Occasional papers

Communication device to a broad audience

Our Occasional Paper Series (OPS) disseminates work carried out by, as a rule, ECB staff on subjects that relate to the main tasks and functions of the ECB and the ESCB. Occasional Papers (OPs) are addressed to a wide audience, including other policy-makers, financial analysts, academics, the media and the interested general public. Understanding the papers will normally require some prior knowledge of the topic.

No. 195
8 August 2017
The profitability of banks in a context of negative monetary policy rates: the cases of Sweden and Denmark

Abstract

JEL Classification

E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies

Abstract

This paper looks at how the profitability of banks in Sweden and Denmark has evolved in the context of negative interest rates. Overall, it finds that profitability has continued to improve, even with negative monetary policy rates. Data and modelbased evidence confirm that the monetary policy transmission to bank lending rates has so far not been impaired, though they point to a downward stickiness in the bank deposit rate. Swedish and Danish banks rely mainly on wholesale funding to finance their activities, and the fall in wholesale funding costs has led to a significant decline in interest expenses, thereby bolstering the resilience of the net interest income margin. All in all, this has created the prerequisites for positive credit supply developments, and possible unintended consequences of negative monetary policy rates, such as a reduction in credit supply, have not materialised. However, according to Sveriges Riksbank and Danmarks Nationalbank, the prevailing low level of interest rates has aggravated financial stability risks stemming from the large exposure of the banking sector to the housing market in both economies, in a context of rapidly rising housing prices and the resultant growing indebtedness of the household sector.

No. 194
31 July 2017
A new database for financial crises in European countries

Abstract

JEL Classification

G01 : Financial Economics→General→Financial Crises

E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy

E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies

E60 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→General

H12 : Public Economics→Structure and Scope of Government→Crisis Management

Abstract

This paper presents a new database for financial crises in European countries, which serves as an important step towards establishing a common ground for macroprudential oversight and policymaking in the EU. The database focuses on providing precise chronological definitions of crisis periods to support the calibration of models in macroprudential analysis. An important contribution of this work is the identification of financial crises by combining a quantitative approach based on a financial stress index with expert judgement from national and European authorities. Key innovations of this database are (i) the inclusion of qualitative information about events and policy responses, (ii) the introduction of a broad set of non-exclusive categories to classify events, and (iii) a distinction between event and post-event adjustment periods. The paper explains the two-step approach for identifying crises and other key choices in the construction of the dataset. Moreover, stylised facts about the systemic crises in the dataset are presented together with estimations of output losses and fiscal costs associated with these crises. A preliminary assessment of the performance of standard early warning indicators based on the new crises dataset confirms findings in the literature that multivariate models can improve compared to univariate signalling models.

No. 193
11 July 2017
Dark pools in European equity markets: emergence, competition and implications

Abstract

JEL Classification

G10 : Financial Economics→General Financial Markets→General

G14 : Financial Economics→General Financial Markets→Information and Market Efficiency, Event Studies, Insider Trading

G18 : Financial Economics→General Financial Markets→Government Policy and Regulation

Abstract

This paper considers the growth of dark pools: trading venues for equities without pre-trade transparency. It first documents the emergence and expansion of dark pools in European equity markets in the context of regulatory changes and increased high-frequency trading (HFT). It finds that the market share of trading conducted in dark pools has stabilised below 10% and is similar across groups of stocks from different countries. Second, this paper assesses the nature of competition between dark pools, which is based on price and services offered to clients. It documents a substantial degree of horizontal differentiation among European dark pools, with venues providing different options for placing and processing orders likely to attract different types of traders. The hypothesis that most dark pools are primarily used to shield large orders from information leakage is not supported by evidence. This finding is based on a simple indicator that assesses different dark pools in terms of the level of protection from information leakage due to trading with HFT or predatory traders. Finally, this paper evaluates the benefits and costs of the use of dark pools from the perspective of individual traders as well as for market efficiency and financial stability. Recent evidence appears to reject the notion that dark pools adversely affect volatility in stock markets.

