S. Carbó-Valverde, P. Cuadros-Solas, Francisco Rodríguez-Fernández
Reducing interest rates below zero may be justified on theoretical grounds while, in practice, it is shown to create a number of distortions and malfunctions in several dimensions of banking and financial markets, which in turn may affect the whole economy. This paper surveys international experience of negative interest rates and the existing theoretical and empirical research of the impact on banks. It also investigates the impact of negative interest rates on the European banking sector using a dataset of 3,155 banks from 36 European countries over 2011–2018. Using a difference-in-differences methodology, we show that banks in negative interest-rate environments experienced a 18.4% decrease in their net interest margins compared to other banks operating in European countries that did not adopt negative interest rates. We also show banks taking more customer deposits are more affected.
{"title":"Intermediation Below Zero: Effects of Negative Interest Rates on Banks' Performance and Lending","authors":"S. Carbó-Valverde, P. Cuadros-Solas, Francisco Rodríguez-Fernández","doi":"10.2139/ssrn.3498277","DOIUrl":"https://doi.org/10.2139/ssrn.3498277","url":null,"abstract":"Reducing interest rates below zero may be justified on theoretical grounds while, in practice, it is shown to create a number of distortions and malfunctions in several dimensions of banking and financial markets, which in turn may affect the whole economy. This paper surveys international experience of negative interest rates and the existing theoretical and empirical research of the impact on banks. It also investigates the impact of negative interest rates on the European banking sector using a dataset of 3,155 banks from 36 European countries over 2011–2018. Using a difference-in-differences methodology, we show that banks in negative interest-rate environments experienced a 18.4% decrease in their net interest margins compared to other banks operating in European countries that did not adopt negative interest rates. We also show banks taking more customer deposits are more affected.","PeriodicalId":344099,"journal":{"name":"ERN: Banking & Monetary Policy (Topic)","volume":"2 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-11-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"124909101","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 principal purpose of the given work is to summarize certain observations on the evolution of thought in macroeconomic theory with the original (rather than conventional) notation where appropriate. The observations are organized by topic and supplied with respective references.
{"title":"Observing the Evolution in Macroeconomic Theory","authors":"Georgii G. Podshivalov","doi":"10.2139/ssrn.3495882","DOIUrl":"https://doi.org/10.2139/ssrn.3495882","url":null,"abstract":"The principal purpose of the given work is to summarize certain observations on the evolution of thought in macroeconomic theory with the original (rather than conventional) notation where appropriate. The observations are organized by topic and supplied with respective references.","PeriodicalId":344099,"journal":{"name":"ERN: Banking & Monetary Policy (Topic)","volume":"58 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-11-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"129852481","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 response to the global financial crisis, macroprudential policy is now firmly established as a financial policy area to prevent excessive risk taking in the financial sector and mitigate its effects on the real economy. It has become thoroughly integrated in the work programmes of global standard setters and international organisations (FSB, BCBS, IOSCO, IMF, BIS etc.) and in financial regulation at the regional and national levels. However, for macroprudential policy to fulfil its role in curbing systemic risk, it needs to manage several challenges relating to its political sensitivity and institutional context. This policy note discusses these challenges, and maps the current policy debate on the most appropriate governance arrangements to manage them. Thereafter, it provides an overview of macroprudential policy in the EU, both in terms of EU-wide law and regulation, and at the national level. The policy note continues by discussing how institutional contexts and governance arrangements appear to have influenced the exertion of macroprudential policy across EU countries in the post crisis period. Drawing on these findings, this note ends with a presentation of a number of policy conclusions and contrast them with the current international policy debate on macroprudential policy: -Macroprudential policy makers’ inaction biases appear to be best counteracted by appointing a single macroprudential authority with strong transparency requirements. Single authorities display generally more intense policy stances, and are associated with stronger independence and accountability arrangements. Transparency matters since openness and transparency reduce political or other influences: - Both accountability and independence arrangements appear to have weaker power to explain policy outcomes. This does not suggest they are unimportant, but rather that their interaction may matter more than individual effect. However, independence may also lead “self-interest capture” at the expense of public interest. - Policy frameworks that are multi-layered and complex pose conundrums on how to ensure sufficient institutional autonomy and policy capacity among macroprudential authorities. One such example is the Euro zone area, where the ECB has an overlay function in domestic macroprudential policy. - It is unlikely that there is panacea to the policy problems surrounding macroprudential policy. Additional debate, research and policy development in the field of macroprudential policy is especially warranted; not least given its distributional consequences and since it redefines the role of public authority over private interest.
