Borrowing Costs Research Articles

Motives and Consequences of Libor Strategic Reporting: How Much Can We Learn from Banks’ Self-Reported Borrowing Rates?

Abstract Libor is an estimate of interbank borrowing costs computed daily from rates reported by a fixed panel of banks. Evidence suggests that banks have manipulated Libor in recent years by misreporting their borrowing costs. I estimate a strategic reporting model that identifies banks’ borrowing costs as well as their motives for misreporting. The estimation places a lower bound on the value that Libor would have had if banks had truthfully reported their borrowing costs. The model is identified even when unobserved heterogeneity exists in the form of a common cost component that is known by all banks but unobservable to the econometrician and is allowed to follow a non-stationary process. The only data used for identification are banks’ Libor quotes. Overall, I find that the estimated lower bound for the unmanipulated Libor is always above the published Libor, with an average deviation of 25 basis points at the worst of the financial crisis of 2007–2008. The estimated bound displays a pattern similar to two other measures of interbank borrowing costs that have been used previously to assess the extent of manipulation. The model is also used to determine the extent to which misreporting was motivated by signalling or banks’ net exposure to Libor. The estimation results indicate that sending creditworthiness signals was the main driver of systematic misreporting from 2007 to 2010.

Neobanks in emerging markets: a risk assessment

Neobanks have risen as popular digital challengers to incumbent banks, especially in emerging markets (EMs) where the banking sector is often characterized by oligopolies. This article first estimates the value of Nubank and StoneCo in Brazil, two of the fastest-growing neobanks in Brazil. Normalizing revenue growth assumptions from their financial data, valuation models uncover that Nubank could be overvalued by about two times, whereas StoneCo could be undervalued by 80% of its fair value, as of March 19, 2024. This article then discusses firm-specific (high cumulative net operating losses, low long-term operating margins, high borrowing costs) and adherent macroeconomic (political uncertainty, foreign exchange risks, high equity risk premia) risks in EMs that explain the volatility in Nubank’s and StoneCo’s stock prices. These risks are instructive for understanding the challenges facing the business model of neobanks in EMs.

Reprint of “Unveiling the dance of commodity prices and the global financial cycle”

We examine the impact of commodity price changes on the business cycles and capital flows in emerging markets and developing economies (EMDEs), distinguishing between their role as a source of shock and as a channel of transmission of global shocks. Our findings reveal that surges in export prices, triggered by commodity price shocks, boost domestic GDP, an effect further amplified by the endogenous decline of country spreads. However, the effects on capital flows appear muted. Shifts in U.S. monetary policy and global risk appetite drive the global financial cycle in EMDEs. Eased global credit conditions, attributed to looser U.S. monetary policy or lower global risk appetite, lead to a rise in export prices, higher output, a decrease in government borrowing costs, and stimulate greater capital flows. The endogenous response of export prices amplifies the output effects of a more accommodative U.S. monetary policy while country spreads magnify the impact of shifts in global risk appetite.

Monetary policy, threshold of profitability and dynamics of private investment in the West African Economic and Monetary Union

This study investigates the interactions between optimal monetary policy, investment profitability thresholds, and private sector investment dynamics within the West African Economic and Monetary Union. Analyzing data from 2000 to 2021, it employs advanced econometric models (linear, asymmetric, and threshold effect dynamic panel error correction models) to provide a nuanced understanding of the investment environment in the union. The findings reveal the confluence of low returns and high borrowing costs for private investment. Notably, this study suggests that simply pursuing an expansionary monetary policy does not offer a sufficient solution. Instead, it proposes a more accommodative stance by the Central Bank, featuring lower policy rates, to alleviate the negative impact of high credit costs on private investment and ultimately stimulate economic activity.

