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Research interest in the reaction of consumption to expected inflation has increased in recent years due to efforts by central banks to kick-start demand by steering inflation expectations. We contribute to this literature by analysing whether various components of households’ balance sheets determine how consumption reacts to expected inflation. Two channels in particular are conceivable: an increase in inflation expectations can raise consumption through direct increases in expected real wealth, e.g. for households with nominal financial liabilities. By affecting the real interest rate, expected inflation can interact with wealth if only those households can adapt their consumption to current real interest rates that are not budget-constrained or sufficiently liquid to shift funds between consumption and savings. We investigate these channels empirically using household-level information on balance sheets, durable consumption and inflation expectations from the Dutch Central Bank’s Household Survey. We find that investments in risky assets as well as net worth moderates the relation between expected inflation and durable spending decisions. The net worth effect is most pronounced for households with fixed interest rate mortgages.

Banking regulation faces multiple challenges that call for rethinking the way it is designed. In this paper, we argue that regulators should focus more on simple equity requirements instead of elaborating complex rules. Such a constraint in equity is however opposed by the banking industry because of its presumed adverse impact on banks’ performance. Using various techniques (Lasso, Random Forest, Support Vector Regression, Artificial Neural Network) on a large dataset of banks’ balance sheet variables, we show that the equity ratio (equity over total assets) has a clear positive effect on banks’ performance when measured by the return on assets, while the impact of this ratio on the return on equity is most of the time negative. Strong equity requirements do not therefore impede banks’ performance, but do reduce the shareholder value. This may be the reason why the banking industry so fiercely opposes strong equity requirements. In addition, from a methodological perspective, we provide evidence that Random Forest performs better than other techniques at dealing with banks’ balance sheet data. Doing so, we provide avenues for future research dealing with these kind of data.

This paper compares the effects of macroprudential policy, fiscal policy, and two liberalization policies on house prices and bank balance sheets and examines the welfare and distributional implications of each policy. Three prominent features of the Chinese economy, including monopolistically competitive banks, a managed float, and capital controls, are built into a New Keynesian dynamic stochastic general equilibrium model to produce a quantitative analysis of these policies. The model is estimated with Bayesian methods using Chinese data from 1998Q1 to 2016Q4. Results show that macroprudential policy greatly improves welfare and is the most effective tool for strengthening banks' balance sheets.

Ample literature builds on the notion that real estate values boost corporate secured borrowing (“collateral channel”). A comprehensive contract-level database allows us to observe the value, location, and end-use of firms’ real estate holdings in the US and all debts raised against those assets over the 2000–2017 period. Firms raise new debt following an increase in the value of their real estate but use unsecured rather than secured borrowing. We rationalize these findings with a model where firms’ choices between secured and unsecured debt reflect the systematic risk exposures of the assets on their balance sheets. While secured debt may be seen as a safer claim than unsecured debt contractually, we demonstrate that it can be riskier from an economic perspective. Our analysis adds new insight into how firms set their debt structure.

This paper investigates the interrelation between household balance sheets, collateral constraints, and monetary policy. Using data on the U.S. economy, we estimate a monetary DSGE model with financial frictions and occasionally binding borrowing constraints. The model implies stronger effects of monetary policy interventions when the borrowing constraint is binding compared to situations when it turns slack. In a prediction analysis we find that, out of a set of alternative plausible endogenous model variables, the level of household net worth is the single best predictor of the tightness of the borrowing constraint, which implies that monetary policy is more effective when household net worth is low. We test this model prediction in the data and provide robust empirical evidence on asymmetric effects of monetary policy across the household net worth cycle that validates the model predictions. A contractionary monetary policy shock leads to a large and significant fall in economic activity during periods of low household net worth. In contrast, monetary policy shocks have only small and mostly insignificant effects when net worth is high.

This paper studies private business ownership as a source of heterogeneity of households’ indebtedness. We analyse micro-data on the debt side of household balance sheets in a small economy, with an underdeveloped financial system. We find that households’ behaviour in the credit markets varies substantially between employees and entrepreneurs; and that separately considering formal and informal business ownership is first-order. Our results indicate that the probability of being indebted is higher for employees. We also show that debt to income elasticity differs markedly across types of households, with employees (informal business owners) being the most (least) sensitive to income variations. Finally, we go beyond the mean, and find important differences between average elasticities and those at different quantiles of debt for formal entrepreneurs, while no divergences are detected for employees or informal business owners.

Though the monetary policy transmission and financial intermediation literatures have respectively highlighted the role of the “bank credit channel” and relationship banking, the effect of relationship banking on the transmission of monitory policy has not been investigated. In this paper, we study the impact of relationship banking on the transmission of monitory policy. Theoretically, relationship banking could ameliorate or exacerbate the effects of monetary policy shocks. Using a sample of bank dependent firms in India, we find that firms that enjoy an exclusive banking relationship are less susceptible to monetary policy shocks than firms that engage in transactional banking. The effects are symmetric across monetary policy tightening and loosening. We conjecture that reduced information asymmetry due to relationship banking blunts the impact of “firm balance sheet channel” of monitory policy transmission.

