Are International Interest Rate Differentials Driven by the Risk Premium? The Case of Asian Countries

This paper investigates the relationship between international interest rate differentials and the risk premium during the 1997-1998 Asian crisis. Variables standing for the accumulation of imbalances in the monetary sector are used as proxies for the risk premium. We show,using a Vector Error Correction Model (VECM) on monthly data from January 1994 to December 2002, that the international interest rate differentials are driven by the risk premium indicators. This result explains the temporary inability of high interest rates to support exchange rates. However, the risk premium considered in this paper would have been required regardless of the interest rate policy. Consequently, high interest rates helped to prevent exchange rates from depreciating more.

Hot Money Inflows and Monetary Stability in China: How the People's Bank of China Took up the Challenge

Non-foreign direct investment capital inflows in China were particularly strong in 2003 and 2004. They were even stronger than current account surpluses or net foreign direct investment inflows. As a result, the pace of international reserves accumulation in China increased significantly. This paper investigates if the rapid build up of international reserves in 2003 and 2004 was a source of monetary instability in China. The relationship between international reserves and domestic credit is examined with a Vector Error Correction Model (VECM), estimated on monthly data from March 1995 to December 2005. Empirical results show that this relationship was stable and consistent with monetary stability. Direct and indirect Granger causality tests are implemented to show how the People's Bank of China (PBC) achieved this monetary stabilityhot money inflows, international reserves, VECM, Granger causality

Hot Money Inflows in China : How the People's Bank of China Took up the Challenge

This paper investigates hot money inflows in China. The financial liberalization comes into effect and the effectiveness of capital controls tends to diminish over time. As a result, China is fuelled by hot money inflows. The US interest rate cut since 2001 and expectations of exchange rate adjustments are the main factors explaining these capital inflows. This study use the Bernanke and Blinder (1988) model extended to an open economy to examine implications of hot money inflows for the Chinese economy. A Vector Error Correction Model (VECM) on monthly data from March 1995 to March 2005 is estimated to investigate the recent upsurge in foreign reserves and shows that the interaction between domestic credit and foreign reserves was stable and consistent with monetary stability. Granger causality tests are implemented to show how the People's Bank of China (PBC) achieved this result.Hot money inflows, domestic credit, VECM, Granger causality.

Hot money inflows and monetary stability in China: how the People's Bank of China took up the challenge

Non-foreign direct investment capital inflows in China were particularly strong in 2003 and 2004. They have led to a rapid accumulation of international reserves and they may have provided excess liquidity to the Chinese economy. This paper investigates how the central bank of China managed the rapid build-up of international reserves in 2003 and 2004. The relationship between real international reserves and real domestic credit is examined with a Vector Error Correction Model (VECM), estimated on monthly data from January 1997 to March 2006. Empirical results show that this relationship was negative, which suggests that the central bank succeeded in slowing down real domestic credit when real international reserves increased. Direct and indirect Granger causality tests are implemented to show how the People's Bank of China (PBC) proceeded to control domestic credit

Canal des provisions bancaires et cyclicité du marché du crédit

International audienceRésumé : Des travaux empiriques portant sur les comportements de provisionnement des banques montrent que les provisions pour pertes évoluent de façon contracyclique. Ce fait stylisé est intégré dans un modèle théorique déterminant le comportement d'une banque représentative sur le marché du crédit. Le modèle et les simulations réalisées montrent que les modi…cations du coût de provisionnement supportées par la banque à travers un cycle économique ampli…ent les uctuations sur le marché du crédit. Deux mécanismes sont identi…és pour éliminer cette e¤et d'ampli…cation. D'un point de vue réglementaire, l'adoption d'un système de provisionnement dynamique représente une première solution. Au niveau de la banque, la constitution d'un "coussin de sécurité" en capital bancaire représente une seconde solution. Abstract :The literature on provisioning bank behaviour shows that loan loss provisions are counter-cyclical. Based on this stylised fact, this paper develops a partial equilibrium model of a banking …rm that analyzes how provisioning rules inuence credit market uctuations. The model and the simulations show that a backward-looking provisioning system ampli…es the uctuations in the credit market over an economic cycle. Two solutions are proposed to remove this bank provision channel. First, the regulatory authority can implement a forward-looking provisioning system. Second, if a backward-looking provisioning system rules are implemented, banks can build a capital bu¤er to cover the expected losses which are not covered by loan loss reserves

On the link between credit procyclicality and bank competition

This paper investigates the relationship between bank competition and credit procyclicality for 17 OECD countries on the 1986-2009 period. We account for heterogeneity among countries in terms of bank competition through the use of a hierarchical clustering methodology. We then estimate panel VAR models for the identified sub-groups of economies to investigate whether credit procyclicality is more important when the degree of bank competition is high. Our findings show that while credit significantly responds to shocks to GDP, the degree of bank competition is not essential in assessing the procyclicality of credit for OECD countries.Credit cycle, economic cycle, bank competition, financial stability, panel VAR.

Banks' procyclicality behavior: does provisioning matter?

