Banks, government bonds, and default: what do the data say?

We use data from Bankscope to analyze the holdings of public bonds by over 18,000 banks located in 185 countries and the role of these bonds in 18 sovereign debt crises over the period 1998-2012. We find that: (i) banks hold a sizeable share of their assets in government bonds (about 9% on average), particularly in less financially developed countries; (ii) during sovereign crises, banks on average increase their bondholdings by 1% of their assets, but this increase is concentrated among larger and more profitable banks, and; (iii) the correlation between a bank's holdings of public bonds and its future loans is positive in normal times, but turns negative during defaults. A 10% increase in bank bond-holdings during default is associated with a 3.2% reduction in future loans, and bonds bought in normal times account for 75% of this effect. Our results are consistent with the view that there is a liquidity benefit for banks to hold public bonds in normal times, which is critical for understanding bank fragility during sovereign crises.

A note on convergence of Peck-Shell and Green-Lin mechanisms in the Diamond-Dybvig model

We study the effects of population size in the Peck-Shell analysis of bank runs. We find that a contract featuring equal-treatment for almost all depositors of the same type approximates the optimum. Because the approximation also satisfies Green-Lin incentive constraints, when the planner discloses positions in the queue, welfare in these alternative specifications are sandwiched. Disclosure, however, it is not needed since our approximating contract is not subject to runs.

The fragility of two monetary regimes: The European Monetary System and the Eurozone. National Bank of Belgium Working Paper No. 243, October 2013

The purpose of these working papers is to promote the circulation of research results (Research Series) and analytical studies (Documents Series) made within the National Bank of Belgium or presented by external economists in seminars, conferences and conventions organised by the Bank. The aim is therefore to provide a platform for discussion. The opinions expressed are strictly those of the authors and do not necessarily reflect the views of the National Bank of Belgium.

Post crisis challenges to bank regulation

The current crisis has swept aside not only the whole of the US investment banking industry butalso the consensual perception of banking risks, contagion and their implication for bankingregulation. As everyone agrees now, risks where mispriced, they accumulated in neuralgic pointsof the financial system, and where amplified by procyclical regulation as well as by the instabilityand fragility of financial institutions.The use of ratings as carved in stone and lack of adequate procedure to swiftly deal withsystemic institutions bankruptcy (whether too-big-to-fail, too complex to fail or too-many to fail).The current paper will not deal with the description and analysis of the crisis, already covered inother contributions to this issue will address the critical choice regulatory authorities will face. Inthe future regulation has to change, but it is not clear that it will change in the right direction. Thismay occur if regulatory authorities, possibly influenced by public opinion and political pressure,adopt an incorrect view of financial crisis prevention and management. Indeed, there are twoapproaches to post-crisis regulation. One is the rare event approach, whereby financial crises willoccur infrequently, but are inescapable.

Bank liquidity, interbank markets and monetary policy

A major lesson of the recent financial crisis is that the interbank lending marketis crucial for banks facing large uncertainty regarding their liquidity needs. Thispaper studies the efficiency of the interbank lending market in allocating funds. Weconsider two different types of liquidity shocks leading to different implications foroptimal policy by the central bank. We show that, when confronted with a distributional liquidity-shock crisis that causes a large disparity in the liquidity held amongbanks, the central bank should lower the interbank rate. This view implies that thetraditional tenet prescribing the separation between prudential regulation and monetary policy should be abandoned. In addition, we show that, during an aggregateliquidity crisis, central banks should manage the aggregate volume of liquidity. Twodifferent instruments, interest rates and liquidity injection, are therefore required tocope with the two different types of liquidity shocks. Finally, we show that failureto cut interest rates during a crisis erodes financial stability by increasing the riskof bank runs.

Enriching information to prevent bank runs

Sequential service in the banking sector, as modeled by Diamond and Dybvig (1983), is a barrier to full insurance and potential source of financial fragility against which deposit insurance is infeasible (Wallace, 1988). In this paper, we pursue a different perspective, viewing the sequence of contacts as opportunities to extract information through a larger message space with commitment to richer promises. As we show, if preferences satisfy a separating property then the desired elimination of dominated strategies (Green and Lin, 2003) occurs even when shocks are correlated. In this manner the sequential service promotes stability.

Financial fragility, trade credit and contagion effects during the crisis: a spatial econometric approach to firm-level data

The number of distressed manufacturing firms increased sharply during recessionary phase 2009-13. Financial indebtness traditionally plays a key role in assessing firm solvency but contagion effects that originate from the supply chain are usually neglected in literature. Firm interconnections, captured via the trade credit channel, represent a primary vehicle of individual shocks’ propagation, especially during an economic downturn, when liquidity tensions arise. A representative sample of 11,920 Italian manufacturing firms is considered to model a two-step econometric design, where chain reactions in terms of trade credit accumulation (i.e. default of payments to suppliers) are primarily analyzed by resorting to a spatial autoregressive approach (SAR). Spatial interactions are modeled based on a unique dataset of firm-to-firm transactions registered before the outbreak of the crisis. The second step in instead a binary outcome model where trade credit chains are considered together with data on the bank-firm relationship to assess determinants of distress likelihoods in 2009-13. Results show that outstanding trade debt is affected by the liquidity position of a firm and by positive spatial effects. Trade credit chain reactions are found to exert, in turn, a positive impact on distress likelihoods during the crisis. The latter effect is comparable in magnitude to the one exerted by individual financial rigidity, and stresses the importance to include complex interactions between firms in the analysis of the solvency behavior.

