Size Of Balance Sheet Research Articles

A Large Central Bank Balance Sheet? Floor vs Corridor Systems in a New Keynesian Environment

The quantitative easing (QE) policies implemented in recent years by central banks have had a profound impact on the working of money markets, giving rise to large excess reserves and pushing down key interbank rates against their floor – the interest rate on reserves. With macroeconomic fundamentals improving, central banks now face the dilemma as to whether to maintain this large balance sheet/floor system, or else to reduce their balance sheet size towards pre-crisis trends and operate traditional corridor systems. We address this issue using a New Keynesian model featuring heterogeneous banks that trade funds in an interbank market characterized by matching frictions. In this environment, balance sheet expansions push market rates towards their floor by slackening the interbank market. A large balance sheet regime is found to deliver ampler “policy space” by widening the steady-state distance between the interest on reserves and its effective lower bound (ELB). Nonetheless, a lean-balance-sheet regime that resorts to temporary but prompt QE in response to recessions severe enough for the ELB to bind achieves similar stabilization and welfare outcomes as a large-balance-sheet regime in which interest-rate policy is the primary adjustment margin thanks to the larger policy space.

Money Markets, Collateral and Monetary Policy

Interbank money markets have been subject to substantial impairments in the recent decade, such as a decline in unsecured lending and substantial increases in haircuts on posted collateral. This paper seeks to understand the implications of these developments for the broader economy and monetary policy. To that end, we develop a novel general equilibrium model featuring heterogeneous banks, interbank markets for both secured and unsecured credit, and a central bank. The model features a number of occasionally binding constraints. The interactions between these constraints - in particular leverage and liquidity constraints - are key in determining macroeconomic outcomes. We find that both secured and unsecured money market frictions force banks to either divert resources into unproductive but liquid assets or to de-lever, which leads to less lending and output. If the liquidity constraint is very tight, the leverage constraint may turn slack. In this case, there are large declines in lending and output. We show how central bank policies which increase the size of the central bank balance sheet can attenuate this decline.

Money Markets, Collateral and Monetary Policy

Interbank money markets have been subject to substantial impairments in the recent decade, such as a decline in unsecured lending and substantial increases in haircuts on posted collateral. This paper seeks to understand the implications of these developments for the broader economy and monetary policy. To that end, we develop a novel general equilibrium model featuring heterogeneous banks, interbank markets for both secured and unsecured credit, and a central bank. The model features a number of occasionally binding constraints. The interactions between these constraints - in particular leverage and liquidity constraints - are key in determining macroeconomic outcomes. We find that both secured and unsecured money market frictions force banks to either divert resources into unproductive but liquid assets or to de-lever, which leads to less lending and output. If the liquidity constraint is very tight, the leverage constraint may turn slack. In this case, there are large declines in lending and output. We show how central bank policies which increase the size of the central bank balance sheet can attenuate this decline.

Unconventional Monetary Policies and Central Bank Profits: Seigniorage as Fiscal Revenue in the Aftermath of the Global Financial Crisis

This study investigates the evolution of central bank profits as fiscal revenue (or: seigniorage) before and in the aftermath of the global financial crisis of 2008–9, focusing on a select group of central banks—namely the Bank of England, the United States Federal Reserve System, the Bank of Japan, the Swiss National Bank, the European Central Bank, and the Eurosystem (specifically Deutsche Bundesbank, Banca d’Italia, and Banco de Espana)—and the impact of experimental monetary policies on central bank profits, profit distributions, and financial buffers, and the outlook for these measures going forward as monetary policies are seeing their gradual “normalization.” Seigniorage exposes the connections between currency issuance and public finances, and between monetary and fiscal policies. Central banks’ financial independence rests on seigniorage, and in normal times seigniorage largely derives from the note issue supplemented by “own” resources. Essentially, the central bank’s income-earning assets represent fiscal wealth, a national treasure hoard that supports its central banking functionality. This analysis sheds new light on the interdependencies between monetary and fiscal policies. Just as the size and composition of central bank balance sheets experienced huge changes in the context of experimental monetary policies, this study’s findings also indicate significant changes regarding central banks’ profits, profit distributions, and financial buffers in the aftermath of the crisis, with considerable cross-country variation.

