why have negative nominal interest rates had such a small effect on bank performance cross country evidence abstract we explore the impact of negative policy rates on banks using data on 5200 banks from 27 advanced european and asian countries 2010 2017 our cross country panel specification allows us to condition on global shocks and bank specific fixed effects banks offset interest income losses under negative rates with lower deposit expenses and gains in non interest income including fees and capital gains small and low deposit ratio banks drive most results banks respond to negative rates by increasing lending activity and raising their share of deposit funding overall our results indicate benign implications of negative rates to date for bank profitability

interest groups and the rise and decline of growth interest groups are known to exert a sclerotic impact on mean growth a la olson 1982 it is unknown however what impact if any groups exert on the volatility of growth an important hindrance to development in this article we first consider what impact we should expect olson groups to have on the volatility of growth we then estimate the relation between groups and growth volatility in a cross country panel using system generalized method of moments the findings indicate that groups are associated with growth stability in addition the findings suggest that interest groups may be a source of the stability observed in democracies

explaining the rain the rise and decline of nations after 25 years in the quarter century since the publication of mancur olson s rise and decline of nations a large literature has evolved testing the central hypothesis regarding olson s thesis on institutional sclerosis these tests have taken the form of both econometric regression analysis involving a sample of various nations and detailed narrative case studies of specific nations tests have appeared in both economics and political science journals as well as in collected volumes and independent books performed primarily by authors from america and europe a review of over 50 separate works reveals that on the whole the theory of institutional sclerosis is generally but certainly not universally supported no systematic bias in favor of or opposition to olson is found to have arisen on the basis of methodology publication outlet or authorship location

bank loan portfolios and the monetary transmission mechanism abstract we study the portfolio behavior of bank loans following a monetary tightening and find that real estate and consumer loans sharply decrease while commercial and industrial c i loans increase these responses are compared with responses following non monetary shocks which also reduce output but keep interest rates roughly unchanged during such a non monetary downturn c i loans sharply decrease while real estate and consumer loans show no substantial response these responses together with the responses of relevant lending rates are hard to reconcile with a decline in the supply of c i bank loans during a monetary downturn as stressed by the bank lending channel several arguments are presented explaining why the supply of c i loans may actually increase after a monetary contraction

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

financial supervision regimes and bank efficiency international evidence abstract there exists a lively debate as for the appropriate architecture of the financial supervision regime with a long list of theoretical advantages and disadvantages associated with each one of its key dimensions the present study investigates whether and how bank profit efficiency is influenced by the central bank s involvement in financial supervision the unification of financial authorities and the independence of the central bank the results show that efficiency decreases as the number of the financial sectors that are supervised by the central bank increases additionally banks operating in countries with greater unification of supervisory authorities are less profit efficient finally central bank independence has a negative impact on bank profit efficiency

the age of milton friedman between 1980 and 2005 as the world embraced free market policies living standards rose sharply while life expectancy educational attainment and democracy improved and absolute poverty declined is this a coincidence a collection of essays edited by balcerowicz and fischer argues that indeed reliance on free market forces is key to economic growth a book by stiglitz and others disagrees i review and compare the two arguments

the risk taking channel of monetary policy exploring all avenues the literature on the risk taking channel of monetary policy grew quickly leading to scattered evidence we examine this channel through different angles exploring detailed information on loan origination and performance ex ante riskier borrowers receive more funding at the extensive margin when interest rates are lower ex post performance is independent of the level of interest rates at origination still loans granted in periods of very low and stable interest rates show higher default rates once interest rates start to increase risk taking is stronger among banks with lower capital ratios suggesting that this channel may be linked to managerial incentives for risk shifting

what is the effect of unconventional monetary policy on bank performance this paper examines the relationship between unconventional monetary policy and the us banking performance unconventional monetary policy is captured through the central bank s assets and excess reserves results show that unconventional monetary policy has a negative relationship with bank performance further analysis shows that the negative association between unconventional monetary policy and performance is mitigated for banks with a high level of asset diversification and low deposit funding we also find that the negative relationship between unconventional monetary policy and performance subdues for deposit insured financial institutions finally we use dynamic panel threshold analysis which reveals that the negative association between unconventional monetary policy and bank performance is particularly pronounced above the reported threshold value

the distributional effects of conventional monetary policy and quantitative easing evidence from an estimated dsge model abstract this paper compares the distributional effects of conventional monetary policy and quantitative easing qe within an estimated open economy dsge model of the euro area the model includes two groups of households i wealthier households who own financial assets and are able to smooth consumption over time and ii poorer households who only receive labor and transfer income and live hand to mouth we use the model to compare the impact of policy shocks on constructed measures of income and wealth inequality net disposable income net asset position and relative per capita income except for the short term expansionary conventional policy and qe shocks tend to mitigate income and wealth inequality between the two population groups in light of the coarse dichotomy of households that abstracts from richer income and wealth dynamics at the individual level the analysis emphasizes the functional distribution of income

