Size Of Balance Sheet Research Articles

Prices, debt and market structure in an agent-based model of the financial market

We develop an agent-based model in which heterogeneous and boundedly rational agents interact by trading a risky asset at an endogenously set price. Agents are endowed with balance sheets comprising the risky asset as well as cash on the asset side and equity capital as well as debt on the liabilities side. A number of findings emerge when simulating the model: we find that the empirically observable log-normal distribution of bank balance sheet size naturally emerges and that higher levels of leverage lead to a greater inequality among agents. Furthermore, greater leverage increases the frequency of bankruptcies and systemic events. Credit frictions, which we define as the stickiness of debt adjustments, are able to explain a key difference in the relation between leverage and assets observed for different bank types. Lowering credit frictions leads to an increasingly procyclical behavior of leverage, which is typical for investment banks. Nevertheless, the impact of credit frictions on the fragility of the model financial system is complex. Lower frictions do increase the stability of the system most of the time, while systemic events become more probable. In particular, we observe an increasing frequency of severe liquidity crises that can lead to the collapse of the entire model financial system.

Non-standard monetary policy of the ECB: Macroeconomic effects and exit strategy

In the initial phases of the global economic and financial crisis ECB reacted by lowering interest rates to a historic minimum. After the crash of Lehman Brothers and strengthening of financial tensions in the EU and later on the sovereign debt crisis in the euro zone, ECB was forced to search for resource in the non-standard monetary policy measures. The ECB non-standard monetary policy changed the structure and the balance sheet size, and through actions and undertaken measures in the crisis which is still ongoing, strives to conduct the policy of the anticipated long-term interest rate. This paper offers a review of the ECB non-standard policy measures applied and the manner in which monetary policy is spilling over on to the banking and the real sector, but also the effects of the balance sheet expansion on the effects of certain macroeconomic variables. VAR model shows that the effects of the ECB balance sheet expansion are having a positive impact on the macroeconomy effects, i.e. on the two variables, output and prices, and the economic growth. The long-term effects of the non-standard monetary policy implementation remain uncertain and bear the risk of resurrection of undesired financial shocks. The manner in which ECB can avoid the uncertainty of these policies, over a long-term, is to start with gradual 'narrowing down of the non-standard policy', e. to create prerequisite for an exit strategy.

Efficiency of the Czech Banking Sector Employing the DEA Window Analysis Approach

The aim of this paper is to apply the Data Envelopment Analysis (DEA) window analysis on the data of the Czech commercial banks and to examine the efficiency of the Czech banking sector during the period 2003–2012. The paper employed an extended DEA approach, specifically DEA window analysis for the efficiency assessment of commercial banks in the Czech Republic. It is based on panel data for the period from 2003 to 2012. Data Envelopment Analysis has become a popular approach in measuring the efficiency of banking industry. We use the DEA window analysis based on an input oriented model to measure banking efficiency. In the analysed period, the average efficiency under constant return to scale reached 70–78% and average efficiency under variable return to scale reached 84–89%. The most efficient bank was GE Money Bank and the lowest efficient bank was Československá obchodní banka. The group of large bank (Československá obchodní banka, Česka spořitelna and Komerční banka) was lower efficient than other banks in the banking industry. The reasons of the inefficiency of the group of large banks were the excess of deposits in balance sheet and inappropriate size of operation.

Bank business models, capital rules and structural separation policies

Purpose – The study examines the roles of capital rules, macro variables and bank business models in determining the safety of banks as measured by the “distance-to-default” (DTD) with the purpose of drawing implications for regulation of bank capital and business models. Design/methodology/approach – A panel regression study using pre- and post-crisis data for 108 US and European banks is used to explore the issue empirically. A new technique is also used to back out the amount of capital banks would have needed during the crisis to keep the “DTD” in the very safe zone. Findings – The simple leverage ratio has a strong relationship with “DTD”, while the Basel ratio does not. The most important business model features are derivatives and wholesale funding, which have a strong negative relationship with “DTD”. Trading and available-for-sale securities have a positive influence. Calculations show that it is not possible for any reasonable capital rule to compensate for the risks created by business model features encompassing large derivative-based activities. Bank separation policies are essential. Originality/value – The micro evidence-based analysis as an approach to bank regulation and business model requirements stands in contrast to the ad hoc way policy has been constructed before and after the crisis. The empirical evidence supports separation based on the balance sheet size of derivatives and a leverage ratio instead of the complex Basel risk-weighted capital approach. The current approaches to structural separation are criticised constructively, and some evidence-based suggestions for improving bank business models to reduce systemic risk are made.

