The Bargaining Power in Taiwan Interbank Overnight Market

Transcription

1 Inernaional Journal of Economics and Finance; Vol. 5, No. 9; 2013 ISSN X E-ISSN Published by Canadian Cener of Science and Educaion The Bargaining Power in Taiwan Inerbank Overnigh Marke Mei-Yin Lin 1, Hanyu Hsu 2 & Jue-Shyan Wang 2 1 Deparmen of Economics, Shih Hsin Universiy, Taiwan 2 Deparmen of Public Finance, Naional Chengchi Universiy, Taiwan Correspondence: Mei-Yin Lin, Associae Professor, Deparmen of Economics, Shih Hsin Universiy, Taiwan. mylin@cc.shu.edu.w Received: June 18, 2013 Acceped: July 22, 2013 Online Published: Augus 26, 2013 doi: /ijef.v5n9p50 URL: hp://dx.doi.org/ /ijef.v5n9p50 Absrac The rae corridor regime, relying on lending and deposi faciliies o se ceilings and floors for inerbank overnigh raes, has been praciced by many cenral banks. This paper modifies he heoreical model proposed by Bech and Klee (2011) o discuss he seller s bargaining power in Taiwan inerbank overnigh marke under rae corridor sysem. We apply wo-limi Tobi model o esimae he bargaining power. The empirical resuls show ha he repo rae, policy indicaor and index for reserves concenraion have significanly posiive relaionship wih seller s bargaining power. Meanwhile, he resuls imply ha he inerbank overnigh raes rise wih hese hree variables. The conclusions could be clearly observed from he predicions on he pahs of he inerbank overnigh rae under various scenarios. Keywords: inerbank overnigh marke, bargaining power, Tobi Model 1. Inroducion The operaing procedures of moneary policy involve insrumens (ools), operaing arges, inermediae arges, and policy goals. Cenral Banks manipulae he insrumens o achieve a specified value of an operaing arge. In recen years, he ineres rae on inerbank overnigh loans has been widely used as he primary operaing arge for moneary policy because i is he mos immediae source of regulaing banks liquidiy. For example, he Fed has announced a federal funds rae arge a each Federal Open Marke Commiee meeing since February The European Cenral Bank ses a arge for he overnigh cash rae which is similar o he federal funds rae. Therefore, he whole marke paricipans keep close wach on he announcemen of he inerbank overnigh rae because i affecs ineres raes hroughou he economy. The cenral banks can use heir monopoly power over he supply of currency and reserves o influence he inerbank overnigh rae. The basic reserves marke model could be used o examine he responses of he reserves quaniies and inerbank overnigh rae under alernaive insrumens. Much lieraure discusses a rae corridor regime for inerbank overnigh marke which has been praciced in Ausralia, New Zealand, Sweden and Swizerland. Some feaures of his regime have been described in Whiesell (2006) and Mishkin (2013). Operaionally, he discoun rae is se a a premium above he arge rae, while he ineres rae paid on he reserve balances (deposi rae) is se a a spread below he arge rae. The discoun rae funcions as a ceiling and he deposi rae as a floor for he inerbank overnigh rae. As he reserve demand flucuaes, he inerbank overnigh rae will say beween hese wo limis. The financial crisis of led he Fed o adop he corridor sysem. The auhoriy o pay ineres rae on reserve balances had been graned by Congress in 2006 bu was no effecive unil Ocober The financial crisis induced he Fed o implemen his power on Ocober 6, However, he effecive federal funds rae did no say above he floor of he corridor. Lavoie (2010) explains his phenomenon by he fac ha no all he paricipans in he federal funds are eligible o receive ineres paymens on heir reserve balances. The governmen-sponsored enerprises (GSEs) and foreign insiuions ge nohing on heir reserve balances. This creaes a segmened marke where hese insiuions lack bargaining power and are being forced o lend a a rae below he floor. Moreover, Bech and Klee (2011) develop a bargaining model o explore he behavior of he federal funds rae. They use informaion on observed raes o calibrae he bargaining power of he differen paricipans. The heoreical model proposed by Bech and Klee would provide us an available framework o analyze Taiwan inerbank overnigh marke. 50

