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The Effects of Unconventional Monetary Policies on Bank Soundness

Author: Frederic Lambert

Publisher: International Monetary Fund

Published: 2014-08-13

Total Pages: 40

ISBN-13: 1498300030

Unconventional monetary policy is often assumed to benefit banks. However, we find little supporting evidence. Rather, we find some evidence for heightened medium-term risks. First, in an event study using a novel instrument for monetary policy surprises, we do not detect clear effects of monetary easing on bank stock valuation but find a deterioration of medium-term bank credit risk in the United States, the euro area, and the United Kingdom. Second, in panel regressions using U.S. banks’ balance sheet information, we show that bank profitability and risk taking are ambiguously affected, while balance sheet repair is delayed.

Unintended Side Effects of Unconventional Monetary Policy

Author: Tobias Berg

Publisher:

Published: 2022

Total Pages:

ISBN-13:

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Using granular supervisory data from Germany, we investigate the impact of unconventional monetary policies via central banks' purchase of corporate bonds. While this policy results in a loosening of credit market conditions as intended by policy makers, we document two unintended side effects. First, banks that are more exposed to borrowers benefiting from the bond purchases now lend more to high-risk firms with no access to bond markets. Since more loan write-offs arise from these firms and banks are not compensated for this risk by higher interest rates, we document a drop in bank profitability. Second, the policy impacts the allocation of loans among industries. Affected banks reallocate loans from investment grade firms active on bond markets to mainly real estate firms without investment grade rating. Overall, our findings suggest that central banks' quantitative easing via the corporate bond markets has the potential to contribute to both banking sector instability and real estate bubbles.

Effects of Unconventional Monetary Policy on Financial Institutions

Author: Gabriel Chodorow-Reich

Publisher:

Published: 2014

Total Pages: 57

ISBN-13:

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Monetary policy affects the real economy in part through its effects on financial institutions. High frequency event studies show the introduction of unconventional monetary policy in the winter of 2008-09 had a strong, beneficial impact on banks and especially on life insurance companies. I interpret the positive effects on life insurers as expansionary policy recapitalizing the sector by raising the value of legacy assets. Expansionary policy had small positive or neutral effects on banks and life insurers through 2013. The interaction of low nominal interest rates and administrative costs forced money market funds to waive fees, producing a possible incentive to reach for yield to reduce waivers. I show money market funds with higher costs reached for higher returns in 2009-11, but not thereafter. Some private defined benefit pension funds increased their risk taking beginning in 2009, but again such behavior largely dissipated by 2012. In sum, unconventional monetary policy helped to stabilize some sectors and provoked modest additional risk taking in others. I do not find evidence that the financial institutions studied formented a tradeoff between expansionary policy and financial stability at the end of 2013.

Global Financial Stability Report, October 2016

Author: International Monetary Fund. Monetary and Capital Markets Department

Publisher: INTERNATIONAL MONETARY FUND

Published: 2016-10-05

Total Pages: 0

ISBN-13: 9781513559582

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The current report finds that short-term risks to global financial stability have abated since April 2016, but that medium-term risks continue to build. Financial institutions in advanced economies face a number of cyclical and structural challenges and need to adapt to low growth and low interest rates, as well as to an evolving market and regulatory environment. Weak profitability could erode banks’ buffers over time and undermine their ability to support growth. A cyclical recovery will not resolve the problem of low profitability. More deep-rooted reforms and systemic management are needed, especially for European banks. The solvency of many life insurance companies and pension funds is threatened by a prolonged period of low interest rates. Corporate leverage in emerging market economies remains elevated in some countries, but the current favorable external environment presents an opportunity for overly indebted firms to restructure their balance sheets. The political climate is unsettled in many countries. A lack of income growth and a rise in inequality have opened the door for populist, inward-looking policies. These factors make it even harder to tackle legacy problems and further expose economies and markets to shocks. A potent and more balanced policy mix is needed to deliver a stronger path for growth and financial stability, and avoid slipping into a state of financial and economic stagnation. The report also examines how the rise of nonbank financing has altered the impact of monetary policy and finds that fears of a decline in the effectiveness of monetary policy are unfounded. It appears that the transmission of monetary policy is, if anything, stronger in economies with larger nonbank financial sectors. Finally, the report examines the link between corporate governance, investor protection, and financial stability in emerging market economies. It finds that the improvements over the past two decades have helped bolster the resilience of their financial systems. These benefits strengthen the case for further reform.