Sources and Sinks of M1 Money in a Four Sector Model of the U.S. Financial System

This paper defines two accounting identities in the Flow of Funds Accounts (FOFA) that specify the level of transaction accounts (demand deposits) in the aggregate Bank balance sheet. The identities are called the Bank generator and the Fed generator (of transaction accounts in M1 money supply). The primary assumption underlying the development of the Fed generator identity is that only the central bank (Fed) can inject transaction accounts into the aggregate Bank which are not injected by the identity defining the Bank generator. A model is introduced to identify the sources and sinks of the M1 money supply in a four sector economy with Treasury, Fed, Banks, and Nonbanks. The model defines a set of abstract symbols linked to flow of funds data which reveal the basic structure of the U.S. financial system. Banks and Fed have the power to create and cancel transaction accounts as a component of the M1 money supply. Nonbanks do not have the power to create or cancel transaction accounts except during specific credit deals made with Fed and Banks. When Fed controls the interbank fed funds lending rate the Treasury must operate like an M1 user to avoid interfering with credit formation of Fed and Banks. Nonbanks can increase the M1 money supply by making withdrawals of currency which are serviced by Fed. Currency withdrawals by Nonbanks do not reduce the aggregate Bank balance sheet when Fed services the currency drain. When Nonbanks change levels of investment in money market mutual funds (MMMFs) this does not create or cancel transaction accounts in the M1 money supply. Nor do changes in the MMMF levels alter the size of the aggregate Bank balance sheet. Instead any change in the levels of MMMF investment simply force the aggregate Bank to adjust its mix of liabilities between deposits and money market instruments.

A critical evaluation of the sensitivity of a bank’s balance sheet to change when optimizing for capital requirements under Basel

The management of a modern bank is a complex task that is becoming increasingly more so due to the inherent complexities of its business and of an ever changing modern financial environment. Recent turmoil in the global financial environment necessitated new regulation, some of which may have a material impact on the structure and management of a bank. The establishment of higher minimum capital buffers for banks to counter the possibility of failing will have a material influence on profitability. Apart from making investment in banks shares less attractive, the regulation may turn out to be bad for global economic growth. In view of the above, the objective of this research was to single out and demonstrate the effect of the minimum capital requirements on the profitability, composition and size of a bank balance sheet. The Simplex algorithm was used to set up a goal programming problem formulation in Excel. Different capital minima was entered in the model and then optimised to observe the effect on the bank balance sheet size, composition and profitability. The research clearly demonstrated that at a capital reserve requirements of 5%, the resulting balance sheet is 190% of the original balance sheet size and at the 25% capital reserve requirement the new balance sheet is merely 57% of the original size. Increasing the reserve requirement from say 5% to 9,5% gives rise to approximately 40% change in balance sheet size, all other things being constant. As the capital reserve requirement is increased from 5% of RWA to 14%, the profit falls from over R60 billion to just over R10 billion. It is clear from the research that banks are very sensitive to the new regulation. It also underlines how difficult it may be for banks to maintain profitability. The changes needed to maintain the profitability, may not be possible/feasible in the South African financial environment. The time is possibly right now for banks to start improving efficiency and developing new innovative low risk high return services and product lines.

The Effect of Liquidity and Company Size on Tax Avoidance in the Wholesale and Retail Trade Sub-Sector on the IDX

The contribution of every taxpayer, both corporate and individual, to the state must submit an annual tax return. The higher the incoming income, the higher the amount of tax that must be paid by each taxpayer. It can lead to tax avoidance. Tax avoidance is an attempt to reduce the legal tax liability, causing many people and even businesses to engage in tax avoidance. The purpose of this study is to determine the effect of company liquidity and company size towards tax avoidance. Sample of this study were 54 companies in the wholesale and retail trading sub-sector of the Indonesian stock market for the period 2018 - 2020. Data analysis techniques used was multiple linear regression tests. The test results and research findings indicate that the liquidity variable has no effect on tax avoidance, which is caused by the company's ability to pay liabilitie. The company size variable has positive effect towards tax avoidance, because the company's balance sheet size as measured by Ln total assets affects the occurrence of tax avaidance.

