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Authors employ an extensive dataset on borrower-level loans to study the influence of non-performing loans (NPLs) on the supply of bank credit to nonfinancial firms in Italy between 2008 and 2015. Authors use time-varying firm fixed effects to control for shifts in demand and changes in borrower characteristics, and they also exploit the supervisory interventions associated with the 2014 Asset Quality Review to identify exogenous variations in the banks’ NPL ratios. Authors find that banks’ lending behavior is not causally affected by the level of NPL ratios: the negative correlation between NPL ratios and credit growth in data is mostly generated by changes in firms’ conditions and contractions in their demand for credit. However, the exogenous emergence of new NPLs and the associated increase in provisions can cause a negative adjustment in credit supply.
This paper provides a unique snapshot of the exposures of EU banks to shadow banking entities within the global financial system. Drawing on a rich and novel dataset, the paper documents the cross-sector and cross-border linkages and considers which are the most relevant for systemic risk monitoring. From a macroprudential perspective, the identification of potential feedback and contagion channels arising from the linkages of banks and shadow banking entities is particularly challenging when shadow banking entities are domiciled in different jurisdictions. The analysis shows that many of the EU banks’ exposures are towards non-EU entities, particularly US-domiciled shadow banking entities. At the individual level, banks’ exposures are diversified although this diversification leads to high overlap across different types of shadow banking entities.
This paper presents a general equilibrium, monetary model of bank runs to study monetary injections during financial crises. When the probability of runs is positive, depositors increase money demand and reduce deposits; at the economy-wide level, the velocity of money drops and deflation arises. Two quantitative examples show that the model accounts for a large fraction of (i) the drop in deposits in the Great Depression, and (ii) the $400 billion run on money market mutual funds in September 2008. In some circumstances, monetary injections have no effects on prices but reduce money velocity and deposits. Counterfactual policy analyses show that, if the Federal Reserve had not intervened in September 2008, the run on money market mutual funds would have been much smaller.
Authors introduce SRISK to measure the systemic risk contribution of a financial firm. SRISK measures the capital shortfall of a firm conditional on a severe market decline, and is a function of its size, leverage and risk. Authors use the measure to study top US financial institutions in the recent financial crisis. SRISK delivers useful rankings of systemic institutions at various stages of the crisis and identifies Fannie Mae, Freddie Mac, Morgan Stanley, Bear Stearns and Lehman Brothers as top contributors as early as 2005-Q1. Moreover, aggregate SRISK provides early warning signals of distress in indicators of real activity.
The global financial crisis allegedly led to the end of global banking. However, authors find that reports of the demise of global banking are premature. Among the global systemically important banks, they find that there has been a shift of business from the global European banks to the more domestic Asian banks, which are gradually increasing their global reach. The US banks have maintained their strong position. Within Europe, authors find a mixed picture. The euro-area banks have maintained their global reach, while UK and Swiss banks have experienced a significant decline in their geographic reach.
Japan serves as a cautionary tale for Italy on how to clean up banking-sector problems. A general lesson is the need for policies to forthrightly address non-performing loans (NPLs) in countries with widespread banking problems. This helps address zombie banks and sluggish economic growth. The Japanese experience indicates that three elements are necessary to address NPLs: (a) sufficiently capitalised banks that can take losses from NPL write-downs; (b) an independent regulator that can identify problems and force action; and (c) tools to manage the orderly disposal of NPLs. The problem is not that this combination of policy tools is unknown, but that banks and governments lack incentives to use them in combination. Italy’s December 2016 package providing €20 billion for recapitalisation of banks is a step in the right direction. Similarly, pressure from the European Central Bank on Italian authorities and on banks to address NPLs is welcome.
Following the global financial crisis, the European Union extensively reformed its regulatory framework for financial services. With legislation such as the Bank Recovery and Resolution Directive (BRRD), it ensures that, through mechanisms such as 'bail-in', the recovery or restructuring of distressed financial institutions is done without spreading to other institutions, or using taxpayers' money to bail them out. To ensure that sufficient financial resources are available for bail-in, the BRRD requires resolution authorities to set financial institutions a minimum requirement for own funds and eligible liabilities (MREL). In parallel, a similar standard, the total loss-absorbing capacity (TLAC), was adopted internationally for systemically important financial institutions.
This paper investigates the foreign funding mix of globally active banks. Using BIS international banking statistics for a panel of 12 advanced economies, authors detect a structural break in international bank funding at the onset of the global financial crisis. In their post-break business model, banks rely less on cross-border liabilities and, instead, tap funds from outside their jurisdictions by making more active use of their subsidiaries and branches, as well as inter-office accounts within the same banking group.
The twin financial and sovereign debt crisis occurred during the last decade fostered the already existent debate on the so called too-big-to-fail financial institutions (“TBTF”) issue. The present essay will try to critically discuss the effectivity of the main measures adopted insofar in order to address such topical problem, on which scholars and authorities in the field are still in disagreement, as the conflicting statements of the President of the FRB of Minneapolis, Neel Kashkari and the Governor of the BoE recently evidenced. In doing so, a first section will identify and define the TBTF issue, looking at the rationale and the consequences of such concept. Moving forward, the following section will focus on some selected regulatory initiatives recently adopted across the U.S. and the EU, aimed at eradicating the TBTF problem and the linked consequences.
Yield spreads on sovereign bonds represent market expectations for the economic performance of issuing countries. In the international financial market, yield spreads also reflect the extent to which the issuing countries are integrated into the global market. Authors analyze market integration and interconnectedness for several countries by studying the characteristics of yield spreads of long-term bonds from December 1, 2006 to March 31, 2010. Analysis is based on a latent factor model with the following factors: world factor, the regional factor, the country-specific factor, and the US shock. Results show that there are clear contagion effects of the 2007-2008 crisis, which originated from the U.S., on all emerging economies under consideration. Stronger effects are observed on countries with relatively higher susceptibility to world factors before crisis. Mixed effects of regional factors are shown with similarities and differences across regions and countries. Relatively stronger effects of country-specific factors are shown in Korea, Japan, the U.K., and the U.S.
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