Three Essays On The Impact Of Monetary Policy Target Interest Rates On Bank Distress And Systemic Risk
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Three Essays On The Impact Of Monetary Policy Target Interest Rates On Bank Distress And Systemic Risk
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Author : Mustafa Akcay
language : en
Publisher:
Release Date : 2018
Three Essays On The Impact Of Monetary Policy Target Interest Rates On Bank Distress And Systemic Risk written by Mustafa Akcay and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2018 with categories.
My dissertation topic is on the impact of changes in the monetary policy interest rate target on bank distress and systemic risk in the U.S. banking system. The financial crisis of 2007-2009 had devastating effects on the banking system worldwide. The feeble performance of financial institutions during the crisis heightened the necessity of understanding systemic risk exhibited the critical role of monitoring the banking system, and strongly necessitated quantification of the risks to which banks are exposed, for incorporation in policy formulation. In the aftermath of the crisis, US bank regulators focused on overhauling the then existing regulatory framework in order to provide comprehensive capital buffers against bank losses. In this context, the Basel Committee proposed in 2011, the Basel III framework in order to strengthen the regulatory capital structure as a buffer against bank losses. The reform under Basel III framework aimed at raising the quality and the quantity of regulatory capital base and enhancing the risk coverage of the capital structure. Separately, US bank regulators adopted the Dodd-Frank Wall Street Reform and Consumer Protection Act (2010) to implement stress tests on systemically important bank holding companies (SIBs). Concerns about system-wide distress have broadened the debate on banking regulation towards a macro prudential approach. In this context, limiting bank risk and systemic risk has become a prolific research field at the crossroads of banking, macroeconomics, econometrics, and network theory over the last decade (Kuritzkes et al., 2005; Goodhart and Sergoviano, 2008; Geluk et al., 2009; Acharya et al., 2010, 2017; Tarashev et al., 2010; Huang et al., 2012; Browless and Engle, 2012, 2017 and Cummins, 2014). The European Central Bank (ECB) (2010) defines systemic risk as a risk of financial instability "so widespread that it impairs the functioning of a financial system to the point where economic growth and welfare suffer materially." While US bank regulators and policy-makers have moved to strengthen the regulatory framework in the post-crisis period in order to prevent another financial crisis, a growing recent line of research has suggested that there is a significant link between monetary policy and bank distress (Bernanke, Gertler and Gilchrist, 1999; Borio and Zhu, 2008; Gertler and Kiyotaki, 2010; Delis and Kouretas, 2010; Gertler and Karadi, 2011; Delis et al., 2017). In my research, I examine the link between the monetary policy and bank distress. In the first chapter, I investigate the impact of the federal funds rate (FFR) changes on the banking system distress between 2001 and 2013 within an unrestricted vector auto-regression model. The Fed used FFR as a primary policy tool before the financial crisis of 2007-2009, but focused on quantitative easing (QE) during the crisis and post-crisis periods when the FFR hit the zero bound. I use the Taylor rule rate (TRR, 1993) as an "implied policy rate", instead of the FFR, to account for the impact of QE on the economy. The base model of distress includes three macroeconomic indicators-real GDP growth, inflation, and TRR-and a systemic risk indicator (Expected capital shortfall (ES)). I consider two model extensions; (i) I include a measure of bank lending standards to account for the changes in the systemic risk due to credit tightening, (ii) I replace inflation with house price growth rate to see if the results remain robust. Three main results can be drawn. First, the impulse response functions (IRFs) show that raising the monetary policy rate contributed to insolvency problems for the U.S. banks, with a one percentage point increase in the rate raising the banking systemic stress by 1.6 and 0.8 percentage points, respectively, in the base and extend models. Second, variance decomposition (VDs) analysis shows that up to ten percent of error variation in systemic risk indicator can be attributed to innovations in the policy rate in the extended model. Third, my results supplement the view that policy rate hikes led to housing bubble burst and contributed to the financial crisis of 2007-2009. This is an example for how monetary policy-making gets more complex and must be conducted with utmost caution if there is a bubble in the economy. In the second chapter, I examine the prevalence and asymmetry of the effects on bank distress from positive and negative shocks to the target fed fund rate (FFR) in the period leading to the financial crisis (2001-2008). A panel model with three blocks of control variables is used. The blocks include: positive/negative FFR shocks, macroeconomic drivers, and bank balance sheet indicators. A distress indicator similar to Texas Ratio is used to proxy distress. Shocks to FFR are defined along the lines suggested by Morgan (1993). Three main results are obtained. First, FFR