HETEROGENEITY, CORRELATIONS AND FINANCIAL CONTAGION

We consider a model of contagion in financial networks recently introduced in Gai, P. and Kapadia, S. [Contagion in financial networks, Proc. R. Soc. A466(2120) (2010) 2401–2423], and we characterize the effect of a few features empirically observed in real networks on the stability of the system. Notably, we consider the effect of heterogeneous degree distributions, heterogeneous balance sheet size and degree correlations between banks. We study the probability of contagion conditional on the failure of a random bank, the most connected bank and the biggest bank, and we consider the effect of targeted policies aimed at increasing the capital requirements of a few banks with high connectivity or big balance sheets. Networks with heterogeneous degree distributions are shown to be more resilient to contagion triggered by the failure of a random bank, but more fragile with respect to contagion triggered by the failure of highly connected nodes. A power law distribution of balance sheet size is shown to induce an inefficient diversification that makes the system more prone to contagion events. A targeted policy aimed at reinforcing the stability of the biggest banks is shown to improve the stability of the system in the regime of high average degree. Finally, disassortative mixing, such as that observed in real banking networks, is shown to enhance the stability of the system.

Interest Rate Risk in the Banking Book (IRRBB) Levels for Indian Banks

A cross section of 18 Indian banks are surveyed to assess the interest rate risk levels reported by them in their Basel II Pillar III disclosures. The banks report interest rate risk levels ranging from less than 1% to 9%. A regression analysis of interest rate risk levels against ownership, growth rankings, balance sheet size and overall rankings revealed that higher the ranking on growth, lower the interest rate risk.

Prices, Debt and Market Structure in an Agent-Based Model of the Financial Market

We develop an agent-based model in which heterogenous and boundedly rational agents interact by trading a risky asset at an endogenously set price. Agents are endowed with balance sheets comprising the risky asset as well as cash on the asset side and equity capital as well as debt on the liabilities side. The introduction of balance sheets and debt into an agent-based setup is relatively new to the literature and allows us to tackle several research questions that are mostly inaccessible following conventional methodology, especially representative agent models. A number of findings emerge when simulating the model. We find that the empirically observable log-normal distribution of bank balance sheet size naturally emerges and that higher levels of leverage lead to a greater inequality among agents. When further analyzing the relationship between leverage and balance sheets, we observe that decreasing credit frictions result in an increasingly procyclical behavior of leverage, which is typical for investment banks. We show how decreasing credit frictions increase volatility but decrease the number of bankruptcies.

Heterogeneity, Correlations and Financial Contagion

We consider a model of contagion in financial networks recently introduced in the literature, and we characterize the effect of a few features empirically observed in real networks on the stability of the system. Notably, we consider the effect of heterogeneous degree distributions, heterogeneous balance sheet size and degree correlations between banks. We study the probability of contagion conditional on the failure of a random bank, the most connected bank and the biggest bank, and we consider the effect of targeted policies aimed at increasing the capital requirements of a few banks with high connectivity or big balance sheets. Networks with heterogeneous degree distributions are shown to be more resilient to contagion triggered by the failure of a random bank, but more fragile with respect to contagion triggered by the failure of highly connected nodes. A power law distribution of balance sheet size is shown to induce an inefficient diversification that makes the system more prone to contagion events. A targeted policy aimed at reinforcing the stability of the biggest banks is shown to improve the stability of the system in the regime of high average degree. Finally, disassortative mixing, such as that observed in real banking networks, is shown to enhance the stability of the system.

Network Structure and Systemic Risk in Banking Systems

We present a quantitative methodology for analyzing the potential for contagion and systemic risk in a network of interlinked financial institutions, using a metric for the systemic importance of institutions: the Contagion Index. We apply this methodology to a data set of mutual exposures and capital levels of financial institutions in Brazil in 2007 and 2008, and analyze the role of balance sheet size and network structure in each institution's contribution to systemic risk. Our results emphasize the contribution of heterogeneity in network structure and concentration of counterparty exposures to a given institution in explaining its systemic importance. These observations plead for capital requirements which depend on exposures, rather than aggregate balance sheet size, and which target systemically important institutions.

