Bank Balance Sheets Research Articles

Central bank balance sheets under foreign exchange accumulation: insights from endogenous money theory and monetary policy implementation

Abstract This article proposes to draw on the recent experiences of many central banks of advanced economies and the evolution of their operational frameworks in the new context of increased domestic liquidity when analyzing the operations of central banks that engage in exchange rate management and increase their official foreign reserves as a result. It argues that the theoretical literature on endogenous money set within the context of an open economy with an exchange rate objective needs to be amended to account for such developments, as it would be entirely possible for a central bank that accumulates substantial foreign reserves to adopt a floor system and thus maintain a near-perfect control over its policy interest rate without the need for any compensating measure. On the grounds of the reverse causation argument, establishing a direct link between the foreign reserves and the monetary base should not entail any quantitative effect on other economic variables.

Unemployment Insurance and Macro-Financial (In)Stability

We identify and study two mechanisms that can overturn the stabilizing effects of unemployment insurance (UI) policies. First, households in economies with more generous UI reduce their precautionary savings and increase their mortgage debt. Second, the share of mortgages, especially those with higher loan-to-income ratios, increases on bank balance sheets. As a result, both bank and household balance sheets become more vulnerable to adverse shocks, which deepens recessions. We demonstrate the importance of these channels by employing a quantitative heterogeneous-agent general equilibrium model and by providing county-level empirical evidence from the U.S. housing and mortgage markets.

Britain's Liability-Driven Investment Episode Was a Canary No One Elsewhere Bothered to Think About

Britain's liability-driven investment crisis in fall 2022 had lessons for other major financial centers that, as evidenced by the US and Swiss banking crises only a few months later, were largely ignored. They are still relevant. In this article, I first discuss what drove the British crisis before identifying lessons for the microregulation of pension funds; for financial stability policy on shadow banking and beyond; for central banking balance sheet regimes, including lending of last resort and market making of last resort; and for monetary policy when fiscal policy makers sit on their hands.

A COMPARATIVE STUDY OF ARYAVART BANK AND BARODA U.P. BANK

Aryavart Bank (AB) and Baroda U.P. Bank (BUPB) both are regional rural bank operating in Uttar Pradesh (UP). AB was incorporated on 1st April 2019 and BUPB on 1st April 2020 under the provision of the RRBs Act,1976. AB spreads in 26 districts while BUPB in 31 districts of UP. Both want to develop the rural UP in better way through banking facilities. Both are shaping their commitments. It is proven in Programmes, Balance Sheets, and Annual Reports of banks. Both have to nurture much more according to potential of rural Uttar Pradesh.

Sovereign risk and intangible investment

This paper measures the output and TFP losses from sovereign risk, considering firm-level intangible investment. Using Italian firm-level data, we show that firms reallocated from intangible assets to tangible assets during the 2011–2012 Italian sovereign debt crisis. This asset reallocation is more pronounced among small firms and high-leverage firms. This reallocation affects aggregate output and TFP. To explain the reallocation pattern and quantify the output and TFP losses, we build a sovereign default model incorporating firm intangible investment. In our model, sovereign risk deteriorates bank balance sheets, disrupting banks’ ability to finance firms. Firms with greater external financing needs are more exposed to sovereign risk. Facing tightening financial constraints, firms shift their resources towards tangibles because they can be used as collateral. We find that elevated sovereign risk explains 45% of the observed output losses and 31% of the TFP losses in Italy from 2011 to 2016.

Brazilian banks risk-taking and systemic risk

This study analyzes the marginal contribution of Brazilian banks to the systemic risk. The objective is to identify whether banks that share common characteristics similarly contribute to systemic financial shocks. First, the risk assumed by a sample of listed banks is measured from the accounting, market, and regulatory perspectives. Sample banks were segregated using an unsupervised clustering model. The results were compared with the methodology currently used by the Central Bank of Brazil to segment the banking institutions. Finally, we evaluate the banking groups’ marginal contribution to systemic financial risk using ΔCoVaR. These results suggest that institutions that share similar characteristics in relation to their risk profiles behave similarly during times of greater market stress. Notably, size, geographic diversification, and liquidity were common attributes among banks contributing significantly to systemic risk during financial crises. This study advances the field of banking finance by introducing an analytical framework that goes beyond the traditional focus on bank balance sheet size, aligning with international standards for evaluating the systemic importance of financial institutions.

