Staff, Functions, and Staff Costs at Central Banks: An International Comparison with a Labor-demand Model

During the period 2000-2004 central banks sustained a generalized reduction in their staff, which was accompanied, in most cases, with significant increases in staff costs. This could obey to an enhanced interest of central banks in focusing on their core functions. In fact, central banks have changed the ways they perform their operative functions (e.g. currency operations, payment systems operation, printing notes, etc.) through different strategies aimed at gathering the participation of third parties. These strategies differ according to the relationship that central banks have with the financial sector and the government, as well as to their historical tradition and modernization trend. To explain the effect of these changes on the staff, we estimated a short-term labor demand function for 66 central banks using a panel data model with random effects. Results indicate that central banks’ labor demand is strongly determined by the country’s population, economic development level and changes in operative functions, as well as by staff costs. In addition, we found a low employment-wage elasticity suggesting the presence of a flexible budgetary constrain in central banks.Central Banking, Labor Demand, Modernization, Functions, Staff Costs, Panel Data, Random Effects. Classification JEL: E50; J23; J30; C33

The benefits are at the tail: uncovering the impact of macroprudential policy on growth-at-risk

Este estudio une los desarrollos recientes sobre la metodología de crecimiento en riesgo con la literatura sobre evaluaciones de impacto de la política macroprudencial. Para ello, extiendo el uso de regresiones cuantílicas del crecimiento del PIB con el objetivo de incluir variables macrofinancieras con propiedades de alerta temprana de riesgo sistémico y medidas macroprudenciales. Como resultado, encuentro efectos heterogéneos de la política macroprudencial sobre el crecimiento del PIB, los cuales permiten identificar beneficios importantes sobre la cola izquierda de su distribución. Este efecto positivo de la política macroprudencial en la reducción del crecimiento en riesgo es mayor que el impacto negativo sobre la mediana de la distribución, lo que sugiere un efecto neto positivo en el medio plazo. No obstante, estos efectos son heterogéneos y dependen de la posición en el ciclo financiero, la dirección de la política, el tipo de instrumento implementado y el tiempo transcurrido desde su implementación. En particular, el endurecimiento de medidas de capital durante fases expansivas del ciclo puede tardar hasta dos años en evidenciar beneficios sobre el crecimiento en riesgo, mientras que el efecto positivo de medidas de límites a los estándares crediticios se materializaría rápidamente. Esto sugiere la necesidad de implementar medidas de capital, como el colchón de capital anticíclico, con suficiente antelación respecto al desarrollo del ciclo, mientras que el endurecimiento de límites a los estándares crediticios podría implementarse en etapas más avanzadas. Por otra parte, durante episodios de crisis financieras, los beneficios de la liberación de capital son inmediatos, mientras que los de la relajación de límites a los estándares de crédito son más limitados. En general, este estudio brinda un marco de gran utilidad para la evaluación de los costes y los beneficios de la política macroprudencial en términos de crecimiento del PIB y permite identificar la estructura temporal de instrumentos específicos.This paper brings together recent developments on the growth-at-risk methodology and the literature on the impact of macroprudential policy. For this purpose, I extend the recent proposals on the use of quantile regressions of GDP growth by including macrofinancial variables with early warning properties of systemic risk, and macroprudential measures. I identify heterogeneous effects of macroprudential policy on GDP growth, uncovering important benefits on the left tail of its distribution. The positive effect of macroprudential policy on reducing the downside risk of GDP is found to be larger than the negative impact on the median, suggesting a net positive effect in the mid-term. Nonetheless, I identify heterogeneous effects depending on the position in the financial cycle, the direction of the policy, the type of instrument, and the time elapsed since its implementation. In particular, tightening capital measures during expansions may take up to two years in evidencing benefits on growth-at-risk, while the positive impact of borrower-based measures is rapidly observed. This suggests the need of implementing capital measures, such as the countercyclical capital buffer, early enough in the cycle; while borrower-based measures can be tightened in more advanced stages. Conversely, in downturns the benefits of loosening capital measures are immediate, while those of borrower-based measures are limited. Overall, this study provides a useful framework to assess costs and benefits of macroprudential policy in terms of GDP growth, and to identify the term-structure of specific types of instruments