Large-Scale Asset Purchases by the Federal Reserve: Did They Work?

1. INTRODUCTION In December 2008, the Federal Open Market Committee (FOMC) lowered the target for the federal funds rate to a range of 0 to 25 basis points. With its traditional policy instrument set as low as possible, the Federal Reserve faced the challenge of how to further ease the stance of monetary policy as the economic outlook deteriorated. The Federal Reserve responded in part by purchasing substantial quantities of assets with medium and long maturities in an effort to drive down private borrowing rates, particularly at longer maturities. These large-scale asset purchases (LSAPs) have greatly increased the size of the Federal Reserve's balance sheet, and the additional assets may remain in place for years to come. To be sure, the Federal Reserve undertook other important initiatives to combat the financial crisis. It launched a number of facilities to relieve financial strains at specific types of institutions and in specific In addition, in an attempt to even more stimulus, it used public communications about its policy intentions to lower market expectations of the federal funds rate in the future. All of these strategies were designed to ease financial conditions and to support a sustained economic recovery. Over time, though, the credit extended by the liquidity facilities has declined, and the dominant component of the Federal Reserve's balance sheet has become the assets accumulated through the LSAP programs. The decision to purchase large volumes of assets through March 2010 came in two steps. In November 2008, the Federal Reserve announced purchases of housing agency debt and agency mortgage-backed securities (MBS) of up to $600 billion. In March 2009, the FOMC decided to substantially expand its purchases of agency-related securities and to purchase longer term Treasury securities as well, with total asset purchases of up to $1.75 trillion, an amount twice the magnitude of total Federal Reserve assets prior to 2008. (1) The FOMC stated that the increased purchases of agency-related securities should provide greater support to mortgage lending and housing markets and that purchases of longer term Treasury securities should help improve conditions in private credit markets. In this paper, we review the Federal Reserve's experience with implementing the LSAPs through March 2010 and describe some of the challenges raised by such large purchases in a relatively short time. In addition, we discuss the economic mechanisms through which LSAPs may be expected to stimulate the economy and present some empirical evidence on those effects. In particular, LSAPs reduce the supply to the private sector of assets with long duration (and, in the case of mortgage securities, highly negative convexity) and increase the supply of assets (bank reserves) with zero duration and convexity. (2) To the extent that private investors do not view these assets as perfect substitutes, the reduction in supply of the riskier longer term assets reduces the risk premiums required to hold them and thus reduces their yields. We assess the extent to which LSAPs had the desired effects on market interest rates using two different approaches and find that the purchases resulted in economically meaningful and long-lasting reductions in longer term interest rates on a range of securities, including securities that were not included in the purchase programs. We show that these reductions in interest rates primarily reflect lower risk premiums rather than lower expectations of future short-term interest rates. (3) We conclude with a discussion of issues raised by these policies and potential lessons for implementing monetary policy at the zero bound in the future. 2. HOW LSAPS AFFECT THE ECONOMY The primary channel through which LSAPs appear to work is by affecting the risk premium on the asset being purchased. By purchasing a particular asset, a central bank reduces the amount of the security that the private sector holds, displacing some investors and reducing the holdings of others, while simultaneously increasing the amount of short-term, risk-free bank reserves held by the private sector. …

Leverage, balance-sheet size and wholesale funding

Some evidence points to the procyclicality of leverage among financial institutions leading to aggregate volatility. This procyclicality occurs when financial institutions finance their assets with non-equity funding (i.e., debt financed asset expansions). Wholesale funding is an important source of market-based funding that allows some institutions to quickly adjust their leverage.

Financial Intermediaries and Monetary Economics

We reconsider the role of financial intermediaries in monetary economics, and explore the hypothesis that the financial intermediary sector is the engine that drives the financial cycle through fluctuations in the price of risk. In this framework, balance sheet quantities emerge as a key indicator of risk appetite and, hence, for the risk-taking channel of monetary policy. We document evidence that balance sheets of financial intermediaries provide a window on the transmission of monetary policy through capital market conditions. Short-term interest rates are found to be important in influencing the size of financial intermediary balance sheets. Our findings suggest that the traditional focus on the money stock for the conduct of monetary policy may have more modern counterparts, and suggest the importance of tracking balance sheet quantities.