interest groups and economic performance some new evidence mancur olson s theory of the decline of nations is path breaking in political economics it has been tested cross sectionally in numerous empirical studies we survey the existing results briefly with a special focus on studies using the number of lobbies as an exogenous variable using data from the period 1973 2006 we then present the field s first time series analysis of the effects of the number of interest groups on the german lobby list and macroeconomic performance gauged in terms of economic growth and inflation the number of interest groups as a proxy for their influence is shown to have an important impact on macro variables interest group activity significantly leads to a decline in the growth rate and a rise in the inflation rate

collective moral hazard maturity mismatch and systemic bailouts the paper elicits a mechanism by which private leverage choices exhibit strategic complementarities through the reaction of monetary policy when everyone engages in maturity transformation authorities haver little choice but facilitating refinancing in turn refusing to adopt a risky balance sheet lowers the return on equity the key ingredient is that monetary policy is non targeted the ex post benefits from a monetary bailout accrue in proportion to the number amount of leverage while the distortion costs are to a large extent fixed this insight has important consequences first banks choose to correlate their risk exposures second private borrowers may deliberately choose to increase their interest rate sensitivity following bad news about future needs for liquidity third optimal monetary policy is time inconsistent fourth macro prudential supervision is called for we characterize the optimal regulation which takes the form of a minimum liquidity requirement coupled with monitoring of the quality of liquid assets we establish the robustness of our insights when the set of

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

explaining bank distress in eastern european transition economies abstract this paper considers the joint role of macroeconomic structural and bank specific factors in explaining the occurrence of banking problems in the nineteen eastern european transition countries over the last decade with data at the individual bank level we show using a discrete time survival model that all three factors interact in their impact and have a rich dynamic profile which underlines the highly volatile cycles challenging the stability of banks in this region a fragile funding basis accompanied by high exposure to market risk in an environment of reforms and macroeconomic disturbances is the typical precursor of bank distress

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

in search for yield survey based evidence on bank risk taking abstract monetary policy can have an impact on economic and financial stability through the risk taking of banks falling interest rates might induce investment into risky activities this paper provides evidence on the link between monetary policy and bank risk taking we use a factor augmented vector autoregressive model favar for the us for the period 1997 2008 besides standard macroeconomic indicators we include factors summarizing information provided in the federal reserve s survey of terms of business lending stbl these data provide information on banks new loans as well as interest rates for different loan risk categories and different banking groups we identify a risk taking channel of monetary policy by distinguishing responses to monetary policy shocks across different types of banks and different loan risk categories following an expansionary monetary policy shock small domestic banks increase their exposure to risk large domestic banks do not change their risk exposure foreign banks take on more risk only in the mid 2000s when interest rates were too low for too long

bank regulation property prices and early warning systems for banking crises in oecd countries abstract early warning systems ews for banking crises generally omit bank capital bank liquidity and property prices most work on ews has been for global samples dominated by emerging market crises where time series data on bank capital adequacy and property prices are typically absent we estimate logit crisis models for oecd countries finding strong effects from capital adequacy and liquidity ratios as well as property prices and can exclude traditional variables higher capital adequacy and liquidity ratios have a marked effect on the crisis probabilities implying long run benefits to offset some of the costs that such regulations may impose

the hazards of expert control chief risk officers and risky derivatives at the turn of the century regulators introduced policies to control bank risk taking many banks appointed chief risk officers cros yet bank holdings of new complex and untested financial derivatives subsequently soared why did banks expand use of new derivatives we suggest that cros encouraged the rise of new derivatives in two ways first we build on institutional arguments about the expert construction of compliance suggesting that risk experts arrived with an agenda of maximizing risk adjusted returns which led them to favor the derivatives second we build on moral licensing arguments to suggest that bank appointment of cros induced organizational licensing leading trading desk managers to reduce policing of their own risky behavior we further argue that ceos and fund managers bolstered or restrained derivatives use depending on their financial interests we predict that ceos favored new derivatives when their compensation rewarded risk taking but that both ceos and fund managers op

following germany s lead using international monetary linkages to estimate the effect of monetary policy on the economy abstract forward looking behavior on the part of the monetary authority makes it difficult to estimate the effect of monetary policy interventions on output we present instrumental variables estimates of the impact of interest rates on quarterly real output for several european countries using german interest rates as the instrument these estimates confirm a strong forward looking bias in least squares estimates that persists even conditional on standard controls for the history of the system due to the potential for correlation of output shocks across countries we interpret our estimates as lower bounds for the effect of monetary policy on real output