2 Inernaional Journal of Economics and Finance Vol. 5, No. 9; 2013 Taiwan inerbank overnigh marke, as called inerbank call loans marke, was esablished in April Originally, he paricipans were resriced o hose insiuions, like he domesic banks and local branch of foreign banks, which were required o hold reserve balances. To expand he size of ransacions, invesmen and rus companies (ITC) and bills finance companies (BFC) ha were no required o hold reserve balancess had been allowed o join he inerbank overnigh marke since Figure 1 shows he ransacions by insiuions. The domesic banks are he mos imporan raders in he marke. ITC and BFC seem o usually sand inn he posiion of borrowing. However, he amoun of ransacions by ITC and BFC is no large. Figure 1. Inerbank overnigh ransacions by insiuions Source: Cenral Bank of R.O.C (Taiwan), Financial Saisics Monhly. As mos oher counries, banks in Taiwan could borrow a he discoun window offered by he cenral bank or o ge he liquidiy from oher banks. However, he cenral bank of Taiwan se he discoun rae as he floor of he arge rae beforee To be corresponden wih he corridor scheme of oher counries, he inerbank overnigh rae has been allowed o be lower han he discoun rae since This feaure is illusraed in Figure 2. Addiionally, he inerbank overnigh rae does no really say wihin he corridor. Source: Cenral Bank of R.O.C (Taiwan), Financial Saisics Monhly. Figure 2. Taiwan inerbank overnigh raes 51

3 Inernaional Journal of Economics and Finance Vol. 5, No. 9; 2013 Bech and Klee (2011) propose a model wih heerogeneous paricipans in markes and banking. However, he roles of ITC and BFC in Taiwan are no as significan as ha of GSEs in he Unied Saes. Therefore, his paper will no deal wih he problem of heerogeneiy in he heoreical model. Insead, we use he share variables in he economeric model o invesigae he influence of ITC and BFC on he bargaining power in Taiwan inerbank overnigh marke. This paper is organized as follows. We describe he bargaining model and is implicaions in Secion 2. Then we will calibrae he model o Taiwan inerbank overnigh marke daa and back ou he bargaining power of he marke paricipans in Secion 3. We also predic he inerbank overnigh rae under various scenarios in his secion. The conclusions are in Secion The Model 2.1 Theoreical Model The economy consiss a cenral bank and a se of profi-maximizing and risk-neural agens ha buy and sell overnigh funds in he inerbank overnigh marke. According o he definiion of Nash, a bargaining problem wih wo agens could be expressed as a pair (F, d), where F is he se of feasible agreemens, and d indicaes he hrea poin. Bech and Klee define a bargaining model where he uiliy of he agens is equal o he ineres income. Following he argumen of Binmore e al. (1986), he Nash soluion could be wrien as buyer buyer 1 seller seller r ( F, d) arg max( f d ) ( f d ) (1) d f where r is he equilibrium inerbank overnigh rae in his bargaining model, (f buyer, f seller ) denoe he ineres rae paid by he buyer (borrower) and he ineres rae received by he seller (lender) respecively, and (d buyer, d seller ) indicae he highes rae a which he buyer is willing o borrow money and he lowes ineres a which he seller is willing o lend fund. Moreover, β [0, 1] is he bargaining power of he seller, and hen 1-β is he bargaining power of he buyer. The final soluion implies ha he buyer pays he seller he ineres r. I means ha (f buyer, f seller )=(-r, r). The hrea poin should saisfy he condiions ha d buyer f buyer = -r and d seller f seller = r. The Nash soluion in equaion (1) could be rewrien as r arg max ( r d ( r d buyer 1 seller seller buyer d rd Seing he firs-order condiion of equaion (2) being zero yields he soluion of r as r d ) buyer seller buyer buyer ( d d ) d (1 )( d d ) (3) seller seller In he model of Bech and Klee, here are wo segmened markes and he effecive federal funds rae is he weighed average rae yielding from he bargaining problem in each marke. However, he separaion of Taiwan inerbank overnigh marke is no significan because of he lile amoun of ransacions by ITC or BFC. Therefore, we will direcly use equaion (3) o discuss he behavior of Taiwan inerbank overnigh rae. Suppose he ineres rae paid on reserve balances is r ioer, i is clear ha he seller will no lend o oher bank if he inerbank overnigh rae is lower han r ioer. I implies ha d seller = r ioer. Le r sdw denoe he discoun rae, and i is known he buyer will no borrow money from oher bank if he inerbank overnigh rae is higher han r sdw. I means ha d buyer = -r sdw. The surplus can be divided beween wo paries is he ineres rae difference r sdw - r ioer. Therefore equaion (3) can be expressed as r rioer rsdw rioer rsdw rsdw rioer ( ) (1 )( ), (4) We discuss he implicaions derived from equaion (4). Firs, an increase in he seller s bargaining power (β) will raise he inerbank overnigh rae. I implies he seller could ask for a higher ineres paymen if his bargaining power increases. The posiive relaionship will be magnified when he surplus ha could be divided beween wo paries is larger. This propery is observed by differeniaing equaion (4) wih respec o β. r / r sdw r 0, (5) Secondly, we analyze he impac of ineres rae paid on reserve balances by he following differeniaing equaion. ioer r / 1 0 (6) r ioer The inerbank overnigh rae moves in he same direcion wih he ineres rae paid on reserve balances. ) (2) 52

