Banks' Funding Stress,Lending Supply,and Consumption Expenditure

We employ a unique identification strategy linking survey data on household consumption expenditure to bank-level data to estimate the effects of bank funding stress on consumer credit and consumption expenditures. We show that households whose banks were more exposed to funding shocks report lower levels of nonmortgage liabilities. This, however, only translates into lower levels of consumption for low-income households. Hence, adverse credit supply shocks are associated with significant heterogeneous effects.     

Examining the Relationships between Capital,Risk and Efficiency in European Banking

This paper analyses the relationship between capital, risk and efficiency for a large sample of European banks between 1992 and 2000. In contrast to the established US evidence we do not find a positive relationship between inefficiency and bank risk‐taking. Inefficient European banks appear to hold more capital and take on less risk. Empirical evidence is found showing the positive relationship between risk on the level of capital (and liquidity), possibly indicating regulators' preference for capital as a mean of restricting risk‐taking activities. We also find evidence that the financial strength of the corporate sector has a positive influence in reducing bank risk‐taking and capital levels. There are no major differences in the relationships between capital, risk and efficiency for commercial and savings banks although there are for co‐operative banks. In the case of co‐operative banks we do find that capital levels are inversely related to risks and we find that inefficient banks hold lower levels of capital. Some of these relationships also vary depending on whether banks are among the most or least efficient operators.     

Financial Crises and Recapitalizations

We develop a dynamic stochastic general equilibrium model with financial frictions on both financial intermediaries and goods‐producing firms. Since financial intermediaries are highly leveraged, we show that the welfare gains from their recapitalization in response to large but rare net worth losses are as large as those from eliminating typical business cycle fluctuations. We also find that these gains are increasing in the size of the net worth loss, are larger when recapitalization funds are raised from the household rather than the real sector, and can be larger when lower idiosyncratic risk leads to higher leverage.     

Variations in Market Liquidity and the Intraday Interest Rate

Most central banks offer banks participating in large‐value real‐time gross settlement (RTGS) systems a free intraday overdraft facility to discourage banks from actively managing their daylight liquidity. In this paper, we ask whether this facility has kept the intraday interest rate at zero. Using a unique transaction‐level data set on collateralized interbank loans for 2006–12, we find that during periods of financial distress, rates for morning transactions are higher than those in the afternoon. Moreover, this intraday rate correlates with market liquidity, suggesting that rates contain a liquidity premium. This intraday pattern is reduced, but not eliminated by the Eurosystem's accommodative liquidity provision.     

The macroeconomic consequences of terrorism

We perform an empirical investigation of the macroeconomic consequences of international terrorism and interactions with alternative forms of collective violence. Our analysis is based on a rich unbalanced panel data set with annual observations on 177 countries from 1968 to 2000, which brings together information from the Penn World Table data set, the ITERATE data set for terrorist events, and data sets of external and internal conflict. We explore these data with cross-sectional and panel growth regression analysis and a structural VAR model. We find that, on average, the incidence of terrorism may have an economically significant negative effect on growth, albeit one that is considerably smaller and less persistent than that associated with either external wars or internal conflict. As well, terrorism is associated with a redirection of economic activity away from investment spending and towards government spending. However, our investigation also suggests important differences both regarding the incidence and the economic consequences of terrorism among different sets of countries. In OECD economies, in particular, terrorist incidents are considerably more frequent than in other nations, but the negative influence of these incidents on growth is smaller.     

Macroprudential Policies and Housing Prices: A New Database and Empirical Evidence for Central,Eastern, and Southeastern Europe

Several countries in Central, Eastern, and Southeastern Europe used a rich set of prudential instruments during the recent credit and housing boom and bust cycles. We construct a comprehensive database of these policy measures covering 16 countries at a quarterly frequency. We use this database to investigate whether the policy measures had an impact on housing price inflation. The measures that appeared to be effective were capital measures (minimum capital adequacy ratio, maximum ratio of lending to households to share capital) and nonstandard liquidity measures (marginal reserve requirements (MRRs) on foreign funding, MRRs linked to credit growth).     

Interventions in Markets with Adverse Selection: Implications for Discount Window Stigma

I study the implications for central bank discount window stigma of a workhorse model of adverse selection in financial markets. In the model, firms (banks) need to borrow to finance a productive project. There is limited liability and firms have private information about their ability to repay their debts, which gives rise to the possibility of adverse selection. The central bank can ameliorate the impact of adverse selection by lending to firms. Discount window borrowing is observable and it may be taken as a signal of firms' credit worthiness. Under some conditions, firms borrowing from the discount window may pay higher interest rates to borrow in the market, a phenomenon often associated with the presence of stigma. I discuss these and other outcomes in detail and what they suggest about the relevance of stigma as an empirical phenomenon.     