testing long run neutrality using intra year data previous tests of the long run neutrality hypothesis have generally relied on annual time series data this paper analyses the long run neutrality of money in australia using different sources of intra year data which permits an examination of the effects of seasonality and the robustness of previous empirical results a reduced form arima model is used with both quarterly seasonally unadjusted and adjusted australian real gdp and nominal money supply to test the neutrality hypothesis using two measures of money stock namely m1 and m3 it is shown that the hypothesis is supported using m1 as the measure of money supply while it is rejected using m3 recent trends and developments in the money and credit markets in australia provide a possible explanation of the sensitivity of the outcome to the measure of money stock employed in the analysis

on low frequency estimates of long run relationships in macroeconomics abstract a number of recent studies have attempted to test propositions concerning long run economic relationships by means of frequency domain time series techniques that concentrate attention on low frequency comovements of variables the present paper emphasizes that many of these propositions involve expectational relationships that are not inherently related to specific frequencies or periodicities thus the association of low frequency time series test statistics with long run economic propositions is not generally warranted that such an association can be misleading is demonstrated by analysis of examples taken from notable papers by geweke lucas and summers

the effect of unconventional monetary policy on cross border bank loans evidence from an emerging market abstract we analyze the impact of quantitative easing by the federal reserve european central bank and bank of england on cross border credit flows relying on comprehensive loan level data we find that fed qe strongly boosts cross border credit granted to turkish banks by banks located in the us euro area and uk while ecb and boe qes work only moderately through banks in the ea and uk respectively in general qe works at short maturities across bank locations and loan currencies more strongly for weaker lenders and borrowers and may have resulted in maturity mismatches in turkish banks searching for yield 99 words

rent seeking distributional coalitions taxes relative prices and economic growth the results clearly indicate that much of the considerable variation in the pace and pattern of economic growth between the various american states is explainable by institutional arrangements amenable to revisions through public policy the findings suggest that long run economic growth would be best served by constraining distributional coalitions be it through constitutional restraints e g balanced budget amendments the item veto statutory changes e g subjecting coalitions like labor unions to the antitrust laws or some other means e g labor and capital fleeing distributional coalitions such as in the movement of workers and plants to nonunion areas

sooner or later timing of monetary policy with heterogeneous risk taking we analyze the effects and interactions of monetary policy tools that differ in terms of their timing and their targeting in a model with heterogeneous agents more productive agents endogenously expose themselves to higher interim liquidity risk by borrowing and investing more two inefficiencies impair the transmission of monetary policy an investment and a hoarding inefficiency heterogeneous agents respond disparately to ex ante conventional and ex post unconventional monetary policy however we show that the two policies are equivalent due to the endogeneity of hoarding in contrast targeted interventions such as discount window lending can alleviate both inefficiencies at the same time

monetary policy bank leverage and financial stability abstract this paper shows that with limited liability banks lever up excessively to finance new loans lower monetary policy rates can worsen or reduce these incentives depending on the size of the shock when equity financing is ruled out when this constrained is relaxed but the bank faces costly dividend adjustment lower monetary policy rates always worsen risk taking incentives and the effect is persistent the reason is that costly dividend adjustment lowers the opportunity cost of lending in this model capital requirements are closer to the source of the distortion and thus work better than loan to value caps in reducing excessive risk taking

the risk taking channel of monetary policy in the u s evidence from corporate loan data to study the presence of a risk taking channel in the u s we build a comprehensive data set from the syndicated corporate loan market and measure monetary policy using different measures most notably taylor 1993 and romer and romer 2004 residuals we identify a negative relation between monetary policy rates and bank risk taking especially in the run up to the 2007 financial crisis however this effect is purely supply side driven only when using taylor residuals and an ex ante measure of bank risk taking our results highlight the sensitivity of the potency of the risk taking channel to the measures of monetary policy innovations

interest rates and credit risk this paper explores the effects of shifts in interest rates on corporate leverage and default we develop a dynamic model in which the relationship between firms and their outside financiers is affected by a moral hazard problem and entrepreneurs initial wealth is scarce the link between leverage and default risk comes from the lower incentives of overindebted entrepreneurs to guarantee firm survival the need to finance new investment with outside funding pushes firms leverage ratio above some state contingent target towards which they gradually adjust through earnings retention the dynamic response of leverage and default to interest rate rises and cuts is both asymmetric and heterogeneously distributed across firms both rises and cuts increase the aggregate default rate in the short run however a higher interest rate reduces firms target leverage and hence produces lower default rates in the longer run this helps rationalize some evidence regarding the risk taking channel of monetary policy

distributional coalitions state strength and economic growth toward a comprehensive theory of economic development high performing economies in the asia pacific region together with only mediocre economic development in latin america prompts the question of what explains differential economic growth rates among developing countries combining a statist perspective with olson s theory of interest group formation this research hypothesizes that nations with weak distributional coalitions will more likely experience high growth and state intervention will be effective using a longitudinal research design this secondary analysis involves a comparative and interactive examination of eight asian pacific and twelve latin american countries by considering the role of the state in interaction with distributional coalitions in society the results indicate that approximately two thirds of the variance in national economic growth is explained

