scholarly journals Central bank digital currency, loan supply, and bank failure risk: a microeconomic approach

2021 ◽  
Vol 7 (1) ◽  
Author(s):  
Jooyong Jun ◽  
Eunjung Yeo
Keyword(s):  
Central Bank ◽  
Bank Loans ◽  
Bank Failure ◽  
Rates Of Return ◽  
Loan Rate ◽  
Failure Risk ◽  
Risk Increase ◽  
Loan Supply ◽  
Demand Deposits ◽  
Pass Through

AbstractCentral bank digital currencies (CBDCs), which are legal tenders in digital form, are expected to reduce currency issuance and circulation costs and broaden the scope of monetary policy. In addition, these currencies may also reduce consumers’ need for conventional demand deposits, which, in turn, increases banks’ loan provision costs because deposits require higher rates of return. We use a microeconomic banking model to investigate the effects of introducing an economy-wide, account-type CBDC on a bank’s loan supply and its failure risk. Given that a CBDC is expected to lower the cost of liquidity circulation and become a strong substitute for demand deposits, both the loan supply and the bank failure risk increase. These increases are countered by subsequent increases in the rates of return on term deposits and loans, which, in turn, reduce the loan supply and thus bank failure risk. These offsetting forces lead to no significant change in banking, as long as the rate of return on loans is below a certain threshold. However, once the rate is above the threshold, bank failure risk increases, thereby undermining banking stability. The problem is more pronounced when the degree of pass-through of funding costs to the loan rate is high and the profitability of a successful project is low. Our results imply that central banks wishing to introduce an economy-wide, account-type CBDC should first monitor yields on bank loans and consider policy measures that induce banks to maintain adequate liquidity reserve levels.

scholarly journals ROBUST MONETARY POLICY IN A NEW KEYNESIAN MODEL WITH IMPERFECT INTEREST RATE PASS-THROUGH

2015 ◽  
Vol 20 (6) ◽  
pp. 1504-1526 ◽  
Author(s):  
Rafael Gerke ◽  
Felix Hammermann
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Central Bank ◽  
Model Misspecification ◽  
New Keynesian ◽  
Optimal Monetary Policy ◽  
Loan Rate ◽  
Keynesian Model ◽  
Pass Through ◽  
Policy Shifts

We use robust control to study how a central bank in an economy with imperfect interest rate pass-through conducts monetary policy if it fears that its model could be misspecified. We find that, first, whether robust optimal monetary policy under commitment responds more cautiously or more aggressively depends crucially on the source of shock. Imperfect pass-through amplifies the robust policy. Second, if the central bank is concerned about uncertainty, it dampens volatility in the inflation rate preemptively but accepts higher volatility in the output gap and loan rate. However, for highly sticky loan rates, insurance against model misspecification becomes particularly pricy. Third, if the central bank fears uncertainty only in the IS equation or the loan rate equation, the robust policy shifts its concern for stabilization away from inflation.

scholarly journals The problem of lending to agricultural enterprises in the context of the COVID-19 pandemic

2021 ◽  
Vol 282 ◽  
pp. 06003
Author(s):  
Sergey Yekimov ◽  
Galina Guzhina ◽  
Pavel Lukyanov ◽  
Olga Bespalova ◽  
Dmitriy Kucherenko
Keyword(s):  
Central Bank ◽  
Discount Rate ◽  
Agricultural Policy ◽  
Commercial Banks ◽  
Banking Sector ◽  
Bank Loans ◽  
Rates Of Return ◽  
Agricultural Enterprises ◽  
The World ◽  
The Moment

The main obstacle to the implementation of lending to agricultural enterprises is the high cost of credit. In our opinion, an adequate state agricultural policy should increase the interest of commercial banks in providing loans. In our opinion, it should be aimed at increasing the availability of bank loans for agricultural enterprises. For this purpose, it is advisable to partially compensate the payment of bank interest by agricultural enterprises. In the world practice in the banking sector, negative rates of return on deposits have found application. Commercial banks are able to borrow money at a discount rate. At the moment, there is a practice according to which the Central Bank has only one discount rate. In our opinion, there could be several discount rates at the same time. We hold the view that depending on the purposes to which the commercial bank directs the funds received from the Central Bank, the size of the Central Bank’s discount rate may be different and even have a negative value. We believe that the negative discount rate applied by the central bank for lending to commercial banks to continue providing loans for the purchase of agricultural machinery could encourage them to issue loans to agricultural enterprises. In our opinion, the use of a negative discount rate of the Central Bank in some cases may contribute to the realization of the bank’s credit potential and enhance its lending activities.

scholarly journals ALUR TRANSMISI DAN EFEKTIFITAS KEBIJAKAN MONETER GANDA DI INDONESIA

2012 ◽  
Vol 14 (3) ◽  
pp. 283-315
Author(s):  
Ascarya Ascarya
Keyword(s):  
Interest Rate ◽  
Central Bank ◽  
Negative Impact ◽  
Transmission Mechanism ◽  
Monetary Transmission ◽  
Monetary Transmission Mechanism ◽  
Monetary System ◽  
Data Form ◽  
Pass Through ◽  
The Interest Rate