Central bank balance sheet, liquidity and autonomous factors

For monetary policy implementation purposes, it is important to forecast demand of liquidity in the market in order to ensure market equilibrium that is close to the monetary policy target by injecting or withdrawing liquidity from the market. One of the main reasons of changes in liquidity conditions is autonomous factors, which are reflected in central bank balance sheet. There are interconnections between the changes in these factors, the exploration of which can enhance the effectiveness of liquidity demand forecasts.

Banking Crises Under a Central Bank Digital Currency (CBDC)

Abstract One of the main concerns associated with central bank digital currencies (CBDC) is the disintermediating effect on the banking sector in general, and the risk of bank runs in times of crisis in particular. This paper examines the implications of an interest-bearing CBDC on banking crises in a dynamic bank run model with a financial accelerator. The analysis distinguishes between bank failures due to illiquidity and due to insolvency. In a numerical exercise, CBDC leads to a reduction in the net worth of banks in normal times but mitigates the risk of a bank run in times of crisis. The financial stability implications also depend on how CBDC is accounted for on the asset side of the central bank balance sheet: if CBDC issuance is complemented by asset purchases, it delays the onset of both types of bank failures to larger shocks. In contrast, if CBDC issuance is complemented by loans to banks, it substantially impedes failures due to illiquidity, but only marginally affects bank failures due to insolvency.

Quick Introduction into the General Framework of Portfolio Theory

This survey offers a succinct overview of the General Framework of Portfolio Theory (GFPT), consolidating Markowitz portfolio theory, the growth optimal portfolio theory, and the theory of risk measures. Central to this framework is the use of convex analysis and duality, reflecting the concavity of reward functions and the convexity of risk measures due to diversification effects. Furthermore, practical considerations, such as managing multiple risks in bank balance sheets, have expanded the theory to encompass vector risk analysis. The goal of this survey is to provide readers with a concise tour of the GFPT’s key concepts and practical applications without delving into excessive technicalities. Instead, it directs interested readers to the comprehensive monograph of Maier-Paape, Júdice, Platen, and Zhu (2023) for detailed proofs and further exploration.

Exchange rate dynamics and the central bank's balance sheet

Are nominal exchange rate variations linked to the central bank's balance sheet, in particular to remunerated domestic liabilities? We use two metrics of implied exchange rates based on central bank balance sheet data: one is a traditional metric that includes the monetary base, and the other adds remunerated domestic liabilities. We first estimate a VAR model to investigate the endogenous interactions between central bank balance sheet components for a set of seven Latin American countries for the 2006:01-2019:12 period. Then, we use a pairwise cointegration framework to compare these two metrics of implied exchange rate with the spot (observed) exchange rate. We find that the implied exchange rates and the spot exchange rate are cointegrated for most of the set of Latin American countries. We also find that for a subset of our sample, the spot exchange rate adjusts to the metric that adds remunerated domestic liabilities. We conclude that remunerated domestic liabilities matter for understanding exchange rate dynamics, and explore a simple theoretical setup to better understand the mechanism.

Quantities and Covered-Interest Parity

Studies of intermediated arbitrage argue that bank balance sheets are an important consideration, yet little evidence exists on banks’ positioning in this context. Using confidential supervisory data (covering $25 trillion in daily notional exposures) we examine banks’ positions in connection with covered-interest parity (CIP) deviations. Exploiting cross-sectional variation in CIP deviations that have largely challenged existing theories, we document three novel forces that drive bases: 1) foreign safe asset scarcity, 2) market power and segmentation of banks specializing in different markets, and 3) concentration of demand. Our findings shed empirical light on the interplay of frictions influencing banks’ provision of dollar funding.