do banks affect the level and composition of industrial volatility in theory better access to bank credit can reduce or increase output volatility depending on whether firms are more financially constrained during contractions or expansions this paper finds that the volatility of industrial output is lower in countries with more bank credit most of the reduction in volatility is idiosyncratic which follows from the ability of banks to pool and diversify shocks systematic volatility is reduced less strongly volatility dampening is achieved via countercyclical borrowing at the firm level short term borrowing is less or more negatively correlated with sales and inventories in countries with high levels of bank credit

does deposit insurance increase banking system stability an empirical investigation based on evidence of 61 countries in 1980 97 the authors find that explicit deposit insurance tends to be detrimental to bank stability the more so where bank interest rates are deregulated and the institutional environment is weak the adverse impact of deposit insurance on bank stability tends to be stronger the more extensive is the coverage offered to depositors and where the scheme is funded and run by the government rather than the private sector

leaning against the wind and the timing of monetary policy abstract if monetary policy is to aim also at financial stability how would it change to analyze this question this paper develops a general form framework financial stability objectives are shown to make monetary policy more aggressive in reaction to negative shocks cuts are deeper but shorter lived than otherwise by keeping cuts brief monetary policy tightens as soon as bank risk appetite heats up within this shorter time span cuts must then be deeper than otherwise to also achieve standard objectives finally we analyze how robust this result is to the presence of a bank regulatory tool and provide a parameterized example

the interest rate pass through in the euro area during the sovereign debt crisis abstract we investigate the pass through of monetary policy to bank lending rates in the euro area during the sovereign debt crisis in comparison to the pre crisis period we make the following contributions first we use a factor augmented vector autoregression which allows us to assess the responses of a large number of country specific interest rates and spreads second we analyze the effects of monetary policy on the components of the interest rate pass through which reflect banks funding risk including sovereign risk and markups charged by banks over funding costs third we not only consider conventional but also unconventional monetary policy we find that while the transmission of conventional monetary policy to bank lending rates has not changed with the crisis the composition of the pass through has changed specifically expansionary conventional monetary policy lowered sovereign risk in peripheral countries and longer term bank funding risk in peripheral and core countries during the crisis but has been unable to lower banks markups this was not or not as much the case prior to the crisis unconventional monetary policy helped decreasing lending rates mainly due to large shocks rather than a strong propagation

micro level transmission of monetary policy shocks the trading book channel abstract we open the black box of the monetary policy transmission mechanism with a granular model that considers the balance sheet composition and network relationships of each economic agent though there are several well documented channels through which monetary policy operates we focus on the overlooked trading book channel which arises because of adjustments in the accounting value of trading book exposures on banks balance sheets that have to be marked to market when interest rates change variations in banks net worth due these adjustments are used as input to a network model that incorporates the financial and corporate sectors the framework permits us to determine the effects of interest rate changes on every bank and firm in the economy and any second round contagion effects in the short run we apply the model to a comprehensive database of brazilian banks and firms from 2015 to 2020 we find that interest rate shocks affect more strongly financial stability in periods of monetary policy tightening we also find notable asymmetric effects of positive and negative interest rate shocks in the brazilian economy with positive interest rate shocks affecting more financial stability finally our results also suggest a non linear relationship between interest rate changes and financial stability reinforcing the need to mitigate monetary policy shocks through interest rate smoothing and adequate communication and transparency to society

capital requirements monetary policy and aggregate bank lending theory and empirical evidence capital requirements linked solely to credit risk are shown to increase equilibrium credit rationing and lower aggregate lending the model predicts that the bank s decision to lend will cause an abnormal runup in the borrower s stock price and that this reaction will be greater the more capital constrained the bank i provide empirical support for this prediction the model explains the recent inability of the federal reserve to stimulate bank lending by increasing the money supply i show that increasing the money supply can either raise or lower lending when capital requirements are linked only to credit risk the motivation of this article is first to examine the impact of risk based capital requirements namely those that link mandatory capital to asset ratios for banks to their loans on aggregate bank lending these requirements called the basle capital rules or bis guidelines went into effect in march 1989 for banks in the leading industrialized nations these rules initially required banks to maintain capital equal to 7 25 percent of business and most consumer loans with the requirement increasing to 8 percent by the end of 1992 secondly i wish to understand the link between monetary policy and aggregate bank credit in the presence of risk based capital requirements my curiosity is sparked in part by two recent phenomena one is the experience of the u s economy which displayed sluggish growth during 1989 93 despite a monetary policy that attempted to spur bank lending and economic activity and the other is the striking decline in loans relative to security holdings mostly government bonds in the asset portfolios of u s