An Exploratory Study on Role of Direct Selling Agent towards Bank and Customer with Specific Reference to Home Loan Services in Punjab

DSA (Direct Selling Agent) that agent who involves in the process of grants home loan from the bank or NBFC to the potential customer. DSA’s job outline is create leads, documentation, cross checking. This study explains role and responsibility of DSA towards bank and customers, awareness of DSA services of the different banks and NBFC among the potential customer, challenges faced by the customer for the approval of home loan and challenges faced by the DSA at the time of process home loan application. In this study the researcher has to implement both primary data and secondary data complete this paper. The primary data deals with raw data collected through questionnaire to the respondents related with their level of disbursement of housing loan. The secondary data consists of reports of existing customers from the banks and NBFC. Pass the housing loan by banks and NBFC provides a boost for the growth and development of house construction industries. Now a time lack of knowledge among individuals related with banking products of all types of banks at one time. In case home loan customer wants to take loan according to their requirements for example lower rate of interest, Type of banks, credit score for transparency and clarity of about loan terms. There are many problems discussed already in previous studies such as different cost of borrowing, collateral security, processing time, proof of income, documentation and margin money. These problems studied by the previous researcher described in the section of the literature review. In view of the above things, it is necessary to conduct a research study to fill these gaps that have been depicted as research problem. The respondents for this research who belong to upper class, middle class or lower-class groups and lived in Patiala city or zones of Patiala. Keywords satisfaction level of customer, Responsibility of Direct selling agent, Challenges faced by DSA

De-dollarization? Not so fast

De-dollarization refers to the reduction of the reliance of foreign countries on the US dollar. This phenomenon generates concern about the U.S. dollar as a global currency. We construct new data on the currency denomination of central bank currency reserves, foreign exchange transaction volume, denomination of global debt securities, and the invoicing of trade. This paper presents empirical evidence suggesting that these concerns are misplaced, finding US dollar dominance remains unchanged up through late 2023, nearly two years after the 2022 Russian invasion of Ukraine and several years after the 2020 COVID-19 pandemic. Meanwhile euro and renminbi influence have since declined. These findings have implications for reserve currency resilience, U.S. dollar dominance, U.S. sanctions policy, international spillovers of U.S. monetary policy, and U.S. government borrowing costs.

Effect of Increasing Government Debt Profile on Economic Prosperity of Nigeria

The study aimed at assessing the effect of increasing government debt profile on economic prosperity of Nigeria. Specifically, the study examined the extent that Gross Domestic Product (GDP) was affected, during the period of study, by rising domestic debt, external debt, and cost of borrowing in Nigeria. The data for analysis were sourced principally from CBN Bulletins and Debt Management Office. The null hypotheses that domestic debt, external debt, and cost of borrowing do not significantly affect Gross Domestic Product, were tested through a multiple regression analysis. The findings indicate that Domestic Debt has a positive and significant effect on Gross Domestic Product in Nigeria with coefficient of 1.005965 and p-value of 0.0000. Furthermore, the external debt stock reveals a negative and non-significant effect on Gross Domestic Product with coefficient of -0.083963 and p-value of 0.5909, while Cost of Borrowing exposes a positive and non-significant effect on Gross Domestic Product in Nigeria with coefficient of 0.038835 and p-value of 0.7589. The R-squared (Coefficient of Determination) indicates that 98% of the variations in Gross Domestic Product in Nigeria could be explained by changes in Domestic Debt, External Debt and Cost of Borrowing. The implication of the findings is that economic prosperity is facilitated by Domestic Borrowing while External Borrowing must be avoided where possible because of its’ negative effect on GDP. In addition, the effect of Cost of Borrowing on GDP is purely dependent on the appropriateness of use of borrowed fund. The study recommended that government should first explore internal sources of fund whenever borrowing is unavoidable in preference to foreign/external sources, reduce or avoid external borrowing and properly apply the borrowed fund for its economy to prosper.