Benefits for the Greek economy from resolving bad loans and zombie firms

We examine the type and magnitude of negative externalities stemming from “zombie” firms in the Greek economy, focusing on investment, employment and productivity. For this purpose, we use a panel dataset of Greek firms broken down by size and sector of economic activity for the period 2002-2021. A descriptive analysis reveals a high positive correlation in the trends between non-performing business loans and the number of zombie companies in the Greek economy over the last twenty years. Through quantitative analysis, significant direct and indirect effects emerge from the degree of density of zombie firms at the total economy and sectoral levels. First, healthy firms outperform zombie firms in terms of investment growth, employment growth and productivity levels. Second, a high concentration of capital in zombie firms negatively affects the rate of investment growth of healthy firms in specific sectors of economic activity. Third, a high concentration of capital in zombie firms forces healthy firms to increase their overall productivity in order to survive. Fourth, a high concentration of capital in zombie firms prevents the reallocation of capital to more productive investments across firms and sectors of activity. Finally, younger and larger companies generally perform better in terms of investment and employment growth, and productivity levels. Overall, a faster resolution of zombie firms and non-performing corporate loans, both on and off bank balance sheets, allows a more efficient allocation of resources and can boost investment, employment and growth rates in the Greek economy in the medium to long term.

Risk contagion in interbank lending networks: A multi-agent-based modeling and simulation perspective

The interbank lending network, while facilitating transactions, poses risk contagion in the banking system. To address challenges in existing research, this paper models the interbank lending network using a multi-agent approach and generates a dynamic network through a bidirectional matching mechanism(BiMM). Additionally, We divide banks into three categories based on realistic bank balance sheet data. Given the fact that banks of different categories exhibit different degrees of contagion, we propose the weighted DebtRank (W-DebtRank). Then, comprehensive simulation analysis is conducted on the risk contagion of heterogeneous banks in the dynamic network using W-DebtRank. The proposed method addresses four issues: the heterogeneity of banks, the dynamic nature of networks, the practicality of lending strategies, and the comprehensiveness of risk analysis. The model is validated using the SRISK metric and the Monte Carlo-based SYMBOL simulation model. Through multiple perspectives in simulation experiments, the risk contagion process among banks is deeply investigated in our paper.

Balance Sheet Analysis with the Aim of Improving Financial Reporting: A Case Study of DCCB Raipur, India

This paper presents in the form of a case study the process of analysis of the balance sheet and income statement of the District Central Cooperative Bank (DCCB) Raipur. The research presented in the paper is based on the analysis of the official set of basic financial reports, as well as other publicly available data on the DCCB Raipur. As the time component is very important for research of this type, that reports were observed in the paper during only current and the previous years, ie for the period 2021-22. The aim of the research is to assess the financial result and financial position of a given company by examining the structure and dynamics of total income and the distribution of total income, profitability and opportunities to improve the financial position. The results of the research indicate that the bank's strong financial position and profitability are attributed to its efficient operations and strategic financial management, as evidenced by the substantial growth in net income. The bank has effectively managed its assets and liabilities to achieve strong financial health. This positive trend indicates the bank's ability to generate sustainable profits and maintain its competitive edge in the market.

Liquidity, Liquidity Everywhere, Not a Drop to Use: Why Flooding Banks with Central Bank Reserves May Not Expand Liquidity

ABSTRACTCentral bank balance sheet expansion, through actions like quantitative easing, is run through commercial banks. While this increases liquid central bank reserves held on commercial bank balance sheets, demandable uninsured deposits issued to finance the reserves also increase. Subsequent shrinkage in the central bank balance sheet may entail shrinkage in bank‐held reserves without a commensurate reduction in deposit claims. Furthermore, during episodes of liquidity stress, when many claims on liquidity are called, surplus banks may hoard reserves. As a result, central bank balance sheet expansion may create less additional liquidity than typically thought, and indeed, may increase the probability and severity of episodes of liquidity stress.