We study default in a multifirm equilibrium setting with incomplete information. Defaults are consistent with the firm’s balance sheet and aggregation. We show that the endogenous volatility and jump size of debt and equity generated by other firms’ shocks vanish as the number of firms in the economy increases. As a result, credit spreads depend asymptotically only on the firms’ own cash flow risk. Our vanishing contagion spread result calls into question recent findings based on production economies, in which quantities of risk (volatilities and jump sizes of securities) are specified exogenously, that attribute credit spreads mostly to contagion. This paper was accepted by Kay Giesecke, finance.

The aim of this paper is to investigate the cause behind rising Target2 imbalances since early 2015, coinciding with the implementation of a quantitative easing program by the ECB. Two facts have captured our attention. Firstly, the official explanation of rising Target2 imbalances, offered by the ECB, is not convincing because it does not fit the empirical evidence available for Italy and Spain. Further, our alternative interpretation reveals that through quantitative easing, the ECB has helped to clean up banks’ balance sheets and has indirectly funded government spending. Secondly, those who spoke out against the risks of rising Target2 imbalances in 2011-12, now remain silent on this issue, despite the fact that some of the presumed risks during the first wave of rising imbalances still hold. We interpret this silence as an implicit acceptance that the risks put forward in 2011-12 are offset by reform fatigue and anti-euro sentiments in the Euro Zone.Key words: Target2, Public sector purchase programme, Euro Zone crisis.JEL: E42, E58, F34, F36, F45.

Before the 2008 crisis, the cross-sectional skewness of banks’ leverage went up and macro risk concentrated in the balance sheets of large banks. Using a model of profit-maximizing banks with heterogeneous Value-at-Risk constraints, we extract the distribution of banks’ risk-taking parameters from balance sheet data. The time series of these estimates allow us to understand systemic risk and its concentration in the banking sector over time. Counterfactual exercises show that (1) monetary policymakers confront the trade-off between stimulating the economy and financial stability, and (2) macroprudential policies can be effective tools to increase financial stability.

The aim of this paper is to explore the macroeconomic determinants of corporate financial distress using a data from the Indian corporate sector. We also consider a set of quasi-macro variables to develop a hybrid model of financial distress. For this purpose, we use accounting information-based three-factor criteria to construct a series for probability of financial distress of firms. We initially use a systematic variable selection approach to develop alternative models of financial distress and then apply the bounds test to establish a long-run equilibrium relationship between financial distress of firms and its determinants. We find that macroeconomic factors play crucial role in determining financial distress. Results suggest that aggregate output, flow of international funds, international demand, and corporate profitability are negatively associated with probability of financial distress. However, periods of high inflation may not be beneficial as the results suggest that a high inflation leads to high financial distress. The findings are important in the sense that movement in these macroeconomic and quasi-macro factors can be useful in monitoring the buildup of risk or financial distress in the balance sheet of firms over time. The set of indicators identified in the study can be used to develop an efficient distress prediction models.

The deleterious effect of debt restructuring on banks’ balance sheets and, consequently, on the economy as a whole has been a key policy issue. This paper studies how post-default fiscal policy interacts with this sovereign-bank loop and shape the response of a model economy. Calibration of the model matches characteristics of the Greek economy at the time of the bond exchange. Debt restructuring in place of higher lump-sum taxation or lower nonproductive government spending harms the economy even if no other cost of default is considered. However, the sovereign-debt loop is less costly to the economy than increases in labor or capital taxes to service debt. Even so, if fiscal policy is too responsive, a crowding-out effect inhibits the recovery of capital markets, hence a more conservative fiscal stance is desirable. Thus, how diabolic the post-default sovereign-bank loop is depends to a large extent on the way fiscal policy responds.

What are the heterogeneous effects of financial shocks on firms' behavior? This paper evaluates and answers this question from both an empirical and a theoretical perspective. Using micro data from Portugal during the sovereign debt crisis, starting in 2010, we document that highly leveraged firms and firms that had a larger share of short-term debt on their balance sheets contracted more in the aftermath of a financial shock. We use a standard model to analyze the conditions under which leverage and debt maturity determine the sensitivity of firms' investment decisions to financial shocks. We show that the presence of long-term investment projects and frictions to the issuance of long-term debt are needed for the model to rationalize the empirical findings. We conclude that the differential responses of firms to a financial shock do not provide unambiguous information to identify these shocks. Rather, we argue that this information should be use to test for the relevance of important model assumptions.

