb part of these stocks’ downside risk during financial crises. Recent regulatory reform introducing bail-in and a common standardized resolution framework for European banks were successful in reducing implicit guarantees at first, but became less credible after the effective implementation of these rules came into question in early 2016.","PeriodicalId":344099,"journal":{"name":"ERN: Banking & Monetary Policy (Topic)","volume":"48 1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2017-12-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"134245279","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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