Do Foreign Currency Accounts Help Relax Credit Constraints? Evidence from Nepal

We analyse a novel bank‐level data set from Nepal, where domestic and foreign currency (FX) deposits are reported separately on the liability side of commercial bank balance sheets. In a panel regression analysis, we estimate semi‐accounting‐identities that allow us to identify the marginal sources of financing for various asset positions. We find that banks hedge against FX exposure via their sectoral lending composition: banks with a large share of FX deposits primarily lend to firms in traded‐goods sectors. Loans to non‐traded sectors are mostly financed by domestic deposits. While earlier studies have documented a positive impact of FX accounts on financial development, our analysis suggests that this does not need to imply that severely credit constrained sectors are the main beneficiaries of this process.     

Macroprudential policy and the inward transmission of monetary policy: The case of Chile,Mexico, and Russia

This paper studies whether domestic macroprudential policy may attenuate the inward transmission of monetary policy shocks from the United States to domestic bank lending growth in three emerging market economies—Chile, Mexico, and Russia. Identification relies on banks’ heterogeneous exposure to prudential policies and the fact that foreign monetary policy shocks are exogenous from the perspective of these economies. After analyzing the effects of the aggregate domestic prudential policy stance, we focus on specific prudential policies targeting mortgage and consumer loans, as well as foreign‐currency deposits. Although our overall results are mixed, we find evidence that the strength of international monetary policy spillovers varies depending on the stance of domestic macroprudential policy. In particular, a tighter reserve requirement stance over foreign‐currency deposits in Chile dampens the effect of an international monetary policy shock on domestic local‐currency lending, but reinforces that on foreign‐currency lending, whereas in Russia, it dampens the effect on both local‐currency and foreign‐currency lending, although to different degrees. Prudential policies targeting the asset side of banks’ balance sheets, such as mortgage loans or consumer credit, are found to amplify international monetary policy spillovers in some cases and attenuate it in others, depending on the country context.     

Islamic Banking in Malaysia: Unchartered Waters

This paper explores the Islamic banking business in Malaysia since its beginning in 1983. The Islamic banking sector has achieved its target of 20% market share in assets and deposits in 2010. To boost the industry's competitiveness and efficiency, the demands of the market forces will have to be delicately balanced with the dictates of the Shari'ah. The search for niche Islamic banking products warrants enhancements in the current regulatory, legal, and fiscal infrastructure for Islamic banking, without which these products cannot be a viable alternative to the conventional ones. While the prevailing infrastructure is conducive to Islamic banking products that hold similar characteristics with interest‐bearing loans, Shari'ah compliance can be a futile exercise when the purpose of the law (maqasid al‐shari'ah) is overlooked, for there is much more to Islamic banking than the elimination of interest.     

存贷款利差定价分析

存贷款利差合理水平取决于违约率、损失率、流动性风险、资本缓冲与信贷类资产的比率,以及无风险基准利率。银行业内部管理水平不足和存贷款市场的总体失衡会导致利差水平扩大和提高。我国当前的存贷款利差水平相对于其合理水平而言过低,不仅不利于银行业长期健康发展,而且也对整个金融体系累积了巨大的体系性风险。     

ON INTERNATIONAL TRADE IN BANKING SERVICES

In order to examine theories of domestic and international trade in banking, information is presented in this paper on the vast array of service charges banks levy on their customers, both resident and non-resident, and the complex of interest rates on deposits and loans that must be collected. Examination is also necessary of collection procedures of the various charges which central banks levy on banks, as well as interest rates paid on reserves, insurance premia on deposits and the like in order to test propositions that international trade in banking is a function of the various monetary policies followed by Monetary Authorities.     

