the real effects of financial integration abstract this paper shows how correlations in gdp fluctuations rise with financial integration finance serves to increase international correlations in both consumption and gdp fluctuations which explains the persistent gap between the two in the data a quantity puzzle the positive association between financial integration and gdp correlation constitutes a puzzle as theory suggests a negative relation if anything nevertheless it prevails in the data even after the effects of finance on trade and specialization are accounted for

bank risk taking securitization supervision and low interest rates evidence from the euro area and the u s lending standards using a unique dataset of the euro area and the u s bank lending standards we find that low monetary policy short term interest rates soften standards for household and corporate loans this softening especially for mortgages is amplified by securitization activity weak supervision for bank capital and low monetary policy rates for an extended period conversely low long term interest rates do not soften lending standards finally countries with softer lending standards before the crisis related to negative taylor rule residuals experienced a worse economic performance afterward these results help shed light on the origins of the crisis and have important policy implications the author 2011 published by oxford university press on behalf of the society for financial studies all rights reserved for permissions please e mail journals permissions oup com oxford university press

market structure and price cost margins in philippine manufacturing industries we test the hypothesis that variations in industry price cost margins pcm performance are explained by sellers various structure and conduct variables such as sellers concentration i e hhi for value added capital output ratio barrier to entry industry demand growth rate import penetration export share and degree of foreign participation multinational in four digit philippines standard industrial classification manufacturing industries the statistical analyses are a series of multiple regression equations relating the pcm to the previously mentioned explanatory variables estimation results show a generally positive relationship between sellers concentration capital intensity degree of foreign participation and the pcm industry growth rate may either increase or reduce pcm imports and exports lower pcm

a dual liquidity model for emerging markets the last few years have seen a significant re evaluation of the models used to analyze crises in emerging markets recent models typically stress financial constraints or distorted financial incentives while this certainly represents progress these models share a weakness with the earlier work neither is uniquely about emerging markets adaptations of the mundell fleming model represent argentina as a belgium with larger external shocks likewise emerging market models of financial constraints are adaptations of developed economy ones with tighter financial constraints in our work we have advocated a model which distinguishes between the financial constraints affecting borrowing and lending among agents within an emerging economy and those affecting borrowing from foreign lenders this dual liquidity model offers a parsimonious description of the behavior of firms governments and asset prices during financial crises it also provides prescriptions for optimal policy responses to these crises

credit constraints and the international propagation of us financial shocks abstract this paper investigates whether credit constraints in the us economy amplify the international propagation of us financial shocks we model the dynamics of the us economy jointly with global macroeconomic and financial variables using a threshold vector autoregression this model captures regime specific dynamics conditional on the severity of credit constraints in the us economy we identify three main episodes of tight credit in us financial history over the past thirty years these occur in the late 1980s in the early 2000s and during the 2007 09 financial crisis we find that us financial shocks are associated with a significant contraction in global economic activity in times of tight credit by contrast there is little impact of us financial shocks on the global economy in normal times this asymmetry highlights an international dimension of the us financial accelerator mechanism

diversification in banking is noninterest income the answer this paper assesses potential diversification benefits in the u s banking industry from the steady shift toward activities that generate fee income trading revenue and other types of noninterest income in the aggregate declining volatility of net operating revenue reflects reduced volatility of net interest income not diversification benefits from noninterest income which is quite volatile and increasingly correlated with net interest income at the bank level greater reliance on noninterest income particularly trading revenue is associated with lower risk adjusted profits and higher risk this suggests few obvious diversification benefits from the ongoing shift toward noninterest income

money liquidity and monetary policy in a market based financial system banking and capital market developments are inseparable and funding conditions are closely tied to fluctuations in the leverage of market based financial intermediaries offering a window on liquidity the balance sheet growth of broker dealers provides a sense of the availability of credit contractions of broker dealer balance sheets have tended to precede declines in real economic growth even before the current turmoil for this reason balance sheet quantities of market based financial intermediaries are important macroeconomic state variables for the conduct of monetary policy

