Bank Regulation in the Economies in Transition

Given that banking in economies of transition fluctuate heavily, we explore the effect of regulatory norms on performance of banking industry. In particular, we examine the effect of Reserve Requirements, Activity Restrictions, and Capital Stringencies on the overall industry profitability and stability of the financial institutions. We utilize the Generalized Methods of Moments methodology to the panel data regressions over 17 different transitional economies during, and after the crisis period of 2008 through to 2019. Our results show that the Reserve Requirements regulatory norm is the only significant factor that improves the profitability and diminishes the risk of financial instability. The findings are confirmed with our tests over the regional sub-samples. This research sheds the light on the necessities of political and economic reforms in banking for these markets in transition.

An Overview of Probabilistic Dimensioning of Frequency Restoration Reserves with a Focus on the Greek Electricity Market

The dynamic dimensioning of frequency restoration reserves based on probabilistic criteria is becoming increasingly relevant in European power grid operations, following the guidelines of European legislation. This article compares dynamic dimensioning based on k-means clustering to static dimensioning on a case study of the Greek electricity market. It presents a model of system imbalances which aims to capture various realistic features of the stochastic behavior of imbalances, including skewed distributions, the dependencies of the imbalance distribution on various imbalance drivers, and the contributions of idiosyncratic noise to system imbalances. The imbalance model was calibrated in order to be consistent with historical reserve requirements in the Greek electricity market. The imbalance model was then employed in order to compare dynamic dimensioning based on probabilistic criteria to static dimensioning. The analysis revealed potential benefits of dynamic dimensioning for the Greek electricity market, which include a reduction in average reserve requirements and the preservation of a constant risk profile due to the adaptive nature of probabilistic dimensioning.

Monetary Policy Instruments

This chapter presents and discusses the instruments of monetary policy that are used by LFDCs’ central banks. The trend towards market-based monetary policies has been followed by LFDCs’ central banks, which have increasingly resorted to indirect instruments, though direct instruments that are, like exchange controls, of a more administrative nature are still common. The chapter surveys the particular features of reserve requirements, refinancing facilities, open market operations and foreign exchange interventions of LFDCs’ central banks. Each instrument is discussed in detail: its specific purpose, the context, mechanisms and modalities of its use, its advantages but also its possible drawbacks. The way central banks in LFDCs combine these instruments to achieve their operating and intermediate targets is also examined. The discussion is illustrated by examples taken from selected countries.

Monetary and macroprudential policies in the presence of external shocks: evidence from an emerging economy

PurposeThis paper examines the impact of using the reserve requirements, combined with foreign exchange (FX) intervention, as key instruments in an inflation-targeting framework.Design/methodology/approachIn the context of a dynamic stochastic general equilibrium (DSGE) framework and using Bayesian techniques, the authors estimate a model for the Indonesian economy using quarterly data spanning the period 2005Q2–2019Q4.FindingsThe reserve requirement is found to assume a complementary role to that of the interest rate policy and FX intervention when used to stabilise the macroeconomy.Originality/valueThis paper provides a benchmark for other emerging countries that consider adopting the inflation targeting framework and impose an FX intervention as part of their monetary policy.

Capital Controls, Domestic Macroprudential Policy and the Bank Lending Channel of Monetary Policy

We study how capital controls and domestic macroprudential policy tame credit supply booms, respectively targeting foreign and domestic bank debt. For identification, we exploit the simultaneous introduction of capital controls on foreign exchange (FX) debt inflows and an increase of reserve requirements on domestic bank deposits in Colombia during a strong credit boom, as well as credit registry and bank balance sheet data. Our results suggest that first, an increase in the local monetary policy rate, raising the interest rate spread with the United States, allows more FX-indebted banks to carry trade cheap FX funds with more expensive peso lending, especially toward riskier, opaque firms. Capital controls tax FX debt and break the carry trade. Second, the increase in reserve requirements on domestic deposits directly reduces credit supply, and more so for riskier, opaque firms, rather than enhances the transmission of monetary rates on credit supply. Importantly, different banks finance credit in the boom with either domestic or foreign (FX) financing. Hence, capital controls and domestic macroprudential policy complementarily mitigate the boom and the associated risk-taking through two distinct channels

A Model Predictive Control for the Dynamical Forecast of Operating Reserves in Frequency Regulation Services

The intermittent and uncontrollable power output from the ever-increasing renewable energy sources, require large amounts of operating reserves to retain the system frequency within its nominal range. Based on day-ahead load forecasts, many research works have proposed conventional and stochastic approaches to define their optimum margins for reliability enhancement at reasonable production cost. In this work, we aim at delivering real-time load forecasting to lower the operating-reserve requirements based on intra-hour weather update predictors. Based on critical predictors and their historical data, we train an artificial model that is able to forecast the load ahead with great accuracy. This is a feed-forward neural network with two hidden layers, which performs real-time forecasts with the aid of a predictive model control developed to update the recommendations intra-hourly and, assessing their impact and its significance on the output target, it corrects the imposed deviations. Performing daily simulations for an annual time-horizon, we observe that significant improvements exist in terms of decreased operating reserve requirements to regulate the violated frequency. In fact, these improvements can exceed 80% during specific months of winter when compared with robust formulations in isolated power systems.

The Wisselbank and Amsterdam Price Volatility: A fractal test of the Austrian fractional-reserve banking hypothesis

Using 1708-1788 historical data, we test the Austrian hypothesis that fractional-reserve banking destabilizes commodity prices, complicating eco­ nomic calculation and entrepreneurial planning, and contributes to boom-bust cycles. The Bank of Amsterdam («Wisselbank», 1609-1819) maintained high reserve requirements until the Fourth Anglo-Dutch War (1780-1784), when its reserve ratio plummeted from nearly 100% in 1778 to around 20% by 1788. We compare price volatilities for 1722-1779 and 1780-1788 using fractal Hurst exponents. For all commodity prices tested, fractal volatility was higher during the lower fractional reserve period, except for rye, wheat, and Hamburg Bills of Exchange. Bill of Exchange stability was likely attributable to Hamburg transport ships’ ability to evade British incursion and to the Wisselbank’s legal monopsony in the secondary commercial paper market. However, rye and wheat prices — directly indicative of bread prices — generally (and contrary to Austrian theory) stabilized even though British blockades significantly re­ duced Dutch bread grain imports. We attribute this unexpected result primarily to emergency wartime provision by the Amsterdam municipal granary. The Wisselbank experience may confirm, or at least does not clearly falsify, the economic relevance of the Austrian Fractional-Reserve Banking Hypothesis. Keywords: Fractional reserve banking, monetary expansion, price stability, equilibrium. JEL Codes: E42, E44, N13, N23, N83. Resumen: Analizando los datos históricos correspondientes al Banco de Áms­ terdam de 1708 a 1788 concluimos que la evidencia empírica confirma (o al menos no refuta) la hipótesis austriaca sobre los negativos efectos de la banca con reserve fraccionaria. Palabras clave: Banca con reserva fraccionaria, expansión monetaria, estabili­ dad de precios, equilibrio. Clasificación JEL: E42, E44, N13, N23, N83.