Interbank Tiering and Money Center Banks

This paper provides evidence that interbank markets are tiered rather than flat, in the sense that most banks do not lend to each other directly but through money center banks acting as intermediaries. We capture the concept of tiering by developing a core-periphery model, and devise a procedure for fitting the model to real-world networks. Using Bundesbank data on bilateral interbank exposures among 1800 banks, we find strong evidence of tiering in the German banking system. Moreover, bankspecific features, such as balance sheet size, predict how banks position themselves in the interbank market. This link provides a promising avenue for understanding the formation of financial networks.

W(h)ither the Fed's Balance Sheet?

The Federal Reserve balance sheet's size and composition have changed dramatically since September 2008. Federal Reserve policymakers have expressed their support for eventually shrinking the Fed's balance sheet and returning the composition of its securities portfolio to include only U.S. Treasury issues. Through the careful study of public Federal Open Market Committee documents, this Economic Commentary concisely explains some of the FOMC's decisions concerning an appropriate sequence of policy actions.

Politiques monétaires : panser l'avenir

Since the beginning of the financial turmoil, central banks have been are on the front line. From august 2007, central banks went to resort to unconventional measures. Financial stress has been dampened but the interest rates spread between interbank rates and monetary policy rates have not all recovered their precrisis levels. Now, central banks have to deal with the phasing-out of the non standard operational measures so that liquidity management is anew designed to make the “signaled” interest rate effective. Some of the unconventional measures have already come to an end and the size of balance sheets may progressively be reduced. The first increases in the interest rates would be effective at the end of 2010. Except for the Japan, monetary policy interest rates would be 50 basis points higher in 2011. JEL Classification: E2.

L'art du central banking de la BCE et le principe de séparation

Cet article examine l’art du central banking de la BCE en reprenant la distinction proposée par Goodfriend [2009] entre les trois politiques qui sont du ressort d’une banque centrale : la politique monétaire qui consiste à faire varier la taille de son bilan ; la politique du crédit qui consiste à en modifier la structure et la politique de taux d’intérêt qui consiste à modifier les taux sur la facilité de prêt marginal et sur la facilité de dépôt. La « littérature » théorique souligne l’existence d’un principe de séparation entre la première, orientée vers la stabilité monétaire, et les deux autres politiques, orientées vers la stabilité financière identifiée au bon fonctionnement du marché monétaire interbancaire ; elle montre en particulier qu’une banque centrale non seulement a la possibilité mais doit s’efforcer de séparer la conduite de sa politique monétaire, qui doit être fondée sur la recherche de la stabilité des prix à moyen et long terme, de sa politique du crédit, qui obéit à des impératifs de court terme et consiste à approvisionner le système bancaire en liquidité en cas de chocs transitoires sur la demande de monnaie. Le principe de séparation, qui a guidé l’action de la BCE durant la première phase de la crise, est devenu de plus en plus difficile à maintenir quand les taux d’intérêt se sont rapprochés de zéro. Les mesures non conventionnelles adoptées par la BCE ont en effet créé une interférence entre sa politique monétaire, sa politique du crédit et sa politique de taux d’intérêt.

Size and Composition of the Central Bank Balance Sheet: Revisiting Japan's Experience of the Quantitative Easing Policy

This paper re-examines Japan’s experience of the quantitative easing policy in light of the policy responses against the current financial and economic crisis. Central banks use various unconventional measures in the range of financial assets being purchased and in the scale of such purchases. As the scope of such unconventional measures expands, it is often emphasized that the U.S. Federal Reserve policy reactions focus more on the asset side of its balance sheet, the so-called credit easing. By contrast, the Bank of Japan’s quantitative easing policy from 2001 to 2006 set a target for the current account balances, the liability side of its balance sheet. It is crucial to understand that central banks combine the two elements of their balance sheets, size and composition, to enhance the overall effects of unconventional policy measures, given constraints on policy implementation.