Commercial Bank Balance Sheets Research Articles

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.

Imbalances in the Capital of Credit Institutions as a Source of Instability in the Economy and in the Market of Loans Issued to Subjects of the Real Sector of the Economy

In the present paper, the study of imbalances in the capital structure of some Russian banks is carried out. The very imbalances in the structure of commercial banks have a significant impact on the dynamics of the entire banking and loan market in the country. And in particular, the dynamics of the development of the agricultural sector. The study of the uneven structure of the balance sheets of commercial banks allowed us to draw conclusions. First, the uneven balance of the bank can be expressed both in a positive and negative plane, depending on the size of the capital imbalance, it can be concluded that the size of the imbalance is naturally dependent and the effect of influence on the dynamics of the formation of reserves for the loan portfolio. Second, analysis of various operations of commercial banks, in particular the analysis of banking operations, transactions of a credit institution and other transactions allows us to divide the services of the Bank for various type of clients from significant to insignificant to have an impact on possible alleged imbalance in the Bank, which can affect the imbalance in the lending industry for the real sector of the economy, particularly the imbalances in lending to agribusiness. The cumulative growth of these imbalances in several banks can lead to an unstable situation in the loan market. The fight against possible imbalances in the capital of banks can lead to an increase in the stability of the loan market and the stability of the entire economic system as a whole. This will stabilize the market of loans to the real sector of the economy and the market of loans issued within the framework of the agro-industrial complex.

Central Bank Money: Liability, Asset, or Equity of the Nation?

Based on legal arguments, we advocate a conceptual and normative shift in our understanding of the economic character of central bank money (CBM). The widespread treatment of CBM as a central bank liability goes back to the gold standard, and uses analogies with commercial bank balance sheets. However, CBM is sui generis and legally not comparable to commercial bank money. Furthermore, in modern economies, CBM holders cannot demand repayment of CBM in anything other than CBM. CBM is not an asset of central banks either, and it is not central bank shareholder equity because it does not confer the same ownership rights as regular shareholder equity. Based on comparisons across a number of legal characteristics of financial instruments, we suggest that an appropriate characterization of CBM is as ‘social equity’ that confers rights of participation in the economy’s payment system and thereby its economy. This interpretation is important for macroeconomic policy in light of quantitative easing and potential future issuance of central bank digital currency (CBDC). It suggests that in robust economies with credible monetary institutions, and where demand for CBM is sufficiently and sustainably high, large-scale issuance such as under CBDC is not inflationary, and it does not weaken public sector finances.

Optimization of multi-objective commercial bank balance sheet management model: A parametric T-set approach

In this article, we consider optimisation of multi-objective model with fuzzy coefficients in imprecise environment. In 2016, we introduced T-set to supersede fuzzy set for representing impreciseness. It followed our observation that some constraints of existing classical fuzzy optimisation method compel membership values of fuzzy objective functions and constraints to fall in range between zero and one. So we cannot always attain most preferable Pareto optimal solution to it. Again existing constraints in this method sometimes show models as infeasible. Here we introduce parametric T-set. Next we consider multi-objective optimisation model with fuzzy cost coefficients and present general algorithm to arrive at parametric Pareto optimal solution to it. In numerical application, we illustrate usefulness of proposed algorithm by considering commercial bank balance sheet management model with fuzzy cost coefficients in parametric T-environment. Also we perform sensitivity analysis of parameters and present key managerial insights. Finally we draw conclusions.

Optimisation of multi-objective commercial bank balance sheet management model: a parametric T-set approach

Optimisation of multi-objective commercial bank balance sheet management model: a parametric T-set approach