The green corporate bond issuance premium

We study a global panel of green and conventional corporate bonds to assess the borrowing cost advantage at issuance for green bond issuers. We find that, on average, green corporate bonds have a yield spread that is between 3 and 8 basis points lower relative to conventional bonds, depending on the regression specification. We link this borrowing cost advantage, or “greenium,” to demand pressure at issuance, highlighting a key mechanism through which the greenium is allocated. We find that a significant greenium emerges only as of 2019, coinciding with the growth of the sustainable asset management industry following EU regulation. While green bond governance and external review appear to matter for the greenium, the credibility of the underlying projects has little impact. Instead, the greenium is unevenly distributed to large, investment-grade issuers, primarily within the banking sector and developed economies. These findings have implications for the role of green bonds in incentivizing meaningful green investments throughout the global economy.

Firms’ Bond Market Access and Impact on Bank Borrowing Costs

AbstractThis paper documents that companies with bond issuance are larger, are more leveraged, and have higher financing needs, but have lower observed syndicated loan spreads. Using endogenous treatment and outcome estimations, we find that companies would potentially face an average of 114 to 185 basis points (bps) higher loan spreads in counterfactual absence of bond market access, significantly larger than observational difference (57 bps) or existing estimates in the literature. This finding underscores the importance of bond markets for corporate financing and overcoming lending constraints or market power of banks, and also casts doubt on valued banking services as the explanation why loans are more costly to bonds. We also find bond issuance as information release a partial explanation only.

International transmission of quantitative easing policies: Evidence from Canada

What are the cross-border spillovers from major economies' quantitative easing policies to their trading partners? We provide evidence by concentrating on spillovers from the US to Canada during the ZLB period when QE policies were actively used. We identify QE shocks in the US and estimate their impact on a large number of Canadian macroeconomic and financial variables. Then we analyze transmission channels of foreign QE shocks to the domestic economy. Our results suggest that US QE shocks are expansionary for Canada despite a currency appreciation. This is because they spill over to domestic borrowing costs, lowering long-term rates as well as financial premiums, and increasing asset prices. We find evidence for both portfolio balance and risk channels.

Unveiling the dance of commodity prices and the global financial cycle

We examine the impact of commodity price changes on the business cycles and capital flows in emerging markets and developing economies (EMDEs), distinguishing between their role as a source of shock and as a channel of transmission of global shocks. Our findings reveal that surges in export prices, triggered by commodity price shocks, boost domestic GDP, an effect further amplified by the endogenous decline of country spreads. However, the effects on capital flows appear muted. Shifts in U.S. monetary policy and global risk appetite drive the global financial cycle in EMDEs. Eased global credit conditions, attributed to looser U.S. monetary policy or lower global risk appetite, lead to a rise in export prices, higher output, a decrease in government borrowing costs, and stimulate greater capital flows. The endogenous response of export prices amplifies the output effects of a more accommodative U.S. monetary policy while country spreads magnify the impact of shifts in global risk appetite.

Differential taxation in agricultural credit market

AbstractThis study examines whether the market competitiveness of farm loan suppliers is affected by the US tax policy for the farm credit system (FCS) and its potential spillover on the farmers' cost of borrowing. We exploit the variation in the corporate income tax rate to estimate its relationship with the farm debt share of the FCS and the potential spillover effect on the estimated cost of borrowing for agricultural loans. Results suggest that a 10% rise in the state (federal) tax rate is associated with an increase in FCS's total farm debt market share by 1.76% (3.76%). A 10% rise in the FCS total farm debt market share tends to increase the cost of borrowing on agricultural loans by 0.06%. Overall, the findings imply that favorable tax treatment could increase FCS' competitiveness in the agricultural lending market. Also, an increase in the interest rate on farm debt is correlated with the increasing market share of FCS in the agricultural credit market. [EconLit Citations: Q14, N22, H2, H7, G21].