Measuring credit-to-GDP gaps : the Hodrick-Prescott filter revisited

La brecha crédito-PIB calculada con la metodología recomendada por el Comité de Supervisión Bancaria de Basilea (BCBS, por sus siglas en inglés) presenta importantes limitaciones, debido principalmente a la alta inercia de la tendencia de largo plazo estimada, que no permite capturar de manera apropiada cambios estructurales o rápidos en la tendencia. Como resultado, la brecha estimada presenta actualmente en muchos países valores muy negativos, que no reflejan de un modo adecuado el entorno de riesgo cíclico ni su posición en el ciclo financiero. Esto ha llevado a que la gran mayoría de los países que han activado recientemente el Colchón de Capital Anticíclico (CCA) no estén siguiendo las señales derivadas de este indicador. La principal razón de estas discrepancias entre las señales del indicador y la actual posición en el ciclo financiero de muchos países puede estar relacionada no solo con las propiedades de los métodos de filtrado estadístico, sino también con la adaptación específica del filtro de Hodrick-Prescott (HP) recomendada por el BCBS para el cálculo de la brecha. En particular, el parámetro de suavización del filtro HP propuesto asume una duración del ciclo de crédito mucho mayor que la evidenciada empíricamente en la mayoría de los países, lo que lleva a que la tendencia de largo plazo estimada tenga una memoria muy larga. Este estudio evalúa si una relajación de este supuesto mejora la capacidad predictiva del indicador y su utilidad para identificar señales de riesgo sistémico cíclico que permitan informar adecuadamente sobre decisiones de política macroprudencial en los próximos añosLos resultados sugieren que adaptaciones del filtro HP que asumen una menor duración del ciclo de crédito, más coherente con la evidencia empírica, mejoran la capacidad predictiva del indicador y corrigen el sesgo negativo tras los eventos de crisis, en comparación con la brecha calculada con la metodología propuesta por el BCBS. Esto se evidencia no solo en el caso de España, sino también en otros países de la Unión Europea. Finalmente, se encuentra que los resultados obtenidos con las diferentes adaptaciones del filtro HP presentan una capacidad predictiva superior a la de otros métodos de filtrado estadístico y comparable con la obtenida con modelos econométricosThe credit-to-GDP gap computed under the methodology recommended by Basel Committee for Banking Supervision (BCBS) suffers of important limitations mainly regarding the great inertia of the estimated long-run trend, which does not allow capturing properly structural changes or sudden changes in the trend. As a result, the estimated gap currently yields large negative values which do not reflect properly the position in the financial cycle and the cyclical risk environment in many countries. Certainly, most countries that have activated the Countercyclical Capital Buffer (CCyB) in recent years appear not to be following the signals provided by this indicator. The main underlying reason for this might not be only related to the properties of statistical filtering methods, but to the particular adaptation made by the BCBS for the computation of the gap. In particular, the proposed one-sided Hodrick-Prescott filter (HP) only accounts for past observations and the value of the smoothing parameter assumes a much longer length of the credit cycle that those empirically evidenced in most countries, leading the trend to have very long memory. This study assesses whether relaxing this assumption improves the performance of the filter and would still allow this statistical method to be useful in providing accurate signals of cyclical systemic risk and thereby inform macroprudential policy decisionsFindings suggest that adaptations of the filter that assume a lower length of the credit cycle, more consistent with empirical evidence, help improve the early warning performance and correct the downward bias compared to the original gap proposed by the BCBS. This is not only evidenced in the case of Spain but also in several other EU countries. Finally, the results of the proposed adaptations of the HP filter are also found to perform fairly well when compared to other statistical filters and model-based indicator

BANKNOTE PRINTING AT MODERN CENTRAL BANKING: TRENDS, COSTS, AND EFFICIENCY

This paper examines trends in banknote printing during the period 2000-2005 for a crosssection of 56 central banks. Because of the high increase in the demand for currency in recent years, central banks have implemented new strategies to increase efficiency in the production of banknotes. Some of them, involve the private sector by means of different modalities (e.g. joint ventures, subsidiaries or purchase of banknotes from specialized companies), and the integration of banknote printing and cash processing in a single complex (e.g. Portugal and Colombia). A cost function using a panel data model with random effects was estimated. It was identified that the denomination structure, the size of banknotes, and the production method used by central banks have a significant impact on production costs. Government printing was found to be the most costly method, while private-sector involvement in the process substantially reduces production costs. Using a non-parametric efficient frontier model, it was found that most central banks have increased its technical efficiency during the period, especially in central banks where the privatesector has involved. Computing a Malmquist index through distance functions it was identified that central banks have showed a moderate increase in its productivity, primarily due to increases in efficiency and, in a lower proportion to technical change. In most of the cases, a positive change in efficiency is mainly the result of higher scale efficiency. This could obey to high increase in demand for currency.Central Banks, Banknote Printing, Efficiency Frontier, Cost Function, Panel Data, Malmquist Index. Classification JEL: E50; C33; C23; C43.

