Lev Ratnovski's Books

Benefits and Costs of Bank Capital

By: Jihad Dagher,Mr.Giovanni Dell'Ariccia,Mr.Luc Laeven,Mr.Lev Ratnovski,Mr.Hui Tong

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Benefits and Costs of Bank Capital

By: Jihad Dagher,Mr.Giovanni Dell'Ariccia,Mr.Luc Laeven,Mr.Lev Ratnovski,Mr.Hui Tong

The appropriate level of bank capital and, more generally, a bank’s capacity to absorb losses, has been at the core of the post-crisis policy debate. This paper contributes to the debate by focusing on how much capital would have been needed to avoid imposing losses on bank creditors or resorting to public recapitalizations of banks in past banking crises. The paper also looks at the welfare costs of tighter capital regulation by reviewing the evidence on its potential impact on bank credit and lending rates. Its findings broadly support the range of loss absorbency suggested by the Financial Stability Board (FSB) and the Basel Committee for systemically important banks.

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International Monetary Fund

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ISBN 10

1513539337

ISBN 13

9781513539331

Bank Size and Systemic Risk

By: Mr.Luc Laeven,Mr.Lev Ratnovski,Mr.Hui Tong

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Bank Size and Systemic Risk

By: Mr.Luc Laeven,Mr.Lev Ratnovski,Mr.Hui Tong

The proposed SDN documents the evolution of bank size and activities over the past 20 years. It discusses whether this evolution can be explained by economies of scale or “too big to fail” subsidies. The paper then presents evidence on the extent to which bank size and market-based activities contribute to systemic risk. The paper concludes with policy messages in the area of capital regulation and activity restrictions to reduce the systemic risk posed by large banks. The analysis of the paper complements earlier Fund work, including SDN 13/04 and the recent GFSR chapter on “too big to fail” subsidies, and its policy message is in line with this earlier work.

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International Monetary Fund

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ISBN 10

1484369629

ISBN 13

9781484369623

The Dynamics of Non-Performing Loans during Banking Crises: A New Database

By: Mr.Anil Ari,Sophia Chen,Mr.Lev Ratnovski

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The Dynamics of Non-Performing Loans during Banking Crises: A New Database

By: Mr.Anil Ari,Sophia Chen,Mr.Lev Ratnovski

This paper presents a new dataset on the dynamics of non-performing loans (NPLs) during 88 banking crises since 1990. The data show similarities across crises during NPL build-ups but less so during NPL resolutions. We find a close relationship between NPL problems—elevated and unresolved NPLs—and the severity of post-crisis recessions. A machine learning approach identifies a set of pre-crisis predictors of NPL problems related to weak macroeconomic, institutional, corporate, and banking sector conditions. Our findings suggest that reducing pre-crisis vulnerabilities and promptly addressing NPL problems during a crisis are important for post-crisis output recovery.

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International Monetary Fund

Published Date

ISBN 10

1513521152

ISBN 13

9781513521152

Liquidity and Transparency in Bank Risk Management

By: Mr.Lev Ratnovski

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Liquidity and Transparency in Bank Risk Management

By: Mr.Lev Ratnovski

Banks may be unable to refinance short-term liabilities in case of solvency concerns. To manage this risk, banks can accumulate a buffer of liquid assets, or strengthen transparency to communicate solvency. While a liquidity buffer provides complete insurance against small shocks, transparency covers also large shocks but imperfectly. Due to leverage, an unregulated bank may choose insufficient liquidity buffers and transparency. The regulatory response is constained: while liquidity buffers can be imposed, transparency is not verifiable. Moreover, liquidity requirements can compromise banks' transparency choices, and increase refinancing risk. To be effective, liquidity requirements should be complemented by measures that increase bank incentives to adopt transparency.