This study aims to investigate transmission mechanism of dual monetary system from conventional and Islamic policy rates to inflation and output using Granger and VAR methods on monthly Indonesian banking data form January 2003 to December 2009. The result shows that conventional transmission mechanismsfrom conventional policy rate are all linked tooutput and inflation, while Islamic policy rate are not linked to output and inflation.In addition, the interest rate, credit and conventional interbank rate shocks give negative and permanent impacts to inflation and output, while PLS, financing and Islamic interbank PLS, as well as SBIS(Central Bank Shariah Certificate) as Islamic policy rate shocks give positive and permanent impacts to inflation and output. SBI (Central Bank Certificate) as conventional policy givespositive impact to inflation and negative impact to output.Keywords: Monetary transmission mechanism, Interest rate pass through, Conventional Banking, Islamic BankingJEL Classification: E43, E52, G21, G28

Inside the Bank Box

2019 ◽  
pp. 368-405
Author(s):  
Leonardo Gambacorta ◽  
Paul Mizen
Keyword(s):  
Interest Rate ◽  
Central Bank ◽  
Interest Rates ◽  
Adjustment Costs ◽  
Bank Lending ◽  
Bank Capital ◽  
Bank Lending Channel ◽  
Lending Channel ◽  
Pass Through ◽  
The Interest Rate

Central bank policy operates first through financial markets and then through banks as they adjust their interest rates. This chapter discusses the transmission of policy in this first step of the monetary transmission mechanism, known as interest-rate pass-through. Historically, the focus of attention has been the interest-rate channel. We show the origins of this channel via a microfounded model of interest-rate setting by deposit-taking institutions that are Cournot oligopolists facing adjustment costs. We then examine other channels such as the bank lending channel and the bank capital channel and the role of central bank communications, signaling, and forward guidance over future interest rates. Each is shown to influence the setting of current short-term interest rates. The chapter closes with some issues for the future of pass-through in the transmission process.

Chinese banking failure: the case of Baoshang Bank and its implications

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Kerry Liu
Keyword(s):  
Ownership Structure ◽  
Banking Crisis ◽  
Bank Failure ◽  
Monetary Transmission ◽  
Market Response ◽  
Bank Performance ◽  
Content Type ◽  
Nonlinear Relation ◽  
Pass Through ◽  
Chinese Banking

Purpose On May 24, 2019, the People’s Bank of China (China’s central bank) announced that the Baoshang Bank had been taken over because of credit risk. The Baoshang Bank failure has caused concerns over the stability of the Chinese financial system and the Chinese economy. This study aims to examine the case of Baoshang Bank’s failure and its theoretical implications including the relation between ownership structure and bank performance, the monetary transmission during a banking crisis and the market response to Baoshang Bank failure. Then this study discusses policy implications. Design/methodology/approach This study adopts a two-stage least squared model to examine the relation between ownership structure and bank performance, a series of rolling regressions to examine the monetary transmission and event studies to examine the market response to Baoshang Bank failure. Findings This study finds that there is a nonlinear relation between ownership structure and bank performance, the interest pass-through has broken down after the Baoshang Bank failure and the Baoshang Bank failure and the gradual exit of implicit guarantee from the Chinese government are considered to be positive to the Chinese banking sector. Originality/value First, although previous studies on ownership structure and bank performance classified different types of larger shareholders and found that this nonlinear relation is insignificant, this study finds a significant relation by innovatively using a combined ownership. Second, further contributing to the studies on monetary transmission in banking crisis based on international data, this study based on Chinese data sets finds that the interest rate pass-through has broken down after the Baoshang Bank failure.

The Swiss Sovereign Money Initiative

2018 ◽  
Vol 51 (4) ◽  
pp. 621-644
Author(s):  
Katrin Assenmacher ◽  
Claus Brand
Keyword(s):  
Central Bank ◽  
Commercial Bank ◽  
Commercial Banks ◽  
Global Financial Crisis ◽  
Balance Sheet ◽  
Jel Classification ◽  
Constitutional Amendment ◽  
Demand Deposits ◽  
Bank Balance Sheets ◽  
The Global Financial Crisis

