Bank competition and optimal monetary policies under alternative reserve accounting schemes

The purpose of this paper is to provide a theoretical analysis of the implications of increased competition among depository financial institutions for the optimal conduct of monetary policy with respect to the ultimate goals of price and output stability. In the context of a general equilibrium model which includes rational expectations and a market for bank deposits, it is shown that a rise in bank rivalry for deposits produces a more steeply sloped LM schedule. Under a system of lagged required reserve accounting, this fact has no effect on the optimal conduct of monetary policy, which requires an operating procesure designed to target a market interest rate. However, under a system of contemporaneous reserve accounting, this fact implies that less emphasis should be placed on a market interest rate as a variable upon which the Fed's setting of reserves should be conditioned.     

Central Banking and Post-Keynesian Economics

Abstract

The Post-Keynesian theory of endogenous money has given much attention to the role of the central bank in the money creation process. Circuit theory has neglected this role, in so far as it has focused on the relationship between banks and firms within a monetary production economy. The aim of this paper is therefore twofold. First, it intends to fill this gap in circuit theory, by providing a role for the central bank in settlement of interbank debts. Secondly, it aims at reinforcing the Post-Keynesian analysis of central bank money by considering both the money-purveying and the credit-purveying roles of the settlement institution in the interbank market. The result of this analysis is a more comprehensive theory of endogenous money, where the lender-of-last-resort facilities of a central bank are viewed as an endogenous phenomenon involving both a money creation and a credit operation between the central bank and the domestic banking system. In such a framework, monetary policy consists of setting the base rate of interest at a level that enables banks to limit their bilateral debt position in the interbank market, so as not to disrupt the workings of the payment system by either an illiquidity or an insolvency crisis.     

The Differential Returns Offered by Mutually Owned and Proprietary UK Depository Institutions: 1993–2000

The study quantifies the differences in the level of return from investing in deposit (savings) accounts provided by depository institutions, which are either 'mutual' or 'proprietary'. It is shown that for most types of deposit accounts offered in the UK, mutual building societies provide higher returns than proprietary firms. Surprisingly, it is also shown that returns from deposit accounts issued by converted or non‐mutual building societies are, generally, lower than either mutual building societies or proprietary firms. These findings are consistent for interest rate data adjusted for the effect of non‐price product characteristics and for unadjusted interest rate data.     

Bank Mergers, Information, Default and the Price of Credit

This paper addresses the impact of bank mergers on the price of firm credit, through an information channel. It is shown that, as bank mergers imply a wider spreading of information among banks concerning firms' past defaults, they may increase the expected revenue from lending. Therefore, interest rates may decline as long as a sufficiently competitive environment is preserved. A fall in interest rates, in turn, reduces the incentives for firms to strategically default, which reinforces the downward effect on the price of credit. The results are a function of the level of information sharing and of the sensitivity of the default probability to the interest rate .     

不良贷款、路径依赖与中小企业的融资困难--对当前我国中小企业融资难的一种新解释

关于中小企业在经济发展中所占据的重要地位及作用在理论界早已形成较为一致的看法并为各国政府所重视.目前,虽然中小企业与金融机构之间已经普遍建立起了较为稳定的合作关系,但中小企业的融资难问题仍然是制约中小企业发展的最大瓶颈.本文根据转型时期我国银行和企业的基本特征,建立了一个包括家庭-企业-银行的三部门两期模型,从我国国有银行的体制利弊出发,运用路径依赖的理论,对不良贷款在造成我国中小企业融资困难时的作用机理进行了深入分析,并讨论了单纯的贸易部门开放和贸易金融部门的同时开放对解决中小企业融资难的不同效果,以期对将来的改革有所启示.     

Creditor passivity: The effects of bank competition and institutions on the strategic use of bankruptcy filings

In transition countries, banks often fail to take action against loan defaulters. Using a model of the bank–firm relationship, we study the trade-off a bank faces when having defaulting firms declared bankrupt. First, the bank receives a payoff if a firm is liquidated. Second, it provides information about a firm’s type to its competitors. Therefore, asymmetric information between banks is reduced, and bank competition intensifies. We find that the better the institutions and the more competitive the banking sector, the greater the bank’s incentive to bankrupt defaulting firms. This makes information between banks less asymmetric and thus leads to lower interest rates and increases the probability that all banks offer loans.     

Financial structure,productivity, and risk of foreign direct investment

This study investigates how heterogeneous firms choose their lenders when they raise external finance for Foreign Direct Investment (FDI) and how the choice of financing structure affects FDI activities. We establish an asymmetric information model to analyze why certain firms use private bank loans while others use public bonds to finance foreign production. The hidden information is the productivity shock to FDI. Banks are willing to monitor the risk of FDI, while bondholders are not; hence, banks act as a costly middleman that enables firms to avoid excessive risk. We show that firms’ productivity levels, the riskiness of FDI, and the relative costs of bank finance and bond finance are three key determinants of the firm’s financing choice. Countries with higher productivity, higher bank costs, or investment in less risky destinations, use more bond finance than bank finance. These results are supported by evidence from OECD countries.     

