Discussion: The Economics of Money, Banking and Financial Markets

Exam
Exam for The Economics of Money, Banking and Financial Markets Summer Semester 2021
Date of Examination: 14/09/2021-17/09/2021
Preliminary remarks
· Processing time: max. 6 hours

· Structure: 2 questions (40 points)

· Question 1: 20 points

· Question 2: 20 points

· Your examination performance includes

· The amount of maximum pages per exercise is given below. Quality dominates quantity.

· Merge the pages into one PDF document. Add a signed statement of authorship to the PDF.

· If you use a word processing software, use Times New Roman 12pt or Arial 11pt, at least single-spaced, 2cm margins.

· Please write your name on top of the first page.

Question 1: Financial stability
a) Before the pandemic, the German supervisory authority activated the counter-cyclical capital buffer (CCyB). Explain the instrument (e.g. why has it been established, how is it used etc.). Illustrate based on a balance sheet example how capital buffers can stabilize lending in case a bank experiences loan losses and faces a minimum capital requirement. Discuss in how far non-performing loans due to the pandemic are a threat to financial stability.

( 1 )

Instructions: No more than three DIN-A-4 pages with complete sentences regarding i) the explanation of the instrument, ii) the balance sheet example, and iii) the discussion of non-performing loans. Use a separate sheet per sub-point. Make use of concepts studied in the lecture. If you draw on external sources, please cite them.

b) Explain how the leverage ratio connects return on equity and return on assets. Discuss whether shareholders prefer a smaller/ larger leverage ratio. Provide an example to illustrate your point.

Instructions: Provide your answer on no more than one Din-A-4 page.

Question 2: Monetary policy
a) Generate your own graph for the ECBs holdings of bonds under the corporate sector purchase programme (CSPP). The data can be accessed here: https://www.ecb.europa. eu/mopo/implement/app/html/index.en.html 1. Do not copy a graph from somewhere. The graph should be self-explanatory. Describe your graph and comment on the devel- opment of the line over time.

Instructions: Your answer should not exceed one Din-A-4 page.

b) Listen to the podcast Tackling climate change as a central bank: Between motivation, obligation and limitation2 and discuss the role of the ECB when it comes to climate change. Use the demand and supply framework of bonds to show what might happen to demand and supply, prices and yields of bonds issued by green firms versus by firms with huge carbon emissions in case the ECB would set up an asset purchase programme with a focus on green bonds.

Instructions: Do not hand in more than three pages regarding the i) discussion, ii) the relation to the demand and supply framework of bonds for green bonds and non-green bonds. Use a separate sheet per sub-point. Make use of concepts studied in the lecture. Your graphs should be self-explanatory (add axes description etc.) and be accompanied by a short explanation.

1Hint: See History of cumulative purchase breakdowns under the APP

2https://www.ecb.europa.eu/press/tvservices/podcast/html/ecb.pod210512 episode16.en.html

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