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International Monetary Fund

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ISBN 10

1475536151

ISBN 13

9781475536157

Bank Profitability and Risk-Taking

By: Natalya Martynova,Mr.Lev Ratnovski,Mr.Razvan Vlahu

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Bank Profitability and Risk-Taking

By: Natalya Martynova,Mr.Lev Ratnovski,Mr.Razvan Vlahu

Traditional theory suggests that more profitable banks should have lower risk-taking incentives. Then why did many profitable banks choose to invest in untested financial instruments before the crisis, realizing significant losses? We attempt to reconcile theory and evidence. In our setup, banks are endowed with a fixed core business. They take risk by levering up to engage in risky ‘side activities’(such as market-based investments) alongside the core business. A more profitable core business allows a bank to borrow more and take side risks on a larger scale, offsetting lower incentives to take risk of given size. Consequently, more profitable banks may have higher risk-taking incentives. The framework is consistent with cross-sectional patterns of bank risk-taking in the run up to the recent financial crisis.

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International Monetary Fund

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ISBN 10

1513565818

ISBN 13

9781513565811

Shadow Banking

Economics and Policy

By: Mr.Stijn Claessens,Mr.Lev Ratnovski,Mr.Manmohan Singh

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Shadow Banking

Economics and Policy

By: Mr.Stijn Claessens,Mr.Lev Ratnovski,Mr.Manmohan Singh

This note outlines the basic economics of the shadow banking system, highlights (systemic) risks related to it, and suggests implications for measurement and regulatory approaches.

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ISBN 10

1475537808

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9781475537802

The Effects of Higher Bank Capital Requirements on Credit in Peru

By: Xiang Fang,David Jutrsa,Mr.Maria Soledad Martinez Peria,Andrea Presbitero,Mr.Lev Ratnovski,Mr.Felix J Vardy

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The Effects of Higher Bank Capital Requirements on Credit in Peru

By: Xiang Fang,David Jutrsa,Mr.Maria Soledad Martinez Peria,Andrea Presbitero,Mr.Lev Ratnovski,Mr.Felix J Vardy

This paper offers novel evidence on the impact of raising bank capital requirements in the context of an emerging market: Peru. Using quarterly bank-level data and exploiting the adoption of bank-specific capital buffers, we find that higher capital requirements have a short-lived, negative impact on bank credit in Peru, although this effect becomes statistically insignificant in about half a year. This finding is robust to estimating different specifications to address concerns about the exogeneity of capital requirements. The fact that the reform was gradual and pre-announced and that banks were highly profitable at the time could explain the short-lived effects on credit.

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International Monetary Fund

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ISBN 10

1484378830

ISBN 13

9781484378830

The Dark Side of Bank Wholesale Funding

By: Mr.Lev Ratnovski,Rocco Huang

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The Dark Side of Bank Wholesale Funding

By: Mr.Lev Ratnovski,Rocco Huang

Banks increasingly use short-term wholesale funds to supplement traditional retail deposits. Existing literature mainly points to the "bright side" of wholesale funding: sophisticated financiers can monitor banks, disciplining bad but refinancing good ones. This paper models a "dark side" of wholesale funding. In an environment with a costless but noisy public signal on bank project quality, short-term wholesale financiers have lower incentives to conduct costly monitoring, and instead may withdraw based on negative public signals, triggering inefficient liquidations. Comparative statics suggest that such distortions of incentives are smaller when public signals are less relevant and project liquidation costs are higher, e.g., when banks hold mostly relationship-based small business loans.

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International Monetary Fund

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ISBN 10

1455201812

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9781455201815

Credit and Fiscal Multipliers in China

By: Sophia Chen,Mr.Lev Ratnovski,Pi-Han Tsai

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Credit and Fiscal Multipliers in China

By: Sophia Chen,Mr.Lev Ratnovski,Pi-Han Tsai

We jointly estimate credit and fiscal multipliers in China. We use the tenure of the provincial party secretary, interacted with the type of stimulus used in other provinces, to obtain separate instruments for provincial credit and government expenditure. We estimate a fiscal multiplier of 0.8 and a credit multiplier of 0.2 in 2001-2015. The multipliers have changed over time. The fiscal multiplier has increased from 0.75 in 2001-2008 to 1.4 in 2010-2015. The credit multiplier has declined from 0.17 to zero over the same periods. Our results suggest that reducing credit growth in China is unlikely to disrupt output growth, whereas fiscal policy may be effective in supporting macroeconomic adjustment.