The Swiss Sovereign Money Initiative

Abstract On 10 June 2018, Switzerland voted against a constitutional amendment to introduce a system of sovereign money or Vollgeld. The proposal foresaw that all money be created by the central bank and that commercial banks be banned from creating demand deposits. Demand deposits would have been required to be held in off-balance sheet accounts at commercial banks. We discuss the specific features of this proposal and compare them to its historical predecessor, the Chicago plan. We argue that the Swiss initiative would not have tangibly enhanced financial, monetary, and economic stability. Specifically, if implemented earlier, it would not have addressed the root causes of the Global Financial Crisis and would have been ineffective in changing its course and its consequences for Switzerland. Though the Vollgeld proposal would have turned commercial bank into central bank money, close-money substitutes would likely have remained on the liability side of commercial bank balance sheets. Vollgeld would also unlikely have redeemed promises of ancillary effects such as a reduction in public debt, more sustainable economic growth, and less complex regulation. Forestalling and tackling financial imbalances requires limiting leverage and safeguarding liquidity buffers through bank-level and system-wide rules and regulation. Zusammenfassung Am 10. Juni 2018 lehnten drei Viertel der Schweizer Stimmberechtigten eine Verfassungsänderung ab, die ein Vollgeldsystem in der Schweiz eingeführt hätte. Der Vorschlag hätte der Notenbank das alleinige Recht zur Geldschöpfung gegeben und den Geschäftsbanken die Schaffung von Sichteinlagen verboten. Zahlungsverkehrskonten hätten von den Geschäftsbanken ausserhalb ihrer Bilanz geführt werden müssen. Wir diskutieren die Einzelheiten des Vorschlags und vergleichen sie mit dessen Vorgänger aus den 1930er Jahren, dem Chicago Plan. Wir argumentieren, dass sich die monetäre und wirtschaftliche Stabilität sowie die Finanzstabilität in der Schweiz durch die Annahme der Initiative nicht wesentlich verbessert hätten. Ein bestehendes Vollgeldsystem hätte nicht bei den Ursachen der Finanzkrise angesetzt und wäre unerheblich für ihren Verlauf und ihre Folgen für die Schweiz gewesen. Obwohl mit Vollgeld Sichteinlagen bei Geschäftsbanken in Zentralbankgeld umgewandelt worden wären, hätten geldnahe Einlagen auf der Passivseite der Bilanz weiter existiert. Vollgeld hätte auch Versprechen wie eine Senkung der Staatsverschuldung, ein nachhaltigeres Wachstum und eine weniger komplexe Bankenregulierung nicht erfüllt. Die Verhinderung und Bewältigung von finanziellen Ungleichgewichten erfordert eine Regulierung sowohl auf Bankenebene als auch für das Finanzsystem insgesamt, um die gesamtwirtschaftliche Verschuldung zu beschränken und Liquiditätspuffer zu schaffen. JEL Classification: E42, E50

Do Foreign Currency Accounts Help Relax Credit Constraints? Evidence from Nepal

We analyse a novel bank‐level data set from Nepal, where domestic and foreign currency (FX) deposits are reported separately on the liability side of commercial bank balance sheets. In a panel regression analysis, we estimate semi‐accounting‐identities that allow us to identify the marginal sources of financing for various asset positions. We find that banks hedge against FX exposure via their sectoral lending composition: banks with a large share of FX deposits primarily lend to firms in traded‐goods sectors. Loans to non‐traded sectors are mostly financed by domestic deposits. While earlier studies have documented a positive impact of FX accounts on financial development, our analysis suggests that this does not need to imply that severely credit constrained sectors are the main beneficiaries of this process.

Central and Commercial Bank Balance Sheet Risk Before, During, and After the Global Financial Crisis

This paper presents an overview of exposures in the balance sheets of central banks, banks, and other depository institutions during the past decade, with emphasis on asset growth and currency composition. It exploits the IMF’s SRF-based monetary data to show: (i) there was a widely observed buildup of assets prior to the global financial crisis, but there has been no significant reduction in its wake; (ii) the foreign currency composition of the balance sheets of banks and other depository institutions remained remarkably constant in spite of the crisis, significant changes in the composition of balance sheets, and globalization, and does not seem to have been significantly influenced by the behavior of exchange rates; and (iii) exposure to households increased prior to the crisis, but this increased risk was offset by increased capitalization.