{"title":"Macroprudential Policy in the EU–Reflections on Institutional Contexts and Governance Arrangements","authors":"Elias Bengtsson","doi":"10.2139/ssrn.3480339","DOIUrl":"https://doi.org/10.2139/ssrn.3480339","url":null,"abstract":"In response to the global financial crisis, macroprudential policy is now firmly established as a financial policy area to prevent excessive risk taking in the financial sector and mitigate its effects on the real economy. It has become thoroughly integrated in the work programmes of global standard setters and international organisations (FSB, BCBS, IOSCO, IMF, BIS etc.) and in financial regulation at the regional and national levels. \u0000 \u0000However, for macroprudential policy to fulfil its role in curbing systemic risk, it needs to manage several challenges relating to its political sensitivity and institutional context. This policy note discusses these challenges, and maps the current policy debate on the most appropriate governance arrangements to manage them. Thereafter, it provides an overview of macroprudential policy in the EU, both in terms of EU-wide law and regulation, and at the national level. The policy note continues by discussing how institutional contexts and governance arrangements appear to have influenced the exertion of macroprudential policy across EU countries in the post crisis period. \u0000 \u0000Drawing on these findings, this note ends with a presentation of a number of policy conclusions and contrast them with the current international policy debate on macroprudential policy: \u0000 \u0000-Macroprudential policy makers’ inaction biases appear to be best counteracted by appointing a single macroprudential authority with strong transparency requirements. Single authorities display generally more intense policy stances, and are associated with stronger independence and accountability arrangements. Transparency matters since openness and transparency reduce political or other influences: \u0000 \u0000- Both accountability and independence arrangements appear to have weaker power to explain policy outcomes. This does not suggest they are unimportant, but rather that their interaction may matter more than individual effect. However, independence may also lead “self-interest capture” at the expense of public interest. \u0000 \u0000- Policy frameworks that are multi-layered and complex pose conundrums on how to ensure sufficient institutional autonomy and policy capacity among macroprudential authorities. One such example is the Euro zone area, where the ECB has an overlay function in domestic macroprudential policy. \u0000 \u0000- It is unlikely that there is panacea to the policy problems surrounding macroprudential policy. Additional debate, research and policy development in the field of macroprudential policy is especially warranted; not least given its distributional consequences and since it redefines the role of public authority over private interest.","PeriodicalId":344099,"journal":{"name":"ERN: Banking & Monetary Policy (Topic)","volume":"309 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-11-04","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"121705440","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}
Since the Eurozone Crisis of 2010-12, a critical debate on the viability of a currency union has focused on the role of a fiscal union in adjusting for country heterogeneity. However, a fully-fledged fiscal union may not be politically feasible. This paper develops a two-country general equilibrium model to examine the benefits of the bankruptcy code of a capital markets union - in the absence of a fiscal union - as an alternative mechanism to improve the financial stability and welfare of a currency union. When domestic credit risks are present, I show that a lenient bankruptcy code in the cross-border capital markets union removes the pecuniary externality of banking insolvency, so it leads to a Pareto improvement within the currency union. Moreover, the absence of floating nominal exchange rates removes a mechanism to neutralise domestic credit risks; I show that softening the bankruptcy code can recoup the lost benefits of floating nominal exchange rates. The model provides the financial stability and welfare implications of bankruptcy within a capital markets union in the Eurozone.
