Category: Banking & finance
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The balance sheets of firms matter for the transmission of monetary policy to inflation and real economic activity. Both deposit rates on corporate deposits and the interaction between debt and liquid balances shape the ultimate effects of a central bank’s decision to increase its policy rate.
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Concerns about financial markets becoming less competitive as a result of artificial intelligence may be overstated. Instead, asset pricing outcomes will depend on how algorithms are designed – and on the competitive pressures faced by the financial institutions that are deploying them.
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The gap between interest rates earned on savings and paid for borrowing varies with the state of the economy. Research reveals the contrasting consequences for households depending on their place in the wealth distribution. Safer banks can mean calmer business cycles but riskier individual lives.
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While the rules controlling them are mostly domestic, banks are largely international. This creates risks as countries compete for financial institutions’ business by weakening regulations – or go the other way and end up over-regulating. Policy coordination can promote greater financial stability.
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Deposit insurance prevents bank runs by assuring depositors that their money is safe. At the same time, it can weaken bank discipline. While some argue that expanding insurance makes banks lend more aggressively, this is not always the case. The impact depends on how banks fund their lending.
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Banks and other financial institutions are not simply battling for market share. Rather, they collaborate to exploit loopholes in regulation on key issues like capital requirements, which compel banks to back lending with their own equity. Ultimately, this can lead to higher bills for taxpayers.