shocks, either positive or negative, raise bank distress over the following year. Second, the magnitudes of the effects from positive and negative shocks are unequal (asymmetric); a 100 bps positive (negative) shock raises the bank distress indicator (scaled from 0 to 1) by 9 bps (3 bps) over the next year. Put differently, after a 100 bps positive (negative) shock, the probability of bankruptcy rises from 10% to 19% (13%). Third, expanding operations into non-banking activities by FHCs does not benefit them in terms of distress due to unanticipated changes in the FFR as FFR shocks (positive or negative) create similar levels of distress for BHCs and FHCs. In the third chapter, I explore the systemic risk contributions of U.S. bank holding companies (BHCs) from 2001 to 2015 by using the expected shortfall approach. Developed by analogy with the component expected shortfall concept, I decompose the aggregate systemic risk, as measured by expected shortfall, into several subgroups of banks by using publicly available balance sheet data to define the probability of bank default. The risk measure, thus, encompasses the entire universe of banks. I find that concentration of assets in a smaller number of larger banks raises systemic risk. The systemic risk contribution of banks designated as SIFIs increased sharply during the financial crisis and reached 74% at the end of 2015. Two-thirds of this risk contribution is attributed to the four largest banks in the U.S.: Bank of America, JP Morgan Chase, Citigroup and Wells Fargo. I also find that diversifying business operations by expanding into nontraditional operations does not reduce the systemic risk contribution of financial holding companies (FHCs). In general, FHCs are individually riskier than BHCs despite their more diversified basket of products; FHCs contribute a disproportionate amount to systemic risk given their size, all else being equal. I believe monetary policy-making in the last decade carries many lessons for policy makers. Particularly, the link between the monetary policy target rate and bank distress and systemic risk is an interesting topic by all accounts due to its implications and challenges (explained in more detail in first and second chapters). The literature studying the relation between bank distress and monetary policy is fairly small but developing fast. The models I investigate in my work are simple in many ways but they may serve as a basis for more sophisticated models.
Three Essays On The Transmission Of Monetary Policy To Non Bank Credit Activity
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Author : Karl David Boulware
language : en
Publisher:
Release Date : 2014
Three Essays On The Transmission Of Monetary Policy To Non Bank Credit Activity written by Karl David Boulware and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2014 with Electronic dissertations categories.
This dissertation is composed of three essays that measure the impact of monetary policy on non-bank credit activity by issuer, composition, and duration. The first essay measures the dynamic impact of monetary policy on gross repurchase agreement activity of primary government dealers of the Federal Reserve System. The second essay measures the dynamic impact of monetary policy on commercial paper activity. The third essay measures the impact of monetary policy on issuers of asset-backed securities. In the first essay, we find a positive shock to the federal funds rate significantly affects the level of credit activity. In particular, repo arrangements longer than a day display persistent declines. By comparison, overnight financing increases after a delay. This implies that contractionary monetary policy shocks lead to maturity substitution in the repo market. Our findings show that credit activity in the repo market is more sensitive to monetary policy than previously reported in the literature. In the second essay, our measure of contractionary monetary policy shocks corresponds to a sharp decline in money market mutual fund assets. Though there is an increase in aggregate commercial paper volumes, the impact of monetary policy is stronger for issuers with less liquid balance sheets. Specifically, issuers of asset-backed paper and issuers with second tier credit ratings. Furthermore, there is evidence of a broad substitution towards shorter maturities, in particular for asset backed and nonfinancial paper. In the final essay, we find that an anticipated increase in the target for the federal funds rate impacts the behavior of ABS issuers. In particular, we find commercial paper issuance rises while bond issuance falls. Consequently, our results support the existence of a liquidity risk channel for monetary policy operating through the total supply of non-bank credit activity. In this manner, our findings indicate the monetary transmission mechanism contributes to systemic risk in the shadow banking system through rollover risk. As a result, non-bank credit activity is an important component of the relationship between monetary policy and financial stability.
Three Essays On Macro Finance Banking And Monetary Policy
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Author : Russell H. Rollow
language : en
Publisher:
Release Date : 2022
Three Essays On Macro Finance Banking And Monetary Policy written by Russell H. Rollow and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2022 with Banks and banking categories.