the macroeconomic sources of systemic risk in the banking sectors of five new eu member states abstract rapid credit growth has been one of the most pervasive developments in recent years in central and eastern europe our estimates support the hypothesis that the growth of credit and the amount of available finance might harm banking performance and deteriorate non performing loans npl dynamics most probably due to the overheating of economies in the five nmss the procyclicality of banking sector performance and high economic activities growth is a signal of an economy overheating and therefore a slowdown in economic activity is likely to accelerate the growth of the npl ratio

credit market competition and capital regulation market discipline for financial institutions can be imposed not only from the liability side as has often been stressed in the literature on the use of subordinated debt but also from the asset side this will be particularly true if good lending opportunities are in short supply so that banks have to compete for projects in such a setting borrowers may demand that banks commit to monitoring by requiring that they use some of their own capital in lending thus creating an asset market based incentive for banks to hold capital borrowers can also provide banks with incentives to monitor by allowing them to reap some of the benefits from the loans which accrue only if the loans are in fact paid off since borrowers do not fully internalize the cost of raising capital to the banks the level of capital demanded by market participants may be above the one chosen by a regulator even when capital is a relatively costly source of funds this implies that capital requirements may not be binding as recent evidence seems to indicate

imperfect competition risk taking and regulation in banking abstract we asses the welfare implications of banking competition under various deposit insurance regimes in a model of imperfect competition with social failure costs and where banks are subject to limited liability we study the links between competition for deposits and risk taking incentives and conclude that the welfare performance of the market and the appropriateness of alternative regulatory measures depend on the degree of rivalry and the deposit insurance regime specifically when competition is intense and the social failure costs high deposit rates are excessive both in a free market and with risk based insurance if insurance premiums are insensitive to risk then the same is true even if there is no social cost of failure we find also that in an uninsured market with nonobservable portfolio risk or with flat premium deposit insurance deposit regulation rate regulation or deposit limits and direct asset restrictions are complementary tools to improve welfare in an uninsured market with observable portfolio risk or with risk based insurance deposit regulation may be a sufficient instrument to improve welfare

bank valuation and accounting discretion during a financial crisis this paper shows that banks overstate the value of distressed assets and their regulatory capital during the us mortgage crisis real estate related assets are overvalued in banks balance sheets especially those of bigger banks compared to the market value of these assets banks with large exposure to mortgage backed securities also provision less for bad loans furthermore distressed banks use discretion over the classification of mortgage backed securities to inflate their books our results indicate that banks balance sheets offer a distorted view of the financial health of the banks and provide suggestive evidence of regulatory forbearance and noncompliance with accounting rules

the productivity slowdown the oil shocks and the real cycle f ive facts stand out about economic performance in the united states since world war ii the first is that for most of the postwar period the u s has had a slower rate of economic growth than the other major developed democracies except great britain and much lower rates of growth than germany japan and italy the gap between the growth of per capita income of the united states and comparable countries has however tended to diminish over time and the united states has lately grown at about the same rate as most other developed countries the second outstanding fact is that the united states has fallen far behind in many mass production industries in which it used to lead the world whereas it is ahead of other nations in many new and especially high technology industries in automobiles steel tires household appliances and earth moving and farm equipment for example u s production has fallen dramatically in relation to output in most comparable countries and the country has become a net importer of most such products by contrast in newer industries such as computers jet aircraft sophisticated weaponry and high technology in general the united states is often dominant both as producer and exporter the third outstanding fact is that most of the older heartland of american industry roughly the area north and east of an arc drawn from baltimore to st louis to milwaukee has declined dramatically in comparison with the south and the west this change in regional fortunes has been due in large part to migration motivated by differences in economic prospects from the declining to the advancing

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

inside the crisis an empirical analysis of banking systems in distress much of the substantial literature on banking crises focuses on early warning indicators the authors look at what happens to the economy and the banking sector after a banking crisis breaks out much of the theory of banking crises assigns a central role to depositor runs with vulnerability to runs viewed as a basic characteristic of banks as financial intermediaries but banking systems can be financially distressed even when depositors do not withdraw their deposits if other bank creditors rush for the exit or if banks become insolvent are contemporary banking crises characterized by large declines in deposits the authors find that contemporary banking crises are not accompanied by declines in aggregate bank deposits and credit does not fall relative to output but the growth of both deposits and credit does slow down substantially output recovery begins the second year after the crisis and is not led by a resumption of credit growth instead banks including the stronger banks reallocate their asset portfolio away from loans this suggests that protecting deposits during a banking crisis may not be enough to protect bank credit as lack of usable collateral and poor borrower creditworthiness discourage banks from lending however protecting bank credit may not be a priority right after a crisis as the real economy can rebound without it at least while there is substantial under used capacity