does the deposits channel work under a low interest rate environment abstract according to the deposits channel of monetary policy central banks can influence the deposits holdings and the loan supply by changing the policy rate this paper discusses the generality of this channel and shows that low interest rates may turn this channel off this result contributes to the literature on unintended effects of monetary policy and banks profitability in a low interest rate environment

breaking the bank a probabilistic assessment of euro area bank profitability this paper explores the determinants of profitability across large euro area banks using an approach based on conditional profitability distributions the most reliable determinants of bank profitability are real gdp growth and the nonperforming loan npl ratio the estimated conditional distributions reveal that while higher growth would raise profits on average a large swath of banks would most likely continue to struggle even amid a strong economic recovery therefore for some banks a determined reduction in npls combined with cost efficiency improvements and customized changes to their business models appears to be the most promising strategy for durably raising profitability

asset pledgeability and international transmission of financial shocks abstract this paper studies the international transmission of pledgeability shocks as the recent crisis involved a negative shock to the pledgeability of assets the paper develops a two country portfolio model with leveraged investors that incorporates this type of shock and a solution approach for the corresponding portfolio choice problem this approach captures the effect of pledgeability on asset risk premiums the paper finds that the equilibrium portfolios play a heightened role as transmission channels moreover by complementing the effect of productivity shocks under borrowing constraints the pledgeability shocks improve the fit of an otherwise standard international macroeconomic model for the g7 countries especially during crises

quantitative implications of a debt deflation theory of sudden stops and asset prices abstract this paper shows that the quantitative predictions of an equilibrium asset pricing model with financial frictions are consistent with key features of the sudden stop phenomenon foreign traders incur costs in trading assets with domestic agents and a collateral constraint limits external debt to a fraction of the market value of domestic equity holdings when this constraint does not bind standard productivity shocks cause typical real business cycle effects when it binds the same shocks cause strikingly different effects depending on the leverage ratio and asset market liquidity with high leverage and a liquid market the shocks force fire sales of assets and fisher s debt deflation mechanism amplifies the responses of asset prices consumption and the current account precautionary saving makes these sudden stops infrequent in the long run

why european banks are less profitable than u s banks a decomposition approach abstract the low profitability of european banks relative to their u s counterparts has recently raised concerns among policy makers and researchers this paper attempts to shed light on this issue by using the o donnell 2012 decomposition approach this approach enables us to decompose the relative profitability of european banks into an output input price index and a total factor productivity index with the former further decomposed into two price indexes and the latter further into four productivity and efficiency measures our results show that european banks profitability was not only weak but also deteriorated over time our further analysis shows that the decline in the output input price index was due to declines in relative lending rate and relative return on securities and an increase in funding costs while the decline in the productivity index was driven by declines in technical efficiency scale efficiency and residual mix efficiency

international business cycles with endogenous incomplete markets backus kehoe and kydland 1992 baxter and crucini 1995 and stockman and tesar 1995 find two major discrepancies between standard international business cycle models with complete markets and the data in the models cross country correlations are much higher for consumption than for output while in the data the opposite is true and cross country correlations of employment and investment are negative while in the data they are positive this paper introduces a friction into a standard model that helps resolve these anomalies the friction is that international loans are imperfectly enforceable any country can renege on its debts and suffer the consequences for future borrowing to solve for equilibrium in this economy with endogenous incomplete markets the methods of marcet and marimon 1999 are extended incorporating the friction helps resolve the anomalies more than does exogenously restricting the assets that can be traded

an economic capital model integrating credit and interest rate risk in the banking book banks often measure credit and interest rate risk in the banking book separately and then add the risk measures to determine economic capital this approach misses complex interactions between the two risk types we develop a framework where these risks are analysed jointly since banking book positions are generally not marked to market our model is based on book value accounting our simulations show that interactions matter and that ignoring them leads to risk overstatement the magnitude of the errors depends on the structure of the balance sheet and on the repricing characteristics of assets and liabilities

how the financial market can dampen the effects of commodity price shocks abstract commodities have begun to function as an asset class during the past decade as trading in commodity derivatives has increased massively since the mid 2000s this paper studies the role of commodities as an asset class in accounting for the recently lessened impacts of commodity price shocks on the u s economy by constructing a model with a financial accelerator and with financial intermediaries that own two assets tied to commodities as well as to capital simulation results of the model show that financial intermediaries holdings of commodities as assets have contributed to the recent reduction in the effects of commodity price shocks

