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Monetary Policy Transmission in the Eastern Caribbean Currency Union
This paper empirically investigates international and domestic monetary policy transmission mechanisms in the Eastern Caribbean Currency Union (ECCU). We assess interest rate pass-through of both the U.S. policy rate and the ECCU minimum saving deposit rate (MSR) into domestic interest rates through the interest rate channel. While economic theory suggests that the international pass-through should be high in small open economies with fixed exchange rates and open capital accounts, our findings, based on regression analysis, point to a low long-run pass-through coefficient of the U.S. interest rate. The domestic transmission channel, however, is found to operate through changes in the MSR. The results hold for different interest rates (deposit and lending) and are supported by survey-based findings.
Loss of Correspondent Banking Relationships in the Caribbean
Banks across the Caribbean have lost important Correspondent Banking Relationships (CBRs). The macroeconomic impact has so far been limited, in part because banks either have multiple relationships or have been successful in replacing lost CBRs. However, the cost of services has increased substantially, some services have been cut back, and some sectors have experienced reduced access. Policy options to address multiple drivers, including lower profitability and risk aversion by global banks, require tailored actions by several stakeholders.
Dutch Inflation: Developments, Drivers, and the Risk of Wage-Price Spiral
Global inflation surged in 2022, driven by high gas price growth. With Russia being a key supplier of energy products, the start of the war in Ukraine has led to strong inflationary pressures in the euro area (EA), given the region’s significant exposure to the Russian gas. The price shock has been particularly strong in the Netherlands, largely due to the larger share of gas on the energy mix compared to other peers, making the country vulnerable to changing market conditions.
Bank Network Analysis in the ECCU
This paper applies network analysis to assess the extent of systemic vulnerabilities in the ECCU banking system. It includes two sets of illustrative stress tests. First, solvency and liquidity shocks to each individual bank and the impact on other banks in the network through their biltareal net asset exposures. Second, country and region-wide tail shocks to GDP affecting capital and liquidity of all banks in the shocked jurisdictions, followed by the rippling effects through the regional network. The results identify systemic institutions that merit hightened attention by the regulator, as determined by the degree of connectivity with the rest of the system, and the extent to which they are vulnerable to the failure of other banks.
Problem Loans in the Caribbean: Determinants, Impact and Strategies for Resolution
The high level of nonperforming loans (NPLs) in the Caribbean has been, in large part, a legacy of the global financial crisis, but their persistence owes much to the weak economic recovery in the region, as well as to structural obstacles to their resolution. A comprehensive strategy is needed to address these impediments to sever the adverse feedback loops between weak economic activity and weak asset quality. This paper finds that NPLs are a drag on Caribbean growth and macro-financial links are strong: a deterioration in asset quality hinders bank lending and dampens economic activity, undermining, in turn, efforts to resolve problem loans. A multifaceted approach is needed, involving a combination of macro- economic policies to support growth and employment; strong supervisory frameworks to ensure macro-financial stability and create incentives for resolution; efforts to address informational gaps and deficiencies in insolvency and debt-enforcement frameworks; and development of markets for distressed loans. The institutional capacity constraints require coordination of reforms within the region and support from international organizations through capacity-building.
Non-Performing Loans in the ECCU
This paper assesses the determinants of NPLs in the Eastern Caribbean Currency Union (ECCU) and whether a deterioration in asset quality may result in negative feedback effects from the banking system to economic activity. The results suggest that the deterioration in asset quality can be attributed to both macroeconomic and bank-specific factors. Banks with stronger profitability and lower exposure to the construction sector and household loans tend to have lower NPLs. Further, some evidence indicates that foreign owned banks systematically have lower NPLs than domestic banks, pointing to the presence of important differences across bank practices with an impact on asset quality. Finally, the results emphasize the strength of macrofinancial feedback loops in the ECCU.
The Role of State-Contingent Debt Instruments in Sovereign Debt Restructurings
The COVID-19 crisis may lead to a series of costly and inefficient sovereign debt restructurings. Any such restructurings will likely take place during a period of great economic uncertainty, which may lead to protracted negotiations between creditors and debtors over recovery values, and potentially even relapses into default post-restructuring. State-contingent debt instruments (SCDIs) could play an important role in improving the outcomes of these restructurings.
Problem Loans in the Caribbean: Determinants, Impact and Strategies for Resolution
The high level of nonperforming loans (NPLs) in the Caribbean has been, in large part, a legacy of the global financial crisis, but their persistence owes much to the weak economic recovery in the region, as well as to structural obstacles to their resolution. A comprehensive strategy is needed to address these impediments to sever the adverse feedback loops between weak economic activity and weak asset quality. This paper finds that NPLs are a drag on Caribbean growth and macro-financial links are strong: a deterioration in asset quality hinders bank lending and dampens economic activity, undermining, in turn, efforts to resolve problem loans. A multifaceted approach is needed, involving a combination of macro- economic policies to support growth and employment; strong supervisory frameworks to ensure macro-financial stability and create incentives for resolution; efforts to address informational gaps and deficiencies in insolvency and debt-enforcement frameworks; and development of markets for distressed loans. The institutional capacity constraints require coordination of reforms within the region and support from international organizations through capacity-building.
Assessing the Determinants of Interest Rate Transmission Through Conditional Impulse Response Functions
We employ a structural panel VAR model with interaction terms to identify determinants of effective transmission from central bank policy rates to retail lending rates in a large country sample. The framework allows deriving country specific pass-through estimates broken down into the contributions of structural country characteristics and policies. The findings suggest that industrial economies tend to enjoy a higher pass-through largely on account of their more flexible exchange rate regimes and their more developed financial systems. The average pass-through in our sample increased from 30 to 60 percent between 2003 and 2008, mainly due to positive risk sentiment, rising inflation and increasingly diversified banking sectors. The crisis reversed this trend partly as banks increased precautionary liquidity holdings, non-performing loans proliferated and inflation moderated.
Belgium
This Technical Note discusses the results of the stress testing of Belgium’s banking and insurance sectors. Belgium’s financial sector remains resilient in the face of the rising cyclical vulnerabilities, but there is a need for closely monitoring risks. Stress tests on banks and insurance companies confirm that they can absorb credit, sovereign, and market losses in the event of a severe deterioration in macro-financial conditions. All banks meet minimum capital requirements and none needs to draw down its capital conservation buffer over the stress horizon. The risk of interbank contagion through direct exposures is low. Insurance companies are also generally resilient and losses incurred in the stress scenarios by those that belong to banking groups do not threaten the soundness of those groups.