monetary and macroprudential policy coordination among multiple equilibria abstract the notion of a tradeoff between output and financial stabilization is based on monetary macroprudential models with unique equilibria using a game theory setup this paper shows that multiple equilibria lead to qualitatively different results monetary and macroprudential authorities have tools that impose externalities on each other s objectives one of the tools macroprudential is coarse while the other monetary policy is unconstrained we find that this asymmetry always leads to multiple equilibria and show that under economically relevant conditions the authorities prefer different equilibria giving the unconstrained authority a weight on helping the constrained authority leaning against the wind now has unexpected effects the relation between this weight and the difficulty of coordinating is hump shaped and therefore a small degree of leaning worsens outcomes on both authorities objectives

determinants of the increase in the number of interest groups in western democracies theoretical considerations and evidence from 21 oecd countries mancur olson s theory of institutionalsclerosis is based on the notion that thenumber of interest groups within a countryincreases with the duration of itspolitical stability the following paperargues that the increase in the number ofinterest groups over time could also be aconcomitant of economic development theoretically both explanations provetenable an empirical cross sectionalregression analysis using data from 21oecd countries finds no evidence for asignificant impact of the duration ofpolitical stability on the number ofinterest groups a significantly positiveeffect is however reported for the degreeof economic development

bailouts and systemic insurance abstract we revisit the link between bailouts and bank risk taking bailout expectations create moral hazard increase bank risk taking however when an individual bank s success depends on both its effort and the overall stability of the banking system bailouts that shield banks from contagion may increase their incentives to invest prudently and so reduce bank risk taking this systemic insurance effect is more important when bailout rents are low while contagion risk is high the optimal policy is then to make bailouts not difficult but effective associated with lower rents we further show that besides better bank resolution a powerful means to reduce bailout rents is higher ex ante bank capital since it implies a larger bank equity cushion that can be expropriated in a resolution this highlights an important complementarity between bank capital regulation and bailouts as tools to enhance financial stability

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

real interest rates leverage and bank risk taking do low interest rate environments lead to greater bank risk taking we show that when banks can adjust their capital structures reductions in real interest rates lead to greater leverage and higher risk for any downward sloping loan demand function however if the capital structure is fixed the effect depends on the degree of leverage following a decrease in interest rates well capitalized banks increase risk while highly levered banks may decrease it if loan demand is linear or concave further the capitalization cutoff depends on the degree of bank competition this effect therefore should vary across countries and over time

monetary policy as financial stability regulation this paper develops a model that speaks to the goals and methods of financialstability policies there are three main points first from a normative perspective the model defines the fundamental market failure to be addressed namely that unregulated private money creation can lead to an externality in which intermediaries issue too much short term debt and leave the system excessively vulnerable to costly financial crises second it shows how in a simple economy where commercial banks are the only lenders conventional monetary policy tools such as open market operations can be used to regulate this externality while in more advanced economies it may be helpful to supplement monetary policy with other measures third from a positive perspective the model provides an account of how monetary policy can influence bank lending and real activity even in a world where prices adjust frictionlessly and there are other transactions media besides bank created money that are outside the control of the central bank

tests of long run neutrality using permanent monetary and real shocks abstract we present tests of long run monetary neutrality using an empirical framework that allows for the effects of real shocks on the long run behavior of both output and monetary aggregates our findings support long run monetary neutrality as a feature of the post world war ii u s economy we further find that permanent innovations in labor supply as measured by working age population are a principal factor in the long run movements in u s output and monetary aggregates

monetary policy and risk taking abstract we assess the effects of monetary policy on bank risk to verify the existence of a risk taking channel monetary expansions inducing banks to assume more risk we first present var evidence confirming that this channel exists and is particularly significant on the bank funding side then to rationalize this evidence we build a macroeconomic model where banks subject to runs endogenously choose their funding structure deposits vs capital and risk level a monetary expansion increases bank leverage and risk in turn higher bank risk in steady state increases asset price volatility and reduces equilibrium output

long run monetary neutrality in this article we provide a test of long run monetary neutrality employing cointegration and vector error correction modelling methodology using quarterly data for the united states we estimate the long run relationships among money supply and output and other key macroeconomic variables our findings in general raise doubts about the long run monetary neutrality proposition

financial opening deposit insurance and risk in a model of banking competition abstract we study the impact of competition on banks risk taking behavior under different assumptions about deposit insurance and the dissemination of information while financial opening increases banks riskiness a risk based deposit insurance or alternatively the public disclosure of financial information are likely to mitigate this effect moreover the limiting cases of uninsured but fully informed depositors and risk based full deposit insurance yield the same equilibrium risk level although the welfare consequences of increased competition depend on its impact on risk financial opening unambiguously improves welfare as we approach the limiting cases