The impact of setting negative policy rates on banking flows and exchange rates

In the aftermath of the great contraction of 2008, policymakers were faced with the Zero Lower Bound (ZLB) on nominal interest rates. Central banks implemented several unconventional monetary policies to overcome the ZLB, including setting negative nominal interest rates. This paper explores possible unintended effects of setting negative policy rates. Using Danish data, I assess the impact of paying a negative interest rate on reserves. Results suggest that going into negative territory has a particular impact, distinct from that of simply lowering interest rates: it leads to higher banking outflows and depreciation of the currency. Due to the reluctance of commercial banks to pass on negative rates to their depositors (retail deposits can easily be switched into cash), paying a negative (vs. positive) interest rate on reserves creates a disconnection between the assets and liabilities of commercial banks' balance sheets. Commercial banks can avoid this disconnection by holding external assets or assets in foreign currencies. This incentive to increase banking outflows appears to explain the particular impact of going into negative territory.     

BANK OUTPUT MEASUREMENT IN THE EURO AREA: A MODIFIED APPROACH

Banks do not charge explicit fees for many of the services they provide, bundling the service payment with the offered interest rates. This output therefore has to be imputed using estimates of the opportunity cost of funds. We argue that rather than using the single short‐term, low‐risk interest rate as in current official statistics, reference rates should match the risk characteristics of loans and deposits. This would lower euro area imputed bank output by, on average, 28–54 percent compared with the current methodology, implying that euro area GDP (at current prices) is overstated by 0.11–0.18 percent. This adjustment also leads to more plausible shares in value added of income from fixed capital in the banking industry.     

International Financial Contagion: Why are Eastern Europe's banks not failing when everybody else's are?

While the Asian financial crisis spread to Russia and Brazil, the transition economies in Central and Eastern Europe (CEECs) are largely unaffected by international financial contagion. This is the more surprising considering that most economies have experienced severe banking sector problems in the past, that large bad loan ratios are still prevalent, that banking regulation and supervision are only slowly improving, and that stabilizing policies have slowly been eliminated. What insulated the CEECs from the recent wave of financial instability? To consider the counterfactual, we first provide a framework that links banking crises to financial deregulation. We then focus on a number of macro- and microeconomic factors, using data compiled from the IMF's International Financial Statistics, from the World Bank's World Debt Tables, and from the BIS's Consolidated International Banking Statistics. We first compare past experiences in CEECs with those in other emerging economies as a cross-sectional reference point. We then consider whether the situation in CEECs has changed since the last banking sector problems, in order to establish a reference point across time. Our results indicate that the factors leading up to past banking crises are generally different in CEECs from those in other emerging economies. However, in recent years, the characteristics of CEECs have become more similar to those of other emerging economies.     

The transmission of business cycles: Lessons from the 2004 enlargement of the EU and the adoption of the euro

This paper evaluates the macroeconomic interdependencies of seven Central and Eastern European Countries (CEECs) with the Euro Area (EA) through trade relationship. We estimate a near‐VAR model and simulate the responses of activity in those CEECs to output shocks for 12 former members of the EA before and after the 2004 enlargement of the European Union. During both periods, empirical results show that spillover effects come through the main economies of the EA: Germany, France and Italy. Furthermore, CEECs were more responsive to output shocks in the EA after 2004 than before (3.3 times more on average). Increases in spillover effects are larger for the three CEECs that adopted the Euro early (Slovenia, Slovakia and Estonia) than the other CEECs but without higher trade intensity with the EA. Our results show that trade effects are positive inside the same currency area but negative for the CEECs without the euro.     

A few observations on financial liberalization and financial instability

Recent studies have conjectured that there may be a link between financial liberalization (FL) and financial instability in emerging economies. Most of these studies, however, do not investigate whether emerging economies are, in fact, becoming structurally more vulnerable to currency and banking crises. In this paper, I argue that emerging economies are becoming more susceptible to both currency and banking crises after FL. Using data for 27 emerging economies—excluding transition economies—from 1973 to the present, a univariate analysis indicates that the likelihood of currency crises may increase with stronger reactions to financial variables than to real or external trade variables. Similarly, for banking crises, interest rate, exchange rate, maturity, and default may increase, while simultaneously the support structure of the government seems to decline.     

Currency Exposure to Downside Risk: Which Fundamentals Matter?