We analyze the systemic risk of Italian banks with the ΔCoVaR from a bivariate normal GARCH model. The results show that it is a good measure of systemic risk and is applicable to the ranking of Italian other systemically important institutions. Using an elastic-net approach, we identify the balance sheet and market variables that explain the ΔCoVaR of Italian banks. The analysis confirms that these variables are key determinants of systemic importance and highlights how higher capitalization is beneficial to tackling systemic risk. And, we detect a connection between ΔCoVaR and some variables for trading and investment banking.

We examine how investors worldwide evaluate the mix of company assets both on and off its balance sheet. On aggregate, they appear to correctly value tangible assets but misprice intangible assets, with the possible exception of emerging market stocks. Investments in stakeholder capital—such as innovation, brand, and employees—often go unrecognized both on the balance sheet and by investors, despite their increased economic importance. In contrast, the premium paid for past acquisitions that is included on financial statements as goodwill generally fails to deliver on expectations, being written down too slowly by management and shareholders alike. These results are not explained by exposure to known systemic risk premia, limits to arbitrage, or data mining. Corroborating a recent surge of articles on this topic, we find that adjusting valuation metrics for the actual benefit of such intangibles improves performance in global equity markets. More impactfully, investors can diversify value exposure by targeting companies with latent such growth assets. Key Findings ▪ Historically, investors appear to have correctly valued tangible assets but mispriced intangible assets in developed global equity markets, overvaluing those recognized on the balance sheet, such as goodwill, but undervaluing the unreported “stakeholder capital” created from past spending on R&D, employees, and advertising. ▪ Adjusting valuation metrics to properly reflect the economic benefit of such intangible assets would consistently have improved their performance during our analysis period (1995–2020), even in emerging markets where the evidence for mispricing of companies’ assets mix was not statistically significant. ▪ Investors may also diversify value exposure by targeting companies with latent such growth assets, which outperformed even during the recent “quant winter” when most equity factor strategies and particularly value investing fared poorly.

We find dealer-level evidence that recent regulation on the leverage ratio requirement causes deviations from covered interest parity. Our analysis uses a unique data set of currency derivatives with disclosed counterparty identities together with exogenous variation introduced by the U.K. leverage ratio framework. Dealers who are affected by the regulatory shock charge an additional premium of about 20 basis points per annum for synthetic dollar funding relative to unaffected dealers. This finding holds even after controlling for changes in clients' demand. Also, some clients increase their trading activity with unaffected dealers with whom they already had a preexisting relationship.

We propose a model of banks’ exposure to movements in interest rates and their role in the transmission of monetary shocks. Since bank deposits provide liquidity, higher interest rates allow banks to earn larger spreads on deposits. Therefore, if risk aversion is higher than one, banks’ optimal dynamic hedging strategy is to take losses when interest rates rise. This risk exposure can be achieved by a traditional maturity-mismatched balance sheet and amplifies the effects of monetary shocks on the cost of liquidity. The model can match the level, time pattern, and cross-sectional pattern of banks’ maturity mismatch. (JEL E43, E44, E51, E52, G21, G32)

This paper is devoted to the monetary policy context of gold in central banks' reserves. It examines the correlation between the nominal and real price of gold and selected macroeconomic variables and financial assets over the financial and business cycles. In this context, it analyses the investment diversification opportunity that gold offers central banks and other investors. The paper also highlights differences in gold holdings between the central banks of advanced economies (including those with reserve currencies) and those of emerging market and developing economies. It goes on to outline the history of gold holdings from the establishment of the independent Czechoslovakia at the end of 1918 to the present day. It concludes by presenting the rationale for the position of the CNB, which ranks among the modern central banks holding minimal amounts of reserve gold.

An appreciation in the price of housing could generate speculation opportunities for enterprises. Many firms try to seize these opportunities for quick returns. This may harm their productivity. We use the real estate boom and the investment activities of Chinese manufacturing firms during 2006–2017 to examine the processes and the net effect of housing market speculation on firm productivity. We find that housing market speculation negatively affects firm productivity by crowding out investments in research and development and productive fixed assets, and the positive effect brought about by a strengthened balance sheet and better financing capacity is outweighed by the crowding‐out effect. This negative impact is more evident in state‐owned firms, but is mitigated in regions and periods with better business environments. Set in the overheated housing market in China, our study contributes to the existing literature by exploring how firms’ investments outside of their main business influence firm behavior and productivity.

We analyze the effects of prudential regulation on short-term interest rates. The European Market Infrastructure Regulation (EMIR) induces clearing houses (CCPs) to supply large amounts of cash in reverse repurchase agreements (repos). Basel III, in contrast, disincentivizes the borrowing demand by tightening banks’ balance sheet constraints. Using unique regulatory data of CCP investment activity and repo transactions, we find compelling evidence for both the supply and demand channels. The overall effects are decreasing short-term rates and increasing market imbalances in various forms, all of which entail unintended consequences due to the new regulatory framework.

