Knowledge that Transforms

How susceptible to contagion are bank deposits associated with financial inclusion? To assess this susceptibility, we analyze the behavior of deposits around three significant events of bank failure in the Philippines. We conduct the event studies with the advantage of a unique dataset that disaggregates deposits by size at the town level. We show that both small and large deposits are withdrawn up to 4–5 quarters before the bank’s closure. We take advantage of this distinction between small and large deposits to test for contagion. Applying difference-in-difference regressions, we find evidence of contagion: the closure of a large bank leads to withdrawals at banks in neighboring towns by depositors both large and small. This is the case for two of the three events, and when the data is taken collectively. That there is a market for information affects deposit insurance as a safety net for depositors and as a disciplining tool for banks. There are also liquidity considerations that banks need to consider. In any case, we consistently find the behavior of small depositors to be no different from that of large depositors. Hence, if financial inclusion is about access to bank deposits, it is not likely to heighten systemic risks nor mitigate them.

Motivated by its rapid growth, this paper investigates how FinTech activities influence risk-taking by financial intermediaries (FIs). In this context, the paper revisits an ongoing debate on the impact of competition on financial stability: on one side, it is argued that greater competition encourages greater risk-taking (competition-fragility hypothesis), while the other side asserts that more competition can increase financial stability (competition-stability hypothesis). Using a curated database covering over 10,000 FIs and global FinTech activities, we find a robust relationship whereby greater FinTech presence is associated with heightened risk-taking by FIs, offering support for the competition-fragility hypothesis. However, the inclusion of bank-, industry, and country-specific characteristics can alter this relationship. Importantly, there is suggestive evidence indicating that in certain cases, greater FinTech presence may be associated with less FI risk-taking amid stronger domestic institutions. Notwithstanding the relevance for policy, this paper presents a novel framework that may help reconcile some of the conflicting results in the literature, which have found supportive evidence for each of the two competing hypotheses.

This study presents a methodology for analyzing procyclical systemic risk arising from joint monetary and prudential policy decisions. We analyze the impact of different scenarios of the monetary policy interest rate on the leverage ratio of US commercial banks. The Dynamic Conditional Correlation - Semi-nonparametric model and bivariate spectral analysis are applied to model the dynamics among the variables. The results indicate that high and low interest rates increase leverage while medium rates reduce it. The importance of considering asymmetries and heavy tails of probability distributions in stress tests and the dynamics of the correlation between variables is highlighted when assessing financial stability.

The rapid adoption of artificial intelligence (AI) poses new and poorly understood threats to financial stability. We use a game-theoretic model to analyse the stability impact of AI, finding that it amplifies existing financial system vulnerabilities — leverage, liquidity stress and opacity — through superior information processing, common data, speed and strategic complementarities. The consequence is crises become faster and more severe, where the likelihood of a crisis is directly affected by how effectively the authorities engage with AI. In response, we propose that the financial authorities develop their own AI systems and expertise, establish direct AI-to-AI communication, implement automated crisis facilities and monitor AI use.

Using global data on syndicated loans, we show that any negative effect of stronger creditor rights on loan spreads, as identified in the prior literature (Qian and Strahan, 2007; Bae and Goyal, 2009), disappears once we include a single country characteristic: country size. This finding is robust to several identification methods, both global samples and within-country changes in creditor rights, different panel spans, and hundreds of control variables. We identify that key origins of the effect of country size on loan pricing are ethnic fractionalization and within-country heterogeneity in economic preferences, which create country risk.