The Central Bank Balance Sheet As a Policy Tool: Lessons From the Bank of England's Experience

The Central Bank Balance Sheet As a Policy Tool: Lessons From the Bank of England's Experience

Quantitative easing and bank risk-taking: Evidence from the federal reserve's large-scale asset purchases

This study uses individual bank balance sheet data from the United States to investigate the effects of the Federal Reserve's large-scale asset purchases, which are commonly known as quantitative easing (QE), on bank lending standards and risk-taking behaviour. Covering all three phases of QE (QE1, QE2 and QE3), we find a consistent and significant reduction in bank lending standards during each phase, indicating that QE incentivised banks to extend relatively riskier loans while relaxing lending standards. We also compare the effects of QE with those of conventional monetary policy instruments, such as short-term interest rates. Despite short-term interest rates reaching the zero lower bound and continuing to influence bank risk-taking behaviour, our analysis suggests that the impact remains relatively stable over time. Consequently, we cautiously assert that QE is a more potent tool for stimulating economic activity, effectively substituting for the role of the monetary policy rate during periods when traditional monetary policy options are constrained.

The Unforeseen Results of Unconventional Monetary Dominance

This empirical study investigates the implications of the substantial size of central banks’ balance sheets and the potential risks of their gradual normalization. Following the global financial crisis of 2008, central banks worldwide implemented unprecedented monetary stimulus measures, including large-scale asset purchases and unconventional policy tools like quantitative easing (QE). As a result, central bank balance sheets expanded significantly, reaching historically unprecedented levels in size and composition. While these measures played a crucial role in stabilizing financial markets and supporting economic recovery, concerns have arisen regarding the eventual reduction of these balance sheets and the possibility of disruptive market dynamics. This research examines the challenges and risks of normalizing central bank balance sheets. Furthermore, it explores the potential occurrence of “hard landing” scenarios, where sudden reductions in balance sheets could trigger financial market turmoil and economic downturns. By analyzing historical precedents and theoretical frameworks, this paper offers valuable insights into the intricate relationship between central bank balance sheets and the dynamics of financial markets. It provides policymakers and market participants with valuable perspectives on navigating the path toward monetary policy normalization.

The reserve supply channel of unconventional monetary policy

We find that central bank reserves injected by QE crowd out bank lending. We estimate a structural model with cross-sectional instrumental variables for deposit and loan demand. Our results are determined by the elasticity of loan demand and the impact of reserve holdings on the cost of supplying loans. The reserves injected by QE raise loan rates by 7.4 basis points, and each dollar of reserves reduces bank lending by 7.7 cents. Our results imply that a large injection of central bank reserves has the unintended consequence of crowding out bank loans because of bank balance sheet costs.

Effects of Negative Interest Rates on Stability and Profitability of Commercial Banks

The article examines the impact of the European Central Bank's (ECB) negative interest rate policy (NIRP) on commercial banks in Europe. It traces the historical context of the policy back to the financial market and banking crises, which eroded trust among banks, leading to liquidity issues and economic downturns. To counteract this, the ECB introduced negative interest rates in 2014, aiming to stimulate the economy.The research question focuses on how NIRP affects banks' annual reports, particularly concerning total assets, credit and risk volumes, proprietary trading, profits, and stability. The hypothesis suggests that NIRP significantly increases risks in bank profitability and stability. Analysis spanning from 2014 to 2022 compares negative interest rate changes with bank balance sheet and profit/loss account developments.Economic theory predicts that negative interest rates decrease bank profits but increase lending activity. Statistical analysis confirms a correlation between NIRP and increased credit risk volume, as well as a shift from bonds to shares in proprietary trading. However, there is no statistical evidence linking NIRP with profit and profitability declines.In conclusion, while NIRP does lead to a significant increase in credit risk volume, it does not halt falling profits and profitability. Therefore, the hypothesis that NIRP increases risks for commercial banks' profitability and stability holds true, posing a threat to financial stability.