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International Monetary Fund

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ISBN 10

1484332180

ISBN 13

9781484332184

Bank Lending in the Knowledge Economy

By: Mr.Giovanni Dell'Ariccia,Dalida Kadyrzhanova,Ms.Camelia Minoiu,Mr.Lev Ratnovski

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Bank Lending in the Knowledge Economy

By: Mr.Giovanni Dell'Ariccia,Dalida Kadyrzhanova,Ms.Camelia Minoiu,Mr.Lev Ratnovski

We study bank portfolio allocations during the transition of the real sector to a knowledge economy in which firms use less tangible capital and invest more in intangible assets. We show that, as firms shift toward intangible assets that have lower collateral values, banks reallocate their portfolios away from commercial loans toward other assets, primarily residential real estate loans and liquid assets. This effect is more pronounced for large and less well capitalized banks and is robust to controlling for real estate loan demand. Our results suggest that increased firm investment in intangible assets can explain up to 20% of bank portfolio reallocation from commercial to residential lending over the last four decades.

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International Monetary Fund

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ISBN 10

1484324897

ISBN 13

9781484324899

Monetary Policy Pass-Through to Interest Rates: Stylized Facts from 30 European Countries

By: Robert C. M. Beyer,Ms. Ruo Chen,Florian Misch,Claire Li,Ezgi O. Ozturk,Mr. Lev Ratnovski

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Monetary Policy Pass-Through to Interest Rates: Stylized Facts from 30 European Countries

By: Robert C. M. Beyer,Ms. Ruo Chen,Florian Misch,Claire Li,Ezgi O. Ozturk,Mr. Lev Ratnovski

The extent to which changes in monetary policy rates lead to changes in loan and deposit rates for households and firms, referred to as ‘pass-through’, is an important ingredient of monetary policy transmission to output and prices. Using data on seven different bank interest rates in 30 European countries, different approaches, and the full sample as well as a subsample of euro area countries, we show that a) the pass-through in the post-pandemic hiking cycle has been heterogenous across countries and types of interest rates; b) the pass-through has generally been weaker and slower, except for rates of non-financial corporation loans and time deposits in euro area countries; c) differences in pass-through over time and across countries for most deposit rates are correlated with financial sector concentration, liquidity, and loan opportunities, and d) the effects of pass-through to outstanding mortgage rates on monetary transmission on prices and output are heterogenous across countries.

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ISBN 13

9798400263613

Bailouts and Systemic Insurance

By: Mr.Giovanni Dell'Ariccia,Mr.Lev Ratnovski

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Bailouts and Systemic Insurance

By: Mr.Giovanni Dell'Ariccia,Mr.Lev Ratnovski

We revisit the link between bailouts and bank risk taking. The expectation of government support to failing banks creates moral hazard—increases bank risk taking. However, when a bank’s success depends on both its effort and the overall stability of the banking system, a government’s commitment to shield banks from contagion may increase their incentives to invest prudently and so reduce bank risk taking. This systemic insurance effect will be relatively more important when bailout rents are low and the risk of contagion (upon a bank failure) is high. The optimal policy may then be not to try to avoid bailouts, but to make them “effective”: associated with lower rents.

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International Monetary Fund

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ISBN 10

1475514743

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9781475514742

Do Lenders Make Less-Informed Investments in High-Growth Housing Markets?

By: Sophia Chen,Mr. Lev Ratnovski,Yangfan Sun

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Do Lenders Make Less-Informed Investments in High-Growth Housing Markets?