SHORT AND LONG-TERM CAUSALITY RELATIONS BETWEEN BROAD MONEY AND CRUDE OIL, EXCHANGE RATE, COMMODITY OPTION VOLATILITIES

Purpose- The purpose of the study is to examine the dynamics linking broad money (M3) growth and crude oil volatility, euro/dollar volatility, commodity option volatility for the case of the US. Methodology- Causality analysis depending on Vector Error Correction (VEC) models is employed to estimate the relationship between broad money (M3) growth and crude oil volatility, euro/dollar volatility, commodity option volatility for the case of the US. Findings- Causality analysis results stresses that the balance sheet size of FED increase the uncertainties commodity and currency markets and thus volatility in euro/dollar and spot oil price and commodity options can be raised in the long-term. Both instantaneous causality and Granger causality indicate that money demand behavior of US economic agents are not affected from the commodity option, euro/dollar and crude oil volatilities both in short- and long-run. Conclusion- Our empirical analysis implies that monetary aggregate targeting policy of FED can not be negatively mitigated by commodity option volatility, euro/dollar volatility, crude oil volatility indices. For further studies and analysis, we suggest the clarification of channels between monetary policy stance and financial instruments traded in commodity and currency markets.

Determinanty normalizacji polityki monetarnej Europejskiego Banku Centralnego

Due to the implementation of non-standard monetary policy by the European Central Bank, concentrated in the first part of the financial crisis mainly on the unconventional open market operations, and in the second on the Quantitative Easing policy, the exit strategies and monetary policy normalization have become the subject of intensified discussion. The concept of a return to "normal" monetary policy of the ECB will require the implementation of two aspects: raising of interest rates and reduction of the size of central bank balance sheet. However, it is undisputed that the exit strategies of the ECB could be implemented only after completing of the asset purchase program and stabilization of euro area public finances. It seems that at this moment the monetary policy of Eurozone will have to wait. The main aim of the study is to identify the determinants of the monetary policy normalization of the European Central Bank. Particular attention will be paid to the conditions of normalization relating to the support for creation of economic recovery in the euro area, the increase of inflation towards the inflation target, stimulation of dynamics of lending activity and the situation on the financial market. The following research methods will be used: the literature studies, including domestic and foreign literature, case studies, cause and effect analysis, observation analysis as well as synthesis analysis.

Global Liquidity: A Selective Review

Global liquidity is a catch-all term that is used to denote the combination of easier financing conditions, capital inflows, and exchange rate appreciation. An approach based on the activities of internationally active financial institutions sheds light on the conceptual underpinnings and the economic mechanisms involved in the transmission of global liquidity. The analysis highlights the role of international funding currencies, especially the US dollar. The analysis also motivates a set of global liquidity indicators based on the size and currency composition of balance sheets.

The Impact of Accounting Treatment of Research and Development Costs: Evidence from Chemring Group Plc

This study seeks to examine the accounting treatments of Research and Development (R&D) costs and to assess the impact of the treatments on the statement of profit or loss, and financial position of Chemring Group Plc using secondary data for 2015 financial year. To achieve this, data were obtained from Chemring Group’s 2015 annual reports and accounts, and analyzed using content analysis such as tables, walk through accounting illustration and key financial ratios, this is the major contribution of this study demonstrating practically the impact of the treatments of R&D costs, which to the best knowledge of the researcher has not been analyzed before. Findings from the analysis show that expensing all R&D costs has reduced the value of non-current asset and equity at the same proportion to the tune of the initial capitalized amount of development costs. This has impacted the financial position and the balance sheet size negatively by £36.1m. Due to the decline in profit and the balance sheet size in terms of assets and equity, the efficiency ratios have indicated down ward trend while the long term solvency ratio indicates the company is more geared. The study concludes that expensing all R&D costs reduces net asset and equity thereby reducing the size of the balance sheet, and potential investors and other users of financial statement evaluating the company would note that the assets appearing on the balance sheet are incomplete because the huge amount spent to create future benefits are not recognized and reported in the statement of financial position of the company.