I study whether or not countries' macroeconomic characteristics are systematically related to their currencies' exposure to the downside market risk. I find that the currency downside risk is strongly associated with the local inflation rate, real interest rate and net foreign asset position. Currencies of countries with high inflation and real interest rates and negative net foreign asset position (debtor countries) are more exposed to the downside risk whereas currencies of countries with low inflation and real interest rates and positive net foreign asset position (creditor countries) exhibit “safe haven” properties. The local real interest rate has the highest explanatory power in accounting for the cross‐section of currency exposure to the downside risk. This suggests that the high currency exposure to the downside risk is a consequence of investments in high‐yield risky countries and flight from them in “hard times”.     

七次降息对储蓄、贷款及货币供应量影响的实证分析

我国已连续七次下调利率 ,以 1 998年为界 ,前三次利率下调的基本特征是“恢复性调整” ,即适应物价由高走低的变化。后四次利率下调则是“调控性调整” ,主要针对 1 997年 1 0月以来我国首次出现物价负增长的现象 ,央行试图适度放松银根。本研究采用月度数据 ,分段对比分析。实证结果表明 :(1 )在 1 995年 1月— 1 999年 1 0月期间 ,我国居民储蓄存款和金融机构贷款的利率弹性不是表现在总量变动上而是表现在结构变动上。 (2 )影响储蓄变动的第一因素是股市变动 ,其次是个人收入 ,再次是利率 ;影响金融机构贷款变动的第一因素是金融机构存款的变化 ,其次是固定资产投资的变动。 (3 )七次利率下调减缓了货币流动性下降 ,但作用微小     

Foreign bank entry,bank efficiency and market power in Central and Eastern European Countries1

This article analyses the implications of the recently observed sharp expansion of foreign banks in the Central and Eastern European Countries (CEECs) as measured by equity ownership. We show that the mode of foreign entry has a pivotal impact on the post‐entry performance of banks in CEECs. Foreign greenfield banks are characterized by superior cost efficiency, compared with domestic and foreign‐acquired banks. The efficiency of foreign‐acquired banks deteriorates in the initial year of acquisition, but improves thereafter. Banks acquired by foreigners have less market power relative to domestic and foreign greenfield banks. Overall, the CEEC banking sectors have benefited from the increased foreign bank participation, both in terms of higher efficiency and more competition.     

A RE‐EXAMINATION OF REAL INTEREST PARITY IN CEECs USING ‘OLD’ AND ‘NEW’ SECOND‐GENERATION PANEL UNIT ROOT TESTS

This study applies ‘old’ and ‘new’ second‐generation panel unit root tests to check the validity of the long‐run real interest rate parity (RIP) hypothesis for ten Central and Eastern European Countries (CEECs) with respect to the Euro area and an average of the CEECs’ real interest rates. When the ‘new’ panel unit root tests are carried out relative to the Euro area rate as reference, we confirm the results of previous studies that support the RIP hypothesis, and the results of the ‘old’ tests used as a benchmark. Nevertheless, when the ‘new’ tests are performed using the average of the CEECs’ rate as reference, our results are mitigated, revealing that the hypothesis of CEECs’ interest rates convergence cannot be taken for granted. From a robustness analysis perspective, our findings indicate that the RIP hypothesis for CEECs should be considered with caution, because the RIP hypothesis is sensitive to the retained reference rate for computing the real interest rate differential, and also to the retained countries in the sample.     

FURTHER THOUGHTS ON THE BANKING IMPUTATION IN THE NATIONAL ACCOUNTS*

The banking problem in the National Accounts arises because interest rates paid by banks on deposits are generally lower than the rates charged for loans and service charges levied by banks are generally less than the cost of the banking services provided. This paper offers two explanations for such observations: first there is the new neo-classical theory of private banking and central banking which suggests that they arise because of distorting “taxes” levied by regulating central banks. Second there is the Keynesian theory which accounts for the observations by the fact that the public good services of monetary stabilization supplied directly by the central banks and indirectly by private banks cannot be priced. Both theories account for the empirical observations giving rise to the banking problem. Neither theory lends support to the banking imputation currently carried out in most National Accounts.     