Impact of Monetary Policy on the Profitability of Nepalese Commercial Banks

This study examines the impact of monetary policy instruments on firm profitability in Nepalese commercial banks from 2007/08 to 2021/22. The research investigates the relationship between profitability and various monetary policy instruments, including broad money supply, statutory liquidity ratio, bank rate, investment in treasury bills, and cash reserve ratio. The analysis reveals diverse return on investment (ROI) trends across banks, with NIMBL initially showing high ROI followed by a drop, SBL and SBI displaying substantial increases, and NABIL and HBL maintaining stable ROI. Net Interest Margin (NIM) analysis shows varying profitability, while monetary policy indicators exhibit diverse and occasionally fluctuating values, influencing borrowing costs and liquidity. Correlation analysis identifies positive associations between NIM, M2, and ROI and negative correlations with TBR and CRR. Regression analysis emphasizes the significance of CRR, IRS, and M2 in impacting ROI. The study concludes that the cash reserve ratio, bank rate, and investment in treasury bills affect Nepalese commercial banks' profitability. Recommendations include managing the cash reserve ratio, maintaining low bank rates, encouraging treasury bill investment, and minimizing the statutory liquidity ratio to enhance profitability. Implications suggest that effective management of monetary policy instruments can improve banks' profitability. Future research could explore additional profitability indicators, expand the sample size and observation years, include other financial institutions, and employ a mixed-method approach for a comprehensive understanding of the impact of monetary policy instruments on bank profitability.

The Effects of Fiscal Policy and Monetary Policy on Borrowing Costs and Credit Access for SMEs: An Empirical Study

The objective of this study is to investigate the impact of fiscal policies (FP) on borrowing costs and credit access (BCAC) for SMEs, considering the role of monetary policy (MP) as a the second independent factor. This research aims to understand more deeply how fiscal and monetary policies can be utilized to support growth and access to finance for SMEs, as well as identify remaining barriers to access to finance. Through comprehensive analysis, this study is expected to provide effective policy recommendations to improve access to credit for SMEs, which in turn can support economic growth and job creation. This study adopts a quantitative research design using statistical analysis to examine the impact of fiscal policies on borrowing costs and credit access for Small and Medium Enterprises (SMEs). The analysis will be conducted using the SMARTPLS 3.0. Sample size based on valuable samples are 120 of SME. The sampling technique used in this study will be purposive sampling. This approach will involve selecting SMEs that meet specific criteria, such as size, sector, and eligibility for relevant government programs or incentives. Result of this study state Fiscal Policy (FP) and Monetary Policy (MP) have a significant effect on Borrowing Costs and Access to Credit (BCAC).

Capital controls, banking competition, and monetary policy

AbstractHow do capital controls and banking concentration affect economic development? This paper develops a general equilibrium model to study these important issues. To do so, we construct a framework with heterogeneous agents and imperfectly competitive financial intermediaries who help depositors manage liquidity risk. Importantly, higher levels of concentration raise the cost of domestic borrowing which increase the reliance on international capital markets. Finally, once the rate of money growth is sufficiently high, capital controls bind and the effects of monetary policy on capital formation are more pronounced.

Does economic and policy uncertainty impact corporate policies? Evidence from India

PurposeThis study aims to examine the role of economic political uncertainty (EPU) on various corporate policies, namely, cash reserves, investment, capital structure and operating activities of Indian listed firms.Design/methodology/approachTo assess the influence of policy-related uncertainties, the author uses the India-specific EPU news-based index constructed by Baker et al. (2016) as a proxy for policy uncertainties. This study uses data from listed Indian firms spanning the period 2003 to 2019. The author uses panel regression models with firm-fixed effects to analyze the impact of EPU on corporate policies, including cash reserves, leverage and CAPEX, while considering key control variables.FindingsIn response to heightened EPU, firms tend to increase their cash reserves, curtail their investment activities and favour secured financing options. Notably, this study aligns with the “real options” framework, demonstrating that firms with substantial investment irreversibility significantly reduce their capital expenditures during periods of elevated EPU. Additionally, the results reveal that rising EPU corresponds to heightened borrowing costs and increased operating expenses for firms.Originality/valueIn contrast to prior research that predominantly investigated the impact of EPU on the decisions of listed firms in developed markets, this study delves into the role of EPU on corporate policies among listed firms in India. This focus is particularly relevant, given the significant policy changes that have transpired in the Indian business landscape in recent years.

