China’s Continuing Credit Boom
Debt in China has increased dramatically in recent years, accounting for roughly one-half of all new credit created globally since 2005. The country?s share of total global credit is nearly 25 percent, up from 5 percent ten years ago. By some measures (as documented below), China?s credit boom has reached the point where countries typically encounter financial stress, which could spill over to international markets given the size of the Chinese economy. To better understand the associated risks, it is important to examine the drivers of China?s expansion in credit, the increasing complexity ...
Shadow banking and the crisis of 2007-08
In recent decades, institutions that function much like traditional banks have grown outside regulatory oversight. Yet, as Daniel Sanches explains, these so-called shadow banks are as vulnerable to runs as regular banks. Because banking crises can inflict lasting economic harm, economists are interested in tracing how the panic ensued in the shadow system.
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 ...
The Differing Effects of the Business Cycle on Small and Large Banks
Small banks and large banks respond differently to business cycle fluctuations. The average net interest margin (NIM) at large banks is negatively correlated with the business cycle, while the average NIM at small banks is positively correlated with the business cycle. In a popular view, small banks are different from large banks because of their close relationships with their borrowers. But a decomposition of the cyclical properties of NIM into the asset and liability sides of the balance sheet suggests that small banks' procyclical NIM is due to their ability to keep funding costs less ...
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 Global Pandemic and Run on Shadow Banks
In March, the global coronavirus pandemic led to a period of financial stress in which credit conditions tightened at an unprecedented pace. Elements of this stress period can be explained as a classic run on “shadow banks”—nonbank financial institutions that fund long-term assets with short-term debt. Although timely Federal Reserve interventions restored some calm to markets, shadow banks remain vulnerable to future runs because they lack the safeguards available to regulated depository institutions.
Access to Electronic Payments Systems by Unbanked Consumers
Fumiko Hayashi identifies electronic payment products that can mitigate unbanked consumers? problems with the banking system.
Has the Relationship between Bank Size and Profitability Changed?
Kristen Regehr and Rajdeep Sengupta explore whether the relationship between bank size and profitability changed after the 2007?09 financial crisis.