4 Inernaional Journal of Economics and Finance Vol. 5, No. 9; 2013 Inuiively, an increase in he ineres rae paid on reserve balances will raise he hrea poin of he seller. Thus he buyer should pay more ineres o ge he fund. Moreover, he magniude of his posiive relaionship depends on he size of borrower s bargaining power. Finally, an increase in he discoun rae will make he inerbank overnigh rae be higher. The reason is ha he demand for inerbank loan will increase when he cos of alernaive source of fund (discoun window) is higher. Then i pushes up he inerbank overnigh rae. The exen of his posiive relaionship is relevan o he seller s bargainingg power and could be shown by he following equaion. r / r 0 sdw, (7) 2.2 Economeric Model By rearranging equaion (4), he seller s bargaining power could be expressed as ˆ r r sdw r r ioer Because he inerbank overnigh rae has been allowed o be lower han he discoun rae since 2003, we will use he ineres rae daa available by he Cenral Bank of R.O.C. (Taiwan) o consruc he values of seller s bargainingg power (β) for Taiwan from January 2003 o May The ime series is shown in Figure 3. Obviously, he values of seller s bargaining power (β) do no say beween zero and one a all imes. Wee will focus on hose observaions ha he values of seller s bargaining power keep wihin he reasonable ranges. Insead of he fracional response model used by Bech and Klee, we will apply Tobi model o invesigae he behavior of bargaining power in Taiwan inerbank overnigh marke. ioer (8) Figure 3. Seller s bargaining power (β) We consider a regression model in which he dependen variable is coninuous and recorded in only some of o he ranges. The wo-limi Tobi model provides a framework for us o esimae he bargaining power when i will be runcaed a boh high and low values. The model is defined as follows: γ ' x u where β is he laen variable, γ is a k 1 vecor of parameers, x is a k 1 vecor of explanaory variables, and a u are disurbances ha are independenly and normally disribued, wih mean zero and a common variance σ 2. Le he seller ss bargaining power (β ) be he observed dependen variable, (8) The likelihood funcion is given by 0 if 0 if if 1 53 (9)