Pelatihan Literasi Keuangan: Cermat Meminjam dan Menabung

This service activity aims to provide an understanding of financial literacy (careful borrowing and saving) so that it is hoped that participants can avoid loan sharks. Apart from that, participants are given knowledge about making simple financial reports so that expenses do not exceed income. This service was carried out at the Women's Farmers Group (KWT) in Pagelaran Village, Pringsewu Regency. The service method used is material presentation and discussion. The results of this activity were that the participants generally understood how to choose the right borrowing and saving as well as calculating the size of the costs of borrowing, although there were some participants who had a little difficulty in reading and writing.

Inflationary Realities, Shrinkflation Strategies: Business Unveiled

Since the onset of the pandemic in March 2020, global supply chains have been severely impacted. Preceding this, the intense protectionism and trade tensions between the USA and China in 2018 and 2019 had already diminished trade volumes on the Western front. The invasion of Ukraine by Russia in February 2022 further disrupted supply chains, creating a ripple effect that shook economic stability. This tumultuous series of events triggered a worldwide wave of inflation, resulting in an increase in the prices of goods and services across various categories. The inflationary surge had a profound impact on family budgets, adversely affecting the standard of living for many. To combat this, the majority of central banks responded by raising interest rates, causing a sharp increase in the cost of borrowing. Faced with these challenges, producers from large, medium, and small enterprises found themselves compelled to make their products more affordable, aiming to alleviate the financial strain on consumers. In the era of consumerism, producers found themselves under pressure to provide relief to end-users. The adopted strategy involved reducing the size or weight of products while maintaining the same price. This tactic, known as shrinkflation, became a psychological game to offset the inconveniences of inflation. Consumers, although paying the same price, received less for their money. While some organizations embraced this strategy, others considered it a serious ethical breach. Some consumers accepted the reduction without complaint, while others, particularly those with conservative views, felt aggrieved by what they perceived as a moral compromise. For some producers, shrinkflation was seen as a temporary measure, applied until input prices softened.

So Right It’s Wrong? Right Governments, Far Right Populism, and Investment Risk

Political economy literature documents how financial investors are more partial to right executives than left ones. Right cabinets face lower interest rates, less volatile stock prices and exchange rates, and higher credit ratings than left cabinets, even after accounting for fiscal differences. But does this advantage persist if right governments accommodate far right parties or ideas? I hypothesize that because far right populism can introduce political instability, markets’ evaluation of right executives might deteriorate if they enter coalition with far right parties or adopt their positions. Employing a panel analysis of bond spread data, and a comparative case study of the Netherlands and Sweden, I find that right executives enjoy significantly lower spreads than their left-wing counter-parts, but this advantage disappears if they rule in coalition with the far right or produce overly right-wing manifestos. These findings highlight that right parties may encounter tangible borrowing costs and market rebuke if they accommodate far right populism.

Indonesia’s Fiscal Policy in the Aftermath of the Pandemic

The post-Covid-19 global economic landscape has yielded complex challenges. Given bleaker global growth prospects, moderating commodity prices and a higher cost of borrowing, the Indonesian government took a conservative approach to fiscal policy by narrowing the budget deficit to ease the financing pressures. Meanwhile, the central bank, Bank Indonesia, implemented contractionary monetary policy by raising the reserve requirement and policy rates. Weaker global demand, along with limited policy support, contributed to a decrease in economic growth, from 5.3% in 2022 to 5.0% in 2023. The government’s conservative approach in 2023 helped produce a surplus in the primary balance, a narrower budget deficit and a lower government–debt ratio. Nonetheless, much is to be done, as more development is needed to encourage long-term growth while revenue collection has been relatively low. Improvement in tax policy and administration will be crucial to allow the government to collect more revenue, including a comprehensive review of tax incentives and exemptions. The efficacy of spending also needs to be further improved by consistently reforming energy subsidisation, reallocating spending to growth areas, better aligning local development policies with the national position, and better targeting poverty-alleviation programs.