URL des Cahiers : https://halshs.archives-ouvertes.fr/CAHIERS-MSECahiers de la Maison des Sciences Economiques 2006.35 - ISSN 1624-0340A panel of 186 European banks is used for the period 1992-2004 to determine if banking behaviors induced by the capital adequacy constraint and the provisioning system, amplify credit fluctuations. Our finding is consistent with the bank capital channel hypothesis, which means that poorly capitalized banks are constrained to expand credit. We also find that loan loss provisions (LLP) made in order to cover identified credit losses (non discretionary LLP) amplify credit fluctuations. Indeed, non discretionary LLP evolve cyclically. This leads to a misevaluation of expected credit risk which affect banks' incentives to grant new loans since lending costs are misstated. By contrast, LLP use for management objectives (discretionary LLP) do not affect credit fluctuations. The findings of our research are consistent with the call for the implementation of dynamic provisioning in Europe.Un panel de 186 banques européennes sur la période 1992-2004 est utilisé pour déterminer si les fluctuations de l'offre de crédit des banques sont amplifiées par la contrainte réglementaire sur les fonds propres et par les règles de provisionnement. Nos résultats sont en accord avec l'hypothèse du canal du capital bancaire : les banques faiblement capitalisées se trouvent contraintes pour accroître leur offre de crédit. Nous montrons également que les provisions contractées pour couvrir des pertes identifiées (provisions non discrétionnaires) amplifient les fluctuations de l'offre de crédits. En effet, ces provisions non discrétionnaires évoluent de façon cyclique et conduisent à une mauvaise prise en compte des pertes anticipées. L'incitation de la banque à offrir du crédit est donc affectée dans la mesure où les coûts liés à l'accord d'un crédit sont mal évalués. D'autre part, la proportion des provisions utilisée pour des objectifs de management (provisions discrétionnaires) n'affecte pas les fluctuations de l'offre de crédit. Les résultats de cet article conduisent à recommander la mise en place d'un système de provisionnement dynamique en Europe

Waves of international banking integration: A tale of regional differences

We propose an original measure of international banking integration based on gravity equations and a spline function on a panel of 14 countries and their 186 partners between 1999 and 2012. Contrary to the conventional wisdom, we uncover that: (1) the international banking integration outside the euro area has been tenaciously increasing since \1999 and has even strengthened after the crisis. (2) In contrast, the international banking integration of the euro area has been cyclical since 1999 with a peak in 2006 and a complete reversal since then. (3) This decline is not a correction of previous overshooting but a marked disintegration. (4) Outside the euro area, the level of income does not affect the shape of banking integration

Hot Money Inflows in China: How the People's Bank of China Took up the Challenge

URL des Cahiers : https://halshs.archives-ouvertes.fr/CAHIERS-MSECahiers de la Maison des Sciences Economiques 2006.11 - ISSN 1624-0340This paper investigates hot money inflows in China. The financial liberalization comes into effect and the effectiveness of capital controls tends to diminish over time. As a result, China is fuelled by hot money inflows. The US interest rate cut since 2001 and expectations of exchange rate adjustments are the main factors explaining these capital inflows. This study use the Bernanke and Blinder (1988) model extended to an open economy to examine implications of hot money inflows for the Chinese economy. A Vector Error Correction Model (VECM) on monthly data from March 1995 to March 2005 is estimated to investigate the recent upsurge in foreign reserves and shows that the interaction between domestic credit and foreign reserves was stable and consistent with monetary stability. Granger causality tests are implemented to show how the People's Bank of China (PBC) achieved this result.Cet article porte sur les entrées de capitaux spéculatifs en Chine. Le système financier chinois se libéralise progressivement et l'efficacité des contrôles des capitaux a tendance à diminuer. Ainsi, l'économie chinoise fait face à des entrées de capitaux spéculatifs. La forte baisse du taux d'intérêt US amorcée en 2001 et les anticipations portant sur l'ajustement du système de change chinois représentent les principaux facteurs expliquant ces entrées de capitaux spéculatifs. Cet article adapte le modèle de Bernanke et Blinder (1988) à une économie ouverte afin d'analyser les implications sur l'économie chinoise des entrées de capitaux spéculatifs. Un modèle à correction d'erreur sur données mensuelles (mars 1995 - mars 2005) est estimé pour évaluer l'impact de l'accroissement des réserves de changes résultant des entrées de capitaux spéculatifs. Les interactions entre le crédit domestique et les réserves de change apparaissent stables et compatibles avec la stabilité monétaire. Des tests de causalité directe et indirecte à la Granger sont également mis en oeuvre afin d'expliciter comment la banque centrale chinoise est parvenue à maintenir la stabilité monétaire

Loan loss provisions and macroeconomic shocks: some empirical evidence for Italian banks during the crisis

© 2017 The Authors. This paper uses data from a panel of more than 400 Italian banks for the period 2001 – 2015 to examine the main determinants of loan loss provision (LLP), which are classified as either discretionary (income smoothing, capital management, signalling) or non-discretionary (related to the business cycle). The possible effects of the double-dip recession of 2008-9 and 2011-15 are also examined. The results suggest that LLP in Italian banks is countercyclical, with non-discretionary components and macroeconomic shocks playing a significant role. Moreover, LLP is less cyclical in the case of local banks, since their loans are more collateralized and their behaviour is more strongly affected by supervisory activity