By combining industry-level data on output and prices with monetary policy rates for a panel of 88 countries, this paper analyzes how the effects of monetary policy vary with certain industry characteristics. Next to being interesting in their own right, our results are informative on the importance of various transmission mechanisms (as they are expected to vary systematically with the included characteristics). Rather than relying on standard monetary policy shock identification, we overcome the endogeneity problem by taking a differential approach (interacting our monetary policy measure with industry-level characteristics). Our results suggest that monetary contractions reduce output by more in industries featuring assets that are more difficult to collateralize (as predicted by the balance sheet channel) and in industries more reliant on international trade (as predicted by the exchange rate channel). Consistent with the financial accelerator mechanism, we find that the balance sheet channel becomes stronger during bad times. At the same time, we do not find evidence supporting the traditional interest rate channel of monetary policy; the same goes for the cost channel.
Following the COVID shock, supervisors encouraged banks to use capital buffers to support the recovery. However, banks have been reluctant to do so. Provided the market expects a bank to rebuild its buffers, any draw-down will open up a capital shortfall that will weigh on its share price. Therefore, a bank will only decide to use its buffers if the value creation from a larger loan book offsets the costs associated with a capital shortfall. Using market expectations, we calibrate a framework for assessing the usability of buffers. Our results suggest that the cases in which the use of buffers make economic sense are rare in practice.
This paper argues that in the European Union (EU) deposit insurance funds are too difficult to use in bank resolution and too easy to use outside resolution. The paper proposes reforms in three areas for the effective management of bank failures of small and medium-sized banks in the European Union: making resolution the norm for dealing with failing banks; establishing a common DIS for the European Union; and increasing funding and backstops for deposit insurance while removing constraints on their use for resolution measures. Without these changes, the European Union will continue to be challenged by banks that are too small for resolution and too large for liquidation.
We study the impact of the COVID-19 recession on capital structure of publicly listed U.S. firms. Our estimates suggest leverage (Net Debt/Asset) decreased by 5.3 percentage points from the pre-shock mean of 19.6 percent, while debt maturity increased moderately. This de-leveraging effect is stronger for firms exposed to significant rollover risk, while firms whose businesses were most vulnerable to social distancing did not reduce leverage. We rationalize our evidence through a structural model of firm value that shows lower expected growth rate and higher volatility of cash flows following COVID-19 reduced optimal levels of corporate leverage. Model-implied optimal leverage indicates firms which did not de-lever became over-leveraged. We find default probability deteriorates most in large, over-leveraged firms and those that were stressed pre-COVID. Additional stress tests predict value of these firms will be less than one standard deviation away from default if cash flows decline by 20 percent.
The Dutch economy is characterized by substantial financial balance sheets in the private sector. Uncommonly large gross financial assets and liabilities are found in the financial sector, whereas households own significant net financial wealth. The large gross financial assets and liabilities reflect a dominant role of multinational corporations (MNCs). Despite their size, these financial positions have not brought significant financial stability risks to the country. On the other hand, Dutch households’ long balance sheets have been associated with depressed consumption and volatile real estate investment, which has probably exacerbated the cyclicality of the economy. The expected reform of the pension system is likely to change the way household balance sheets interact with private consumption.
Mr. Dmitry Gershenson, Frederic Lambert, Luis Herrera, Grey Ramos, Mrs. Marina V Rousset, and Jose Torres
Despite some improvement since 2011, Latin America and the Caribbean continue to lag behind other regions in terms of financial inclusion. There is no clear evidence that fintech developments have supported greater financial inclusion in LAC, contrary to what has been observed elsewhere in the world. Case studies by national policy experts suggest that barriers to entry in the financial sector, along with a constraining regulatory environment, may have hindered a faster adoption of fintech. However, fintech development seems to have accelerated in the wake of the COVID-19 pandemic and with the support of recent policy initiatives.
Policymakers across countries have been seeking to strengthen the institutional framework to control fiscal costs and feedback effects to the real economy generated by bank failures. On a cross-section of countries, we find evidence that suggests that bank supervisors’ intervention in bank failures may be positively associated with some aspects of the administrative and regulatory framework. Our results appear to hold also during times of financial instability. Finally, we find some evidence that the same institutional features may be associated with lower fiscal outlays during banking crises.
This paper reviews the approaches to systemic risk analysis in 32 central bank financial stability reports (FSRs). We compare and contrast the systemic risk analysis in FSRs with the IMF Article IV staff reports, noting that Article IV staff reports and FSRs frequently pick up analytical content from each other. All reviewed FSRs include a systemic risk assessment, which has not always been the case in Article IV staff reports. Also, compared to Article IV staff reports, on average, FSRs tend to cover a wider range of financial risks and vulnerabilities and tend to have more extensive discussions of the policy mix to mitigate systemic risk. In these assessments, FSRs utilize sophisticated analytical tools, such as stress tests and growth-at-risk, more frequently than Article IV staff reports. We emphasize that a central bank FSR typically presents a rich resource that IMF country teams can leverage, as already done by some, in forming their independent view about systemic risk.
Direct measurement of corruption is difficult due to its hidden nature, and measuring the perceptions of corruption via survey-based methods is often used as an alternative. This paper constructs a new non-survey based perceptions index for 111 countries by applying sentiment analysis to Financial Times articles over 2005–18. This sentiment-enhanced corruption perception index (SECPI) captures not only the frequncy of corruption related articles, but also the articles’ sentiment towards corruption. This index, while correlated with existing corruption perception indexes, offers some distinct advantages, including heightened sensitivity to current events (e.g., corruption investigations and elections), availability at a higher frequency, and lower costs to update. The SECPI is negatively correlated with business environment and institutional quality. Increases in the perceived incidence or scope of corruption influences economic agents’ behaviors, and thus economic dynamics. We found that when the SECPI is at least one standard deviation above the mean, the growth per capita falls by 0.65 percentage point on average, with more pronounced impacts for emerging market and low income countries.