Two Big Distortions: Bank Incentives for Debt Financing

Systemically important banks are subject to at least two departures from the neutrality of debt versus equity financing: the tax deductibility of interest payments and implicit funding subsidies. This paper fills a gap in the literature by comparing their mechanism and interaction within a common analytical framework. Findings indicate that both the tax shield and implicit funding subsidy remain large, in the order of up to 1 percent of GDP, despite decreases in recent years. But the underlying mechanisms differ. The tax shield incentivises debt financing as it reduces tax payments to the government. The implicit funding subsidy incentivises debt financing as it lowers private bankruptcy costs. This funding subsidy is passed on to other bank stakeholders. It therefore provides incentives for increases in balance sheet size and risk taking. This, in turn, increases the value of the tax shield. Overall, these results help to explain why systemically important banks are highly leveraged. JEL Classification: G21, G32, H25

Has Fed's Policy Hurt the World Economy?

In an attempt to rescue the U.S. financial market and to stimulate the economy, the Federal Reserve introduced a number of non-conventional monetary policy tools. Termed as and aimed at lowering both the short-term and the long-term interest rates and thereby boosting the consumption and investment demand and, in turn, stimulating the economy, this policy had the effect of altering both the size and composition of the Federal Reserve's balance sheet. These nonconventional policy tools were thought to be necessary when conventional policy tool, such as, the federal funds rate target had almost reached zero. These policy tools were implemented in the forms of: (a) lending to financial institutions, (b) providing liquidity to key credit markets, and (c) purchasing longer-term securities. There have been several studies on the impact of the recent U.S. monetary policy. But these studies mainly focus on its effect on the interest rate, the commodity prices, and the exchange rates. None of these studies have examined the impact of U.S. monetary policy on a specific country, a specific group of countries, or the world economy. Also, these studies do not use a general equilibrium model that takes into account both the goods market and the money market equilibrium condition. We develop a general equilibrium model of income, in which the domestic real GDP is a function of domestic currency's exchange rate and the foreign monetary base. We, then, apply the model on a panel data on the United States and the BRICS countries to see if U.S. credit easing has any effect on BRICS countries' real GDP. Our study finds that the recent U.S. monetary policy of credit (quantitative) easing has an adverse effect on BRICS countries' real GDP. This finding seems intuitive, because, the increase in the U.S. money supply caused by its pursuance of the credit easing policy will lower the interest rate in the U.S. increasing the relative prospective rate of return on investment in the United States. This increased relative rate of return causes increased capital flow into the U.S. from abroad including the BRICS countries. The capital outflows, in turn, lower the investment and, consequently the real GDP in BRICS countries. Also, the random effect is negative for Brazil and Russia, while it is positive for China, India, and South Africa, suggesting that the U.S. monetary policy has a greater negative impact on the real GDP of Brazil and Russia than on that of other BRICS countries. The policy implication of our finding is that an easy monetary policy, such as, quantitative easing does lower the interest rate and increase domestic investment and thereby stimulate the economy. Therefore, some of the policy measures the BRICS countries can take to insulate their economies from a negative impact of the U.S. monetary policy is to implement a similar (easy) monetary policy in their own countries or exercise a direct control on capital outflow.

Central Bank Balance Sheet Policies and Inflation Expectations

We analyse the empirical effects of credit easing and quantitative easing on inflation expectations and exchange rates. Both monetary policy strategies are summarised in measures for composition and size of the central bank balance sheet and are included in a VAR model. The results show that changes in balance sheet size had positive, albeit weak effects on inflation expectations in Japan, while the effects were negligible in the euro area. By contrast, an increasing balance sheet size is associated with reduced short-term inflation expectations in the US and UK, pointing at negative signalling effects. Shocks to balance sheet size or composition have no substantial effects on long-term inflation expectations in the euro area, US and UK. An expanding balance sheet size is associated with a depreciation of the euro, pound sterling and Japanese yen.

THE EFFECT OF HETEROGENEITY ON FINANCIAL CONTAGION DUE TO OVERLAPPING PORTFOLIOS

We consider a model of financial contagion in a bipartite network of assets and banks recently introduced in the literature, and we study the effect of power law distributions of degree and balance-sheet size on the stability of the system. Relative to the benchmark case of banks with homogeneous degrees and balance-sheet sizes, we find that if banks have a power law degree distribution the system becomes less robust with respect to the initial failure of a random bank, and that targeted shocks to the most specialized banks (i.e., banks with low degrees) or biggest banks increases the probability of observing a cascade of defaults. In contrast, we find that a power law degree distribution for assets increases stability with respect to random shocks, but not with respect to targeted shocks. We also study how allocations of capital buffers between banks affects the system’s stability, and we find that assigning capital to banks in relation to their level of diversification reduces the probability of observing cascades of defaults relative to size-based allocations. Finally, we propose a non-capital-based policy that improves the resilience of the system by introducing disassortative mixing between banks and assets.

