This paper addresses the impact of dynamic risk management on bank risk taking. We show that when banks earn rents only from deposit insurance and can engage in risk management it is no longer in their interests to maximize risk; instead, they moderate their risk to increase their chances of survival. The paper also shows that the opportunity for risk management may change the impact of capital...

Foreign-dominated banking sectors, such as those prevalent in Central and Eastern Europe, are susceptible to two major sources of systemic risk: (i) linkages between local banks and (ii) linkages between a foreign mother bank and its local subsidiary. Using a nonparametric method based on extreme value theory, which accounts for fat-tail shocks, we analyze interdependencies in downward risk in ...

We analyze the impact of capital adequacy regulation on bank insolvency and aggregate investment. We develop a model of the banking system that is characterized by the interaction of many heterogeneous banks with the real sector, interbank credit relations as a consequence of bank liquidity management and an insolvency mechanism. This allows us to study the impact of capital adequacy regulation...

This paper reviews analytical work carried out by central banks that participated in the Autumn Meeting of Central Bank Economists on “The evolving inflation process” which the BIS hosted on 28-29 October 2005. The paper first discusses efforts to document the univariate statistical properties of inflation and how they have changed over the last decades. It then reviews studies of disaggregated...

This paper studies optimal monetary policy and central bank transparency in an economy where firms set prices under informational frictions. The economy is subject to two types of shocks which determine the efficient level of output and the firms’ desired mark-up. To minimize the welfare-reducing output gap and price dispersion among the firms, the central bank controls the firms’ incentives an...

Do commercial banks invest less in information gathering activity when they compete more aggressively with each other? Does intensifying competitive pressure in bank loan markets affect the quality of informational ties that bind borrowers and lending banks? Using survey data from German manufacturing firms, we are able to directly measure information flows from loan applicants to banks. We fin...

Limited liability and asymmetric information between an investment bank and its lenders provide an incentive for a bank to undercapitalise and finance overly risky business projects. To counter this market failure, national governments have imposed solvency constraints on banks. However, these constraints may not survive in systems competition, as systems competition is likely to suffer from th...

Employing compensation data provided by 63 banks from 16 European countries for the period from 2000 to 2010 this paper empirically investigates the impact of excess variable compensation on bank risk. As a main finding, we provide evidence for a risk-increasing impact of excess variable pay for both executive variable cash-based and variable equity-based compensation. This baseline finding hol...

The purpose of the paper is to study the monetary policy implications of unionized labor markets in a New Keynesian framework. It is shown that, once the presence of large wage setters is taken into account, the degree of wage setting centralization and the aggressiveness of the central bank in stabilizing inflation jointly affect the equilibrium level of real economic activity in the long-run....

In this paper we analyse the effect of news relating to the expected path of monetary policy on interest rate futures. Central banks’ transparency is in most respects much greater than it was a decade ago, and so central bank communication needs to be included as a potential source of news. We therefore consider four types of news: macroeconomic news, overseas news, monetary policy surprises an...