Bank Intermediation under Flexible Deposit Rates and Controlled Credit Allocation: the Italian Experience

Monti, Mario; Porta, Angelo

doi:10.1007/978-1-349-05585-2_6

Cited by 4 publications

(6 citation statements)

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“…This helps focus on the key questions of interest that concern bank funding and liquidity provision. Market power in lending markets would give rise to markups on lending rates in addition to the model‐implied markdowns on deposit rates (Klein (1971), Monti (1972)). In the normative analysis in Section III, we allow for frictions on the lending side when assessing the robustness of our results.…”

Section: Modelmentioning

confidence: 99%

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Money and Banking with Reserves and CBDC

NIEPELT

2024

The Journal of Finance

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We analyze the role of retail central bank digital currency (CBDC) and reserves when banks exert deposit market power and liquidity transformation entails externalities. Optimal monetary architecture minimizes the social costs of liquidity provision, and optimal monetary policy follows modified Friedman rules. Interest rates on reserves and CBDC should differ. Calibrations robustly suggest that CBDC provides liquidity more efficiently than deposits unless the central bank must refinance banks and this is very costly. Accordingly, the optimal share of CBDC in payments tends to exceed that of deposits.

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Section: Modelmentioning

confidence: 99%

“…Following Klein (1971), Monti (1972), and a more recent literature (e.g., Drechsler, Savov, and Schnabl (2017)), we stipulate a noncompetitive deposit market. In Andolfatto (2021), the introduction of CBDC leads noncompetitive banks to raise the deposit rate.…”

mentioning

confidence: 99%

Money and Banking with Reserves and CBDC

NIEPELT

2024

The Journal of Finance

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“…Klein (1971), Monti (1972) and Ho and Saunders (1981) are the earliest authors who have carried out pioneering work in the development of theories on loan pricing. Klein (1971) and Monti (1972) have proposed a static model for the simultaneous clearance of demands and supplies of deposits and loans. High volatility of the deposit supply function may reduce the profit margin (Zarruk, 1989).…”

Section: Introductionmentioning

confidence: 99%

“…The literature discussed various theories of loan pricing. Klein (1971), Monti (1972) and Ho and Saunders (1981) are the earliest authors who have carried out pioneering work in the development of theories on loan pricing. Klein (1971) and Monti (1972) have proposed a static model for the simultaneous clearance of demands and supplies of deposits and loans.…”

Section: Introductionmentioning

confidence: 99%

A risk-neutral approach to the RAROC method of loan pricing using account-level data

Misra

Rahman²,

Tiwari³

2023

JRF

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PurposeThis paper has used account-level data of corporate and retail borrowers, assessed their credit risk through the risk-neutral principle and examined its implication on loan pricing.Design/methodology/approachIt derives the capital charge and credit risk-premium for expected and unexpected losses through a risk-neutral approach. It estimates the risk-adjusted return on capital as the pricing principle for loans. Using GMM regression, the article has assessed the determinants of risk-based pricing.FindingsIt has been found that risk-premium is not reflected in the current loan pricing policy as per Basel II norms. However, the GMM estimation on RAROC can price risk premium and probability of default, LGD, risk weight, bank beta and capital adequacy, which are the prime determinants of loan pricing. The average RAROC for retail loans is more than that of corporate loans despite the same level of risk capital requirement for both categories of loans. The robustness tests indicate that the RAROC method of loan pricing and its determinants are consistent against the time and type of borrowers.Research limitations/implicationsThe RAROC method of pricing effectively assesses the inherent risk associated with loans. Though the empirical findings are confined to the sample bank, the model can be used for any bank implementing the Basel principle of risk and capital assessments.Practical implicationsThe article has developed and validated the model for estimating RAROC, as per Basel II guidelines, for loan pricing that any bank can use.Social implicationsIt has developed the risk-based loan pricing model for retail and corporate borrowers. It has significant practical utility for banks to manage their risk, reduce their losses and productively utilise the public deposits for societal developments.Originality/valueThe article empirically validated the risk-neutral pricing principle using a unique 1,520 retail and corporate borrowers dataset.

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“…In this paper we present a standard portfolio choice model with banks, in the spirit of Monti (1972); Klein (1971) and Drechsler et al (2017), to analyze whether CBDC can actually generate bank disintermediation and, if so, how big this effect may be. In the model, households choose how to allocate their wealth between an illiquid asset and three imperfectly substitutable liquid assets: cash, bank deposits and CBDC.…”

mentioning

confidence: 99%

Central Bank Digital Currency and Bank Disintermediation in a Portfolio Choice Model

Chang

2023

IMF Working Papers

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Would the introduction of a Central Bank Digital Currency (CBDC) lead to lower deposits (disintermediation) and lending in the banking sector? This paper develops a model where households heterogeneous in wealth allocate between an illiquid asset and assets that can be used for payments: bank deposits, cash, and CBDC. CBDC is more efficient as a means of payment and has lower access cost than deposits. Deposits are offered by an imperfectly competitive banking sector which raises deposit interest rates after CBDC introduction to prevent substitution away from deposits to CBDC. We find that there are two opposing margins of impact on the level of aggregate deposits: (1) the intensive margin gain in deposits by richer households increasing their holdings of deposits because of higher interest rates, and (2) the extensive margin loss of deposits among poorer households who switch from deposits to the CBDC. The extensive margin loss in deposits is more likely to dominate (yielding a fall in aggregate deposits) when the mass of poorer households is large and when it is relatively costly to access bank accounts. This tends to be the case in developing and emerging market economies. However, even when the extensive margin loss of deposits dominates and there is disintermediation, the impact on lending is quantitatively small if banks have access to other forms of funding, such as wholesale or central bank financing.

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Bank Intermediation under Flexible Deposit Rates and Controlled Credit Allocation: the Italian Experience

Cited by 4 publications

References 1 publication

Money and Banking with Reserves and CBDC

Money and Banking with Reserves and CBDC

A risk-neutral approach to the RAROC method of loan pricing using account-level data

Central Bank Digital Currency and Bank Disintermediation in a Portfolio Choice Model

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