collateralized borrowing and risk taking at low interest rates abstract empirical evidence suggests financial intermediaries increase risky investments when interest rates are low we develop a model consistent with this observation and ask whether the risks undertaken exceed the social optimum interest rate policy affects risk taking in the model through two opposing channels first low policy rates make riskier assets more attractive than safe bonds second low policy rates reduce the amount of safe bonds available for collateralized borrowing in interbank markets the calibrated model features excessive risk taking at the optimal policy however at low policy rates collateral constraints tighten and risk taking does not exceed the social optimum

monetary policy and long run systemic risk taking as an extension to the literature on the risk taking channel of monetary policy this paper studies the existence of a systemic risk taking channel srtc in the eurozone through an original macroeconomic perspective based on causality measures because the srtc is effective after an incubation period we make a distinction between short and long term causality following the methodology proposed by dufour and taamouti 2010 we find that causality from monetary policy to systemic risk while not significant in the very short term robustly represents 75 to 100 of the total dependence between the two variables in the long run reverse causality is rejected systemic risk did not influence the policy of the european central bank before the global financial crisis however central banks must be aware that a too loose monetary policy stance may be conducive to a build up of systemic risk

unnatural selection perverse incentives and the misallocation of credit in japan we examine the misallocation of credit in japan associated with the perverse incentives faced by banks to provide additional credit to the weakest firms firms are more likely to receive additional bank credit if they arein poor financial condition because troubled japanese banks have an incentive to allocate credit to severely impaired borrowers in order to avoid the realization of losses on their own balance sheets this evergreening behavior is more prevalent among banks that have reported capital ratios close to the required minimum and is compounded by the incentives arising from extensive corporate affiliations

take the money and run political turnover rent seeking and economic growth abstract we find a negative and significant relationship between gubernatorial turnover and u s state economic growth although our finding of an inverse relationship between growth and political instability may seem to contradict olson s 1982a famous hypothesis regarding the growth retarding nature of political stability such constitutional political changes were not primarily what olson had in mind we argue that enhanced political turnover is associated with more rent seeking since payoffs to focusing on special interest redistributive policies vs general growth enhancing ones are greater for less durable regimes therefore we interpret our evidence as supportive of olson s broader argument concerning the negative affect of rent seeking behavior on growth

the solvency of financial institutions in spain lessons from securitization on analysing a sample of spanish banks we find that securitization has a slightly negative impact on the soundness of the issuing entity an unbalanced dynamic panel model was estimated using the forward orthogonal deviations gmm method and used to analyse 537 traditional securitizations issued by 61 banks between 1998 and 2012 the analysis revealed that the entities soundness became weaker immediately prior to the crisis but this effect became insignificant after 2007 securitization has facilitated a process of regulatory capital arbitrage leading to lower capital requirements while at the same time giving rise to a slight worsening of the quality of the originators portfolios it was found that profitability liquidity and inflation positively affect solvency while changes in short term interest rates affect it negatively

identifying the risk taking channel of monetary transmission and the connection to economic activity abstract i use loan level data from the syndicated loan market in the u s to investigate how monetary policy affects banks sensitivity to risk using loan level data and banks sensitivity to risk enables me to identify the risk taking channel and disentangle it from other monetary channels i show that banks change their behavior toward risk following changes in monetary policy where loose monetary policy reduces banks sensitivity to risk i then provide evidence for the significant contribution of risk taking shocks and changes in banks risk taking behavior to economic outcomes and business cycle fluctuations the paper s primary contribution is in providing new loan level evidence for the existence of the risk taking channel in the u s as well as a possible link between the risk taking channel and business cycle fluctuations

the tullock bastiat hypothesis inequality transfer curve and the natural distribution of income conventional wisdom has long held that public policy has worked to reduce income inequality in contemporary america or that at least it has the real capability of achieving that goal thurow 1971 for example the evidence is strong that there was a pronounced decline in measured inequality during the 1930s and 1940s a period of greatly increased governmental intervention on both the tax and expenditure side designed to reduce inequality lindert and williamson 1980 increased government expenditures went or so it was argued largely to alleviate the plight of the poor and thus greater federal public aid expenditures brought about greater equality similarly it commonly has been maintained that higher and more progressive federal taxes serve to further reduce inequality in america there is another view however which holds that governmental intervention in markets may have a different impact while he believes the modern welfare state has clearly reduced incomes for the extremely wealthy tullock 1983 has suggested that many government transfers are not transfers from higher to lower income groups but rather transfers within the middle class allowing at least the possibility that governmental transfer activity might not in the aggregate increase income equality in any significant manner perhaps the citizenry are interested in promoting income equality but only to some limited extent in that regard evidence compiled by lebergott 1975 is interesting since the midnineteenth century there has been a remarkable rough constancy in government payment levels to the poor relative to wage levels of common laborers to be sure there have been some periods of increased support for the poor such as during the heyday of the war on poverty in the late 1960s but as tullock has expressed in private correspondence with us the body politic has spasms of feeling more than usually charitable and then goes back to normal the conventional wisdom had previously been questioned by reynolds and smolensky 1977 and for that matter by bastiat 1848 1964 who said that the state produces more poverty than it cures along similar lines lebergott 1975 15 speaking of poor elderly americans observed they are not impoverished in spite of the american capitalist welfare state they are in poverty because of it

