Risk-taking channel,bank lending channel and the “paradox of credibility”: Evidence from Brazil

If from one hand credibility is important for the conduct of monetary policy, on the other hand, greater credibility may eventually stimulate the creation of bubbles in the credit market and asset prices through the risk-taking channel, and as a consequence, bring to reality the “paradox of credibility”. The “paradox of credibility” is the new dilemma posed to central banking in the effort to conciliate monetary policy and banking regulation under inflation targeting regimes. Thus, the present work aims to: (i) analyze the impact of central bank actions and the macroeconomic environment on the risk perception of banks, and; (ii) analyze the influence of this risk perception of banks on the credit spread, considering both the credit channel and the risk-taking channel. Based on an econometric analysis, the work provides evidence about: (i) the “paradox of credibility” and the risk-taking channel; (ii) the influence of monetary policies on the risk perception of banks and, as a consequence, on the credit spread; (iii) the procyclical nature of banks in relation to economic activity, and; (iv) the adherence of the countercyclical indicator (called credit gap) proposed in Basel III for the Brazilian case.     

Bank lending and interest on excess reserves: An empirical investigation

This paper econometrically tests for effects on bank lending of the Federal Reserve’s policy of paying interest on excess reserves (IOER). Following the 2008 financial crisis, US banks decreased their loan allocations and increased holdings of excess reserves. A model of bank asset allocation shows that when the rate of IOER is higher than other short-term rates, banks will switch from zero excess reserves to a regime with higher excess reserves and lower lending. Using a sample of panel data on US banks from 2000 through 2018, we find evidence of a switch to a positive excess reserve regime in the post-crisis period. Controlling for market interest rates, loan demand, and economic activity, we find that IOER accounts for the majority of the decline in bank lending after the financial crisis.     

EMU and the transmission of monetary policy: evidence from business lending rates

This paper analyses the pass-through of money market rates to short-term and long-term business lending rates in the four largest euro area countries. The main findings of the paper are (1) that since the start of EMU loan rates appear to have become more responsive to money market rate changes in France, Italy and Spain, but not in Germany, and (2) that German loan rates are significantly more sluggish than loan rates in the other three large euro area countries. I also test for non-linear pass-through based on an asymmetric error-correction model but do not find much evidence of non-linearity in euro area interest rate pass-through.The views expressed in this paper do not necessarily represent the views of the Deutsche Bundesbank.     

The dynamic of bank lending channel: Basel regulatory constraint

This article analyzes the impact of monetary policy on bank behavior under the Basel I regulatory framework using a dynamic model with monopolistic competition. There are two main objectives. First, we theoretically predict the dynamic model of bank lending channels under the Basel I regulatory constraint. Second, we empirically analyze the situation in Malaysia by using panel data on 23 commercial banks in the period of 1999 to 2007 by using General Method of Moments. The empirical results show that market rates on loans and policy rates are important influences on average rates of banks' loans. This has an implication that Malaysian banks have the power to set their own prices on loans as they are influenced by the change in the market rate and policy rate. We also have proven that the previous period of spread risk weighted loans and securities is statistically significant and correlated with the average loan rate, whereas risk weighted securities is also statistically significant and correlated with the average time deposit rate in both periods. This shows that the role of risk-weighted assets under the Basel I is important in influencing the optimal rates on loans and time deposits.     

Capital-enhanced equilibrium exchange rate: evidence from India

This article examines the validity of the capital-enhanced equilibrium exchange rate (CHEER) approach using quarterly data ranging from 1993Q1 to 2016Q2. Using unit root break test and structural break cointegration technique, our overall results indicated that the CHEER is invalidated once a structural break is accounted for in the cointegration relationship. The rejection of the validity could be attributed to the asymmetry in the capital flows and exchange rates being not fully flexible.     

Politics of religiously motivated lending: An empirical analysis of aid allocation by the Islamic Development Bank

We investigate whether lending by the Islamic Development Bank mirrors Saudi Arabia's political interests based on religious affinity using panel data for its 56 member countries over the 1970–2007 period. Our results indicate that Sunni regime countries receive favorable treatment in terms of loan allocation, as well as Shia majority populated countries in exceptional occasions of conflict with other religious minority groups, while non-Muslim countries are the least favored. There is also evidence that lending by the World Bank to the same group of countries and over the same time frame does not respond to the political stance of Saudi Arabia founded on religion. These findings reveal the advantage that Saudi Arabia gains by assuming the leadership of a Regional Development Bank in contrast to coordinating common strategies in a global International Financial Institution with other large shareholders for whom religion might not be essential for political alliances.     