By: Sophia Chen,Mr. Lev Ratnovski,Yangfan Sun

Nonlocal mortgage lenders with greater exposure to high-growth housing markets accept fewer loan applications in these markets and experience greater stock return volatility. When these lenders expand to high-growth markets, they also ration credit to a significantly greater degree than when they ex-pand to other markets. Mean-variance analyses show that nonlocal lenders’ exposure to high-growth markets is associated with more risk, more efficiency, and more return on mortgage portfolios. Overall, these results imply that expansion to high-growth markets leads to a decline in screening and riskier investment by nonlocal lenders, which may reflect a risk–return tradeoff in their portfolio strategy.

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International Monetary Fund

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ISBN 10

1513573381

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9781513573380

Public Financial Institutions in Developed Countries—Organization and Oversight

By: Aditya Narain,Mr.Lev Ratnovski

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Public Financial Institutions in Developed Countries—Organization and Oversight

By: Aditya Narain,Mr.Lev Ratnovski

While public financial institutions (such as public development banks) are commonly associated with developing countries, in fact they are prevalent in the developed world as well. We study a sample of public financial institutions in industrialized countries and identify dominant trends in their organization and oversight. While practices in developed countries may be a useful reference point, a more nuanced approach, accounting for the disparity of institutional environment, regulatory capacity, and government accountability and effectiveness, may be required in developing countries. Further investment in the accumulation of evidence and formulation of best practices in the organization and oversight of public financial institutions seems warranted and necessary. This paper was prepared while Mr. Ratnovski was working in the Financial Supervision and Regulation Division during January-April 2006. The authors are grateful to Jonathan Fiechter, David Marston, and participants of an MCM seminar in April 2006 for their helpful comments.

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ISBN 10

1451867913

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9781451867916

One Hundred Inflation Shocks: Seven Stylized Facts

By: Mr. Anil Ari,Mr. Carlos Mulas-Granados,Mr. Victor Mylonas,Mr. Lev Ratnovski,Wei Zhao

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One Hundred Inflation Shocks: Seven Stylized Facts

By: Mr. Anil Ari,Mr. Carlos Mulas-Granados,Mr. Victor Mylonas,Mr. Lev Ratnovski,Wei Zhao

This paper identifies over 100 inflation shock episodes in 56 countries since the 1970s, including over 60 episodes linked to the 1973–79 oil crises. We document that only in 60 percent of the episodes was inflation brought back down (or “resolved”) within 5 years, and that even in these “successful” cases resolving inflation took, on average, over 3 years. Success rates were lower and resolution times longer for episodes induced by terms-of-trade shocks during the 1973–79 oil crises. Most unresolved episodes involved “premature celebrations”, where inflation declined initially, only to plateau at an elevated level or re-accelerate. Сountries that resolved inflation had tighter monetary policy that was maintained more consistently over time, lower nominal wage growth, and less currency depreciation, compared to unresolved cases. Successful disinflations were associated with short-term output losses, but not with larger output, employment, or real wage losses over a 5-year horizon, potentially indicating the value of policy credibility and macroeconomic stability.

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ISBN 13

9798400254369

Competition Policy for Modern Banks

By: Mr.Lev Ratnovski

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Competition Policy for Modern Banks

By: Mr.Lev Ratnovski

Traditional bank competition policy seeks to balance efficiency with incentives to take risk. The main tools are rules guiding entry/exit and consolidation of banks. This paper seeks to refine this view in light of recent changes to financial services provision. Modern banking is largely market-based and contestable. Consequently, banks in advanced economies today have structurally low charter values and high incentives to take risk. In such an environment, traditional policies that seek to affect the degree of competition by focusing on market structure (i.e. concentration) may have limited effect. We argue that bank competition policy should be reoriented to deal with the too-big-to-fail (TBTF) problem. It should also focus on the permissible scope of activities rather than on market structure of banks. And following a crisis, competition policy should facilitate resolution by temporarily allowing higher concentration and government control of banks.