Beyond the LTV ratio: new macroprudential lessons from Spain

Incrementos excesivos de los precios de la vivienda han estado históricamente correlacionados con el deterioro de los estándares crediticios de las hipotecas. No obstante, la evidencia en España muestra que la ratio préstamo-valor (LTV, por sus siglas en inglés) no refleja apropiadamente estos estándares. Utilizando dos extensas bases de datos que incluyen información de más de cinco millones de operaciones hipotecarias en España durante un período que cubre el pasado ciclo financiero, encontramos evidencia de que el indicador LTV presenta importantes limitaciones para el análisis de vulnerabilidades. Hallamos que la identificación de los riesgos mejora cuando se incluyen otros indicadores. En particular, reconocemos que la ratio préstamo-precio de transmisión (LTP, por sus siglas en inglés), así como ratios que incorporan el ingreso de los prestatarios, son determinantes muy relevantes de los impagos de hipotecas. Adicionalmente, identificamos importantes efectos no lineales de los estándares de crédito sobre el riesgo de impago. Por último, encontramos que la relación entre los estándares de crédito y la probabilidad de impago es dinámica y cambia a lo largo del ciclo financiero. En general, nuestros resultados proporcionan un mejor entendimiento de los efectos que puede tener la implementación de medidas macroprudenciales.Booming house prices have been historically correlated with the loosening of banks’ lending standards. Nonetheless, the evidence in Spain shows that the deterioration of lending policies may not be fully captured by the popular loan-to-value (LTV) ratio. Drawing on two large datasets comprising more than five million mortgage operations that cover the last financial cycle, we show that the LTV indicator may exhibit a misleading picture of actual mortgage credit imbalances and risk. In turn, risk identification improves when other metrics are considered. In particular, we show that loan-to-price (LTP) as well as ratios that consider the income of borrowers are major determinants of mortgage defaults. Moreover, we identify relevant non-linear effects of lending standards on default risk. Finally, we document that the relationship between lending standards and default rates changes over the cycle. Overall, the findings provide useful insights for the design of the macroprudential policy mix and, in particular, for the implementation of borrower-based measures

Drivers of productivity in the Spanish banking sector : recent evidence

Este estudio analiza los determinantes de la productividad total de los factores de los bancos españoles desde el año 2000 hasta el período poscrisis. En particular, analizamos los cambios en la productividad derivados del proceso de reestructuración que ha experimentado el sector bancario español después de la crisis. Encontramos que, tras un período de continuo crecimiento, la productividad se ha reducido desde el comienzo de la crisis, aunque los bancos más grandes se han visto menos afectados. También identificamos que el riesgo, los niveles de capital, la competencia y los precios de los inputs han sido determinantes muy importantes que explican las diferencias en los cambios de productividad entre bancos. Finalmente, nuestros resultados sugieren que, al final de la muestra, existe margen para mejoras adicionales en la productividad, principalmente a través del aprovechamiento de economías de escala y de incrementos de la eficiencia en costes. Identificamos que estas oportunidades son, en general, mayores para los bancos pequeños en nuestra muestraWe analyse the drivers of total factor productivity of Spanish banks from early 2000, including the last financial crisis and the post-crisis period. This allows us to study changes in productivity following a major restructuring process in the banking sector such as the one experienced in Spain. Overall, we find that following a period of continued growth, productivity declined after the height of the crisis, though large banks were less affected. We also find that risk, capital levels, competition and input prices were important drivers of the differences in productivity change between banks. Finally, our results suggest that, by the end of our sample period, there was still some room for potential improvements in productivity via exploiting scale economies and enhancing cost efficiency. These opportunities appear to be generally greater for the smaller banks in our sampl

Inefficiency persistence and heterogeneity in Colombian electricity utilities

The electricity reform in Colombia has exhibited gains in terms of reliability but its effects on firm efficiency and service quality have not been clear. Previous studies evaluating the performance of distribution companies after the reform have not found evidence of improvements, although large differences in efficiency have been found among firms. This suggests high inefficiency persistence and heterogeneity in the Colombian distribution sector. In this paper, we propose an extension of dynamic stochastic frontier models that accounts for unobserved heterogeneity in the inefficiency persistence and in the technology. The model incorporates total expenses, service quality and energy losses in an efficiency analysis of Colombian distributors over fifteen years after the reform. We identify the presence of high inefficiency persistence in the sector, and important differences between firms. In particular, rural companies and firms with small customers present low persistence and evidence the largest gains in efficiency during the period. However, increases in efficiency are only manifested during the last five years when the main improvements in service quality and energy losses are presented. Overall, inefficiency persistence, customer density and consumption density are found to be important criteria to be considered for regulatory purposes.Jorge E. Galán acknowledges from the Energy Policy Research Group at the University of Cambridge and the financial support Spanish Ministry of Education and Science, research project ECO2012-3401

