Optimal Monetary Policy under Negative Interest Rate
In responding to the extremely weak global economy after the financial crisis in 2008, many industrial nations have been considering or have already implemented negative nominal interest rate policy. This situation raises two important questions for monetary theories: (i) Given the widely held doctrine of the zero lower bound on nominal interest rate, how is a negative interest rate (NIR) policy possible? (ii) Will NIR be effective in stimulating aggregate demand? (iii) Are there any new theoretical issues emerging under NIR policies? This article builds a model to show that (i) money ...
Banking Regulation with Risk of Sovereign Default
Banking regulation routinely designates some assets as safe and thus does not require banks to hold any additional capital to protect against losses from these assets. A typical such safe asset is domestic government debt. There are numerous examples of banking regulation treating domestic government bonds as ?safe,? even when there is clear risk of default on these bonds. We show, in a parsimonious model, that this failure to recognize the riskiness of government debt allows (and induces) domestic banks to ?gamble? with depositors? funds by purchasing risky government bonds (and assets ...
Interventions in Markets with Adverse Selection: Implications for Discount Window Stigma
I study the implications for central bank discount window stigma of the model by Philippon and Skreta (2012). I take an equilibrium perspective for a given discount window program instead of following the program-design approach of the original paper. This allows me to narrow the focus on the model's positive predictions. In the model, firms (banks) need to borrow to finance a productive project. There is limited liability and firms have private information about their ability to repay their debts. This creates an adverse selection problem. The central bank can ameliorate the impact of ...
Faster Payments, More Disruptions
New payment technologies have transformed the banking system by increasing the efficiency and mechanisms to transfer funds. How will these innovations disrupt the banking system?
The Effect of Common Ownership on Profits : Evidence From the U.S. Banking Industry
Theory predicts that "common ownership" (ownership of rivals by a common shareholder) can be anticompetitive because it reduces the weight firms place on their own profits and shifts weight toward rival firms held by common shareholders. In this paper we use accounting data from the banking industry to examine empirically whether shifts in the profit weights are associated with shifts in profits. We present the distribution of a wide range of estimates that vary the specification, sample restrictions, and assumptions used to calculate the profit weights. The distribution of estimates is ...
Bank Fees, Aftermarkets, and Consumer Behavior
Fees for banking services have been a policy concern for over 20 years and the subject of several government agencies studies, which focused on the magnitude, incidence, or disclosure of such fees. Using a sample of single market banks, I study the relationship between market-level consumer characteristics and bank fee revenue, fees, and bank return on assets (ROA) to infer consumer and firm behavior. Of particular interest, I use county-level IRS tax records as a measure of the consumer income distribution, but my analysis also includes measures of age and education distributions. I find ...
The Effect of Banks' Financial Position on Credit Growth : Evidence from OECD Countries
This paper presents empirical evidence on the effect of banks' financial position on credit growth using a sample of 29 OECD countries. The failure of the exogeneity assumption of explanatory variables is addressed using dynamic panel type instruments. The empirical results show that among capital, profits and liquidity at the end of the previous year, capital is the most important predictor of credit growth in the current year. The relationship between capital and credit growth is non-linear. Point estimates from the preferred econometric specification imply that at the sample mean a one ...
A Price-Differentiation Model of the Interbank Market and Its Application to a Financial Crisis
Rate curves for overnight loans between bank pairs, as functions of loan values, can be used to infer valuation of reserves by banks. The inferred valuation can be used to interpret shifts in rate curves between bank pairs, for example, in response to a financial crisis. This paper proposes a model of lending by a small bank to a large monopolistic bank to generate a tractable rate curve. An explicit calibration procedure for model parameters is developed and applied to a dataset from Mexico around the 2008 financial crisis. During the crisis, relatively small banks were lending to large ...
Community Bank Performance: How Important are Managers?
Community banks have long played an important role in the U.S. economy, providing loans and other financial services to households and small businesses within their local markets. In recent years, technological and legal developments, as well as changes in the business strategies of larger banks and non-bank financial service providers, have purportedly made it more difficult for community banks to attract and retain customers, and hence to survive. Indeed, the number of community banks and the shares of bank branches, deposits, banking assets, and small business loans held by community banks ...
An Empirical Economic Assessment of the Costs and Benefits of Bank Capital in the US
We evaluate the economic costs and benefits for bank capital levels in the United States. The framework and analysis is similar to that found in previous studies though we tailor the analysis to the specific features and experience of the U.S. financial system and account for the impact of new financial regulations. The conceptual framework identifies the benefits of bank capital with a lower probability of financial crises, which result in decreased economic output. The costs of bank capital are identified with increases in banks cost of funding, which are passed along to borrowers and ...