5 Inernaional Journal of Economics and Finance Vol. 5, No. 9; 2013 γ 'x γ 'x 1 γ 'x L ( γ,, x ) ( ) ( ) [1 ( )] (10) 0 1 Two-sage esimaion procedure could be used o obain he maximum-likelihood esimaes of γ and σ 2. The more deail discussion abou his model could be seen in Maddala (1983). 3. Empirical Resuls 3.1 Deerminans of Bargaining Power Basing on he seings of Bech and Klee, we specify six variables ha may be he imporan facors in deermining he bargaining power. The firs variable, Balances, denoes he logarihm of oal level of reserve balances held by he financial insiuions. The higher level of reserve balances implies here is no much demand for reserves. I is expeced o reduce he seller s bargaining power. The second variable, HHI, indicaes he Herfindahl-Hirschman index which measures he concenraion of he reserve balances. This index is compued as he square sum of reserve share for he larges 29 financial insiuions in Taiwan. Inuiively, if he reserves are held by a few paricipans (a higher HHI), he srucure of he marke is near monopoly. I will srenghen he seller s bargaining power. The hird variable, Repo, is he repurchase agreemen rae on governmen bonds secondary marke (1-30 days). I is known he repo marke and he inerbank overnigh marke are subsiues. A higher repo rae provides he seller wih alernaive invesmen opporuniy. I increases he seller s bargaining power. The forh variable, NPL, is he non-performing loans raio of all financial insiuions. I measures he healh sae of he banking secor. Increases in counerpary risk will lead o worse informaion asymmery. Moreover, banks are no willing o lend because hey prefer o keep liquidiy for precauionary reasons. For example, Afonso e al. (2011) sugges he imporance of liquidiy hoarding and counerpary risk in he U.S. inerbank overnigh marke during financial crisis of Thus a higher non-performing loans raio reduces inerbank lending and he seller s bargaining power migh be lower. The fifh variable, Policy, describes he moneary policy environmen. We se a dummy variable ha equals 1 if he rae paid on reserve balances changes a he laer monh. The expecaion abou fuure moneary policy will affec he moive for bank o hold reserves. The sixh variable is no included in he sudy of Bech and Klee. We consider he raios of he amoun of borrowing (lending ) by BFC and ITC o oal borrowing (lending) which are denoed by BFC b (BFC l ) and ITC b (ITC l ), respecively. These share variables capure he influence of hose heerogeneous paricipans over he bargaining power. The daa se is obained from he Cenral Bank of R.O.C (Taiwan), Financial Saisics Monhly, and he daabank provided by Taiwan Economic Journal (TEJ). The sample period ranges from January 2003 o May 2012, wih a oal 111 monhly observaions. The descripive saisics for he variables involved in his sudy are presened in Table 1. Table 1. Descripive saisics Variable Mean Sd. Dev. Maximum Minimum Balances HHI Repo NPL Policy BFC b BFC l ITC b ITC l Empirical Resuls We use wo-limi Tobi model described in equaion (8) and (9) o esimae he seller s bargaining power. The independen variables include he facors menioned in secion 3.1. We exclude he influence of heerogeneous paricipans in Model 1. Then add he share variables relevan o he ransacion of BFC and ITC in Model 2, 3, 4. 54

6 Inernaional Journal of Economics and Finance Vol. 5, No. 9; 2013 The empirical resuls are presened in Table 2. Repo and Policy are wo significan variables ha are posiively relaed o seller s bargaining power. A higher repo rae ends o push up seller s bargaining power as expeced. Bech and Klee find he same evidence for GSEs ha are significan sellers in Federal Funds marke. Moreover, anicipaion of he change in rae paid on reserve balances will simulae he seller s bargaining power. The concenraion index (HHI) is posiively relaed o seller s bargaining power. I is consisen wih our expecaion. The oal level of reserve balances (Balances) and he healh sae of he banking secor (NPL) do no significanly deermine bargaining power excep in Model 1. The coefficien on NPL is insignificanly negaive. We explain his resul wih wo effecs. The firs effec is noed previously ha counerpary risk makes seller reduce lending and i raises seller s bargaining power. The second effec is ha he injecion of liquidiy by cenral bank in he worse financial sae causes he decrease in seller s bargaining power. These wo effecs move in he opposie direcions and hen he oal effec is indefinie. The coefficiens on lending share of BFC are significan negaive in Model 2 and Model 4. In addiion, he influence of ITC is insignifican. BFC need no hold reserves and hey lend fund under consideraion of benefi. If BFC paricipae he selling marke more aggressively, i will reduce he oher seller s bargaining power. By conras, his effec does no be found when BFC ac as borrowers in he marke. I is worh noing ha BFC, like oher banks, could borrow a he discoun window offered by he cenral bank. Therefore, he borrowing decisions for BFC are similar o oher banks. Table 2. Esimaion for seller s bargaining power wih wo-limi Tobi Model Dependen variable: seller s bargaining power Independen variables Model 1 Model 2 Model 3 Model 4 Balances (1.72) (0.83) (0.54) (0.49) HHI (0.60) (2.01) (1.32) (2.05) Repo (9.70) (10.32) (10.50) (9.46) NPL (-1.71) (-1.54) (-1.47) (-1.28) Policy (2.94) (2.16) (2.62) (2.13) BFC b (-0.25) (-0.52) BFC l (-4.11) (-2.75) ITC b (-0.71) (-0.45) ITC l (-2.27) (-0.63) Consan (-1.75) (-0.90) (-0.59) (-0.56) Log likelihood Noes: values are given in parenheses.,, indicae significance a 1%, 5%, 10% saisical level, especively. 3.3 Predicion of Inerbank Overnigh Rae Cenral bank can change he ineres rae paid on reserve balances o aler he rae corridor. In his secion, we inend o predic he inerbank overnigh rae under differen seing for ineres rae paid on reserve balances. From Table 2, he log likelihood raio for Model 4 is he highes among all models. Therefore, we apply he coefficiens esimaed by Model 4 o perform his predicing exercise. All he independen variables involved in he regression are assumed o say in heir mean level as shown in Table 1. The discoun rae is se a mean level (4.25%). Especially, we plo he implied inerbank overnigh rae wih differen assumpions for BFC lending share. In he low (high) scenario, he BFC lending share is assumed o be he average level minus (plus) one sandard deviaion. Figure 3 illusraes he fac ha higher inerbank overnigh raes are associaed wih higher ineres raes 55