Central and Commercial Bank Balance Sheet Risk Before, During, and after the Global Financial Crisis

Central and Commercial Bank Balance Sheet Risk Before, During, and after the Global Financial Crisis

On Remittances, Foreign Currency Exposure and Credit Constraints: Evidence from Nepal

In this paper, we investigate whether foreign currency accounts help overcome credit constraints in developing countries. We analyze a novel bank-level data set from Nepal, where a steady inflow of remittances has contributed to foreign currency deposits on commercial bank balance sheets. In this data set we find that: (i) Banks hedge their FX exposure by investing in FX assets. (ii) Banks also hedge indirectly via their sectoral lending composition: Banks with a large share of FX deposits primarily lend to firms in traded-goods sectors. They lend only little to the non-traded sectors, as well as deprived sectors of the economy that have been targeted by various support programs. While the direct impact of FX accounts on relaxing credit constraints thus appears small, and biased towards specific sectors, there is also a substantial indirect effect via the additional creation of domestic deposits that benefits all sectors of the economy.

Are Banks Really Lazy? Evidence from Middle East and North Africa

We investigate whether low loan-to-deposit (LTD) ratios and high levels of reserve balances at the central bank (or holdings of government securities) are a reflection of policy-driven factors compared to commonly cited reasons of reluctance to lend or sometimes weak investment demand in uncertain environments. We examine changes to central bank (CB) balance sheet structures as well as commercial banks’ flow of funds over the period 2007–2012. First, Middle East and North Africa (MENA) CBs play an active role in view of their size that is very large with respect to their economies compared to CBs in advanced economies. Second, under exchange rate targeting, most MENA CB balance sheets are asset-driven, holding foreign exchange (FX) reserves to support the exchange rate policy and resulting in lower loan-to-deposit (LTD) ratios in the case of unsterilized increases in FX. Third, CB policy decisions seem to be accompanied by an increase in commercial bank reserve money balances, with ensuing reduction in the LTD. Finally, if governments meet their financing needs from the banking system—whether from commercial banks or by monetary financing—commercial bank balance sheets will tend to expand, resulting in lower LTD ratios. Our analysis suggests that government and CB actions may also drive the demand for and supply of credit, which are traditionally attributed to the behavior of banks and non-financial corporates and households only. The findings offer a different interpretation of changes in CB and banks’ balance sheets, with direct implications for LTD, calling to exercise caution in recommending policy action which aim at propping up LTD to ‘appropriate’ levels in an effort to reinvigorate credit following a downturn.

Effects of Unofficial Euroisation in Serbia With Regards to the Inflation and Real GDP

The term euroisation or dollarization involves several different monetary systems that are very different from one another, but have a common feature of having a foreign currency widespread as a means of payment in the formal or informal transactions. Therefore,Serbiahas the highest index of unofficial euroisation in the region ofSouth Eastern Europe. The aforementioned index demonstrates clearly the high level of informal euroisation inSerbiain the balance sheets of commercial banks. The share of dinar (RSD) corporate loans inSerbiais modest, having 77% of the total loans to corporations inSerbiabeing either euro-indexed or credited directly in euros. During the financial crisis in 2008 and 2009 euroisation was not reduced, but quite the contrary, it was increased and has begun gaining momentum. Despite favourable conditions for dinar loans in terms of lower inflation rate, lower interest rates on dinar loans in such conditions, but also due to the reduction of RRs required (mandatory) reserves to dinar share of commercial banks’ balance sheet, the share of loans in dinars is not increased, but, on the contrary, the loan activity of commercial banks in Serbia is reduced. The current level of informal euroisation inSerbiarepresents a serious challenge in terms of active monetary policy, due to controlled exchange rate, lack of local funding, high foreign exchange risk and lack of hedging instruments in terms of foreign exchange risk mitigation, which are the limiting factors of an active monetary policy.

Impact of Managerial Factors on Commercial Bank Profitability: Empirical Evidence from Jordan

The objective of this paper is to determine the management controllable factors that determine bank’s profitability of the Jordanian commercial banks listed in Amman Stock of Exchange (ASE). For this, the bank-specific variables are derived from the income statements and the balance sheets of commercial banks published in ASE. Excluding Islamic banks, thirteen Jordanian commercial banks listed in ASE since 2000 were selected (91 observations) over the 2005-2011 intervals. This paper uses descriptive analysis(includes the mean, minimum, maximum, median and standard deviation), financial ratios analysis, Pearson correlation analysis ,regression analysis, analysis of variance (ANOVA) and the natural logarithm to implicate the results with the hypotheses. The factors taken into consideration are Profitability measured by ROA, measured by Cost efficiency CIR, measured by Liquidity LADST, measured by Credit Composition measured by NCTA, Credit Risk measured by PRCF, Capital adequacy measured by TETA and the Bank Size measured by SZE. The major outcome of this study is that the cost income ratio is the major endogenous factors under the control of management that determines the profitability of the commercial banks in Jordan. Other variables, such as LADST, NCTA, PRCF, TETA and SZE did not show any statistical effect on profitability.