{"title":"Bankruptcy Codes and Risk Sharing of Currency Unions","authors":"Xuan Wang","doi":"10.2139/ssrn.3481719","DOIUrl":"https://doi.org/10.2139/ssrn.3481719","url":null,"abstract":"Since the Eurozone Crisis of 2010-12, a critical debate on the viability of a currency union has focused on the role of a fiscal union in adjusting for country heterogeneity. However, a fully-fledged fiscal union may not be politically feasible. This paper develops a two-country general equilibrium model to examine the benefits of the bankruptcy code of a capital markets union - in the absence of a fiscal union - as an alternative mechanism to improve the financial stability and welfare of a currency union. When domestic credit risks are present, I show that a lenient bankruptcy code in the cross-border capital markets union removes the pecuniary externality of banking insolvency, so it leads to a Pareto improvement within the currency union. Moreover, the absence of floating nominal exchange rates removes a mechanism to neutralise domestic credit risks; I show that softening the bankruptcy code can recoup the lost benefits of floating nominal exchange rates. The model provides the financial stability and welfare implications of bankruptcy within a capital markets union in the Eurozone.","PeriodicalId":344099,"journal":{"name":"ERN: Banking & Monetary Policy (Topic)","volume":"177 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-11-04","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115585261","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 contribution to the panel on the future to EMU discusses the tensions that arise from the fact that banks are, on the one hand, an essential element of the monetary transmission mechanism and, on the other hand, an integral part of local, regional or national polities. Banking union can eliminate or at least reduce some of the procrastination that has allowed maintained bank weaknesses to persist and harmed the transmission of monetary policy but, whereas the SSM has been fairly successful, resolution is still not working properly and needs further reforms. At the same time, banking union suffers from the problem that interventions from Brussels or Frankfurt are seen as infringements of national sovereignty that lack political legitimacy. The conflict between supranational and national interests is ultimately irresolvable but, if EMU is to survive, measures must be taken to limit its impact.
{"title":"Banks, Politics and European Monetary Union","authors":"M. Hellwig","doi":"10.2139/ssrn.3481115","DOIUrl":"https://doi.org/10.2139/ssrn.3481115","url":null,"abstract":"This contribution to the panel on the future to EMU discusses the tensions that arise from the fact that banks are, on the one hand, an essential element of the monetary transmission mechanism and, on the other hand, an integral part of local, regional or national polities. Banking union can eliminate or at least reduce some of the procrastination that has allowed maintained bank weaknesses to persist and harmed the transmission of monetary policy but, whereas the SSM has been fairly successful, resolution is still not working properly and needs further reforms. At the same time, banking union suffers from the problem that interventions from Brussels or Frankfurt are seen as infringements of national sovereignty that lack political legitimacy. The conflict between supranational and national interests is ultimately irresolvable but, if EMU is to survive, measures must be taken to limit its impact.","PeriodicalId":344099,"journal":{"name":"ERN: Banking & Monetary Policy (Topic)","volume":"50 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"133999357","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}
Despite the extensive debate on the effects of bank competition on risk-taking and procyclicality, there is no evidence of its role in the effects of macroprudential policy on loans’ growth and on the sensitivity of lending to the business cycle. We contribute to the literature by investigating the impact of bank competition on the effects of individual macroprudential tools in a sample covering over 70,000 bank-level observations in 109 countries from 2004 to 2015. Our results are in line with the competition-fragility hypothesis and suggest that increased market power is associated with enhanced loans’ growth in countries in which macroprudential policy is effective in reducing credit growth and with decreased credit growth for instruments that are not effective in diminishing lending. We also find support for the view that increased market power in the banking sector helps to achieve reduced sensitivity of lending to the business cycle in countries that apply cyclical macroprudential instruments due to increased risk-taking in the banking sector. Moreover, we show that, for countries in which macroprudential policy is associated with reduced procyclicality of lending, some degree of market power is beneficial for bank lending, as it tames the excessive countercyclicality of credit.