7 Inernaional Journal of Economics and Finance Vol. 5, No. 9; 2013 paid on reserve balances. Moreover, a higher BFC lending share resuls in a lower inerbank overnigh rae because i implies a lower seller s bargaining power. A furher poin o be noed is ha he inerbank overnigh raes wih differen assumpions for BFC lending share will converge o he same level as he ineres rae paid on reserve balances increases. Figure 4 o Figure 6 show he effecs of differen level of oal reserve balances, differen degree of index of reserve concenraion and differen value of repo rae on he inerbank overnigh rae, respecively. The posiively sloped pahs sugges ha he inerbank overnigh raes rise wih hese hree variables. The negaive relaionship beween non-performing loans raio and inerbank overnigh rae is observed in Figure 7. Figure 3. Predicion of inerbank overnigh rae by ineres rae paid on reserve balances Figure 4. Predicion of inerbank overnigh rae by oal level of reserve balances 56

8 Inernaional Journal of Economics and Finance Vol. 5, No. 9; 2013 Figure 5. Predicion of inerbank overnigh rae by index of reserves concenraion Figure 6. Predicion of inerbank overnigh rae by repo rae Figure 7. Predicion of inerbank overnigh rae by non-performing loans raio 4. Conclusions This paper modifies he heoreical model proposed by Bech and Klee o invesigae he seller s bargaining power in Taiwan inerbank overnigh marke under rae corridor sysem. We apply wo-limi Tobi model o esimae he bargainingg power and evaluae he impacs on inerbank overnigh rae under various scenarios. The empirical resuls show ha he repo rae, policy indicaor and index for reserves concenraion have 57

9 Inernaional Journal of Economics and Finance Vol. 5, No. 9; 2013 significanly posiive relaionship wih seller s bargaining power. Meanwhile, he resuls also imply ha he inerbank overnigh raes rise wih hese hree variables. The predicions on he pahs of he inerbank overnigh rae under differen scenarios make our conclusions more clear. This issue could be exended o focus on oher Asian counries where cenral banks play imporan roles in sabilizing he financial sysem. Especially, i is ineresing o invesigae he dynamics of inerbank overnigh raes during financial crisis. Because he manipulaions of reserves schemes are differen among Asian counries, he heoreical model used in his paper could be modified o fi each economy. I may help us o look more closely a he behavior of cenral banks. References Afonso, G., Kovner, A., & Schoar, A. (2011). Sressed, no frozen: The federal funds marke in he financial crisis. Journal of Finance, 66, hp://dx.doi.org/ /j x Bech, M. L., & Klee, E. (2011). The mechanics of a graceful exi: Ineres on reserves and segmenaion in he federal funds marke. Journal of Moneary Economics, 58, hp://dx.doi.org.auorpa.lib.nccu.edu.w/ /j.jmoneco Binmore, K., Rubinsein, A., & Wolinsky, A. (1986). The nash bargaining soluion in economic modeling. Rand Journal of Economics, 17, hp://dx.doi.org/ / Lavoie, M. (2010). Changes in cenral bank procedures during he subprime crisis and heir repercussions on moneary heory. Inernaional Journal of Poliical Economy, 39, hp://dx.doi.org/ /ijp Maddala, G. S. (1983). Limied-dependen and qualiaive variables in economerics. Cambridge Universiy Press. hp://dx.doi.org/ /cbo Mishkin, F. S. (2013). The Economics of Money, Banking, and Financial Markes (10h ed.). Pearson Educaion, Inc. Whiesell, W. (2006). Ineres rae corridors and reserves. Journal of Moneary Economics, 53, hp://dx.doi.org/ /j.jmoneco Copyrighs Copyrigh for his aricle is reained by he auhor(s), wih firs publicaion righs graned o he journal. This is an open-access aricle disribued under he erms and condiions of he Creaive Commons Aribuion license (hp://creaivecommons.org/licenses/by/3.0/). 58