Knowledge that Transforms

SRISK is a measure of a firms' systemic risk contribution that is computed using its listed stock market price. SRISK measurement is extended and applied to firms that do not have listed equity. A mapping from balance sheet characteristics to SRISK for listed firms is applied to SRISK for unlisted European banks. The mapping is validated by comparing SRISK measures for unlisted banks with their losses in European bank stress-testing.

We examine the transmission of international monetary policy shocks via the bank lending channel. Exploiting a panel of regulatory data on foreign banks operating in Australia, we show that the supply of credit is vulnerable to the international pass-through of monetary policy, with banks headquartered in Asia demonstrating high elasticity. Household and non-financial corporate loans are the most susceptible channels to policy shocks, while higher-margin lending, non-lending assets, and reservable liabilities are insensitive. We demonstrate that although banks curtail lending in the face of tighter monetary policy, they increase their non-reservable borrowing, suggesting an increased reliance on capital markets. Finally, we show that unconventional monetary policies have a muted effect compared to traditional measures. • We study the transmission of monetary policy shocks via the bank lending channel. • We exploit Australian regulatory bank data to test for the presence of the BLC. • Household and corporate loans are found to be the most susceptible channels. • Asian banks demonstrate the highest degree of lending elasticity. • Unconventional policies have a muted effect compared to traditional measures.

In this paper we provide a framework to study the network topology of generalized forecast error variance decomposition (GFEVD) derived from multi-country, multi-variable time series models. Our dynamic variance decomposition network is based on a Bayesian Global Vector Autoregressive (GVAR) model, a suitable macroeconometric method to consider simultaneous multi-level interdependencies across variables. We demonstrate the usefulness of our methodology to analyze the network structure of shock propagation in longitudinal time series and, in particular: (a) the shortest paths of contagion; (b) the clusters of shock transmission; (c) the role of nodes in the risk transmission channels. We illustrate our method through an empirical application to a set of 12 European countries’ Industrial Production, Retail Trade and Economic Sentiment indices over the period 01/2000–11/2021.

There is ample empirical literature centering on the effectiveness of foreign exchange intervention (FXI). Given the mix of objectives and country-heterogeneity, the general lack of consensus thus far is no surprise. We shed light on this debate by conducting the first comprehensive meta-analysis in the FXI literature, with 279 reported effects that stem from 74 distinct empirical studies. We cover estimations conducted in 19 countries across five decades. Overall, our meta-survey reports an average depreciation of domestic currency of 1% and a reduction of exchange rate volatility of 0.6%, in response to a $1 billion US dollar purchase. Results are qualitatively confirmed but smaller in size under fixed and random-effect estimations. When narrowing in on different economic factors, we find that effects are magnified for cases consistent with the monetary trilemma (greater if financial openness and monetary independence are low). Effects are also larger in emerging than advanced economies, when banking crises remain mild, and when interventions are large in size and are announced.

We investigate whether banks’ initial responses during the first wave of the COVID-19 pandemic in supporting their customers, communities, and governments were perceived as value-enhancing by investors. Using a unique responsible banking measure for a sample of the largest US and European commercial banks, we find a negative relationship between responsible bank behavior and stock market performance, particularly in the first wave of the pandemic. We also find that riskier banks were affected more negatively if they behaved responsibly. Overall, our findings show that banks’ responsible behavior during a crisis reduces, or at best is not relevant to, shareholder value.

We examine how the repo market operates during liquidity stress by applying network analysis to novel transaction-level data of the overnight gilt repo market including the COVID-19 crisis. We find that during this crisis the repo network becomes more connected, with most institutions relying on previously used counterparties. There are however important changes in the repo volumes and spreads during the stress relative to normal times. There is a significant increase in volumes traded with the central counterparties (CCPs) sector. At the same time non-banks, except hedge funds, decrease borrowing and face higher spreads in the bilateral segment. Overall, this evidence reflects a preference for dealers and banks to transact in the centrally cleared rather than the bilateral segment. Our results can inform the policy debate around the behaviour of banks and non-banks in recent liquidity stress and on widening participation in CCPs by non-banks.

We investigate the time variation in credit rating standards awarded to financial institutions of commercial bank credit ratings awarded by the three principal CRAs from 1990 to 2015 in a world-wide context by testing for well-defined structural shifts. We focus on the part of the ratings that cannot be accounted using publicly available information. We test whether major financial events are conditioning, ex-post such changes Distinctively in this paper’s timespan our analysis covers four periods: (i) before and (ii) after the 2001–2 corporate collapses, followed by (iii) before the global financial crisis and (iv) after the global financial crisis. We find substantial differences in the assignment of bank credit ratings among the three major agencies, Moody’s, Fitch, and S&P. Agencies differ both in terms of re-adjustment of ratings but also on the speed of response to the evens. All three agencies tightened ratings during the 2008 crisis and kept reducing them in its aftermath.

This paper empirically analyses whether post-global financial crisis regulatory reforms have created appropriate incentives to voluntarily centrally clear over-the-counter (OTC) derivative contracts. We use confidential European trade repository data on single-name sovereign credit default swap (CDS) transactions and show that both seller and buyer manage counterparty exposures and capital costs, strategically choosing to clear when the counterparty is riskier. The clearing incentives seem particularly responsive to seller credit risk, which is in line with the notion that counterparty credit risk (CCR) is asymmetric in CDS contracts. The riskiness of the underlying reference entity also impacts the decision to clear as it affects both CCR capital charges for OTC contracts and central counterparty clearing house (CCP) margins for cleared contracts. Lastly, we find evidence that when a transaction helps netting positions with the CCP and hence lower margins, the likelihood of clearing is higher.

Using unique data from a leading peer-to-peer (P2P) lending platform, we investigate the link between past investment performance and choice of auto-investing tool. Our results suggest that investors who experience fewer defaults in the manual mode are more inclined to switch to automatic investment. Several factors account for this relationship, including investor inattention, decision speed, investment delegation, and experience. Regarding the latter, our results suggest that experienced investors are more likely to continue self-directed bidding, even if they have faced defaults in manual investments in the past. These investors may attribute their previous mistakes to their own actions rather than the limitations of the self-directed bids. Our results are robust to alternative specifications.

We show that financial crises are preceded by changes in specific types of narrative information contained in newspaper article titles. Our novel international dataset and the resulting empirical evidence are gathered by integrating information from a large panel of economic news articles in global newspapers between the years 1870 and 2016 with conventional macroeconomic and financial indicators. We find that the predictive information of newspaper article titles that signals coming crisis episodes is substantial over and above the macroeconomic and financial indicators. Feature contribution analysis and crisis case studies reveal that the new indicators capture more detailed, but still generalizable information on the buildup of crises.