Sentiment-dependent impact of funding liquidity shocks on futures market liquidity

We examine the effect of funding liquidity changes on futures market liquidity, depending on economic sentiment. Futures market liquidity improves following negative funding liquidity shocks, and economic sentiment is an important determinant explaining this relationship. While individuals' trading is most significantly affected by sentiment, its response to funding liquidity shocks remains independent of sentiment effects. Domestic institutions' reactions depend on the sentiment regime; they trade futures contracts more actively as funding liquidity becomes more abundant (scarcer) when sentiment is more pessimistic (optimistic). Foreigners, following negative funding liquidity shocks, generally increase their futures trading, whereas their trading decreases under the extremely pessimistic sentiment. Domestic banks and pension funds provide liquidity to the futures market even when sentiment is pessimistic.     

Intergenerational consequences of gradual pension reforms

Balancing the government budget in an aging economy may require adjusting gradually pension benefits. Such policy change can take two forms: adjusting the accrual rate (the rate at which individuals built-up pension entitlements while working) or the indexation rate (the rate a which accrued entitlements are linked to nominal wage growth). We compare the consequences of such gradual policies across cohorts. We identify a fundamental generational trade-off between democracy and equality. In particular, we show that for Belgium, 80% of the population alive at the time of the reform prefers the accrual to the indexation reform, with the implication that the youngest half of the population would bear 85% of the total adjustment cost. The indexation reform provides more generational equality because the phasing in over time has larger base and thus benefit cut can be smaller per capita. We then consider other reforms improving the generational equality, showing that all those reforms fail to gain majority support. Finally, considering labor incentives, we show that the indexation reform is also more efficient than the accrual reform. Efficiency meets generational equality.     

Wholesale funding and bank stability: The impact of economic policy uncertainty

The primary aim of this paper is to examine the conditioning effects of economic policy uncertainty on the relationship between wholesale funding and bank stability. Based on a sample of 1829 commercial banks in 27 countries over the period 2005–2020, we provide evidence of a nonlinear relationship between wholesale funding and bank stability. Specifically, a small share of nondeposit funding to total deposit and short-term funding (below 22.3%) offers some risk reduction, but a substantial mixing of nondeposit and deposit funding increases bank fragility. Moreover, the adverse effects of excessive wholesale funding on bank stability are strengthened during periods of high policy uncertainty. Nevertheless, banks in advanced countries, large banks, and high-quality banks with better asset quality are less affected by the detrimental impact of excessive wholesale funding on bank stability when during periods of increased policy uncertainty.