This study models the closely held (PE) share of U.S. nonfinancial corporate equity over time. Corporate income tax rates, the Sarbanes-Oxley Act, default risk, and the real medium-run Treasury yield significantly affect the PE share, consistent with other studies which separately analyze these factors. The PE share is negatively related to business loan delinquencies and real medium-term Treasury rates. High interest rates discourage PE funds from using leverage to finance buyouts of public companies and fund distributions of interim cash distributions that enhance the relative liquidity of the closely held firms in PE fund portfolios. Interim cash distributions by PE funds help to avoid the double-taxation of dividends, thus causing the appeal of PE to rise with corporate income tax rates, which increases the PE share. The PE share rose during the Enron scandal and after the Sarbanes-Oxley Act (SOX), which increased the costs of continuing as, or becoming, a publicly traded corporation. The PE share is well explained and tracked by key macroeconomic variables as well as tax and regulatory policies. • We model the private equity (PE) share of US nonfinancial corporate equity over time. • Business loan delinquencies and real medium-term Treasury rates lower the PE share. • Sarbanes-Oxley increased the PE share by raising the costs of being a public firm. • The PE share is well modeled by key macroeconomic, tax, and regulatory variables.

We examine the association between country-level sectoral credit dynamics and bank-level systemic risk. Contrary to most studies that only delve into broad-based credit development, we focus on sectoral credit allocation, specifically to households versus firms, and to the tradable versus non-tradable sector. Based on a global sample of 417 banks across 46 countries over the period 2000-2014, we find that lending to households and corporates in the non-tradable sector is positively associated with system-wide distress. Conversely, credit granted to corporations and to the tradable sector negatively correlates with banks’ systemic behavior. Sub-sample analysis shows that risks from household lending are transmitted through small banks, whereas non-tradable lending is transmitted through large banks. Moreover, banks located in emerging market and developing economies exhibit enhanced systemic behavior against the backdrop of higher household and tradable credit growth, whereas credit to non-tradable sector firms tends to increase systemic fragility of banks in advanced economies. By the same token, the results differ for the pre-crisis and crisis/post-crisis periods, with the full sample findings driven by the crisis/post-crisis timespan. The findings emphasize critical policy implications considering sectoral heterogeneity, bank size, country of incorporation of banks, and periods of financial tranquillity/instability. Authorities can intervene in the most systemic economic sectors and limit the accumulation of “bad credit” and preserve systemic resilience, while still benefiting from the positive impact of “good credit” on growth and financial stability.

We extend the Schumpeter meeting Keynes (K+S) agent-based model by introducing an evolving interbank network in the money market. Banks are exposed to counterparty risk and evaluate interbank positions using a network valuation (NEVA) clearing mechanism, which ensures systemic risk minimization with minimal assumptions on banks’ behavior. The model can replicate several stylized facts about the topology of the interbank network and the dynamics of banks’ balance sheets. The model encompasses financial contagion and systemic risk, allowing us to study the interactions between micro- and macro-prudential policies. Our results suggest that the introduction of a micro-prudential regulation also accounting for the network structure can reduce the incidence of systemic risk events. We also find that, in presence of a two-pillar regulatory framework – grounded on a Basel III macro-prudential regulation and a NEVA-based micro-prudential one –, there is no trade-off between financial stability and macroeconomic performance. This points towards the possibility of designing a regulatory framework able to achieve financial stability without overly stringent capital requirements.

Using the staggered adoption of collateral law reforms across Europe, we examine their effects on trade credit financing. We find that firms in countries that adopt such reforms receive less trade credit, consistent with suppliers viewing these firms as less creditworthy. Moreover, this decrease in trade credit is more pronounced for firms and industries with more movable assets, for financially constrained firms, and for firms in countries with strong legal enforcement, indicating that collateralization of movable assets drives this relation. Our findings suggest that the use of movable assets as collateral in bank borrowing increases supplier risks and decreases demand for trade credit, thus discouraging its use.

Using China’s religion and household survey data, we find that a high degree of religiosity increases households’ willingness to borrow, both formally from financial institutions and informally from family and friends. A high degree of religiosity could facilitate formal household borrowing by fostering trust in transactions. However, the trust mechanism cannot explain the impact of religiosity on informal borrowing. We hypothesize that a strong religiosity might facilitate informal loans by promoting altruism, and we find supporting evidence. The effect of religiosity on informal loans is more pronounced in transactions where the parties involved are intrinsically less altruistic toward each other.