Why gradual and predictable? Bank lending during the sharpest quantitative tightening ever

01/09/2025 European Central Bank Central banks

Exploiting the recalibration of ECB’s outstanding central bank funding in 2022, we show that a sharp reabsorption of bank liquidity induces a tightening impact on credit supply, as intended when centralbanks reduce their balance sheets. The tightening originates from the sudden relative convenience for banks accustomed to large liquidity holdings to more rapidly adapt to the new environment. Moreover, we show that the associated reduction in credit supply has real economic effects.

Equity financing in a banking crisis: evidence from private firms

01/07/2025 European Central Bank Central banks

To what extent can private firms’ external equity substitute for debt financing in a banking crisis? To answer this question, I use firm-level data and firm-bank linkages to estimate the causal effect of an imported lending cut from a large German bank on firms’ capital structure and real outcomes. The estimates imply that for every 1 euro reduction in debt, private firms in Germany received 0.27 euros of external equity.

When banks hold back: credit and liquidity provision

01/07/2025 European Central Bank Central banks

Banks are reluctant to tap central bank backup liquidity facilities and use the borrowed funds for loans to the real economy. We show that excessively parsimonious borrowing and lending can arise in a stigma-free model where the banking sector has an incentive to overissue deposits. Banks don’t heed the central bank’s call for more credit to finance investment because they simply ignore the collective gains from stronger activity in their atomistic decisions. Central banks can address this market failure by disintermediating market-based finance.

How to Reclaim America’s ‘Democracy’ From the Big Finance Oligarchy

01/06/2025 Ineteconomics Analysis

Sociologist Michael A. McCarthy's latest book shows how ordinary people can take back control of financial capitalism and make it work for them.
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FEDS Paper: Nonparametric Time Varying IV-SVARs: Estimation and Inference

01/06/2025 Federal Reserve Central banks

Robin Braun, George Kapetanios, Massimiliano MarcellinoThis paper studies the estimation and inference of time-varying impulse response functions in structural vector autoregressions (SVARs) identified with external instruments. Building on kernel estimators that allow for nonparametric time variation, we derive the asymptotic distributions of the relevant quantities. Our estimators are simple and computationally trivial and allow for potentially weak instruments.

FEDS Paper: Predicting College Closures and Financial Distress

01/06/2025 Federal Reserve Central banks

Robert Kelchen, Dubravka Ritter, and Douglas WebberIn this paper, we assemble the most comprehensive dataset to date on the characteristics of colleges and universities, including dates of operation, institutional setting, student body, staff, and finance data from 2002 to 2023. We provide an extensive description of what is known and unknown about closed colleges compared with institutions that did not close.

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