scholarly journals Toothless Tiger With Claws? Financial Stability Communication, Expectations, and Risk-taking

2021 ◽  
Author(s):  
Johannes Beutel ◽  
Norbert Metiu ◽  
Valentin Stockerl
Keyword(s):  
Risk Taking ◽  
Financial Stability ◽  
Communication Expectations

scholarly journals Optimal Monetary and Prudential Policies

2017 ◽  
Vol 9 (1) ◽  
pp. 40-87 ◽  
Author(s):  
Fabrice Collard ◽  
Harris Dellas ◽  
Behzad Diba ◽  
Olivier Loisel
Keyword(s):  
Risk Taking ◽  
Financial Stability ◽  
Deposit Insurance ◽  
Limited Liability ◽  
Capital Requirements ◽  
Bank Capital ◽  
The Business Cycle ◽  
Recent Financial Crisis ◽  
The Interest Rate ◽  
Excessive Risk Taking

The recent financial crisis has highlighted the interconnectedness between macroeconomic and financial stability, raising questions about how to combine monetary and prudential policies. This paper characterizes the jointly optimal monetary and prudential policies, setting the interest rate and bank-capital requirements. The source of financial fragility is the socially excessive risk taking by banks due to limited liability and deposit insurance. We provide conditions under which locally (Ramsey) optimal policy dedicates the prudential instrument to preventing inefficient risk taking by banks, and the monetary instrument to dealing with the business cycle, with the two instruments covarying either negatively, or positively and countercyclically. (JEL E32, E43, E44, E52, G01, G21, G28)

New Mortgage Lenders and the Housing Market*

2020 ◽  
Author(s):  
Nikodem Szumilo
Keyword(s):  
Risk Taking ◽  
Financial Stability ◽  
House Prices ◽  
Housing Prices ◽  
Real Estate Market ◽  
Mortgage Lending ◽  
Mortgage Market ◽  
The Real Estate ◽  
Banking Market ◽  
The Real Estate Market

Abstract This article examines the effect of a new lender’s entry into a local mortgage market on the supply of new loans, housing prices and repossessions in areas around its branches. I use the decision of the European Commission to force the UK’s largest retail bank to divest a part of its business as a shock to the entry of a new lender, and show that incumbent banks increase mortgage lending in areas where the new bank has its branches. Furthermore, house prices increase by around 5% in the real estate market impacted by the shock. Average transaction numbers and mortgage repossession rates also increase in places where the new bank enters. Overall, my results show that increased competition in the banking market can have adverse consequences for risk-taking and financial stability.

scholarly journals The Role of Capital Regulation and Risk-Taking by Banks in Monetary Policy

2014 ◽  
Vol 5 (1) ◽  
pp. 7-26
Author(s):  
Małgorzata Olszak
Keyword(s):  
Monetary Policy ◽  
Risk Taking ◽  
Financial Stability ◽  
Central Banks ◽  
Output Growth ◽  
Capital Regulation ◽  
Bank Capital ◽  
Endogenous Factors ◽  
Credit Cycle

The credit boom prevailing in the period preceding the last financial crisis was prolonged and associated with neither particularly strong output growth nor rising inflation in economies in which it occurred. This type of credit cycle and financial cycle is hard to reconcile with existing economic theory applied in monetary policy. In this paper we point out to endogenous factors behind this phenomenon. We aim to identify what is the role of bank capital regulation and bank risktaking in the transmission mechanism of monetary policy. The transmission of monetary policy impulses through capital channel is a diversified process, and depends on bank specific, background macroeconomics’s specific and other factors. Bank capital standards affect the banks’ perception, management and pricing of risks. In this area, monetary policy is also of great importance, with prominent role of the so called risk-taking channel in which central banks actions have an impact on bank risk attitudes. Consequently monetary policy is not fully neutral from a financial stability perspective. Stable level of inflation does not guarantee the stability of financial system. Therefore central banks in their conduct of monetary policy should constrain the build-up of financial imbalances.

scholarly journals Destabilizing Stability? Exchange Rate Arrangements and Foreign Currency Debt

2020 ◽  
Vol 20 (173) ◽  
Author(s):  
Balazs Csonto ◽  
Tryggvi Gudmundsson
Keyword(s):  
Exchange Rate ◽  
Risk Taking ◽  
Financial Stability ◽  
Foreign Currency ◽  
Exchange Rate Flexibility ◽  
Macroprudential Policies ◽  
Increase Risk ◽  
Exchange Rate Arrangements ◽  
Stability Issues ◽  
Foreign Currency Debt

Emerging markets (EMs) often respond to shocks by intervening in foreign exchange (FX) markets and thus preventing full exchange rate adjustment. This response can serve to dampen the effect of shocks and increase monetary policy space but may also incentivize economic participants to increase risk taking and take on more FX debt. This paper empirically analyzes the role of exchange rate flexibility in affecting such risk taking, by using rolling correlations and difference-in-difference estimations. The results suggest that a shift towards greater exchange rate flexibility often coincides with a decline in external FX debt. The findings also highlight the importance of using complementary policies to deal with financial stability issues related to the exchange rate, such as FX-specific macroprudential policies and policies aimed at promoting financial development.