We identify an item recognized on the balance sheet that distorts the assessment of default risk. Firms enter into derivatives to protect themselves from price fluctuations on a future purchase or sale commitment denominated in a commodity, foreign currency, or interest rate. There are two reasons why the accounting for these transactions creates difficulty in default risk assessments. First, while the fair value of the derivative is recorded at each balance sheet date, the value of the forecasted purchase or sale commitment is not recorded. Therefore, the balance sheet only tells half of the economic story. Second, the gains/losses associated with these derivatives provide a signal about future firm profitability, which is a determinant of default risk. We examine the extent to which debt investors, credit analysts, and equity investors understand the implications of these transactions for a firm’s default risk. Our results suggest that all three of these groups remove derivative amounts from firms’ balance sheet ratios when assessing default risk. However, only debt investors correctly price the implications of future profitability on default risk. Overall, our results suggest that the accounting for cash flow hedges distorts a firm’s leverage and profitability ratios, that not all investors adjust for this, and that capital market participants might benefit from more transparent hedging disclosures, particularly related to profitability.

Credit restrictions were used as a monetary policy instrument in the Netherlands from the 1960s to the early 1990s. Since these restrictions were aimed at containing money rather than credit growth, their focus was on net credit creation by the financial sector. We document the rationale of these credit restrictions and how their implementation evolved in line with the evolution of the financial system. We study the impact on the balance sheet structure of banks and other financial institutions. We find that banks mainly responded to credit restrictions by making adjustments to the liability side of their balance sheets, particularly by increasing the proportion of long-term funding. Responses on the asset side were limited, while part of the banking sector even increased lending after the adoption of a restriction. These results suggest that banks and financial institutions responded by switching to long-term funding to meet the restriction and shield their lending business. Arguably, the credit restrictions were therefore still effective in reaching their main goal. Indeed, we do find evidence of a significant effect of credit restrictions on inflation.

Minsky, the father of the financial instability hypothesis was concerned with how instability in business sector balance sheets could contribute to overall financial instability. Minsky did not con...

The authors construct a comprehensive measure of mismatch between the market liquidity of assets and the funding liquidity of liabilities of hedge funds. The measure captures the complete liquidity landscape of hedge funds by encompassing liquidity from both sides of the balance sheet. Using quarterly Form Private Fund (PF) filings, they use portfolio, investor, and financing illiquidity to construct the liquidity mismatch measure and study its dynamics from 2013–2015. They find that the market liquidity of a hedge fund’s assets is typically higher than the funding liquidity of its borrowings and investor capital (negative liquidity mismatch). However, liquidity mismatch tends to be greater (more positive) when VIX is high and among funds with higher leverage, lower managerial stake, and smaller size. TOPICS:Real assets/alternative investments/private equity, risk management, exchanges/markets/clearinghouses, financial crises and financial market history Key Findings ▪ The authors use a unique Form PF dataset with information on portfolio, investor, and financial illiquidity to construct a comprehensive measure of mismatch between the market liquidity of assets and the funding liquidity of liabilities of hedge funds. ▪ The authors find that the market liquidity of a hedge fund’s assets is typically higher than the funding illiquidity of its borrowings and investor capital (negative liquidity mismatch). ▪ However, liquidity mismatch tends to be greater (more positive) when VIX is high and among funds with higher leverage, lower managerial stake, and smaller size.

This paper presents an overview of the channels of monetary transmission and their manifestation in Bulgaria – a country in a currency board arrangement – in the first five years after the introduction of the regime. The presence of such a mechanism of transmission requires some form of macroeconomic discretion. The latter is approximated here with dynamics in the single fiscal account present on the balance sheet of the currency board.

The use of short-selling bans in different countries has greatly caught the attention of policy modelling. Our study is among the first studies to try to explain the phenomenon of different bank price reactions in terms of country and stock market conditions, looking at both the stock price reaction and risk. Overall, our findings suggest that the impacts of these bans on overall market efficiency were heterogeneous and, in most cases, modest for the countries analysed. Indeed, either we do not observe any improvements or the improvements are only short-lived. For the first time, we document that banks react differently to ban restrictions mostly because of differences in terms of their fundamental factors (balance sheet indicators). Given that Us and Asia-Pacific banks react differently to a ban on short selling depending on the particular financial structure of each market, when taking these actions, policy makers should consider which firm characteristics are most important and should pay attention to whether these interventions are effective in the market. Moreover, short-selling restrictions did not contribute to containing the volatility of the financial stocks subjected to the bans; on the contrary, our results indicate that negative volatility increased in some countries.

Although corporate default crises are often quite severe, previous work has found little impact on real macroeconomic variables. This article investigates the relationship between railroad defaults and the balance sheets of local banks following the Panic of 1873. Receivers appointed to run railroads in default lacked the legal tools necessary to fully maintain railroad operations. The results indicate that railroad bond defaults negatively impacted the lending activity of local banks. Affected banks experienced declines in loans and deposits along with increases in excess reserves. These findings point to a disruption of the transportation network attributable to the railroad bond default crisis.