Bayesian analysis of heterogeneity in stochastic frontier models

Mención Internacional en el título de doctorIn this thesis, we put forward the modeling of heterogeneity in a Bayesian context by capturing both observed and unobserved heterogeneity in the inefficiency distribution under static and dynamic formulations. We propose several novel speciffications which permit the identiffication of heterogeneity in these contexts. The first of our proposed methods captures unobserved heterogeneity in the inefficiency by modeling a random parameter in the inefficiency distribution. Results suggest that this method is successful in identifying unobserved heterogeneity and that it also can be used as a way to test the relevancy of observed covariates. Also, the location of heterogeneity is found to have important effects on efficiency estimations which are more evident when unobserved heterogeneity is accounted for. The second proposal captures unobserved heterogeneity sources related to firm-specific effects of observed covariates in the inefficiency. This is performed by modeling random coefficients in the inefficiency. It is found that allowing random coefficients for the inefficiency covariates captures firm-speciffic effects which remain unidentiffied under the regular fixed coefficients models. This speciffication distinguishes properly firms in term of the effects of inefficiency drivers and separates unobserved heterogeneity related to these effects from efficiency. Our third proposal relies on the framework of dynamic SFA and speciffies a model that is able to capture unobserved heterogeneity in the inefficiency persistence and unobserved technological heterogeneity. Both unobserved effects are found to be very relevant in explaining inefficiency and its evolution over time. Finally, the implications of including observed covariates in dynamic models were studied by mean of an inefficiency speciffication that allows separating observed inefficiency heterogeneity from the dynamic process. The model allows identifying those firm characteristics that may have persistence effect in the inefficiency from those that can be rapidly adjusted. In general, location of observed covariates is found to have important implications in the identiffication of inefficiency drivers and posterior efficiency estimations. The proposed models are implemented in very different applications such as health performance, airlines, banking and electricity distribution and our results have important implications for companies, regulators and policy makers in these sectors. The inference of all the models is carried out using Bayesian methods and the Win-BUGS software package is used for the implementation throughout. We provide the codes used in each chapter of the thesis at the end of the corresponding chapters. This thesis has the following structure. Chapter 1 presents an introduction to the most important concepts on frontier efficiency, the measuring methods, SFA and its Bayesian approach, and a literature review on the treatment of observed and unobserved heterogeneity in SFA models. Chapter 2 presents the problem of observed heterogeneity in SFA by analyzing the effects of including observed covariates in the frontier, and in different parameters and distributions of the inefficiency. Chapter 3 presents the models proposed to identify unobserved heterogeneity in the inefficiency. Firstly, by modeling a random parameter in the inefficiency; and secondly, by allowing coefficients of inefficiency drivers to vary randomly across firms. Chapter 4 extends the analysis of heterogeneity in the dynamic framework by proposing two specifications: one that identifies unobserved heterogeneity in the inefficiency persistence and in the technology and another one that is able to separate observed heterogeneity from the dynamic behaviour of inefficiency. Finally, Chapter 5 discusses the main conclusions, contributions and further lines of research.Programa Oficial de Doctorado en Economía de la Empresa y Métodos CuantitativosPresidente: Luis Orea Sánchez; Secretario: Karim Anaya; Vocal: Camilla Mastromarc

Roots and recourse mortgages: handing back the keys

Summary of Banco de España Working Paper no. 220

Roots and recourse mortgages: handing back the keys

En este estudio identificamos diferencias en las condiciones de las hipotecas asociadas al arraigo de los prestatarios tras separar este efecto de otros factores que explican dichas condiciones. Para esto usamos datos de préstamos hipotecarios en España de la Central de Información de Riesgos, complementados con datos de hipotecas titulizadas para un ciclo financiero completo. Identificamos que los prestatarios extranjeros con poco arraigo pagan tipos de interés más altos que aquellos con mayores vínculos en el país. También encontramos que un bajo nivel de arraigo está asociado con tasas más altas de impago y con mayores incentivos a no continuar pagando la deuda hipotecaria ante situaciones de patrimonio neto negativo. En general, identificamos que el arraigo es un factor muy relevante que explica las diferencias en las condiciones de las hipotecas en el momento de su concesión, así como las decisiones de impago. Desde el punto de vista de la política, nuestros resultados tienen importantes implicaciones para el entendimiento de las consecuencias de transitar hacia un régimen de dación en pago, y para la efectividad de la política macroprudencial.In this study we disentangle the effect of roots from other confounding factors to explain differences in immigrants’ outcomes in the mortgage market. Using loan-level data from the Spanish Credit Register complemented with data on securitized mortgages over a complete financial cycle, we identify that foreign-born borrowers with shallow roots to the host country pay higher mortgage rates at origination than similar debtors that are better-settled. We also find that weak roots are associated with higher default rates and with greater incentives to go into default in negative equity situations. Overall, we show that rootedness explains differential loan conditions at origination and default behavior in mortgages. From a policy perspective, our results have important implications for understanding the potential consequences of moving away from recourse mortgage regimes, and for the effectiveness of macroprudential policy