scholarly journals Financial Stability Implications of Stress Testing for Risk Taking and Credit Growth

2020 ◽  
Vol 5 (2) ◽  
pp. 1-4
Author(s):  
Orobah Ali Barghouthi ◽  
K. M. Anwarul Islam
Keyword(s):  
Risk Taking ◽  
Financial Stability ◽  
Stress Testing ◽  
Financial System ◽  
Capital Requirements ◽  
Capital Adequacy ◽  
Local Market ◽  
Stress Tests ◽  
Credit Growth ◽  
Generous Credit

This paper examined the literature on financial stability implication of stress testing for risk-taking and credit growth in banks. Macro prudential considered one of the most stress testing tools by Applying countercyclical Macro prudential tools to build up capital buffers in good times that can be run down during bad times. But to improve timing, monitories authorities may need to develop a comprehensive framework to monitor Macro prudential conditions and establish appropriate warning and trigger thresholds. Regarding scope, they examine the entire financial system. This entity contributes to fire sales whose default has follow-on effects, or which can exacerbate a credit crunch that is included. Liability Considerations contain a Scale of wholesale funding that is run-prone is paramount. Capital adequacy depends on the health of the overall financial system. For asset Considerations, the test indicates whether the financial system is vulnerable to deleveraging that might amplify adverse shocks, at the end authorities' development guidance about whether to close a bank and when to sell its assets to maximize taxpayer recovery. We have concluded that the financial stability implications of stress tests for risk-taking and credit growth among banks are the following: A reduction in credit is a feature on stress tests. Post-crisis reforms traded the expectation of lower credit growth for reducing the probability that the larger banks would fail. This has a high negative impact on the economy. Higher capital requirements for the larger banks have prompted a reduction in the supply of credit, especially to riskier borrowers. Smaller banks have increased their share of local market-wide lending, and larger businesses have seen quite generous credit availability in bond and leveraged loan markets. Consider the structure of the financial system and its complexity long the levels of economic integration and openness.

scholarly journals Macroprudential Policy, Credit Cycle, and Bank Risk-Taking

2018 ◽  
Vol 10 (10) ◽  
pp. 3620 ◽  
Author(s):  
Xing Zhang ◽  
Fengchao Li ◽  
Zhen Li ◽  
Yingying Xu
Keyword(s):  
Risk Taking ◽  
Financial Stability ◽  
Bank Loans ◽  
Sustainable Growth ◽  
Estimation Methods ◽  
Bank Risk ◽  
Method Of Moment ◽  
Data Set ◽  
Credit Cycle ◽  
Bank System

This paper constructs a theoretical model to analyze the effect of macroprudential policies (MPPs) on bank risk-taking. We collect a data set of 231 commercial banks in China to empirically test whether macroprudential tools, including countercyclical capital buffers, reserve requirements, and caps on loan-to-value, can affect bank risk-taking behaviors by using the dynamic unbalanced panel system generalized method of moment (SYS-GMM). The results provide further evidence on the important role of MPPs in maintaining financial stability, which helps mitigate financial system vulnerabilities. Bank risk-taking will be decreased with the strengthening of macroprudential supervision, which greatly benefits the resilience and the sustainability of bank sector. Moreover, the credit cycle has a magnifying role on MPPs’ effect on bank risk-taking. Reducing risks in bank loans requires a further slowing of credit growth, which is necessary to ensure sustainable growth in a bank system, or more ambitiously, to smooth financial booms and busts. The results survive robustness checks under alternative estimation methods and alternative proxies of bank risk-taking and MPPs.

How do banks’ capital regulation and risk-taking respond to COVID-19? Empirical insights of ownership structure

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Syed Moudud-Ul-Huq ◽  
Kawsar Ahmed ◽  
Mohammad Ashraful Ferdous Chowdhury ◽  
Hafiz M. Sohail ◽  
Tanmay Biswas ◽  
...  
Keyword(s):  
Ownership Structure ◽  
Risk Taking ◽  
Financial Stability ◽  
Generalized Method Of Moments ◽  
Capital Regulation ◽  
Data Set ◽  
Content Type ◽  
Private Banks ◽  
Three Stage Least Squares ◽  
The Relationship

Purpose This study aims to investigate the relationship between capital regulation and risk-taking behavior (financial stability) concerning the impacts of the recent global (COVID-19) crisis and diverse ownership structure. Design/methodology/approach The analysis uses an unbalanced panel data set from 32 commercial banks of Bangladesh for 2000–2020. The authors use the two-step system generalized method of moments and three-stage least squares to produce the study outcomes. Findings The robust results reveal that the relationship between capital regulation and risk (financial stability) is negative (positive) and bi-directional. More significantly, COVID-19 makes banks fragile and demands more capital to absorb risk. However, the effect of COVID-19 is heterogeneous when the authors consider ownership structure. Among the diverse ownership styles, Islamic and active shareholding show their controlling wheel on capital regulation and risk-taking aptitude (financial stability) during the global (COVID-19) crisis. In normal economic conditions, private banks and minority active shareholding can be a good determinant for capital regulation and risk (financial stability). On the other hand, state-owned and large banks have been found as less capitalized and highly risky. Originality/value This study is the pioneer in exploring capital regulation and risk toward the recent global (COVID-19) crisis.

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