ECB Policy and Eurozone Fragility: Was De Grauwe Right? CEPS Working Document No. 397, June 2014

Paul De Grauwe’s fragility hypothesis states that member countries of a monetary union such as the eurozone are highly vulnerable to a self-fulfilling mechanism by which the efforts of investors to avoid losses from default can end up triggering the very default they fear. The authors test this hypothesis by applying an eclectic methodology to a time window around Mario Draghi’s “whatever it takes” (to keep the eurozone on firm footing) pledge on 26 July 2012. This pledge was soon followed by the announcement of the Outright Monetary Transactions (OMT) programme (the prospective and conditional purchase by the European Central Bank of sovereign bonds of eurozone countries having difficulty issuing debt). The principal components of eurozone credit default swap spreads validate this choice of time frame. An event study reveals significant pre announcement contagion emanating from Spain to Italy, Belgium, France and Austria. Furthermore, time-series regression confirms frequent clusters of large shocks affecting the credit default swap spreads of the four eurozone countries but solely during the pre-announcement period. The findings of this report support the fragility hypothesis for the eurozone and endorse the Outright Monetary Transactions programme.

Iron concentrations in breast milk and selected maternal factors of human milk bank donors

FAPESP n. 03/04061-2

Low-frequency Raman spectra and fragility of imidazolium ionic liquids

Raman spectra within the 5-200 cm(-1) range have been recorded as a function of temperature for different ionic liquids based on imidazolium cations. A correlation has been found between fragility and the temperature dependence of the strength of fast relaxational motions. Understanding quasielastic scattering as the relaxational contribution to ionic mean-squared displacement elucidates some effects on ionic liquids' fragility resulting from modifications in the chemical structure. (C) 2010 American Institute of Physics. [doi:10.1063/1.3462962]

Fragility and glassy dynamics of 2Ca(NO(3))(2)center dot 3KNO(3) under pressure: Molecular dynamics simulations

Molecular dynamics simulations of the glass-forming liquid 2Ca(NO(3))(2)center dot 3KNO(3) (CKN) were performed from high temperature liquid states down to low temperature glassy states at six different pressures from 10(-4) to 5.0 GPa. The temperature dependence of the structural relaxation time indicates that the fragility of liquid CKN changes with pressure. In line with recent proposal [Scopigno , Science 302, 849 (2003)], the change on liquid fragility is followed by a proportional change of the nonergodicity factor of the corresponding glass at low temperature. (c) 2008 American Institute of Physics.

INSTITUTIONAL DEVELOPMENT THROUGH POLICY-MAKING A Case Study of the Brazilian Central Bank

A number of contemporary studies rightly emphasize the notion that policy outcomes result from institutional determinants. But as a growing literature on institutional development notes, these institutions are themselves impermanent. Sometimes, in crisis moments, institutions are replaced wholesale. More frequently, institutions evolve gradually over time. Using the Brazilian Central Bank as a case study, this article illustrates that the policy-making process itself can be a central driver of gradual institutional development, with institutions evolving through the accumulation of policy choices made over many years and under different policymakers in response to contemporaneous events and unforeseeable economic and political challenges.

Human immunodeficiency virus test-seeking blood donors in a large blood bank in Sao Paulo, Brazil

BACKGROUND: Persons with human immunodeficiency virus (HIV) risk behaviors are excluded from donation to reduce the risk of transfusion-transmitted infection. Persons donating to be tested for HIV may therefore deny risk behaviors. STUDY DESIGN AND METHODS: A random sample of donors completed a survey on motivations, knowledge, and attitudes on the screening process. Donors were considered test seekers if they agreed with two statements ""I think that blood donation is a good, fast, and anonymous way to get my blood tested"" and ""I donate to get my test results."" This study was conducted from June to November 2006 at the largest blood bank in Sao Paulo, Brazil. RESULTS: Of 3061 participants, 208 (7%) were test seekers. They tended to be male and had a lower educational level. They were more likely to have incorrect knowledge about blood safety (e.g., not knowing that a unit can test antibody negative and still transmit infection, 60% vs. 42%, p = 0.02), express dissatisfaction with screening questions (e.g., feeling that important questions were not asked, 14% vs. 5%, p < 0.01), and concur that donors do not answer questions truthfully (e.g., donors have more sexual partners than they admit, 29% vs. 18%, p < 0.01). Test seekers were more likely to believe that it is acceptable to donate blood to get tested for HIV (41% vs. 10%, p < 0.01). CONCLUSIONS: Test-seeking motivation, coupled with low knowledge of window period risk, is counter to improving blood safety and to donor prevention needs. Donor education needs to be improved along with availability of appropriate HIV counseling and testing.