In this paper, we have examined the influence of specific factors based on a capital structure sample of five Pakistani textile sector (Leveraged) companies. The secondary data came from an analysis of the balance sheets of five companies listed on the Karachi Stock Exchange between 2004 and 2014.Regression and correlation analysis on the panel data shows that profitability is negatively correlated with leverage ratio, while tangibility is positively correlated with leverage ratio, but not significantly. Firm size and firm growth are also positively and significantly correlated with leverage. Return on equity is also negatively correlated with leverage. Our findings also show that large textile firms, compared with small ones, finance long-term through debt. Keywords: Capital Structure, Return on equity, Profitability, Tangibility, Leverage, Debt to equity ratio, Pakistan.

We construct a new systemic risk measure that quantifies vulnerability to fire-sale spillovers using detailed regulatory balance sheet data for U.S. commercial banks and repo market data for broker-dealers. Even for moderate shocks in normal times, fire-sale externalities can be substantial. For commercial banks, a 1 percent exogenous shock to assets in 2013-Q1 produces fire sale externalities equal to 21 percent of system capital. For broker-dealers, a 1 percent shock to assets in August 2013 generates spillover losses equivalent to almost 60 percent of system capital. Externalities during the last financial crisis are between two and three times larger. Our systemic risk measure reaches a peak in the fall of 2007 but shows a notable increase starting in 2004, ahead of many other systemic risk indicators. Although the largest banks and broker-dealers produce – and are victims of – most of the externalities, leverage and linkages of financial institutions also play important roles.

We construct a balance sheet based network model to study the interconnectedness of US banking system. After a simulation analysis of the buffer effect of contingent convertible (CoCo) debt in controlling contagion in the banking network under a theoretically motivated model, we use 13-F filings made to the US Securities and Exchange Commission (SEC) to calibrate the theoretical model. Our results demonstrate that CoCo debt conversion significantly reduces the average number of bank failures, decreases the Delta-CoVaR of the banking system, and thus, mitigates systemic risk. While CoCo debt with dual-trigger is not so efficient as a single trigger design in reducing individual bank failures, the former is more effective at protecting the surviving banks, which leads to improved stability from the perspective of the banking system. Two-tranche CoCo debt can combine the benefits of single trigger and dual trigger CoCo debt. We claim that the different designs of CoCo triggers result in trade-offs for addressing systemic risk, which may be evaluated in a network model developed in this work.

The new millennium has witnessed a rapid expansion of external balance sheets and significant changes in the capital, currency and sectoral compositions of foreign assets and liabilities of emerging economies. These have created new channels of transmission of global financial shocks and amplified the susceptibility of the value of their outstanding stocks of gross foreign assets and liabilities to global financial conditions, leading to sizeable wealth transfers between emerging and advanced economies. They have also resulted in significant income transfers in view of negative yield differentials between their gross external assets and liabilities. Altogether, such transfers to advanced economies are estimated to have reached 2.3 per cent of the combined GDP of the G20 emerging economies per annum during 2000–2016.

This note explores the potential effects of the widespread adoption of a global stablecoin (GSC) on key aggregate financial sector balance sheets in the United States. To do this, we map out cash flows of GSC transactions among financial sector entities using a stylized set of 't-accounts'. By analyzing these individual transactions, we infer aggregate and compositional effects on U.S. commercial banking sector and Federal Reserve balance sheets. Through this lens, we also consider how these balance sheet changes could affect monetary policy implementation, the demand for central bank reserves, and the market for U.S. dollar safe assets.

Banks may be reluctant to remove bad loans from their portfolios during liquidity shortfalls, giving rise to a moral hazard problem. In this paper, we analyze how liquidity shortages affect the ability of the interbank market to provide liquidity in a moral hazard setting. We distinguish two types of liquidity shocks that arise due to a deposit flight (a contraction in the deposit supply) or to a cash-flow shock (an increase in the non-performing loans). We show that the source of a liquidity shortfall is the main determinant of the decision of banks to stop lending in the interbank market, rather than the extra amount of funds that banks need to cover. An increase in the non-performing loans has more adverse effects on balance sheets than a deposit flight. We also demonstrate that competition has a dual effect on financial stability. Interbank competition enhances financial stability by reducing the liquidity provision cost, whereas credit market competition worsens financial stability by inducing banks to take riskier profiles.

This paper examines the development and comparison of competition and concentration in the banking and insurance sector in the Czech Republic during the 2007-2019 period using the Herfindahl-Hirschman index (HH index). In the empirical section we calculate the degree of concentration and indexes separately for the banking and insurance markets, where the main variable in relation to banks is the balance sheet and this variable is the gross written premium in relation to insurance companies. Subsequently, we compare the two examined sectors including the analysis of their long-term equilibrium. The result of this research confirms the determined hypotheses, whereas the oligopolic structure of both markets, which falls over time and aims towards a competitive market but does not achieve this goal during the monitored period. Throughout examination, the insurance market demonstrates higher HH index values and therefore lower competitiveness compared to the banking market.