a macroprudential approach to financial regulation many observers have argued that the regulatory framework in place prior to the global financial crisis was deficient because it was largely microprudential in nature a microprudential approach is one in which regulation is partial equilibrium in its conception and aimed at preventing the costly failure of individual financial institutions by contrast a macroprudential approach recognizes the importance of general equilibrium effects and seeks to safeguard the financial system as a whole in the aftermath of the crisis there seems to be agreement among both academics and policymakers that financial regulation needs to move in a macroprudential direction in this paper we offer a detailed vision for how a macroprudential regime might be designed our prescriptions follow from a specific theory of how modern financial crises unfold and why both an unregulated financial system as well as one based on capital rules that only apply to traditional banks is likely to be fragile we begin by identifying the key market failures at work why individual financial firms acting in their own interests deviate from what a social planner would have them do next we discuss a number of concrete steps to remedy these market failures we conclude the paper by comparing our proposals to recent regulatory reforms in the united states and to proposed global banking reforms

interest rates and bank risk taking abstract a recent line of research views the low interest rate environment of the early to mid 2000s as an element that triggered increased risk taking appetite of banks in search for yield this paper uses approximately 18000 annual observations on euro area banks over the period 2001 2008 and presents strong empirical evidence that low interest rates indeed increase bank risk taking substantially this result is robust across a number of different specifications that account inter alia for the potential endogeneity of interest rates and or the dynamics of bank risk notably among the banks of the large euro area countries this effect is less pronounced for french institutions which held on average a relatively low level of risk assets finally the distributional effects of interest rates on bank risk taking due to individual bank characteristics reveal that the impact of interest rates on risk assets is diminished for banks with higher equity capital and is amplified for banks with higher off balance sheet items

financial globalization and real regionalization over the period 1972 1986 the correlations of gdp employment and investment between the united states and an aggregate of europe canada and japan were respectively 0 76 0 66 and 0 63 for the period 1986 to 2000 the same correlations were much lower 0 26 0 03 and 0 07 real regionalization at the same time u s international asset trade has significantly increased for example between 1972 and 1999 united states gross fdi and equity assets in the same group of countries rose from 4 to 23 percent of the u s capital stock financial globalization we argue that these two trends are intimately related we document that the correlation of real shocks between the u s and the rest of the world has declined we then present a model in which international financial market integration occurs endogenously in response to less correlated shocks financial integration further reduces the international correlations in gdp and factor supplies we find that both less correlated shocks and endogenous financial market development are needed to account for all the changes in the international business cycle

evaluating international financial integration under leverage constraints abstract the global financial crisis has undermined many economists views about the benefits of open financial markets anecdotal evidence seems to indicate that financial linkages may propagate shocks during crises this paper develops a simple two country model in which financial liberalisation across countries takes place in the presence of credit market distortions within countries countries may be subject to macro risk coming from productivity shocks and direct shocks to the credit system financial shocks three different degrees of financial linkages between countries are examined it is shown that the type of financial integration is critical for both macroeconomic outcomes and welfare in particular financial integration in bond markets alone may increase aggregate consumption volatility and reduce welfare financial integration in both bond and equity markets generates high positive co movement across countries but is welfare improving

simple banking profitability and the yield curve how does bank profitability vary with interest rates we present a model of a monopolistically competitive bank subject to repricing frictions and test the model s predictions using a unique panel data set on uk banks we find evidence that large banks retain a residual exposure to interest rates even after accounting for hedging activity operating through the trading book in the long run both level and slope of the yield curve contribute positively to profitability in the short run however increases in market rates compress interest margins consistent with the presence of nonnegligible loan pricing frictions