Global Banks,Financial Shocks,and International Business Cycles: Evidence from an Estimated Model

This paper estimates a two‐country model with a global bank, using U.S. and euro area (EA) data. Empirically, a model version with a bank capital requirement outperforms a structure without such a constraint. A loan loss originating in one country triggers a global output reduction. Banking shocks matter more for EA macro variables than for U.S. real activity. Banking shocks account for about 2–5% of the unconditional variance of U.S. GDP and for 3–14% of the variance of EA GDP. During the 2007–09 recession, banking shocks accounted for about 15% of the fall in U.S. and EA GDP, and for more than a third of the fall in EA investment and employment.     

Market discipline in the Central American banking system

The hypothesis of market discipline is empirically verified in the Central American banking system. A contrast is carried out on whether the riskier banks (the ones with the worst banking fundamentals) pay higher interest rates and receive smaller amounts in deposits. The generalized method of moments is used for dynamic panel data models (the SYS GMM estimator), as well as a sample of 30 banks from six Central American countries during the 2008–2012 period. Unlike the majority of the previous empirical literature, specifically for developed countries, no evidence of market discipline was found in Central America. The results are robust for several indicators of the banking fundamentals for purposes of internal demand of bank capital, and for other econometric models. These findings indicate weaknesses in the bank policy regarding the disclosure of information.     

The Role of Soft Information in a Dynamic Contract Setting: Evidence from the Home Equity Credit Market

Credit underwriting is a dynamic process involving multiple interactions between borrower and lender. During this process, lenders have the opportunity to obtain hard and soft information from the borrower. We analyze more than 108,000 home equity loans and lines‐of‐credit applications to study the role of soft and hard information during underwriting. Our data set allows us to distinguish lender actions that are based strictly on hard information from decisions that involve the collection of soft information. Our analysis confirms the importance of soft information and suggests that its use can be effective in reducing overall portfolio credit losses ex post.     

Economic Growth and Financial Statement Verification

We use a proprietary data set of financial statements collected by banks to examine whether economic growth is related to the use of financial statement verification in debt financing. Exploiting the distinct economic growth and contraction patterns of the construction industry over the years 2002–2011, our estimates reveal that banks reduced their collection of unqualified audited financial statements from construction firms at nearly twice the rate of firms in other industries during the housing boom period before 2008. This reduction was most severe in the regions that experienced the most significant construction growth. These trends reversed during the subsequent housing crisis in 2008–2011 when construction activity contracted. Moreover, using bank‐ and firm‐level data, we find a strong negative (positive) relation between audited financial statements during the growth period, and subsequent loan losses (construction firm survival) during the contraction period. Collectively, our results reveal that macroeconomic fluctuations produce temporal shifts in the overall level of financial statement verification and temporal shifts in verification are related to bank loan portfolio quality and borrower performance.     

Bailout uncertainty in a microfounded general equilibrium model of the financial system

This paper develops a micro-founded general equilibrium model of the financial system composed of ultimate borrowers, ultimate lenders and financial intermediaries. The model is used to investigate the impact of uncertainty about the likelihood of governmental bailouts on leverage, interest rates, the volume of defaults and the real economy. The distinction between risk and uncertainty is implemented by applying the multiple priors framework to beliefs about the probability of bailout.Results of the analysis include: (i) An unanticipated increase in bailout uncertainty raises interest rates, the volume of defaults in both the real and financial sectors and may lead to a total drying up of credit markets. (ii) Lower exante bailout uncertainty is conducive to higher leverage, which in turn raises moral hazard and makes the economy more vulnerable to expost increases in bailout uncertainty. (iii) Bailout uncertainty affects the likelihood of bubbles, the amplitude of booms and busts as well as the banking and the credit spreads. (iv) Higher bailout uncertainty is associated with higher returns’ variability in diversified portfolios and higher systemic risks, (v) Pre-crisis expansionary monetary policy reinforces those effects by inducing higher aggregate leverage levels. (vi) The larger the change in bailout uncertainty and the change in aversion to this uncertainty, the stronger the pre-crisis buildup and the deeper the ensuing crisis.A central policy implication of the analysis is that the vaguest is bailout policy prior to a crisis, the lower is the magnitude of investments destroyed or missed due to errors in evaluating bailout and other intervention policies. On the other hand, the clearer is bailout policy upon the eruption of a crisis, the smaller the contraction of credit and the destruction of investment activity.     

The Puzzle of Persistently Negative Interest‐Rate–Growth Differentials: Financial Repression or Income Catch‐Up?

The interest‐rate–growth differential (IRGD) plays a critical role in determining the sustainability of government debt. Yet it is striking that IRGDs are correlated with income levels, and are generally negative in emerging and developing economies, which contradicts standard economic theory. Negative IRGDs constitute a powerful debt‐stabilising force, driving down debt ratios or keeping them stable even in the presence of persistent primary deficits. Motivated by the puzzling facts, this paper examines the IRGDs for a large panel of advanced and non‐advanced economies by utilising a newly assembled data set. The evidence shows that large negative IRGDs in emerging and developing economies are largely due to real interest rates well below market equilibrium – stemming from financial repression and captive and distorted markets – whereas the income catch‐up process plays a relatively modest role. Therefore, the IRGD in non‐advanced economies is likely to rise with financial market development and financial global integration, perhaps even before their GDP per capita converges to advanced‐economy levels.