Inflation-linked bonds from a Central Bank perspective

Inflation-linked bond markets have experienced significant growth in recent years. This growth is somewhat surprising, for inflation-linked bonds cannot be considered a financial innovation and their development has taken place in a period of historically low global inflation and inflation expectations. In this context, the purpose of this paper is twofold. First, it provides a selective survey of the key arguments for and against the issuance of inflation-linked debt, and some of the factors that help to understand their recent growth. Second, it illustrates the use of these instruments to better monitor investors’ inflation expectations and growth prospects from a central bank perspective.

Structured finance and the financial turmoil of 2007-2008 : an introductory overview

This paper provides an overview of the most important structured finance instruments in the context of the development of the financial turmoil that started in the third quarter of 2007 and continued into 2008. These financial market tensions were triggered by concerns about exposures of financial institutions to the most risky segment of the US mortgage markets -the so-called subprime mortgage market- and related financial instruments, which predominantly were related to structured finance. As structured finance has developed very fast in recent years and often involves highly complex financial instruments and techniques, which may not be understood completely beyond a small circle of financial market experts, the aim of this paper is to provide an introduction to these instruments that may serve to better understand the specific characteristics of the financial turmoil. In this context, the paper proposes a specific classification of structured finance and discusses both securitizations and credit derivatives with the aim of explaining their specific contributions to the development of the financial turmoil. To this extent, the paper differentiates between two main categories of structured finance instruments. The first one played an important role in the initiation and propagation of the turmoil and includes mortgage-backed securities (MBS), asset backed commercial paper (ABCP) and collateralized debt obligations (CDOs), both cash flow and synthetic. The second category of structured finance instruments involves those that have been more instrumental in monitoring the crisis, both for market participants and policymakers. The main instruments here are credit default swaps (CDS), of which examples are presented for both single name and index contracts. Finally, the paper provides an overview of the specific contagion channels involving various structured finance instrument

A new approach to measuring competition in the loan markets of the euro area

Incluye bibliografíaThis paper is the first that applies a new measure of competition, the Boone indicator, to the banking industry. This approach is able to measure competition of bank market segments, such as the loan market, whereas many well-known measures of competition can consider the entire banking market only. A caveat of the Boone-indicator may be that it assumes that banks generally pass on at least part of their efficiency gains to their clients. Like most other model-based measures, this approach ignores differences in bank product quality and design, as well as the attractiveness of innovations. We measure competition on the lending markets in the five major euro countries as well as, for comparison, the UK, the US and Japan. Bearing the mentioned caveats in mind, our findings indicate that over the period 1994-2004 the US had the most competitive loan market, whereas overall loan markets in Germany and Spain were among the best competitive in the EU. The Netherlands occupied a more intermediate position, whereas in Italy competition declined significantly over time. The French, Japanese and UK loan markets were generally less competitive. Turning to competition among specific types of banks, commercial banks tend to be more competitive, particularly in Germany and the US, than savings and cooperative bank

Un nuevo indicador de competencia del sector bancario

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A new approach to measuring competition in the loan markets of the euro area

This paper is the first that applies a new measure of competition, the Boone indicator, to the banking industry. This approach is able to measure competition of bank market segments, such as the loan market, whereas many well-known measures of competition can consider the entire banking market only. A caveat of the Boone-indicator may be that it assumes that banks generally pass on at least part of their efficiency gains to their clients. Like most other model-based measures, this approach ignores differences in bank product quality and design, as well as the attractiveness of innovations. We measure competition on the lending markets in the five major EU countries as well as, for comparison, the UK, the US and Japan. Bearing the mentioned caveats in mind, our findings indicate that over the period 1994-2004 the US had the most competitive loan market, whereas overall loan markets in Germany and Spain were among the best competitive in the EU. The Netherlands occupied a more intermediate position, whereas in Italy competition declined significantly over time. The French, Japanese and UK loan markets were generally less competitive. Turning to competition among specific types of banks, commercial banks tend to be more competitive, particularly in Germany and the US, than savings and cooperative banks. JEL Classification: D4, G21, L1Banking industry, competition, loan markets, marginal costs, market shares

The role of derivatives in market strains during the COVID-19 crisis

Desde el comienzo de la pandemia, el mercado de renta variable ha experimentado episodios de alta volatilidad. En alguno de ellos, el uso de derivados con fines especulativos por inversores privados ha sido citado como un factor relevante. En este documento se analizan dos casos concretos: la revalorización de la acción de GameStop, y el rápido ascenso y posterior caída del fondo Archegos Capital. En ambos, el apalancamiento facilitado por los derivados ha generado tensiones en el funcionamiento de segmentos de mercado poco líquidos en forma de ciclos retroalimentados de negociación.Since the onset of the pandemic, the equity market has experienced bouts of high volatility, with private investors’ use of derivatives for speculative purposes being cited as a relevant factor in some cases. This paper analyses two specific episodes: the revaluation of GameStop stock, and the swift rise and subsequent collapse of Archegos Capital. In both instances, the leverage provided by derivatives generated strains in the functioning of illiquid market segments in the form of trading feedback loops

Banking in Japan: Will "Too Big To Fail" Prevail?