Bank Capital Ratios and the Structure of Nonfinancial Industries

We exploit variation in commercial bank capital ratios across states to identify the impact of commercial bank balance sheet pressures manifested through changes in capital ratios on employment in the manufacturing sector. For industries dependent on external finance, we find that an increase in the capital ratio has no statistically significant effect on net firm creation, but has an economically significant impact on average firm size, as measured in the number of employees. Our findings indicate a lack of substitutes for bank funding both in the short and long run. This lack of substitutes implies a notable adverse impact of balance sheet pressures on employment in industries dependent on external sources of funding. Our results highlight the potential effects that bank balance sheet pressures, for example, from tightening capital adequacy standards, such as Basel III, may have on nonfinancial firm dynamics.

Bank Capital Ratios and the Structure of Nonfinancial Industries

We exploit variation in commercial bank capital ratios across states to identify the impact of commercial bank balance sheet pressures manifested through changes in capital ratios on employment in the manufacturing sector. For industries dependent on external finance, we find that an increase in the capital ratio has no statistically significant effect on net firm creation, but has an economically significant impact on average firm size, as measured in the number of employees. Our findings indicate a lack of substitutes for bank funding both in the short and long run. This lack of substitutes implies a notable adverse impact of balance sheet pressures on employment in industries dependent on external sources of funding. Our results highlight the potential effects that bank balance sheet pressures, for example, from tightening capital adequacy standards, such as Basel III, may have on nonfinancial firm dynamics.

Bank Capital Ratios and the Structure of Nonfinancial Industries

We exploit variation in commercial bank capital ratios across states to identify the impact of commercial bank balance sheet pressures manifested through changes in capital ratios on employment in the manufacturing sector. For industries dependent on external finance, we find that an increase in the capital ratio has no statistically significant effect on net firm creation, but has an economically significant impact on average firm size, as measured in the number of employees. Our findings indicate a lack of substitutes for bank funding both in the short and long run. This lack of substitutes implies a notable adverse impact of balance sheet pressures on employment in industries dependent on external sources of funding. Our results highlight the potential effects that bank balance sheet pressures, for example, from tightening capital adequacy standards, such as Basel III, may have on nonfinancial firm dynamics.

Liquidity, Bank Credit and Money

The current global financial crisis has seen both substantial credit impairment and pronounced market illiquidity, undermining bank balance sheets and creating a global credit contraction. One consequence has been a dramatic shift in monetary transmission. Central banks can no longer closely control market rates of interest and have reverted to quantitative approaches to monetary policy, with expansion of base and broad money aggregates. The weakness of aggregate demand has threatened to generate an accelerating fall of prices and output (deflation) and the inabilty to counter this threat using monetary policy alone has justified a masive global fiscal stimulus; but this is not a permanent solution, it is merely shifting the problem from bank balance sheets onto public sector balance sheets. Macromonetary models lag well behind these developments. The new 'Wicksellian' consensus on monetary operations has been overthrown. In the most challenging economic conditions for 70 years, the economic authorities are flying blind. As a step towards filling this gap, this paper proposes a simple baseline model for analysing the imapct of both central bank operations on commercial bank balance sheets, credit and the money supply. This is an extension of standard models of liquidity to a macro-monetary setting in which commercial bank money finances working capital, bridging the gap between the supply of labour and the production and consumption of output. In this set up monetary policy and the role of 'lender of last resort' are closely entwined, the central banks ability to control the money supply rests on the precautionary demand for reserves from commercial banks. Extensions of the model help elucidate the curent policies of quantitative easing, suggest limits on the ability of the central bank to act as lender of last resort and help elucidate the relationship between bank capitalisation and access to funding.