An Early Warning Tool for Measuring the Build-Up of Systemic Risks in Banks and Financial Systems

This paper develops, analyses and implements an early warning tool for systemic risk in banks and financial entities. The tool is based on a refined approach to stress testing. Calculations performed on Australian bank data are shown to predict past distres. Risk is measured as a function of expected capital shortfall in individual firms. A simple model of regulatory capital is assumed. Systemic risk is shown to be driven by the size and leverage of balance sheets and interdependence between firms. Firm balance sheets are modelled using publicly available information and assumed to depend on market returns. Model refinements using more comprehensive information and practical implementation are also discussed.

Atlas constrained: the US external balance sheet and international monetary power

ABSTRACTWe address the impact on international monetary power of the size and nature of the US's international financial assets and liabilities. Financial globalization makes critical a focus on a nation's international financial assets and liabilities, its ‘external balance sheet’. We suggest an expansion of Cohen's existing framework of international monetary power to include the implications of valuation changes in these external balance sheets, focusing on sources of valuation, sensitivity and vulnerability of the US economy to these changes and implications for US ability to use monetary statecraft. By focusing on developments since 2007 and on events over the financial crisis period, we show that the increased size and nature of the US's external balance sheet has reduced US autonomy and monetary power. Underpinning the changes in the US's external balance sheet are activities of private financial market actors whose influence in international monetary affairs has grown markedly.

Bond Market Liquidity and the Role of Repo

This paper highlights the important role that repurchase agreements (repos) play in bond market intermediation. Not only do repos allow intermediaries (i.e., dealers) to finance their activities, but they also increase dealers' ability to satisfy levered client demands without having to compromise their own optimal portfolio choice. In effect, the ability to borrow specific assets for delivery allows dealers to source large quantity of assets without taking ownership of them. Larger client orders imply larger asset borrowing demands, thus increasing the borrowing cost for the asset (i.e., repo specialness). We show preliminary evidence that dealers are willing to assume these costs in order to facilitate trades. In the model, dealers pass on the higher intermediation cost to their clients in the form of higher bid-ask spreads. Although this method of intermediation is optimal, the use of repos significantly increases dealers' balance sheets, particularly when servicing client short positions. Thus, limiting the size of dealers' balance sheets reduces their market making ability and hence market liquidity.

Unconventional Monetary Policy Measures and Inflation Expectations

The record increase in the size of the Federal Reserve's balance sheet after the financial crisis ignited fears among some people that high inflation would inevitably follow. We investigated whether those fears were supported in survey or market measures of inflation expectations around the time that large-scale asset purchases were announced. Nothing suggests that the Fed's new policy tools have been perceived by professional forecasters or financial markets as harbingers of hyperinflation.

A Counterparty Risk Study of UK Banking Systems

We study the effect of counterparty risk on the stability of a banking system using stylized banking cascade models calibrated with UK exposure and balance sheet data from regulatory reports. We observe the development of a fragile phase, at which small perturbations to banks' capital reserves can trigger a sudden system failure. We compute the critical balance sheet values for a stylized homogeneous system and show that a more realistic heterogeneous system, with different bank types and complex interbank network calibrated on UK data, also has systemic failures around similar sized shocks to banks' capital as the stylized homogeneous system. By aggregating the fraction of surviving banks to specific bank types, we show that balance sheet size and banks' position in the interbank network are not the decisive components when considering system failure due to counterparty insolvency. This implies that interbank network structure and heterogeneity do not play a critical role in the onset of the fragile phase. Instead, the onset of the system failure depends on the ratios of interbank assets to total assets and loss absorbing capital to total assets. Finally, we discuss the effects of increased exposure of specific banks and we compute minimum capital requirements to ensure a stable banking system.