This paper reviews the evolution of the Japanese banking sector and the development of the banking crisis in Japan in the context of "too big to fail." It describes the deterioration of the Japanese financial sector caused by the bad loan problems and the failure of policymakers to get a grip on the underlying problems. Even at the start of the new century, Japanese policymakers still continue to struggle to find the right policy response to tackle the banking problems and how to avoid moral hazard behavior intertwined with "too big to fail" concerns. The increasing concentration in the Japanese banking industry, which is now dominated by five huge financial conglomerates, should make it more difficult to definitely end "too big to fail" in Japanese prudential policy. In this respect, we believe that the "too big to fail" policy in Japan will prevail.Too big to fail, Banking crisis, Japan

Inflation-linked bonds from a central bank perspective

Incluye bibliografíaInflation-linked bond markets have experienced significant growth in recent years. This growth is somewhat surprising, for inflation-linked bonds cannot be considered a financial innovation and their development has taken place in a period of historically low global inflation and inflation expectations. In this context, the purpose of this paper is twofold. First, it provides a selective survey of the key arguments for and against the issuance of inflation-linked debt, and some of the factors that help to understand their recent growth. Second, it illustrates the use of these instruments to better monitor investors’ inflation expectations and growth prospects from a central bank perspectiv

Measuring bank competition in China : a comparison of new versus conventional approaches applied to loan markets

Since the 1980s, important and progressive reforms have profoundly reshaped the structure of the Chinese banking system. Many empirical studies suggest that financial reform promoted bank competition in most mature and emerging economies. However, some earlier studies that adopted conventional approaches to measure competition concluded that bank competition in China declined during the past decade, despite these reforms. In this paper, we show both empirically and theoretically that this apparent contradiction is the result of flawed measurement. Conventional indicators such as the Lerner index and Panzar- Rosse H-statistic fail to measure competition in Chinese loan markets properly due to the system of interest rate regulation. By contrast, the relatively new Profit Elasticity (PE) approach that was introduced in Boone (2008) as Relative Profit Differences (RPD) does not evidence these shortcomings. Using balance sheet information for a large sample of banks operating in China during 1996-2008, we show that competition actually increased in the past decade when the PE indicator is used. We provide additional empirical evidence that supports our results. We find that these, firstly, are in line with the process of financial reform, as measured by several indices, and secondly are robust for a large number of alternative specifications and estimation methods. All in all, our analysis suggests that bank lending markets in China have been more competitive than previously assumedDesde los años ochenta, la estructura del sistema bancario chino se ha visto reconfigurada a través de importantes reformas progresivas. Muchos estudios empíricos sugieren que la reforma financiera ha fomentado la competencia bancaria en la mayor parte de las economías avanzadas y emergentes. No obstante, algunos estudios previos que adoptaron enfoques convencionales para medir la competencia concluyeron que la competitividad bancaria en China descendió durante la década pasada, a pesar de estas reformas. En el presente análisis se muestra de forma teórica y empírica que esta aparente contradicción se debe a una medición errónea. Diversos indicadores convencionales —como el índice Lerner y el estadístico-H de Panzar-Rosse— no logran medir apropiadamente la competencia en los mercados de préstamo chinos, debido al sistema de regulación de los tipos de interés. Por el contrario, el enfoque relativamente novedoso de la elasticidad del beneficio (Profit Elasticity, PE) introducido por Boone (2008) a través de diferencias relativas en los beneficios (Relative Profit Differences, RPD) no sufre estas deficiencias. Mediante la utilización de información procedente de los balances de una gran muestra de bancos operativos en China durante 1996-2008 se muestra que, en realidad, la competencia se ha visto incrementada durante la pasada década, cuando se emplea el indicador PE. Se proporciona una evidencia empírica adicional que apoya nuestros resultados. En primer lugar, se confirma que estos se encuentran alineados con el proceso de reforma financiera, medido según diversos índicesy, en segundo lugar, que son robustos en un gran número de especificaciones alternativas y métodos de estimación. En términos generales, nuestro análisis sugiere que los mercados de préstamos bancarios en China han sido más competitivos de lo que se asumía en la literatur