monetary policy and bank profitability in a low interest rate environment we analyse the impact of standard and non standard monetary policy on bank profitability we use both proprietary and commercial data on individual euro area bank balance sheets and market prices our results show that a monetary policy easing a decrease in short term interest rates and or a flattening of the yield curve is not associated with lower bank profits once we control for the endogeneity of the policy measures to expected macroeconomic and financial conditions accommodative monetary conditions asymmetrically affect the main components of bank profitability with a positive impact on loan loss provisions and non interest income offsetting the negative one on net interest income a protracted period of low monetary rates has a negative effect on profits that however only materializes after a long time period and is counterbalanced by improved macroeconomic conditions monetary policy easing surprises during the low interest rate period improve bank stock prices and cds

interest rate derivatives at commercial banks an empirical investigation abstract i analyze the effects of bank characteristics and macroeconomic shocks on interest rate risk management behavior of commercial banks my findings are consistent with hedging theories based on cost of financial distress and costly external financing banks with higher probability of financial distress manage their interest rate risk more aggressively both by means of on balance sheet and off balance sheet instruments as compared to the derivative users the derivative non user banks adopt conservative asset liability management policies in tighter monetary policy regimes finally i show that the derivative non user bank s lending volume declines significantly with the contraction in the money supply derivative users on the other hand remain immune to the monetary policy shocks my findings suggest that a potential benefit of derivatives usage is to minimize the effect of external shocks on a firm s operating policies

mending the broken link heterogeneous bank lending rates and monetary policy pass through abstract we analyse the pass through of monetary policy measures to lending rates to households and firms in the euro area using novel bank level datasets banks characteristics such as the capital ratio exposure to domestic sovereign debt percentage of non performing loans and stability of funding structure are responsible for the heterogeneity in the pass through of conventional monetary policy changes the location of a bank is irrelevant non standard measures reduce lending rate heterogeneities banks located in financially stressed countries and with weak balance sheets are most affected banks lending margins have fallen considerably

global banks and crisis transmission abstract we study the effect of financial integration through banks on the transmission of international business cycles in a sample of 18 20 developed countries between 1978 and 2009 we find that in periods without financial crises increases in bilateral banking linkages are associated with more divergent output cycles this relation is significantly weaker during financial turmoil periods suggesting that financial crises induce co movement among more financially integrated countries we also show that countries with stronger direct and indirect financial ties to the u s experienced more synchronized cycles with the u s during the recent 2007 2009 crisis we then interpret these findings using a simple general equilibrium model of international business cycles with banks and shocks to banking activity the model suggests that the relation between integration and synchronization depends on the type of shocks hitting the world economy and that shocks to global banks played an important role in triggering and spreading the 2007 2009 crisis

the synchronization of credit cycles abstract this paper proposes a simple econometric procedure to test for the synchronization of credit cycles using a century of data for 14 advanced economies we find that credit cycle synchronization dropped in the early 1920s from initially relatively high levels between the 1920s and the 1970s synchronization was overall low and concentrated within five predominantly regional clusters however synchronization has significantly increased in the post bretton woods era and has become less associated with geographic proximity australia denmark france italy japan norway spain switzerland the uk and the us form a single major credit cycle cluster since the 1970s a smaller cluster is formed by canada the netherlands and sweden while the german credit cycle follows a distinct path using logistic regressions we find that the synchronization of credit and business cycles go hand in hand our findings are especially relevant for the international coordination of macroprudential policy as well as to spur and inform further analysis on credit cycle dynamics

bank income structure and risk an empirical analysis of european banks the purpose of this paper is to investigate the relationship between bank risk and product diversification in the changing structure of the european banking industry based on a broad set of european banks for the period 1996 2002 our study first shows that banks expanding into non interest income activities present higher risk and higher insolvency risk than banks which mainly supply loans however considering size effects and splitting non interest activities into both trading activities and commission and fee activities we show that the positive link with risk is mostly accurate for small banks and essentially driven by commission and fee activities a higher share of trading activities is never associated with higher risk and for small banks it implies in some cases lower asset and default risks

country portfolios in open economy macro models this paper develops a simple approximation method for computing equilibrium portfolios in dynamic general equilibrium open economy macro models the method is widely applicable simple to implement and gives analytical solutions for equilibrium portfolio positions in any combination or types of asset it can be used in models with any number of assets whether markets are complete or incomplete and can be applied to stochastic dynamic general equilibrium models of any dimension so long as the model is amenable to a solution using standard approximation methods we first illustrate the approach using a simple two asset endowment economy model and then show how the results extend to the case of any number of assets and general economic structure