Abstract On 10 June 2018, Switzerland voted against a constitutional amendment to introduce a system of sovereign money or Vollgeld. The proposal foresaw that all money be created by the central bank and that commercial banks be banned from creating demand deposits. Demand deposits would have been required to be held in off-balance sheet accounts at commercial banks. We discuss the specific features of this proposal and compare them to its historical predecessor, the Chicago plan. We argue that the Swiss initiative would not have tangibly enhanced financial, monetary, and economic stability. Specifically, if implemented earlier, it would not have addressed the root causes of the Global Financial Crisis and would have been ineffective in changing its course and its consequences for Switzerland. Though the Vollgeld proposal would have turned commercial bank into central bank money, close-money substitutes would likely have remained on the liability side of commercial bank balance sheets. Vollgeld would also unlikely have redeemed promises of ancillary effects such as a reduction in public debt, more sustainable economic growth, and less complex regulation. Forestalling and tackling financial imbalances requires limiting leverage and safeguarding liquidity buffers through bank-level and system-wide rules and regulation. Zusammenfassung Am 10. Juni 2018 lehnten drei Viertel der Schweizer Stimmberechtigten eine Verfassungsänderung ab, die ein Vollgeldsystem in der Schweiz eingeführt hätte. Der Vorschlag hätte der Notenbank das alleinige Recht zur Geldschöpfung gegeben und den Geschäftsbanken die Schaffung von Sichteinlagen verboten. Zahlungsverkehrskonten hätten von den Geschäftsbanken ausserhalb ihrer Bilanz geführt werden müssen. Wir diskutieren die Einzelheiten des Vorschlags und vergleichen sie mit dessen Vorgänger aus den 1930er Jahren, dem Chicago Plan. Wir argumentieren, dass sich die monetäre und wirtschaftliche Stabilität sowie die Finanzstabilität in der Schweiz durch die Annahme der Initiative nicht wesentlich verbessert hätten. Ein bestehendes Vollgeldsystem hätte nicht bei den Ursachen der Finanzkrise angesetzt und wäre unerheblich für ihren Verlauf und ihre Folgen für die Schweiz gewesen. Obwohl mit Vollgeld Sichteinlagen bei Geschäftsbanken in Zentralbankgeld umgewandelt worden wären, hätten geldnahe Einlagen auf der Passivseite der Bilanz weiter existiert. Vollgeld hätte auch Versprechen wie eine Senkung der Staatsverschuldung, ein nachhaltigeres Wachstum und eine weniger komplexe Bankenregulierung nicht erfüllt. Die Verhinderung und Bewältigung von finanziellen Ungleichgewichten erfordert eine Regulierung sowohl auf Bankenebene als auch für das Finanzsystem insgesamt, um die gesamtwirtschaftliche Verschuldung zu beschränken und Liquiditätspuffer zu schaffen. JEL Classification: E42, E50

LIQUIDITY, INTERBANK MARKET, AND THE SUPERVISORY ROLE OF THE CENTRAL BANK

2003 ◽  
Vol 7 (2) ◽  
pp. 192-211 ◽  
Author(s):  
Young Sik Kim
Keyword(s):  
Central Bank ◽  
Banking System ◽  
Central Banking ◽  
Bank Loans ◽  
Interbank Market ◽  
Monitoring Cost ◽  
Delegated Monitoring ◽  
The Individual ◽  
Cash Reserves

This paper provides an explanation for the supervisory role of the central bank in a monetary general equilibrium model of bank liquidity provision. Under incomplete information on the individual banks' liquidity needs, individual banks find it optimal to invest solely in bank loans holding no cash reserves, and rely on the interbank market for their withdrawal demands. Using the costly state verification approach under uncertainty in aggregate liquidity demands, the supervisory role of the central bank as a large intermediary arises as an incentive-compatible arrangement by which banks hold the correct level of cash reserves. First, it takes up a delegated monitoring role for the banking system. Second, it engages in discount-window lending at a penalty rate, where the discount margin covers exactly the monitoring cost incurred. Finally, under the central banking mechanism, currency premium no longer exists in the sense that currency is worth the same as deposits having an equal face value.

Optimal bank interest margin under capital regulation: bank as a liquidity provider

2019 ◽  
Vol 11 (2) ◽  
pp. 158-173 ◽  
Author(s):  
Fu-Wei Huang ◽  
Shi Chen ◽  
Jeng-Yan Tsai
Keyword(s):  
Default Risk ◽  
Banking System ◽  
Capital Regulation ◽  
Knock Out ◽  
Content Type ◽  
Loan Rate ◽  
Negative Effect ◽  
Demand Deposits ◽  
Option Model ◽  
Interest Margin

Purpose This paper aims to develop a barrier cap option model, i.e. a cap option model where default can occur at any time before the maturity date, to evaluate the equity and the default risk of a bank. The model implies the bank as a liquidity provider that one institution carriers out both lending and deposit-taking functions under the same roof. This paper studies the impacts of demand deposits and capital regulation on the optimal bank interest margin, i.e. the spread between the loan rate and the deposit rate. Design/methodology/approach This paper characterizes the bank’s equity value by a barrier cap option framework. In the model, default can occur at any time before the maturity and loan markets are imperfectly competitive. Findings This paper has two main results. First, increases in demand deposits reduce the bank’s interest margin and further increase the bank’s default risk. The negative effect on the optimal bank interest margin which ignores the barrier leads to significant overestimation; the positive effect on the default risk which ignores the barrier leads to underestimation. Second, the same pattern of capital regulation as previously applies. Capital regulation as such makes the bank more prone to loan risk-taking, thereby adversely affecting the stability of banking system. Originality/value This paper reintroduces the knock-out value and bank interest margin determination within a synergy banking function to the cap option model. The results confirm the need to model bank equity as a barrier cap option and demonstrate its usefulness in capital regulation.

Bank failure risk: Different now?

2012 ◽  
Vol 116 (3) ◽  
pp. 613-616 ◽  
Author(s):  
Sherrill Shaffer
Keyword(s):  
Bank Failure ◽  
Failure Risk
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