Small business lending and credit risk: Granger causality evidence

Because of their opaque nature, SMEs are overly reliant on bank lending. Therefore, we examine whether banks' credit supply to SMEs are affected by their financial conditions. To this end, we employ a Granger causality analysis to examine whether there is an indication of a significant direction of determination between SME lending and non-performing SME loans. The results reveal no bidirectional relationship between SME lending and NPL for the entire banking sector. For Islamic banks, however, we find two-way linkages between these two parameters: a negative causation is running both from SME lending to NPL growth and from NPL to SME lending. Given Islamic banks' deposit-oriented funding practices and their adherence to profit-and-loss sharing principles, this finding suggests the presence of heightened market discipline within the Islamic banking system.     

Reserve requirements and the bank lending channel in China

This paper examines how reserve requirements influence the transmission of monetary policy through the bank lending channel in China while also taking into account the role of bank ownership. The implementation of Chinese monetary policy is characterized by the reliance on the reserve requirements as a regular policy tool with frequent adjustments. Using a large dataset of 170 Chinese banks for the period 2004–2013, we analyze the reaction of loan supply to changes in reserve requirements. We find no evidence of the bank lending channel through the use of reserve requirements. We observe, nonetheless, that changes in reserve requirements influence loan growth of banks. The same findings hold true for other monetary policy instruments. Further, we show that the bank ownership format influences transmission of monetary policy.     

Monetary aggregates and core inflation: evidence from India

This study constructs a model-based core inflation for India using Divisia monetary aggregates instead of traditional money measures with the methodology proposed by Bagliano and Morana (2003) and evaluates its forecasting abilities. The core inflation derived from Divisia monetary aggregates is found to be a better leading indicator of measured inflation than the core inflation derived from traditional money measures. These results argue for a case in favour of using monetary aggregates in the construction of core inflation for policy purposes.     

The bank lending channel and Swiss banking: a survey-based approach

This paper investigates the issue of the bank-lending channel in Switzerland. Using survey data to reflect loan supply and demand factors, we investigate the dynamic behaviour of aggregate loans in a VAR setting. Our findings indicate that higher interest rates lead to tightened loan approvals, and liquidity is a binding constraint as the contraction in deposits exceeds the reduction in loan growth following a monetary shock. Thus, banks’ actions seem to aggravate (ameliorate) the initial effects of higher (lower) interest rates on aggregate demand.     

Quantitative easing and median income: a state-level analysis

Due to the Great Recession, the Federal Reserve engaged in unconventional monetary policy (QE) to fight the effects of the economic downturn. Literature asserts that QE did have impacts on economic growth and helped alleviate the effects of the recession. Recently, critics have asserted that the benefits of QE may not have been equally distributed across households. In this paper, we build a state-level dataset to investigate the dynamics of QE measures and median income across the U.S states. The findings indicate that, for the period 2008 to 2014, there is statistical evidence that increases in the Federal Reserve’s balance sheet correspond with higher nominal median income. However, once we adjust for inflation, the results become statistically insignificant and the impact of QE on median income becomes almost zero.     

Auctions for social lending: A theoretical analysis

Prosper, today the second largest social lending marketplace with nearly 1.5 million members and $380 million in funded loans, employed an auction mechanism amongst lenders to finance each borrower's loan until 2010. Given that a basic premise of social lending is cheap loans for borrowers, how does the Prosper auction do in terms of the borrower's payment, when lenders are strategic agents with private true interest rates? We first analyze the Prosper auction as a game of complete information and fully characterize its Nash equilibria, and show that the uniform-price Prosper mechanism, while simple, can lead to much larger payments for the borrower than the VCG mechanism. We next compare the Prosper mechanism against the borrower-optimal auction in an incomplete information setting, and conclude by examining the Prosper mechanism when modeled as a dynamic auction, and provide tight bounds on the price for a general class of bidding strategies.     

Economic reforms,growth and well-being: evidence from India

This study examined economic well-being of sub-national units in India since the economic reforms. For this purpose, the study constructed well-being index for 17 major states of India for the period 1981–2011 based on five broad dimensions. Our results showed that the economic well-being of states has declined since the reforms. The interstate disparities have increased and the states (except Punjab and West Bengal) which performed well prior to the reforms continued to perform well in the post-reform years too. In addition, our regression results for the high well-being and low well-being states revealed that the reforms have benefited more developed high well-being states, rather than low well-being states. While human capital was found significantly and positively related to per capita incomes in both groups of the states, financial development was positively related in high well-being states, but a negative association was visible in the low well-being states.     