Evaluating Asset-market Effects of Unconventional Monetary Policy

Author: John H. Rogers

Publisher:

Published: 2014

Total Pages:

ISBN-13:

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Should Unconventional Monetary Policies Become Conventional?

Author: Dominic Quint

Publisher:

Published: 2017

Total Pages:

ISBN-13: 9783957293954

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The large recession that followed the Global Financial Crisis of 2008-09 triggered unprecedented monetary policy easing around the world. Most central banks in advanced economies deployed new instruments to affect credit conditions and to provide liquidity on a large scale after short-term policy rates had reached their effective lower bound. In this paper, we study if this new set of tools, commonly labeled as unconventional monetary policies (UMP), should continue to be used once economic conditions and interest rates have normalized. In particular, we study the optimality of asset purchase programs by using an estimated non-linear DSGE model with a banking sector and long-term private and public debt for the United States. We find that the benefits of using such UMP in normal times are substantial, equivalent to 1.45 percent of consumption. However, the benefits of using UMP are shock-dependent and mostly arise when the economy is hit by financial shocks. By contrast, when more traditional business cycle shocks (such as supply and demand shocks) hit the economy, the benefits of using UMP are negligible or zero.

Banking in a Steady State of Low Growth and Interest Rates

Author: Qianying Chen

Publisher: International Monetary Fund

Published: 2018-08-27

Total Pages: 37

ISBN-13: 1484374746

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A prolonged low-interest-rate environment presents a significant challenge to banks and is likely to entail major changes to their business models over the long-run. Lower returns to maturity transformation in the face of flatter yield curves and an inability to offer deposit rates significantly below zero combine to compress bank earnings in this environment. Smaller, deposit-funded, less diversified banks are hurt most, increasing consolidation pressures and reach-for-yield incentives, presenting new financial stability challenges.To the extent that such an economic environment reflects a new, steady-state with lower equilibrium growth driven by population aging and slower productivity growth, lower credit demand is likely to drive banking toward provision of fee-based, utility services.

Global Financial Stability Report, April 2013

Author: International Monetary Fund. Monetary and Capital Markets Department

Publisher: International Monetary Fund

Published: 2013-04-17

Total Pages: 160

ISBN-13: 1475589581

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The Global Financial Stability Report examines current risks facing the global financial system and policy actions that may mitigate these. It analyzes the key challenges facing financial and nonfinancial firms as they continue to repair their balance sheets. Chapter 2 takes a closer look at whether sovereign credit default swaps markets are good indicators of sovereign credit risk. Chapter 3 examines unconventional monetary policy in some depth, including the policies pursued by the Federal Reserve, the Bank of England, the Bank of Japan, the European Central Bank, and the U.S. Federal Reserve.

Japan

Author: International Monetary Fund. Asia and Pacific Dept

Publisher: International Monetary Fund

Published: 2020-02-10

Total Pages: 119

ISBN-13: 1513529390

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This 2019 Article IV Consultation with Japan highlights that the rapid aging and shrinking of Japan’s population has become central to macroeconomic policies and outcomes. The consultation centered on the macroeconomic effects of Japan’s demographics. Mutually reinforcing policies are needed to lift current and expected inflation, stabilize public debt, and raise potential growth. Underlying growth is expected to remain resilient but will be increasingly challenged by slowing external demand and intensifying demographic headwinds. Growth in domestic demand is being eroded by the weaker external environment. Frontloading of private consumption ahead of the October 2019 consumption tax rate increase appears to have been smaller than in 2014.

Japanese Monetary Policy

Author: Kenneth J. Singleton

Publisher: University of Chicago Press

Published: 2007-12-01

Total Pages: 208

ISBN-13: 0226760685

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How has the Bank of Japan (BOJ) helped shape Japan's economic growth during the past two decades? This book comprehensively explores the relations between financial market liberalization and BOJ policies and examines the ways in which these policies promoted economic growth in the 1980s. The authors argue that the structure of Japan's financial markets, particularly restrictions on money-market transactions and the key role of commercial banks in financing corporate investments, allowed the BOJ to influence Japan's economic success. The first two chapters provide the most in-depth English-language discussion of the BOJ's operating procedures and policymaker's views about how BOJ actions affect the Japanese business cycle. Chapter three explores the impact of the BOJ's distinctive window guidance policy on corporate investment, while chapter four looks at how monetary policy affects the term structure of interest rates in Japan. The final two chapters examine the overall effect of monetary policy on real aggregate economic activity. This volume will prove invaluable not only to economists interested in the technical operating procedures of the BOJ, but also to those interested in the Japanese economy and in the operation and outcome of monetary reform in general.