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International Monetary Fund

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ISBN 10

1484366174

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9781484366172

Externalities and Macroprudential Policy

By: Mr.Gianni De Nicolo,Giovanni Favara,Mr.Lev Ratnovski

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Externalities and Macroprudential Policy

By: Mr.Gianni De Nicolo,Giovanni Favara,Mr.Lev Ratnovski

This note overviews macroprudential policy options that have been proposed to address the systemic risks experienced during the recent financial crisis. It contributes to the policy debate by providing a taxonomy of macroprudential policies in terms of the specific negative externalities in the financial system that these policies are meant to address, and discusses their interrelations and some key implementation issues.

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1475504098

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9781475504095

Commodity Prices and Inflation Expectations in the United States

By: Oya Celasun,Mr.Lev Ratnovski,MissRoxana Mihet

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Commodity Prices and Inflation Expectations in the United States

By: Oya Celasun,Mr.Lev Ratnovski,MissRoxana Mihet

U.S. monetary policy can remain extraordinarily accommodative only if longer-term inflation expectations stay well-anchored, including in response to commodity price shocks. We find that oil price shocks have a statistically significant, but economically small impact on longer-term inflation compensation embedded in U.S. Treasury bonds. The estimated effect is larger for the post-crisis period, and robust to controlling for measures of liquidity risk premia. Oil price shocks are also correlated with the variance of longer-term inflation expectations in the University of Michigan Survey of Consumers in the post-crisis period. These results are not attributable to looser monetary policy - oil price increases were associated with expectations of a faster monetary tightening after the crisis. Overall, the findings are consistent with some impact of commodity prices on long-term inflation expectations and/or on inflation rate risk.

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International Monetary Fund

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ISBN 10

1475519508

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9781475519501

What is Shadow Banking?

By: Mr.Stijn Claessens,Mr.Lev Ratnovski

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What is Shadow Banking?

By: Mr.Stijn Claessens,Mr.Lev Ratnovski

There is much confusion about what shadow banking is. Some equate it with securitization, others with non-traditional bank activities, and yet others with non-bank lending. Regardless, most think of shadow banking as activities that can create systemic risk. This paper proposes to describe shadow banking as “all financial activities, except traditional banking, which require a private or public backstop to operate”. Backstops can come in the form of franchise value of a bank or insurance company, or in the form of a government guarantee. The need for a backstop is in our view a crucial feature of shadow banking, which distinguishes it from the “usual” intermediated capital market activities, such as custodians, hedge funds, leasing companies, etc.

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International Monetary Fund

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ISBN 10

1475597940

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9781475597943

Bank Size and Systemic Risk

By: Mr.Luc Laeven,Mr.Lev Ratnovski,Mr.Hui Tong

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Bank Size and Systemic Risk

By: Mr.Luc Laeven,Mr.Lev Ratnovski,Mr.Hui Tong

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1484369629

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9781484369623

Competition Policy for Modern Banks

By: Mr.Lev Ratnovski

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Competition Policy for Modern Banks

By: Mr.Lev Ratnovski

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1484366174

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9781484366172

What is Shadow Banking?

By: Mr.Stijn Claessens,Mr.Lev Ratnovski

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What is Shadow Banking?

By: Mr.Stijn Claessens,Mr.Lev Ratnovski

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1475597940

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9781475597943

Externalities and Macroprudential Policy

By: Mr.Gianni De Nicolo,Giovanni Favara,Mr.Lev Ratnovski

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Externalities and Macroprudential Policy

By: Mr.Gianni De Nicolo,Giovanni Favara,Mr.Lev Ratnovski

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1475504098

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9781475504095

Bank Profitability and Risk-Taking

By: Natalya Martynova,Mr.Lev Ratnovski,Mr.Razvan Vlahu

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Bank Profitability and Risk-Taking