A CRISIS OF POLITICS, NOT ECONOMICS: COMPLEXITY, IGNORANCE, AND POLICY FAILURE

ABSTRACT The financial crisis was caused by the complex, constantly growing web of regulations designed to constrain and redirect modern capitalism. This complexity made investors, bankers, and perhaps regulators themselves ignorant of regulations promulgated across decades and in different “fields” of regulation. These regulations interacted with each other to foster the issuance and securitization of subprime mortgages; their rating as AA or AAA; and previously their concentration on the balance sheets (and off the balance sheets) of many commercial and investment banks. As a practical matter, it was impossible to predict the disastrous outcome of these interacting regulations. This fact calls into question the feasibility of the century‐old attempt to create a hybrid capitalism in which regulations are supposed to remedy economic problems as they arise.

Commercial Bank Balance Sheets Rebalanced

United States Treasury bill rates have declined to below 1 percent, and the spread between those rates and the federal funds rate has widened. Both effects are evidence of financial institutions’ “flight to safety” since the subprime crisis hit financial markets in August 2007. By bidding away very liquid Treasuries from households and other firms, financial institutions have put upward pressure on the prices—and thus downward pressure on the yields—of these short-term Treasuries. One anomalous aspect of this flight to safety is that, unlike other financial institutions, depository institutions (commercial banks) have not been increasing their holdings of Treasuries over the past several months (see upper chart).1 Moreover, commercial bank holdings of Treasuries have not risen as a proportion of their aggregate balance sheet, which is shown by expressing these assets as a percentage of banks’ total (M2) deposit liabilities. Commercial banks on the whole have not flocked to U.S. government securities, in part, because new developments oblige them to move more of their off-balance-sheet activities onto their balance sheet; as a result, commercial banks have taken on non-government securities formerly held by other institutions. For example, Chairman Bernanke has noted that many banks initially served in underwriting or advisory roles for subprime mortgage arrangements overseen by other institutions: “As the problems with these facilities multiplied,” he observed, “banks came under increasing pressure to rescue the investment vehicles they sponsored... by taking the assets of the off-balance-sheet vehicles onto their own balance sheets.”2 In short, commercial banks have dramatically increased their holdings of “other” (non-Treasury) securities and in turn have had to reduce their holdings of Treasuries to make room for this accumulation (see lower chart). So, the increase in Treasury holdings in the financial system from August 2007 to March 2008 was predominantly due to purchases by non-depository U.S. financial institutions and foreign financial institutions. It remains to be seen what effect this rebalancing will have on commercial banks’ investment and lending policies in the longer term.

(Modeling Early Warning Signal for the Bank Vulnerability Using an Option-Based Approach)

Korean Abstract: 본고는 1995∼2001년 중 우리나라 일반은행의 주가지수 및 재무제표를 이용하여 옵션가격모형에 기초한 부도거리를 추정하였다. 추정된 부도거리와 은행의 수익성 및 건전도 지표와의 관계를 분석한 결과, 은행의 수익성이 증가하거나 자산이 증가할 경우 부실화 확률이 낮아지는 반면, 부실채권이 증가할수록 부실화확률이 높고 신용등급이 낮을수록 부실화확률이 높은 것으로 나타났다. 또한 probit 및 logit 모형을 이용한 부도거리의 유용성을 분석한 결과, 퇴출 및 공적 자금 지원 여부를 기준으로 은행위기를 분류한 경우 3년의 시차를 두고, 신용등급을 기준으로 분류한 경우에는 2년의 시차를 두고 부도거리와 은행위기와는 음(-)의 상관관계를(부도확률이 높을수록 은행위기가 발생할 확률이 높음) 보여주었으나, 분석결과가 통계적으로 유의미하지는 않았다. English Abstract: Distance to default is estimated using the option based model utilizing the stock prices and balance sheets of commercial banks in Korea. Estimated relationship between distance to default and indexes which represent the profitability and soundness of banking sector shows that increased profitability and asset size or improvement in credit ratings leads to the lower probability of default. Empirical analysis results of probit and logit model shows that distance to default and banking crisis has negative relationship with 2 to 3 years of lag, implying higher probability of default leading to higher probability of incidences of banking crises, even though statistically not significant.