{"title":"Bank Competition and the Effects of Macroprudential Policy on Procyclicality of Lending","authors":"I. Kowalska, M. Olszak","doi":"10.2139/ssrn.3471170","DOIUrl":"https://doi.org/10.2139/ssrn.3471170","url":null,"abstract":"Despite the extensive debate on the effects of bank competition on risk-taking and procyclicality, there is no evidence of its role in the effects of macroprudential policy on loans’ growth and on the sensitivity of lending to the business cycle. We contribute to the literature by investigating the impact of bank competition on the effects of individual macroprudential tools in a sample covering over 70,000 bank-level observations in 109 countries from 2004 to 2015. Our results are in line with the competition-fragility hypothesis and suggest that increased market power is associated with enhanced loans’ growth in countries in which macroprudential policy is effective in reducing credit growth and with decreased credit growth for instruments that are not effective in diminishing lending. We also find support for the view that increased market power in the banking sector helps to achieve reduced sensitivity of lending to the business cycle in countries that apply cyclical macroprudential instruments due to increased risk-taking in the banking sector. Moreover, we show that, for countries in which macroprudential policy is associated with reduced procyclicality of lending, some degree of market power is beneficial for bank lending, as it tames the excessive countercyclicality of credit.","PeriodicalId":344099,"journal":{"name":"ERN: Banking & Monetary Policy (Topic)","volume":"53 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-10-17","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"123004784","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}
Government interventions to support the financial institutions fall into two broad categories: direct interventions (which immediately increase the government's financing need) and offbalance sheet contingent guarantees (which have no immediate impact on debt but will add to government debt as and when a loss materializes). If financial sector losses are independent of sovereign's own risk, all else being equal, they must have the same effect on the sovereign's risk profile, even though they impact the government balance sheet differently. In this paper, we study the nature and effectiveness of a government's interventions on its own risk profile. Our findings suggest that direct assistance has a significantly large effect on sovereign risk, while the effect of contingent guarantees is statistically not significant, being significant only for the euro area founders. Controlling for government interventions, we also find that GDP, perceived government effectiveness, economic sentiment, size of the financial sector, and membership of the euro area reduce the sovereign risk, while asset concentration within financial sector, unemployment and inflation have an adverse effect. Our findings support Bresciani and Cossaro (2016)'s claim that during the sovereign debt crisis, governments undertook complex financial operations to change the composition of their interventions towards contingent guarantees.
{"title":"Increasing Contingent Guarantees: The Asymmetrical Effect on Sovereign Risk of Different Government Interventions","authors":"M. Singh, Marta Gómez-Puig, S. Sosvilla‐Rivero","doi":"10.2139/ssrn.3455116","DOIUrl":"https://doi.org/10.2139/ssrn.3455116","url":null,"abstract":"Government interventions to support the financial institutions fall into two broad categories: direct interventions (which immediately increase the government's financing need) and offbalance sheet contingent guarantees (which have no immediate impact on debt but will add to government debt as and when a loss materializes). If financial sector losses are independent of sovereign's own risk, all else being equal, they must have the same effect on the sovereign's risk profile, even though they impact the government balance sheet differently. In this paper, we study the nature and effectiveness of a government's interventions on its own risk profile. Our findings suggest that direct assistance has a significantly large effect on sovereign risk, while the effect of contingent guarantees is statistically not significant, being significant only for the euro area founders. Controlling for government interventions, we also find that GDP, perceived government effectiveness, economic sentiment, size of the financial sector, and membership of the euro area reduce the sovereign risk, while asset concentration within financial sector, unemployment and inflation have an adverse effect. Our findings support Bresciani and Cossaro (2016)'s claim that during the sovereign debt crisis, governments undertook complex financial operations to change the composition of their interventions towards contingent guarantees.","PeriodicalId":344099,"journal":{"name":"ERN: Banking & Monetary Policy (Topic)","volume":"35 4(Special) 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-09-17","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"123823630","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 October 2018, the Basel Committee on Banking Supervision (BCBS) published its stress-testing principles. One of these principles is about stress testing model validation, aided by business interpretation, benchmark comparison and backtesting. In this paper, a credit risk stress testing model based on the factor-augmented vector autoregressive (FAVAR) approach is proposed to project credit risk loss under stressed scenarios. Inherited from both factor analysis (FA) and the vector autoregressive (VAR) model, the FAVAR approach ensures that the proposed model has many appealing features. First, a large number of model input variables can be reduced to a handful of latent common factors to avoid the curse of dimensionality. Second, the dynamic interrelationship among macroeconomic variables and credit risk loss measures can be studied without exogeneity assumptions. Moreover, the application of the impulse response function facilitates the multiperiod projection of credit risk loss in response to macroeconomic shocks. All of these features make the proposed modeling framework a potentially handy solution to fulfilling the BCBS requirement of quantitative adequacy assessment of banks’ internal stress testing results with a benchmark model. The scope of its application can also extend to impairment modeling for International Financial Reporting Standard 9, which requires the projection of credit risk losses over consecutive periods under different macroeconomic scenarios.