By: Natalya Martynova,Mr.Lev Ratnovski,Mr.Razvan Vlahu

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1513517589

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9781513517582

The Dynamics of Non-Performing Loans during Banking Crises: A New Database

By: Mr.Anil Ari,Sophia Chen,Mr.Lev Ratnovski

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The Dynamics of Non-Performing Loans during Banking Crises: A New Database

By: Mr.Anil Ari,Sophia Chen,Mr.Lev Ratnovski

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1513521152

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9781513521152

Benefits and Costs of Bank Capital

By: Jihad Dagher,Mr.Giovanni Dell'Ariccia,Mr.Luc Laeven,Mr.Lev Ratnovski,Mr.Hui Tong

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Benefits and Costs of Bank Capital

By: Jihad Dagher,Mr.Giovanni Dell'Ariccia,Mr.Luc Laeven,Mr.Lev Ratnovski,Mr.Hui Tong

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1475563965

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9781475563962

The Dark Side of Bank Wholesale Funding

By: Mr.Lev Ratnovski,Rocco Huang

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The Dark Side of Bank Wholesale Funding

By: Mr.Lev Ratnovski,Rocco Huang

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1455201812

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9781455201815

Shadow Banking

Economics and Policy

By: Mr.Stijn Claessens,Mr.Lev Ratnovski,Mr.Manmohan Singh

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Shadow Banking

Economics and Policy

By: Mr.Stijn Claessens,Mr.Lev Ratnovski,Mr.Manmohan Singh

This note outlines the basic economics of the shadow banking system, highlights (systemic) risks related to it, and suggests implications for measurement and regulatory approaches.

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1475537808

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9781475537802

Global Liquidity and Drivers of Cross-Border Bank Flows

By: Mr.Eugenio Cerutti,Mr.Stijn Claessens,Mr.Lev Ratnovski

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Global Liquidity and Drivers of Cross-Border Bank Flows

By: Mr.Eugenio Cerutti,Mr.Stijn Claessens,Mr.Lev Ratnovski

This paper provides a definition of global liquidity consistent with its meaning as the “ease of financing” in international financial markets. Using a longer time series and broader sample of countries than in previous studies, it identifies global factors driving cross-border bank flows, alongside country-specific factors. It confirms the explanatory power of US financial conditions, with flows decreasing in market volatility (VIX) and term premia, and increasing in bank leverage, growth in domestic credit and M2. A new finding is that similar variables for other systemic countries – the UK and the Euro Area – are also important, sometimes even more so, consistent with the dominant role of European banks in cross-border banking. Furthermore, recipient country characteristics are found to affect not only the level of country-specific flows, but also the cyclical impact of global liquidity, with sensitivities of flows to banks decreasing with stronger macroeconomic frameworks and better bank regulation, but less so for flows to non-financial firms.

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148436211X

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9781484362112

Banking and Trading

By: Mr.Arnoud W.A. Boot,Mr.Lev Ratnovski

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Banking and Trading

By: Mr.Arnoud W.A. Boot,Mr.Lev Ratnovski

We study the effects of a bank's engagement in trading. Traditional banking is relationship-based: not scalable, long-term oriented, with high implicit capital, and low risk (thanks to the law of large numbers). Trading is transactions-based: scalable, shortterm, capital constrained, and with the ability to generate risk from concentrated positions. When a bank engages in trading, it can use its ‘spare’ capital to profitablity expand the scale of trading. However, there are two inefficiencies. A bank may allocate too much capital to trading ex-post, compromising the incentives to build relationships ex-ante. And a bank may use trading for risk-shifting. Financial development augments the scalability of trading, which initially benefits conglomeration, but beyond some point inefficiencies dominate. The deepending of the financial markets in recent decades leads trading in banks to become increasingly risky, so that problems in managing and regulating trading in banks will persist for the foreseeable future. The analysis has implications for capital regulation, subsidiarization, and scope and scale restrictions in banking.

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