PurposeThe goal of this paper is twofold. First, to examine the role of expectations in shaping agents' behaviour within an extended time frame which incorporates a prolonged harsh downturn of economic activity. Therefore, the authors allow for an indirect impact of economy-wide expectations operating via their coexistence with firms' balance sheet factors. Second, it is tested whether the behaviour of listed firms as regards to debt follows the pecking order theory.Design/methodology/approachThe authors use the panel data methodology in the estimation of the financial structure models since unobservable heterogeneity is an important determinant towards the target leverage. A fixed effects estimation procedure, with robust intercepts allowed to vary across firms, was employed to examine the relationship between leverage and performance.FindingsThe findings offer evidence of patterns of pecking order behaviour and thus for the necessity of internal financing over external debt. The authors also extended the set of determinants by investigating the effect of macroeconomic conditions on the debt decision of firms. Contrary to the authors’ expectations, short-run beliefs of economic agents appear to play a negative role in leverage.Originality/valueThis paper contributes to the literature in a number of ways. First, following the growing literature of loan dynamics, the findings provide useful insights into corporate capital structure decisions in an economy in which businesses were almost excluded from external financing for over a decade. Second, in order to better understand corporate financing decisions, it is necessary to consider the overall economic framework in which companies and especially the listed ones operate.

Buying a house changes a household’s balance sheet by simultaneously reducing liquidity and introducing mortgage payments, which may leave the household more exposed to other shocks. We examine how this change impacts consumer credit beyond the mortgage. Using a large panel, we show that on acquiring a mortgage, credit card debt increases by about $1500 in the short term, severe delinquencies increase by 2.2 percentage points, and credit card utilization—the fraction of a consumer’s credit card limit that is used—increases by 11 percentage points. In the long term, credit card balances increase by $3900 and delinquencies by 9.1 percentage points. In our sample period before the 2008 financial crisis, credit limits increased faster than debt in the long run, pushing down long-term utilization. After the financial crisis, debt increased faster than credit limits in the long run, and credit card utilization rates rose upon the acquisition of a new mortgage, consistent with larger down payments leaving households more constrained.

PurposeConsidering the relationship between the central bank balance sheet and unconventional monetary policy after the 2008 financial crisis, it is crucial to see how the unconventional monetary policy, given near-zero interest rates, affects future stock market performance. This paper analyzes the impact of the Fed's balance sheet size on stock market performance.Design/methodology/approachTo analyze the Fed's balance sheet size's long-term stock market implications, this paper uses the asset pricing framework of market return predictability such as Ordinary least squares (OLS) and Generalized method of moments (GMM) analysis.FindingsFindings in this paper suggest that the Fed's balance sheet size, deflated by asset market wealth, presents evidence of return predictability during 1926–2015 that is robust against standard controls. These results can be explained through the redistribution of risk and the wealth channels of monetary policy transmission. The changing balance sheet size of a central bank (1) affects systemic risk, yields and expectations and (2) signals the future direction of monetary policy and thus economic outlook.Research limitations/implicationsThe main implication of these findings is that policymakers should avoid a severe imbalance between a central bank's balance sheet size and assets market wealth.Originality/valueThe empirical evidence in this paper documents a century-old relation between the Fed's balance sheet size and US stock market return using the Fed's balance sheet data for the last 100 years and stock market returns from the Center for research in security prices (CRSP) database.

The choice of the optimal sovereign risk indicator is crucial in the context of the euro area (EA) countries, which faced a fierce sovereign debt crisis. Traditional indicators of sovereign risk (CDS, bond yields, and credit rating) do not take into consideration the priority structure of creditors and are highly influenced by market sentiment. We propose a new indicator (distance to default, DtD) to quantify sovereign risk for eleven EA countries over the period 2004Q1-2019Q4. Using contingent claims' methodology, DtD incorporates the seniority structure of creditors in an existing theoretical model. Our results suggest that (1) DtD is a leading indicator of sovereign risk and (2) adding information from the public sector's balance sheet structure to market information, helps better incorporate macroeconomic fundamentals in the sovereign risk measure, overcoming some of the weaknesses documented in the traditional indicators.

Although some regard the New Deal of the 1930s as exemplifying an aggressive fiscal and monetary response to a severe economic crisis, the US fiscal and monetary policy responses to the COVID‐19 crisis have actually been far more substantial – and, so far, much more effective in reviving aggregate spending. Although many fear that these responses, and the large‐scale increase in bank reserves especially, must eventually cause unwanted inflation, the concurrent sharp decline in money's velocity has thus far more than offset any inflationary effects of money growth, while forward bond prices reflect a general belief that inflation will remain below 2 per cent for at least another decade. Notwithstanding the growth of the Fed's balance sheet, Fed authorities can always check inflation by sufficiently raising the interest return on bank reserves. Nonetheless, recent developments have heightened the risk of ‘fiscal dominance’ of monetary policy at some point in the future.