{"title":"A FAVAR Modeling Approach to Credit Risk Stress Testing and Its Application to the Hong Kong Banking Industry","authors":"Zhifeng Wang, Fangying Wei","doi":"10.21314/jrmv.2020.226","DOIUrl":"https://doi.org/10.21314/jrmv.2020.226","url":null,"abstract":"In October 2018, the Basel Committee on Banking Supervision (BCBS) published its stress-testing principles. One of these principles is about stress testing model validation, aided by business interpretation, benchmark comparison and backtesting. In this paper, a credit risk stress testing model based on the factor-augmented vector autoregressive (FAVAR) approach is proposed to project credit risk loss under stressed scenarios. Inherited from both factor analysis (FA) and the vector autoregressive (VAR) model, the FAVAR approach ensures that the proposed model has many appealing features. First, a large number of model input variables can be reduced to a handful of latent common factors to avoid the curse of dimensionality. Second, the dynamic interrelationship among macroeconomic variables and credit risk loss measures can be studied without exogeneity assumptions. Moreover, the application of the impulse response function facilitates the multiperiod projection of credit risk loss in response to macroeconomic shocks. All of these features make the proposed modeling framework a potentially handy solution to fulfilling the BCBS requirement of quantitative adequacy assessment of banks’ internal stress testing results with a benchmark model. The scope of its application can also extend to impairment modeling for International Financial Reporting Standard 9, which requires the projection of credit risk losses over consecutive periods under different macroeconomic scenarios.","PeriodicalId":344099,"journal":{"name":"ERN: Banking & Monetary Policy (Topic)","volume":"126 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-09-03","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"123444913","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 essay deals with the EMS experience and its failure, with the Maastricht Treaty, and with the interregnum leading to the formation of the EMU in 1999. The paper highlights the position of German authorities, showing that they were quite lucid about the fundamental weaknesses inherent in a process that separated monetary from fiscal policies by giving priority to the centralization of the former. Instead of repeating the well known critiques leveled against the EMU – for which readers are referred to the unsurpassed treatment by Stiglitz, the essay highlights the splintering of Europe in the way in which it has unfolded during the 1990s and in the first decade of the present millennium. In particular the early economic and political origins of the terminal crisis of Italy are located between the late 1980s and the 1990s. France is shown to belong increasingly to the so-called European periphery by virtue of a weakening industrial structure and persistent balance of payments deficits. The paper argues that France regains its central role by political means and through its weight as an active nuclear military power centered on maintaining its imperial interests and posture especially in Africa. The first decade of the present millennium is portrayed as the period in which a distinct German economic area had been formed in the midst of Europe with a strong drive to the east with an increasingly powerful gravitational pull towards the People’s Republic of China.
{"title":"From the EMS to the EMU and…To China","authors":"J. Halévi","doi":"10.36687/inetwp102","DOIUrl":"https://doi.org/10.36687/inetwp102","url":null,"abstract":"This essay deals with the EMS experience and its failure, with the Maastricht Treaty, and with the interregnum leading to the formation of the EMU in 1999. The paper highlights the position of German authorities, showing that they were quite lucid about the fundamental weaknesses inherent in a process that separated monetary from fiscal policies by giving priority to the centralization of the former. Instead of repeating the well known critiques leveled against the EMU – for which readers are referred to the unsurpassed treatment by Stiglitz, the essay highlights the splintering of Europe in the way in which it has unfolded during the 1990s and in the first decade of the present millennium. In particular the early economic and political origins of the terminal crisis of Italy are located between the late 1980s and the 1990s. France is shown to belong increasingly to the so-called European periphery by virtue of a weakening industrial structure and persistent balance of payments deficits. The paper argues that France regains its central role by political means and through its weight as an active nuclear military power centered on maintaining its imperial interests and posture especially in Africa. The first decade of the present millennium is portrayed as the period in which a distinct German economic area had been formed in the midst of Europe with a strong drive to the east with an increasingly powerful gravitational pull towards the People’s Republic of China.","PeriodicalId":344099,"journal":{"name":"ERN: Banking & Monetary Policy (Topic)","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-09-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"129990830","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}