Corruption,competition and democracy

This paper presents a model of the interaction between corrupt government officials and industrial firms to show that corruption is antithetical to competition. It is hypothesized that a government agent that controls access to a formal market has a self-interest in demanding a bribe payment that serves to limit the number of firms. This corrupt official will also be subject to a detection technology that is a function of the amount of the bribe payment and the number of firms that pay it. Under quite normal assumptions about the shape of the graph of the detection function, multiple equilibria can arise where one equilibrium is characterized by high corruption and low competition, and another is characterized by low corruption and high competition. Some suggestive empirical evidence is presented that supports the main hypothesis that competition and corruption are negatively related.     

Relative price efficiency,technical change,and scale economies for large commercial banks

One of the more important and frequently researched topics in banking is the production process. Previous studies of bank production, however, have employed a methodology which is not appropriate for regulated firms. We generate cost estimates for large commercial banks utilizing a generalized cost model which subsumes the commonly used model as a special case. Our findings suggest that the traditional methodology is inappropriate for the sample banks and generates biased estimates of cost parameters, scale effects, and the influence of technological change. The new methodology allows us to measure directly the effect of regulation on bank costs. The effect found is small, but significant.     

Fixed exchange rates,independent central banks and price stability in postcommunist countries: Conservatism and credibility

Central bank independence (CBI) and fixed exchange rates are used by governments to achieve stable prices. This article analyzes the mechanisms through which the two monetary institutions could work: Indirectly via a disciplinary effect on money growth rates or via an additional credibility effect on inflation expectations and the cost of capital. I further explain how both discipline and credibility are affected by the distinct flaws of independent central banks and fixed exchange rates: central banks lack transparency and fixed exchange rates take many shapes and are routinely devalued. The argument is tested with quarterly data from postcommunist countries for years 1991 to 2007. The findings show a strong disciplinary effect of monetary institutions on rates of M2 change and an effect on inflation controlling for money growth, but credibility does not extend to lower real short‐term market interest rates. Political institutions do condition the effect of central bank independence, while the types of fixed exchange rates affect money growth rates and inflation to different degrees.     

LIQUIDITY,MONEY CREATION AND DESTRUCTION,AND THE RETURNS TO BANKING*

We build on our earlier model of money in which bank liabilities circulate as a medium of exchange. We investigate optimal bank behavior and the resulting provision of liquidity under a range of central bank regulations. In our model, banks issue inside money under fractional reserves, facing the possibility of excess redemptions. Banks consider the float resulting from money creation and make reserve‐management decisions that affect aggregate liquidity conditions. Numerical examples demonstrate positive bank failure rates when returns to banking are low. Central bank interventions may improve banks' returns and welfare through a reduction in bank failure.     

Monetary Policy, Credit and Aggregate Supply: The Evidence from Italy

This paper concerns theory and evidence of the monetary transmission mechanisms. Current research has deeply investigated factors, such as dependence of firms on bank credit, that amplify the impact of monetary policy impulses on aggregate demand exerting strong but temporary effects on output and employment. We present an intertemporal macroeconomic equilibrium model of a competitive economy where current production is financed by bank credit, and then we use it to identify supply–side effects of the credit transmission mechanism in data drawn from the Italian economy. We find evidence that the 'credit variables' identified by the model – the overnight rate as a proxy of monetary policy and a measure of credit risk – have permanent effects on employment and output by altering credit supply conditions to firms.
To save on space, mathematical proofs, statistical tests and data sources have been gathered in two separate appendices that can be examined on request.
(J.E.L.: E2, E5).     

经营活动、融资策略对银 行利润和风险的影响 ——基于我国商业银行的验证

2008年全球金融危机引发了对银行经营模式的思考。本文基于我国97家商业银行2005-2012年的面板数据，综合考虑了银行经营活动和融资策略之间的关联，并系统验证了两者分别对银行风险和利润的影响。结果发现非利息业务的开展与融资渠道的拓宽都未起到显著提升利润、分散风险的效果。这个结论虽然与发达国家的经验存在一定的差异，但是由于我国商业银行积极开展非利息业务的动机较弱，并且仍然高度依赖存款融资，因此符合我国目前的情况。     

Central bank reserve management: Aggregate targets and interest payments on reserves

Tindall and Spencer [1997] presented a dynamic stochastic theory of borrowed reserves that explained the observed nonlinear relationship between borrowing and the spread between the federal funds rate and the discount rate. It showed that borrowed reserves are a function of deposit variation. This paper extends that research, providing a general dynamic model of all key bank reserve aggregates. Nearly all reserve aggregates, which can be used as operating targets by the Federal Reserve, are subject to the influence of deposit variation and are nonlinearly related to the spread between the federal funds rate and the discount rate, complicating their use as targets. Additionally, it is found that the Federal Reserve's proposal to pay interest on bank reserves could generate substantial distortions in reserve aggregate behavior where interest is paid on excess reserves as well as required reserves, effectively resulting in potentially large discount-window policing problems.     