bank concentration and retail interest rates abstract the recent wave of mergers in the euro area raises the question whether the increase in concentration has offset the increase in competition in european banking through deregulation we test this question by estimating a simple cournot model of bank pricing we construct country and product specific measures of bank concentration and find that for loans and demand deposits increasing concentration may have resulted in less competitive pricing by banks whereas for savings and time deposits the model is rejected suggesting increases in contestability and or efficiency in these markets finally the paper discusses some implications for tests of the effect of concentration on monetary policy transmission

market interest rates and commercial bank profitability an empirical investigation the widespread notion that commercial banks borrow short and lend long implies that sharp market interest rate increases may induce a significant number of banking failures this paper develops a method for estimating average asset and liability maturities for a sample of large money center banks regression models are tested to determine if market rate fluctuations have a significant impact on bank profitability the conclusion is negative large banks have effectively hedged themselves against market rate risk by assembling asset and liability portfolios with similar average maturities the impact of market interest rates on commercial bank revenues costs and profitability has increasingly concerned economists and policymakers as financial market conditions have become more volatile in recent years the widespread notion that depository intermediaries borrow short and lend long implies that rapid market rate increases may induce an unacceptable number of financial firm failures monetary policy discussions have reflected this concern for many years the federal reserve board considered stable market rates a goal or at least an intermediate target of monetary policy the extent to which money market conditions are permitted to fluctuate in the short run is also affected by the unique role of the federal reserve system as the nation s lender of last resort liquidity pressures ultimately devolve on the money market and the federal reserve has a responsibility for maintaining orderly conditions in that market

concentration and other determinants of bank profitability in europe north america and australia abstract this study reviews the performance of banks in twelve countries or territories in europe north america and australia and examines the internal and external determination of profitability to circumvent some of the difficulties in making comparisons between banks in different countries the concept of value added is introduced results parallel those in domestic u s studies and provide some support for the edwards heggestad mingo hypothesis of risk avoidance by banks with a high degree of market power

the risk taking channel of monetary policy transmission in the euro area abstract in this paper we provide evidence for a risk taking channel of monetary policy transmission in the euro area that works through the relaxation of lending standards for borrowers our dataset covers the period 2003q1 2016q2 and includes in addition to the standard variables for real gdp growth inflation and the monetary policy stance indicators of bank lending standards and bank lending margins based on vector autoregressive models with i recursive identification and ii sign restrictions we show that banks react aggressively to an expansionary monetary policy shock by lowering their lending standards the banks efforts to keep their lending margin stable however are not successful as we detect a significant compression we document these findings for the euro area as a whole and for its individual member states in particular banks in the netherlands portugal spain and ireland lowered their lending standards after expansionary monetary policy shocks the compression of the lending margin is most pronounced in the five crisis countries greece ireland italy portugal and spain

international real business cycles we ask whether a two country real business cycle model can account simultaneously for domestic and international aspects of business cycles with this question in mind we document a number of discrepancies between theory and data the most striking discrepancy concerns the correlations of consumption and output across countries in the data outputs are generally more highly correlated across countries than consumptions in the model we see the opposite

the determinants of bank interest rate margins an international study abstract this paper studies the determinants of bank net interest margins nims in six selected european countries and the us during the period 1988 1995 for a sample of 614 banks we apply the ho and saunders model ho t saunders a 1981 the determinants of bank interest margins theory and empirical evidence journal of financial and quantitative analyses 16 581 600 to a multicountry setting and decompose bank margins into a regulatory component a market structure component and a risk premium component the regulatory components in the form of interest rate restrictions on deposits reserve requirements and capital to asset ratios have a significant impact on banks nims the empirical results suggest an important policy trade off between assuring bank solvency high capital to asset ratios and lowering the cost of financial services to consumers low nims the more segmented or restricted the banking system both geographically and by activity the larger appears to be the monopoly power of existing banks and the higher their spreads macro interest rate volatility was found to have a significant impact on bank nims this suggests that macro policies consistent with reduced interest rate volatility could have a positive effect in reducing bank margins