Trade liberalization and unemployment: Theory and evidence from India

A widely held view among the public is that trade liberalization increases unemployment. Using state and industry-level unemployment and trade protection data from India, we find no evidence of any unemployment increasing effect of trade reforms. In fact, our state-level analysis reveals that urban unemployment declines with trade liberalization in states with flexible labor markets and larger employment shares in net exporter industries. Moreover, our industry-level analysis indicates that workers in industries experiencing greater reductions in trade protection were less likely to become unemployed, especially in net export industries. Our results can be explained within a theoretical framework incorporating trade and search-generated unemployment and some institutional features of the Indian economy.     

Repayment performance in group lending: Evidence from Jordan

Using data from a survey of 160 urban borrowing groups of the Microfund for Women in Jordan, we investigate the effect of screening, peer monitoring, group pressure, and social ties on borrowing groups' repayment behavior as an indirect test of different theoretical models. The dependent variable used captures the intensity of default measured by the total number of days of late repayment after each due date, allowing us to use count data models with cluster standard errors. As theory predicts, our empirical analysis suggests that peer monitoring, group pressure, and social ties reduce delinquency. The paper uncovers interesting evidence about the role of social ties and religion. Most notably, in an area where religion contributes to attitudes and beliefs of individuals, we find that religiosity improves repayment performance.     

Chinese commercial paper: The bank lending channel of monetary transmission and beyond

China's commercial paper financing experienced dramatic growth in January 2019. This paper examines the bank lending channel of China's monetary transmission to commercial paper, and more broadly, the factors that affect the growth of commercial paper, which is the first of its kind in the academic literature. The main conclusions include: the bank lending channel to commercial paper exists; the performance of the real economy also has a significant effect on the growth of the commercial paper.     

Gender diversity and firm performance: evidence from India and Singapore

ABSTRACT

This study investigates if gender diversity on boards is an effective driver of financial performance. For this purpose, this study choses two countries, one of which has the soft law approach (Singapore) while the other has mandatory requirements (India) on corporate boards gender diversity. By doing so, it examines if there is a comparability between the listed firms of the two countries. Our results suggest that the gender diversity has a positive and significant effect on the financial performance of the firms of both the countries. Although, the gender diversity of the two countries does not seem to affect the growth opportunities of both the countries. Further, our results indicate that the board characteristics affect the performance positively and significantly when the sample is divided into five quantiles for the firms in these two countries. These findings have implications to the managerial decision making and relevance to stewardship theory and resource dependency theory.     

Unemployment burden and its distribution: Theory and evidence from India

We develop a measure of unemployment that takes into account both the duration and intensity of unemployment. This measure satisfies several desirable properties, including distribution sensitivity, which deals with differences among the unemployed. It is particularly suited to developing countries because individuals in these countries display considerable variation in labor force participation, unemployment duration, and unemployment intensity. It can also be decomposed into mean and variance components and contributions to unemployment by various subgroups of the population. We use this measure and data from National Sample Surveys on employment and unemployment to understand unemployment in India during the period 1993 to 2012. We show that unemployment has generally fallen, although the distribution of unemployment has worsened. Moreover, unemployment is driven to a greater extent by higher educated groups; the unemployment among these groups is also fairly substantial. We explain these findings and suggest some policies.     

The political economy of public goods: Some evidence from India

We are interested in how public goods get allocated by a centralized state. We use data on public goods and social structure from parliamentary constituencies in rural India to understand the allocation of these goods over the 1970s and 1980s. National policies and political agendas during this period emphasized universal access to basic amenities and financed a rapid expansion in rural infrastructure. We find evidence of considerable equalization in many of these facilities, reflecting perhaps the importance of these commitments. Among the historically disadvantaged social groups, those that mobilized themselves politically gained relative to the others. Measures of social heterogeneity that have been emphasized in the recent empirical literature on public goods are relevant but not overwhelming in their importance.     

Regulatory independence and thermal power plant performance: evidence from India

Journal of Regulatory Economics - We examine the role of regulatory independence on electricity generation performance in India. Electricity generation in India is exposed to several regulatory...