In my first chapter, I study how the dollar funding fragility of non-US banks amplifies cyclical patterns in their appetite for credit risk. Global banks outside of the United States finance a significant portion of their dollar-denominated lending with uninsured wholesale dollar funding, the price of which rises with the perceived riskiness of the bank. Using data from the syndicated lending market, I examine the risk appetite of non-US global banks when a broad appreciation of the US dollar expands portfolio tail risk and activates value-at-risk constraints. By orthogonalizing errors in professional forecasts of the broad dollar index to other macroeconomic indicators, I show that following such a dollar appreciation, global banks with a heavy dependence on wholesale dollar funding contract cross-border dollar lending to firms with high credit risk, as measured with loan-specific spreads and borrower-specific characteristics. Based on this evidence, I argue that instability in non-US bank funding structures amplifies cyclical patterns in their appetite for credit risk.In my second chapter, I explore how traditional modeling techniques can be applied to produce density forecasts of interest rates. As spikes in economic uncertainty have grown in prevalence, the projection of financial data has become a more arduous task, which has sharpened the focus of investors and policymakers on forecast risk. By integrating a dynamic factor model into a Bayesian framework, I develop a density forecasting model that projects the predictive density of interest rates. Unlike point forecasts, density forecasts produce probability estimates for the full distribution of potential future outcomes of interest rates, as opposed to solely their central tendency. To assess the viability of my forecasting model, I conduct a robust out-of-sample evaluation of the model's performance, finding the model significantly outperforms a competing benchmark autoregressive model, especially when economic uncertainty is high. By examining density forecasts of Treasury yields during the COVID-19 pandemic and the term spread prior to the financial crisis of 2008, I demonstrate the value of the dynamic factor model in expanding the information set available to forward-looking investors and policymakers.In my third chapter, I analyze the impact of the Federal Reserve's adoption of a floor system of monetary policy implementation on the transmission mechanism of changes in the policy rate to US bank balance sheets. Since 2008, in part due to easy monetary policy, United States interest rates have remained at historically low levels. Using US commercial bank call report data, I examine the response of bank profitability and investment to a rise in the rate of interest on reserve balances (IORB). Specifically analyzing the 2015-18 Federal Reserve monetary tightening cycle, I show that, following a rise in the IORB, holding more reserves buffers bank NII growth and asset growth against the adverse effects of a rise in the IORB. Taken together, these results imply that a rise in the policy rate raise profitability for banks with substantial reserve holdings and, when capital constraints bind, expand investment capacity.
Three Essays On Monetary Policy In Economies With Financial Frictions
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Author : Rahul Anand
language : en
Publisher:
Release Date : 2010
Three Essays On Monetary Policy In Economies With Financial Frictions written by Rahul Anand and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2010 with categories.
The objective of this dissertation is to understand the role of financial frictions in the transmission of shocks and their effect on the monetary policy transmission mechanism. To accomplish the task, we develop Dynamic Stochastic General equilibrium models with financial frictions. In the first chapter, we develop a model to analytically determine the appropriate price index to target in the presence of financial frictions (where a fraction of households are constrained to consume their wage income each period). The analysis suggests that in the presence of financial frictions, a welfare-maximizing central bank should adopt flexible headline inflation targeting-i.e. a headline inflation target but with some weight on the output gap. These results are particularly relevant for emerging markets, where the share of food expenditures in total consumption expenditures is high and a large proportion of consumers are credit constrained. In the second chapter, we develop a small open economy model with macrofinancial linkages. The model includes a financial accelerator - entrepreneurs are assumed to partially finance investment using domestic and foreign currency debt - to assess the importance of financial frictions in the amplification and propagation of the effects of transitory shocks to productivity, interest rates and net worth of firms. We use Bayesian estimation techniques to estimate the model using India data. The model is used to assess the importance of the financial accelerator in India and to assess the optimality of the current monetary policy rule. In the third chapter, we develop a small open economy New Keynesian model with financial frictions and an active banking sector for India. We find that the presence of a monopolistic banking sector with sticky interest rate setting attenuates the shocks. However, if the interest rates are flexible it results in the amplification of shocks. We also find that an unexpected reduction in bank capital can have a substantial impact on the real economy and particularly on investment. Use of nonmonetary policy tools result in greater volatility as compared to when central banks use traditional monetary tightening.
Bank Size And Systemic Risk
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Author : Mr.Luc Laeven
language : en
Publisher: International Monetary Fund
Release Date : 2014-05-08
Bank Size And Systemic Risk written by Mr.Luc Laeven and has been published by International Monetary Fund this book supported file pdf, txt, epub, kindle and other format this book has been release on 2014-05-08 with Business & Economics categories.
The proposed SDN documents the evolution of bank size and activities over the past 20 years. It discusses whether this evolution can be explained by economies of scale or “too big to fail” subsidies. The paper then presents evidence on the extent to which bank size and market-based activities contribute to systemic risk. The paper concludes with policy messages in the area of capital regulation and activity restrictions to reduce the systemic risk posed by large banks. The analysis of the paper complements earlier Fund work, including SDN 13/04 and the recent GFSR chapter on “too big to fail” subsidies, and its policy message is in line with this earlier work.