Managing banks' duration gaps when interest rates are stochastic and equity has limited liability

Interest rate risk is an important consideration in both the management and regulation of depository financial institutions. Although the market value of equity is the most often used target of gap management, the conventional tools employed in the literature ignore a crucial characteristic of equity, viz., limited liability. In this article, we compare conventional techniques used to measure the duration gap for depository institutions with the limited liability techniques recently developed in the literature. Our results show that conventional models may over-estimate banks' interest rate risk exposures, especially during times when interest rate volatility and credit risk are at above average levels. This over-estimation may lead banks to make errors in their gap management.     

Mergers,Privatization and Environmental Considerations

The purpose of this paper is to analyze both merger sustainability and optimal privatization decisions, in an international mixed oligopoly model when it is explicitly assumed that firms’ production pollutes the environment. Contrary to traditional theory it is shown that both a merger between private firms and between one private and one public firm could be sustainable. Furthermore, the effects of environmental considerations on mixed firms’ optimal degree of privatization are analyzed.     

Bank versus nonbank financial institution lending behaviour: indictors of firm size,risk or ownership?

Using 1251 matched commercial loan deal terms of listed companies over the period 2003–2014, we examine the heterogeneity of lending behaviours of bank and nonbank financial institutions. The results show that large firms have a higher likelihood of getting loans from nonbank financial institutions. Compared to banks, nonbank financial institutions are more likely to provide credit help to high operation risk firms. State-owned listed firms have a higher probability to get finance from nonbank financial institutions than private firms, which highlights the situation that private firms are in a weak position to get credit help from China’s financial system. Moreover, the process of increasing the banks’ noninterest income ratio tends to drives firms to borrow from nonbank financial institutions.     

信贷融资对异质性企业出口参与的影响* ——基于商业信贷和银行信贷角度的理论和实证分析

本文在新新贸易理论框架下，基于商业信贷和银行信贷的综合视角，系统研究了信贷融资对异质性企业出口参与的影响。本文重点围绕商业信贷对银行信贷的促进作用展开分析，从企业层面为中国出口增长“奇迹”提供来自金融视角的证据。本文在异质企业出口模型中引入商业信贷和银行信贷，论证商业信贷和银行信贷通过缓解出口成本融资约束影响企业出口参与，并运用中国制造业企业和IVprobit估计方法进行实证检验。本文发现：（1）改善商业信贷和银行信贷融资状况会提高企业出口概率；（2）商业信贷对银行信贷的促进作用有利于企业参与出口；（3）商业信贷对企业出口参与的作用不受企业所有制、企业规模、行业竞争性和企业出口固定成本差异的影响，银行信贷的作用则受上述差异的影响，商业信贷对银行信贷的促进作用受企业所有制和企业规模差异的影响。因此，发展信贷融资、建立商业信贷和银行信贷的互融互通机制，是加快中国出口增长的重要举措。     

Life‐Cycle Patterns of Interest‐Rate Mark‐Ups in Small‐Firm Finance*

We derive empirical implications from a theoretical model of bank–borrower relationships. The interest‐rate mark‐ups of banks are predicted to follow a life‐cycle pattern over the age of the borrowing firms. Because of endogenous bank monitoring by competing banks, borrowing firms initially face a low mark‐up, and thereafter an increasing mark‐up as a result of informational lock‐in, until it falls for older firms when the lock‐in is resolved. By applying a large sample of predominantly small unlisted firms and a new measure of asymmetric information, we find that firms with significant asymmetric‐information problems have a more pronounced life‐cycle pattern of interest‐rate mark‐ups. Additionally, we examine the effects of concentrated banking markets on interest‐rate mark‐ups. The results indicate that the life cycle of mark‐ups is mainly driven by asymmetric‐information problems and not by concentration. However, we find evidence that bank market concentration matters for older firms ? 2 Correction added after online publication on 20^th February 2012; the original text read ‘However, we find evidence that bank market concentration for older firms’, omitting the word ‘matters’.
     

MONEY AND BANKING IN SEARCH EQUILIBRIUM*

We develop a new theory of money and banking based on the old story in which goldsmiths start accepting deposits for safe keeping, then their liabilities begin circulating as media of exchange, then they begin making loans. We first discuss the history. We then present a model where agents can open bank accounts and write checks. The equilibrium means of payment may be cash, checks, or both. Sometimes multiple equilibria exist. Introducing banks increases the set of parameters for which money is valued–thus, money and banking are complements. We also derive a microfounded version of the usual money multiplier.