Swiss Roll (A)

In September, 2011, to prevent its currency from appreciating after the Global Financial Crisis, the Swiss National Bank (SNB) decided to peg its currency to EUR and announced that it would not let CHF go beyond 1/1.20 EUR. Maintaining the peg required the SNB to purchase foreign currency assets virtually endlessly in response to the worsening Eurozone crisis. By end of 2014, its foreign currency exchange reserves amounted to almost 80% of its GDP. In an attempt to deter capital flows and reduce its balance sheet size, in December, 2014, the SNB first bought the interest rate on commercial bank deposits to negative levels and then, facing impending quantitative easing by the European Central Bank, announced the removal of the peg on January 15, 2015. The case describes the backdrop and the circumstances leading up to removal of the peg.

POLITICAL BUSINESS CYCLES IN THE TURKISH ECONOMY: 1977-2001

This study is about political business cycles (PBC) and investigates the Turkish case in the 1977-2001 period. The PBC literature has been developed in the last four-five decades and links economics and politics in several ways. In the first part of the study, developments in the literature are mentioned and the link between New Classical Economics and New Political Economics is introduced. In the second part, Turkish case is analyzed in details to determine whether there have been PBC during the above mentioned period. The results show that there have been political cycles in some macroeconomic variables which are currency issued, broad money (M1), public sector credits and agricultural credits extended by Central Bank of the Republic of Turkey (CBRT), and tax revenues. CBRT has not allowed PBC especially on the targeted variables (CBRT balance sheet size, net domestic assets and monetary base), after 1989. Due to the high legal ceilings of CBRT credits to the public sector, CBRT was not able to limit those credits, especially before 1991 general elections. There had been similar PBC on agricultural credits which had been extended in the 1977-1991 period by CBRT. In addition to the regression analysis, comparative tables and figures for personnel expenditures of State Economic Enterprises (SEEs), agricultural credits which had been extended by Agricultural Bank of the Republic of Turkey (ABRT) in the 1964-1998 period and agricultural prices which had been declared by governments in the 1986-1999 period are provided in the paper. The study provides some evidence to PBC literature and determines which policy instruments could have been used to produce PBC in the Turkish economy. And it is also important to learn which policies can be manipulated in order to prevent the PBC in the future.

Central Bank Balance Sheets: Expansion and Reduction Since 1900

In this paper we study the evolution of central banks’ balance sheets in twelve advanced economies since 1900. We present a new dataset assembled from a wide array of historical sources. We find that balance sheet size in most developed countries has fluctuated within rather clearly defined bands relative to output. Historically, clusters of big expansions and contractions of balance sheets have been associated with periods of geopolitical or financial crisis. This explains the co-movement between the size of central bank balance sheets and public debt levels in the past century. The biggest of these crises, in terms of the impact on central bank balance sheets, were World War II and the global financial crisis. We show that large balance sheet expansions have on average taken a long time to unwind. Central banks have rarely reduced the size of their balance sheets in nominal terms. Reductions are predominantly achieved relative to output by holding nominal positions stable for long periods. On the basis of the historical evidence presented here, there are good reasons to expect the contraction of central bank balance sheets in our time to be slow and to take place relative to GDP rather than nominally. Relative to the size of the financial sector, moreover, central bank balance sheets had shrunk dramatically in the three decades preceding the global financial crisis. By that yardstick, their recent expansion partly marks a return to earlier levels. Some of the recent increase could therefore prove to be permanent if the financial sector maintains permanently higher liquidity ratios. The link between central bank balance sheet growth and inflation has loosened considerably in most advanced economies since 1980 and the inflation risks from the recent balance sheet expansion appear limited in the near term. However, we also note that large-scale purchases of government bonds have implications for public finance, even when debt management is not the primary objective of the purchases, because depressing bond yields reduces government debt service costs, especially when the public debt is relatively high. Fiscal considerations may well be adduced as another reason for proceeding cautiously with balance sheet reduction. History suggests that the threat to long run price stability is a real if slow-acting one when fiscal deficits persist and central bank independence is compromised. 뀀ഀȠ뀀ഀȠ뀀ഀȠ뀀ഀȠ뀀ഀȠ뀀ഀȠ뀀ഀȠ뀀ഀȠ뀀ഀȠ