Are Islamic Banks More Resilient During Financial Panics?

Islamic banking is one of the fastest growing segments of the financial sector in developing countries. Rapid growth of this segment is accompanied with claims about its relative resilience to financial crises as compared to conventional banking. However, little empirical evidence is available to support such claims. Using data from Pakistan, where Islamic and conventional banks co‐exist, we compare the behaviour of Islamic and conventional banks during a financial panic. Our results show that Islamic bank branches are less prone to deposit withdrawals during financial panics, both unconditionally and after controlling for bank characteristics. The Islamic branches of banks that have both Islamic and conventional operations tend to attract (rather than lose) deposits during panics, which suggests a role for religious branding. We also find that Islamic bank branches grant more loans during financial panics and that their lending decisions are less sensitive to changes in deposits. Our findings suggest that greater financial inclusion of faith‐based groups may enhance the stability of the banking system.     

Impact of interest rates on Islamic and conventional banks: the case of Turkey

Identifying the impact of the interest rates upon Islamic banks is a key to understand the contribution of such institutions to the financial stability, designing monetary policies and devising a proper risk management applicable to these institutions. This article analyses and investigates the impact of interest rate shock upon the deposits and loans held by the conventional and Islamic banks with particular reference to the period between December 2005 and July 2009 based on Vector Error Correction (VEC) methodology. It is theoretically expected that the Islamic banks, relying on interest-free banking, shall not be affected by the interest rates; however, in concurrence with the previous studies, the article finds that the Islamic banks in Turkey are visibly influenced by interest rates.     

Outsourcing Central Banking: Lessons from Estonia

An orthodox currency board (CB) renders central banking redundant for interest and exchange rate determination. Thereby, monetary policy is de facto outsourced. Foreign direct investment (FDI) in banking can lead to outsourcing of the second important central bank function, responsibility for banking supervision. Economic and political conditions for outsourcing of central banking are discussed. Estonia's experience with a CB and expanding foreign involvement in banking is reviewed. The Argentine CB experience is discussed briefly to provide a contrast. The conclusion outlines the conditions for successful currency outsourcing to another country or regional authority.     

Transmission of monetary policy and exchange rate shocks under foreign currency lending

This paper analyses the differences in reaction of domestic and foreign currency lending to monetary and exchange rate shocks, using a panel VAR model estimated for the three biggest Central and Eastern European countries (Poland, the Czech Republic and Hungary). Our results point toward a drop in domestic currency loans and an increase of foreign currency credit in reaction to monetary policy tightening in Poland and Hungary, suggesting that the presence of foreign currency debt weakens the transmission of monetary policy. A currency depreciation shock leads to an initial decline in foreign currency lending, but also in loans denominated in domestic currency as central banks react to a weaker exchange rate by increasing the interest rates. However, after several quarters, credit in foreign currency accelerates, indicating that borrowers start using it to substitute for depressed domestic currency lending.     

DEPOSITOR DISCIPLINE, REGULATORY CONTROL, AND A BANKING CRISIS: A STUDY OF INDIAN URBAN COOPERATIVE BANKS

ABSTRACT ** :  Urban Cooperative banks in India (UCBs) play an important role in mobilizing resources from lower and middle-income groups and in providing direct finance to small entrepreneurs and traders. Motivated by previous empirical work on depositor disciplining behaviour, this paper examines whether depositors punish weak UCBs by withdrawing deposits during and after a banking crisis. In addition, the paper investigates the impact of tightened prudential standards imposed by the Indian central bank (RBI) on the ratio of investments to loan assets and on the rate of growth of loans. Our sample of 45 UCBs is partitioned into strong and weak banks and subjected to econometric testing. Our analysis reveals that a banking crisis is associated with a contraction in deposits across the sample. However, weak banks appear to be disciplined by depositors during election years. We also find weak support for the contention that banks reduced loans when faced with intensified regulatory scrutiny in the aftermath of a crisis.