MSc. Filip Peovski[1] PhD. Gjorgji Gockov[2] ASSESSING THE EUROPEAN CENTRAL BANK’S UNCONVENTIONAL MEASURES – A RECURSIVE VAR APPROACH ABSTRACT Unconventional monetary measures utilization has proven to be of great importance in maintaining monetary and economic stability after the Great Recession. However, we aim to test this conclusion through the impact of the quantitative easing implemented by the European Central Bank. Observed through generated shocks in the balance sheet of the Eurosystem as our main variable, we tested whether quantitative easing reestablished economic growth and rose price levels, mainly through lowering borrowing costs for banks, thus helping in the post-crisis recovery. To prove our hypotheses we construct a recursive VAR model estimated in levels using 2014M05-2018M12 data. The model incorporates variables such as the industrial production and the HICP, as output and price level proxies, and financial components such as the EONIA-MRO spread and the CISS index. The results show that the expansion shocks of the consolidated balance sheet have a positive temporary influence on industrial production and the HICP, but the reaction of the former seems to be 2.24 times greater. On the other hand, we find out that quantitative easing has an expected negative impact in widening the EONIA-MRO spread. Furthermore, we could not confirm the theoretically expected accommodative impact on financial stress. Keywords: Unconventional monetary measures, price stability, policy interest rates, recursive VAR model JEL Classification: C32, E43, E52, E58 [1] Teaching and Research Assistant, Faculty of Economics – Skopje, “Ss. Cyril and Methodius” University, e-mail: peovski@eccf.ukim.edu.mk [2] Associate Professor, Faculty of Economics – Skopje, “Ss. Cyril and Methodius” University, e-mail: gockovg@eccf.ukim.edu.mk

Financial reporting still raises doubts and concerns among large and small entrepreneurs. When analyzing financial statements, the recipient often asks whether the current comprehensive forms of financial statements are not too vague and confusing. Data disclosed in the financial statements are often not easily read by ordinary users or even analysts. Maybe now it is worth looking for other new solutions that will allow business managers to obtain basic financial information from the financial reports in a quick and immediate way. The increase in competition and financial crises caused the largest number of bankruptcies in the group of small and medium enterprises. And it is to these small economic entities that it is worth facilitating the process of analyzing financial data. For this group of enterprises, it is worth highlighting in the financial statements those data that may inform about risks in conducting and continuing further operations. The article presents a balance sheet model for small business entities. Its layout and formula is designed to lighten the picture of the company’s financial situation and provide the most important information on the company’s financial safety.

Central banks often use certain concentration indices in their official reports to determine the degree of intensity of competition, of which the most common are the concentration ratio and the Herfindahl-Hirschman index. It is important to emphasize that when calculating the value of these indices, the National Bank of Serbia most often uses the absolute value of assets. In addition to the mentioned indices, the values of the Gini coefficient, Entropy coefficient, Rosenblatt index and graphical representation of the Lorenz curve in the period 2015–2019 are presented in this paper, using the balance sheet position loans and receivables from customers, but not including loans and receivables from banks and other financial organizations. The results of the static and dynamic analysis of concentration indicate that, compared to Montenegro, the banking sector of Serbia is characterized by a larger number of banks, less concentration on the market, and stronger intensity of competition. Although market changes are reflected in a reduced number of banks while a change in the dispersion of market shares affected the change in the market structures of the banking sectors, instability and uncertainty of the analysed sector remained unchanged in the case of both countries.

This paper analyzes optimal asset-purchase policies in a macroeconomic model with banks, which face occasionally-binding balance-sheet constraints. It proves analytically that asset-purchase policies are effective in offsetting large financial disturbances, which impair banks’ capital position. It warns, however, that the policy can remain ineffective after non-financial shocks and might offer no substitute for interest rate policy when the latter is constrained by the lower bound. Furthermore, the asset-purchase policy is addictive because it flattens the yield curve, reduces the profitability of the banking sector, and therefore slows down its recapitalization. Consequently, the optimal exit from large central bank balance sheets is gradual.

Several measures of credit-market booms are known to precede downturns in real economic activity. We offer an early indicator for all known measures of credit booms. Our measure is based on intra-family flow shifts towards high-yield bond mutual funds. It predicts indicators such as growth in financial intermediary balance sheets, increase in shares of high-yield bond issuers, and downturns of various measures of credit spreads. It also directly predicts the business cycle by positively predicting GDP growth and negatively predicting unemployment. Our results provide support for the investor demand-based narrative of credit cycles and can be useful for policymakers.