The Federal Reserve System Purposes And Functions
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Author : Board of Governors of the Federal Reserve System
language : en
Publisher:
Release Date : 2002
The Federal Reserve System Purposes And Functions written by Board of Governors of the Federal Reserve System and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2002 with Banks and Banking categories.
Provides an in-depth overview of the Federal Reserve System, including information about monetary policy and the economy, the Federal Reserve in the international sphere, supervision and regulation, consumer and community affairs and services offered by Reserve Banks. Contains several appendixes, including a brief explanation of Federal Reserve regulations, a glossary of terms, and a list of additional publications.
Powering The Digital Economy Opportunities And Risks Of Artificial Intelligence In Finance
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Author : El Bachir Boukherouaa
language : en
Publisher: International Monetary Fund
Release Date : 2021-10-22
Powering The Digital Economy Opportunities And Risks Of Artificial Intelligence In Finance written by El Bachir Boukherouaa and has been published by International Monetary Fund this book supported file pdf, txt, epub, kindle and other format this book has been release on 2021-10-22 with Business & Economics categories.
This paper discusses the impact of the rapid adoption of artificial intelligence (AI) and machine learning (ML) in the financial sector. It highlights the benefits these technologies bring in terms of financial deepening and efficiency, while raising concerns about its potential in widening the digital divide between advanced and developing economies. The paper advances the discussion on the impact of this technology by distilling and categorizing the unique risks that it could pose to the integrity and stability of the financial system, policy challenges, and potential regulatory approaches. The evolving nature of this technology and its application in finance means that the full extent of its strengths and weaknesses is yet to be fully understood. Given the risk of unexpected pitfalls, countries will need to strengthen prudential oversight.
Financial Crises Explanations Types And Implications
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Author : Mr.Stijn Claessens
language : en
Publisher: International Monetary Fund
Release Date : 2013-01-30
Financial Crises Explanations Types And Implications written by Mr.Stijn Claessens and has been published by International Monetary Fund this book supported file pdf, txt, epub, kindle and other format this book has been release on 2013-01-30 with Business & Economics categories.
This paper reviews the literature on financial crises focusing on three specific aspects. First, what are the main factors explaining financial crises? Since many theories on the sources of financial crises highlight the importance of sharp fluctuations in asset and credit markets, the paper briefly reviews theoretical and empirical studies on developments in these markets around financial crises. Second, what are the major types of financial crises? The paper focuses on the main theoretical and empirical explanations of four types of financial crises—currency crises, sudden stops, debt crises, and banking crises—and presents a survey of the literature that attempts to identify these episodes. Third, what are the real and financial sector implications of crises? The paper briefly reviews the short- and medium-run implications of crises for the real economy and financial sector. It concludes with a summary of the main lessons from the literature and future research directions.
Macroprudential Policy
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Author : International Monetary Fund
language : en
Publisher: International Monetary Fund
Release Date : 2011-10-01
Macroprudential Policy written by International Monetary Fund and has been published by International Monetary Fund this book supported file pdf, txt, epub, kindle and other format this book has been release on 2011-10-01 with Business & Economics categories.
This paper provides the most comprehensive empirical study of the effectiveness of macroprudential instruments to date. Using data from 49 countries, the paper evaluates the effectiveness of macroprudential instruments in reducing systemic risk over time and across institutions and markets. The analysis suggests that many of the most frequently used instruments are effective in reducing pro-cyclicality and the effectiveness is sensitive to the type of shock facing the financial sector. Based on these findings, the paper identifies conditions under which macroprudential policy is most likely to be effective, as well as conditions under which it may have little impact.
Staff Guidance Note On Macroprudential Policy
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Author : International Monetary Fund
language : en
Publisher: International Monetary Fund
Release Date : 2014-06-11
Staff Guidance Note On Macroprudential Policy written by International Monetary Fund and has been published by International Monetary Fund this book supported file pdf, txt, epub, kindle and other format this book has been release on 2014-06-11 with Business & Economics categories.
This note provides guidance to facilitate the staff’s advice on macroprudential policy in Fund surveillance. It elaborates on the principles set out in the “Key Aspects of Macroprudential Policy,” taking into account the work of international standard setters as well as the evolving country experience with macroprudential policy. The main note is accompanied by supplements offering Detailed Guidance on Instruments and Considerations for Low Income Countries