Little is known about the location of bank risk, i.e., which investors in which countries hold bank-issued securities like bonds and stocks. In this paper, we analyze the (re-)distribution of bank risk across asset classes (short- and long-term debt, equity), across investor types and across geographic locations. We also differentiate bank holdings according to riskiness based on credit ratings and yield spreads. We use the Securities Holdings Statistics database for the euro area which contains information on securities holdings at the ISIN level. Our main findings are as follows. First, bank risk is held disproportionately by other banks. Second, households are disproportionally exposed to riskier bank securities. Third, about 30% of bank securities are held outside the euro area, with these percentages larger (smaller) for short term debt and equities (long term debt). Geographically, large issuers of bank risk such as France and Germany, also hold most of the bank risk, with the exception of the Netherlands, which, despite being a top 5 issuer, holds almost no bank securities. Fourth, the holding bank risk is highly concentrated domestically, with the concentration more extreme for countries such as Greece, Italy and Portugal, which hold more than 70% of their bank’s securities domestically. The domestic concentration of bank risk is (much) more severe than the domestic concentration of non-bank corporate securities and sovereign debt. Fifth, re-allocation is overall statistically significant but economically more important for bonds than for equities. Finally, we exploit the inclusion of some banks on the list of other systemically important institutions (O-SII) – which makes them subject to more stringent supervisory and regulatory requirements – as a shock to the riskiness of securities issued by those banks. Following the inclusion on the OSII list, bank stock (bond) prices decrease (increase) relative to stock (bond) prices of banks not included on the list. In terms of holdings, other banks increase their holdings of equity and decrease their holdings of bonds issued by the OSII-designated banks. Households and insurances likewise increase holdings of equity issued by the OSII-designated banks. By contrast, investment funds and financial vehicle corporations decrease holdings of equity issued by the OSII-designated banks.
{"title":"The (Re)allocation of Bank Risk","authors":"G. Bekaert, J. Breckenfelder","doi":"10.2139/ssrn.3440929","DOIUrl":"https://doi.org/10.2139/ssrn.3440929","url":null,"abstract":"Little is known about the location of bank risk, i.e., which investors in which countries hold bank-issued securities like bonds and stocks. In this paper, we analyze the (re-)distribution of bank risk across asset classes (short- and long-term debt, equity), across investor types and across geographic locations. We also differentiate bank holdings according to riskiness based on credit ratings and yield spreads. We use the Securities Holdings Statistics database for the euro area which contains information on securities holdings at the ISIN level. Our main findings are as follows. First, bank risk is held disproportionately by other banks. Second, households are disproportionally exposed to riskier bank securities. Third, about 30% of bank securities are held outside the euro area, with these percentages larger (smaller) for short term debt and equities (long term debt). Geographically, large issuers of bank risk such as France and Germany, also hold most of the bank risk, with the exception of the Netherlands, which, despite being a top 5 issuer, holds almost no bank securities. Fourth, the holding bank risk is highly concentrated domestically, with the concentration more extreme for countries such as Greece, Italy and Portugal, which hold more than 70% of their bank’s securities domestically. The domestic concentration of bank risk is (much) more severe than the domestic concentration of non-bank corporate securities and sovereign debt. Fifth, re-allocation is overall statistically significant but economically more important for bonds than for equities. Finally, we exploit the inclusion of some banks on the list of other systemically important institutions (O-SII) – which makes them subject to more stringent supervisory and regulatory requirements – as a shock to the riskiness of securities issued by those banks. Following the inclusion on the OSII list, bank stock (bond) prices decrease (increase) relative to stock (bond) prices of banks not included on the list. In terms of holdings, other banks increase their holdings of equity and decrease their holdings of bonds issued by the OSII-designated banks. Households and insurances likewise increase holdings of equity issued by the OSII-designated banks. By contrast, investment funds and financial vehicle corporations decrease holdings of equity issued by the OSII-designated banks.","PeriodicalId":344099,"journal":{"name":"ERN: Banking & Monetary Policy (Topic)","volume":"35 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-08-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"132230085","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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