We examine the effect of monetary policy on household spending when households are indebted and interest rates on outstanding loans are linked to short-term interest rates. Using administrative data on balance sheets and consumption expenditure of Swedish households, we reveal the cash-flow transmission channel of monetary policy. On average, indebted households reduce consumption spending by an additional 0.23–0.55 percentage points in response to a one-percentage-point increase in the policy rate, relative to a household with no debt. We show that these responses are driven by households that have some or a large share of their debt in contracts where interest rates vary with short-term interest rates, such as adjustable-rate mortgages (ARMs), which implies that monetary policy shocks are quickly passed through to interest expenses.

One of the many consequences of financialization in the past decades has been the significant appreciation of the importance of financial markets' liquidity. In order to maintain financial stability, one must have a clear understanding of the sources of market liquidity (ML). A finer comprehension of liquidity and its direction would help policy makers in fine-tuning the current regulations while also identifying each of the elements that compose it. In this paper, a recursive vector autoregressive model is utilized to empirically analyze how to detect the causality relations between funding and ML in four post-communist countries (Czech Republic, Hungary, Slovakia and Poland). For the analyses freely accessible data on the balance sheets of aggregated banking sectors was utilized with the overall aim of finding a proxy for funding liquidity (FL) in every examined country. As a proxy for ML, government bonds' bid-ask spreads were utilized in the model. The paper provides an empirical evidence that FL drives ML in each economy. The results are clear, statistically significant and robust. They can be understood as evidence for the importance of the role of the trader's FL for the liquidity of financial assets' markets. The results of the paper have important implications for monetary policy, as well as micro- and macro-prudential regulation.

To what extent can a central bank influence its own balance sheet credit risks during a financial crisis through unconventional monetary policy operations? To study this question we develop a risk measurement framework to infer the time-variation in portfolio credit risks at a high (weekly) frequency. Focusing on the Eurosystem’s experience during the euro area sovereign debt crisis between 2010 and 2012, we find that the announcement and implementation of unconventional monetary policy operations generated beneficial risk spill-overs across policy portfolios. This caused overall risk to be nonlinear in exposures. In some instances the Eurosystem reduced its overall balance sheet credit risk by doing more, in line with Bagehot’s well-known assertion that occasionally “only the brave plan is the safe plan.”

This paper investigates empirically the linkages between corporate debt overhang and investment activity at the firm level for a cross section of large‐sized emerging market and developing economies. It analyzes the extent to which investment may be discouraged by high levels of debt that put at risk future profits, as well as firm dimensions that may sharpen the debt‐investment link. Using balance sheet data from a broad set of emerging market and developing economy firms, the analysis suggests that corporate debt overhang imposes a sizable effect on investment at the firm level. This linkage is more pronounced for large firms and highly leveraged firms. The analysis also finds evidence of a nonlinear effect, in which debt overhang discourages investment more severely under high levels of indebtedness.

Relative changes in home and foreign assets of the Czech banking system are negatively correlated in the period 1996-2017. The target of the research is to test this empirical fact deeply to explain how far this is only a balance sheet effect that is a result of booking the exchange rate changes in monetary survey statistics and how far this is a consequence of economic system behaviour. Our empirical analysis using the Granger causality test and the unconditional ARDL ECM model does not rule out the validity of the balance sheet hypothesis. Besides, it explains the economic nature of this phenomenon in relationship with GDP, exchange rate, foreign reserves, short-term interest rates and bank capital dynamics and confirms a possibility of substitutions between net home and foreign assets of a banking system within a money creation process represented by the M2 monetary aggregate.

[enter Abstract Body]One of the proposals that have been brought forward regarding ways of discouraging banks from taking unnecessary risk, widely debated these days, is the introduction of taxes in the financial sector. Although recent empirical investigations document a positive effect of the bank levies (BL), it may also reduce banks’ activity. In this paper, we aim to analyse the Polish BL on assets. Poland’s interbank market might be affected by a new BL introduced in 2016, as interbank positions of the balance sheet have been also taxed. The analysis covers the panel structure of data of 209 Polish banks with unconsolidated financial statements. To evaluate the impact of the BL on the above interbank market features, we use the OLS regression with fixed effects in relation to the bank. Data has been sourced from OrbisFocus and Central Banks’ websites and covers the period 2011-2017. The result demonstrates that the BL on assets applied in Poland has a negative impact on the interbank market. Estimation results shows that the BL on assets significantly decrease the value of 1y and increases the value of 3m interbank loans. In addition, the BL on assets in the banking sector positively affects the value of government securities and negatively affects the interest income on interbank loans. Moreover, the dispersion of 1m and 3m quotations was reduced as a result of the BL introduction. In case of short-term transactions, dispersion amplifies. Additionally, the volatility of quotation decreases due to reduced trading after the BL implementation.