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Bank Profitability and Financial Stability
We analyze how bank profitability impacts financial stability from both theoretical and empirical perspectives. We first develop a theoretical model of the relationship between bank profitability and financial stability by exploring the role of non-interest income and retail-oriented business models. We then conduct panel regression analysis to examine the empirical determinants of bank risks and profitability, and how the level and the source of bank profitability affect risks for 431 publicly traded banks (U.S., advanced Europe, and GSIBs) from 2004 to 2017. Results reveal that profitability is negatively associated with both a bank’s contribution to systemic risk and its idiosyncratic r...
Drivers of Corporate Cash Holdings in
In Japan, corporate savings have risen since 2000 in line with profits. A large share of the additional savings was kept as cash holdings (i.e., cash and short-term investments) rather than used for investment. Building on a rich literature, this paper identifies two additional drivers of corporate cash holdings using financial data of public and private Japanese firms. First, a higher share of intangible capital is associated with more cash holdings. This indicates the presence of financial frictions as intangible capital is not easily collateralizable. Such financial friction could be alleviated by shifting towards cash flow-based lending that is prevalent in the United States (US). Second, corporate tax cuts are associated with more cash holdings while having no significant effect on investment. Given the significant fiscal cost, the efficiency of corporate tax cuts should be re-evaluated.
Financial Sector and Economic Growth in India
India’s financial sector has faced many challenges in recent decades, with a large, negative, and persistent credit to GDP gap since 2012. We examine how cyclical financial conditions affect GDP growth using a growth-at-risk (GaR) approach and analyze the link between bank balance sheets, credit growth, and long-term growth using bank-level panel regressions for both public and private banks. We find that on a cyclical basis, a negative shock to credit or a rise in macro vulnerability all shift the distribution of growth to the left, with lower expected growth and higher negative tail risks; over the long term, the results indicate that higher credit growth, arising from better capitalized banks with lower NPLs, is associated with higher GDP growth.
The Wealth Effect
Shows how the politics of banking crises has been transformed by the growing 'great expectations' among middle class voters that governments should protect their wealth.
What Drives the POLONIA Spread in Poland?
Since the start of the 2008 - 09 financial crisis, the Polish Overnight Index Average (POLONIA) has persistently been below the policy rate, suggesting a limited influence of the NBP’s open market operations on the short-term interbank rate. In this regard, this paper analyzes the behavior of the POLONIA spread and explore several potential factors that could influence the spread. An empirical analysis confirms that the negative POLONIA spread is related to a few factors, which include the existence of the structural liquidity in the banking system; bank’s unwillingness to lock up liquidity in the NBP bills; the frontloading of banks’ fulfillment of the reserve requirements; and external market sentiment. The analysis also shows the effectiveness of the NBP’s responses to the financial crisis and structural liquidity surplus.
IMF Research Bulletin, December 2014
The December 2015 IMF Research Bulletin features a sampling of key research from the IMF. The Research Summaries in this issue look at “The Impact of Deflation and Lowflation on Fiscal Aggregates (Nicolas End, Sampawende J.-A. Tapsoba, Gilbert Terrier, and Renaud Duplay); and “Oil Exporters at the Crossroads: It Is High Time to Diversify” (Reda Cherif and Fuad Hasanov). Mahvash Saeed Qureshi provides an overview of the fifth Lindau Meeting in Economics in “Meeting the Nobel Giants.” In the Q&A column on “Seven Questions on Financial Frictions and the Sources of the Business Cycle, Marzie Taheri Sanjani looks at the driving forces of the business cycle and macroeconomic models. The top-viewed articles in 2014 from the IMF Economic Review are highlighted, along with recent IMF Working Papers, Staff Discussion Notes, and IMF publications.
Dragonomics
An insightful examination of the political and economic ties between China and Latin America from the 1950s to the present This book explores the impact of Chinese growth on Latin America since the early 2000s. Roughly twenty years ago, Chinese entrepreneurs headed to the Western Hemisphere in search of profits and commodities, specifically those that China lacked and that some Latin American countries held in abundance—copper, iron ore, crude oil, soybeans, and fish meal. Focusing largely on Argentina, Brazil, Chile, Costa Rica, Mexico, and Peru, Carol Wise traces the evolution of political and economic ties between China and these countries and analyzes how success has varied by sector, project, and country. She also assesses the costs and benefits of Latin America’s recent pivot toward Asia. Wise argues that while opportunities for closer economic integration with China are seemingly infinite, so are the risks, and contends that the best outcomes have stemmed from endeavors where the rule of law, regulatory oversight, and a clear strategy exist on the Latin American side.
Regional Financial Spillovers Across Europe
The recent financial crisis raises important issues about the transmission of financial shocks across borders. In this paper, a global vector autoregressive (GVAR) model is constructed to assess the relevance of international spillovers following a historical slowdown in U.S. equity prices. The GVAR model contains 27 country-specific models, including the United States, 17 European advanced economies, and 9 European emerging economies. Each country model is linked to the others by a set of country-specific foreign variables, computed using bilateral bank lending exposures. Results reveal considerable comovements of equity prices across mature financial markets. However, the effects on credit growth are found to be country-specific. Evidence indicates that asset prices are the main channel through which-in the short run-financial shocks are transmitted internationally, while the contribution of other variables-like the cost and quantity of credit-becomes more important over longer horizons.
Science, Technology, and Innovation in Latin America and the Caribbean
The advent of the knowledge society has highlighted the growing importance of innovation and intellectual assets as sources of competitiveness and long-term economic growth. This book examines human capital and financial inputs into innovation systems, scientific and innovation outputs, innovative behavior by firms, the links between changes in economic structure, technological intensity, and growth, institutional development and public policy, and the status of one key crosscutting and enabling technological revolution: information and communication technology.
Romania
This Selected Issues paper discusses benefits of boosting quality public infrastructure spending in Romania. Since the financial crisis, fiscal and current account deficits have been tackled, but the infrastructure deficit has widened. Quality public investment in infrastructure can boost domestic demand and potential GDP growth, particularly in low growth environments. The IMF staff simulations employing the European Union’s production function methodology show significant growth benefits from higher quality infrastructure spending. As a result of higher investment, real GDP would increase by about 1 percent initially with the impact peaking in 2025.