risk taking spillovers of u s monetary policy in the global market for u s dollar corporate loans abstract we study the effects of u s interest rates and other factors on risk taking in the global market for u s dollar syndicated term loans we find that before the global financial crisis both u s and non u s lenders originated ex ante riskier loans to non u s borrowers in response to a decline in short term u s interest rates and after the crisis in response to a decline in longer term u s interest rates after the crisis this behavior was more prominent for shadow banks and less prominent for banks with relatively low capital separately before the crisis lenders originated less risky loans in response to u s dollar appreciation across the periods the responses to risk appetite and economic uncertainty varied to the extent that the federal reserve affects u s interest rates we provide evidence of global risk taking spillovers of u s monetary policy which are important but not dominant factors for risk taking in the market

does the ecb act as a lender of last resort during the subprime lending crisis evidence from monetary policy reaction models abstract we investigate whether the ecb aligns its monetary policy with financial crisis risk in emu member countries we find that since the outbreak of the subprime crisis the ecb has significantly increased net lending and reduced interest rates when banking and sovereign debt crisis risk in vulnerable emu countries greece ireland italy portugal and spain increases while no significant effect is identified for the pre crisis period and relatively tranquil emu countries austria belgium france germany and the netherlands these findings suggest that the ecb acts as a lender of last resort for vulnerable emu countries

politicians and banks political influences on government owned banks in emerging markets abstract government ownership of banks is very common in countries other than the united states this paper provides cross country bank level empirical evidence about political influences on these banks it shows that government owned banks increase their lending in election years relative to private banks this effect is robust to controlling for country specific macroeconomic and institutional factors as well as bank specific factors the increase in lending is about 11 of a government owned bank s total loan portfolio or about 0 5 of the median country s gdp per election per government owned bank

credit booms and macrofinancial stability this paper explores several questions about credit booms and busts when do credit booms occur when do they end up in busts and when do they not what are the implications for different policies if curbing credit growth and or mitigating the associated risks is an objective we find that credit booms are often associated with financial reform and economic growth they also tend to be more frequent in fixed exchange rate regimes only one in three credit boom episodes are followed by a financial crisis these booms tend to be larger and last longer macroprudential tools have at times proven effective in containing booms and more often in limiting the consequences of busts due to the buffers they helped to build

what can we learn from the implementation of monetary and macroprudential policies a systematic literature review the emergence of macroprudential policies implemented by central banks as a means of promoting financial stability has raised many questions regarding the interaction between monetary and macroprudential policies given the limited number of studies available this paper sheds light on this issue by providing a critical and systematic review of the literature to this end we divide the theoretical and empirical studies into two broad channels of borrowers consisting of the cost of funds and the collateral constraint and financial intermediaries consisting of risk taking and payment systems in spite of the existing ambiguity surrounding coordination issues between monetary and macroprudential policies it is argued that monetary policy alone is not sufficient to maintain macroeconomic and financial stability hence macroprudential policies are needed to supplement monetary in addition we find that the role of the exchange rate is critical in the implementation of monetary and macroprudential policies in emerging markets while volatile capital flows pose another challenge in so far as how the arrangement of monetary and macroprudential policies varies across countries key theoretical and policy implications have been identified

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

negative monetary policy rates and systemic banks risk taking evidence from the euro area securities register we show that negative monetary policy rates induce systemic banks to reach for yield for identification we exploit the introduction of negative deposit rates by the european central bank in june 2014 and a novel securities register for the 26 largest euro area banking groups banks with more customer deposits are negatively affected by negative rates as they do not pass negative rates to retail customers in turn investing more in securities especially in those yielding higher returns effects are stronger for less capitalized banks private sector financial and nonfinancial securities and dollar denominated securities affected banks also take higher risk in loans

bank liquidity interbank markets and monetary policy a major lesson of the recent financial crisis is that the interbank lending market is crucial for banks facing large uncertainty regarding their liquidity needs this paper studies the efficiency of the interbank lending market in allocating funds we consider two different types of liquidity shocks leading to di erent implications for optimal policy by the central bank we show that when confronted with a distribu tional liquidity shock crisis that causes a large disparity in the liquidity held among banks the central bank should lower the interbank rate this view implies that the traditional tenet prescribing the separation between prudential regulation and mon etary policy should be abandoned in addition we show that during an aggregate liquidity crisis central banks should manage the aggregate volume of liquidity two di erent instruments interest rates and liquidity injection are therefore required to cope with the two di erent types of liquidity shocks finally we show that failure to cut interest rates during a crisis erodes financial stability by increasing the risk of bank runs