No. 192
23 June 2017
Labour market adjustment in Europe during the crisis: microeconomic evidence from the Wage Dynamics Network survey

Abstract

JEL Classification

E24 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Employment, Unemployment, Wages, Intergenerational Income Distribution, Aggregate Human Capital

J30 : Labor and Demographic Economics→Wages, Compensation, and Labor Costs→General

J52 : Labor and Demographic Economics→Labor?Management Relations, Trade Unions, and Collective Bargaining→Dispute Resolution: Strikes, Arbitration, and Mediation, Collective Bargaining

J68 : Labor and Demographic Economics→Mobility, Unemployment, Vacancies, and Immigrant Workers→Public Policy

Abstract

Against the backdrop of continuing adjustment in EU labour markets in response to the Great Recession and the sovereign debt crisis, the European System of Central Banks (ESCB) conducted the third wave of the Wage Dynamics Network (WDN) survey in 2014-15 as a follow-up to the two previous WDN waves carried out in 2007 and 2009. The WDN survey collected information on wage-setting practices at the firm level. This third wave sampled about 25,000 firms in 25 European countries with the aim of assessing how firms adjusted wages and employment in response to the various shocks and labour market reforms that took place in the European Union (EU) during the period 2010-13. This paper summarises the main results of WDN3 by identifying some patterns in firms’ adjustments and labour market reforms. It seeks to lay out the main lessons learnt from the survey in terms of both the general response of EU labour markets to the crisis and how these responses varied across the countries that took part in the survey.

No. 191
16 May 2017
The transmission channels of monetary, macro- and microprudential policies and their interrelations

Abstract

JEL Classification

E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies

G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation

Abstract

This paper investigates the interrelations between monetary macro- and microprudential policies. It first provides an overview of the three policies, starting with their main instruments and objectives. Monetary policy aims at maintaining price stability and promoting balanced economic growth, macroprudential policies aim at safeguarding the stability of the overall financial system, while microprudential policies contribute to the safety and soundness of individual entities. Subsequently, the paper provides a simplified description of their respective transmission mechanisms and analyses the interactions between them. A conceptual framework is first presented on the basis of which the analysis of the interactions across the different policies can be demonstrated in a stylised manner. These stylised descriptions are then further complemented by model-based simulations illustrating the significant complementarities and interactions between them. Finally, the paper concludes that from a conceptual point of view there are numerous areas of interaction between the policies. These create scope for synergies, which can be reaped by sharing information and expertise across the various policy areas.

No. 190
15 May 2017
Financial stability assessment of EU candidate and potential candidate countries

Abstract

JEL Classification

F31 : International Economics→International Finance→Foreign Exchange

F34 : International Economics→International Finance→International Lending and Debt Problems

F36 : International Economics→International Finance→Financial Aspects of Economic Integration

G15 : Financial Economics→General Financial Markets→International Financial Markets

G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages

G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation

Abstract

This paper reviews and assesses financial stability challenges in countries preparing for EU membership i.e. Albania, Bosnia and Herzegovina, Kosovo, the former Yugoslav Republic of Macedonia, Montenegro, Serbia and Turkey. The paper focuses on the period since 2014 and on the banking sectors that dominate financial systems in this group of countries. It identifies two main near-term challenges applying to most of them. The first relates to credit risk, which remains substantial despite some progress in reducing the burden of non-performing loans on banks’ balance sheets in the period under review. However, progress so far is limited, partly owing to structural impediments. The second relates to the still high share of foreign exchange denominated loans and deposits, which poses an indirect credit risk in the case of lending to unhedged borrowers and impairs the monetary transmission channel. In addition, profitability is worth monitoring going forward, as it remains subdued in many countries given high provisioning needs and a lacklustre credit growth and low interest rate environment. These concerns are generally met with a solid shock-absorbing capacity, as exemplified by robust capital and liquidity buffers.

No. 189
10 May 2017
The Eurosystem collateral framework explained

Abstract

JEL Classification

E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies

Abstract

The Eurosystem collateral framework ESCF) has played a key role in the ECB monetary policy implementation since 1999. Moreover, the financial and sovereign debt crisis and with it the increased reliance of banks on central bank credit have underlined the importance of central bank collateral frameworks. Broad collateral frameworks have helped prevent large-scale liquidity-driven defaults of financial institutions in all major advanced economies. More recently, they have allowed central banks to provide a large amount of – at times targeted – longer-term credit. Nevertheless, a number of authors have argued that the ESCF is too forthcoming or broad and that it does not afford the central bank sufficient protection. This paper first explains and justifies the logic of collateral frameworks in general and that of the ESCF in particular. It then reviews the main critical comments. It concludes that the ESCF has been effective (i) in providing an adequate level of elasticity for Eurosystem credit, and (ii) in protecting the Eurosystem from financial losses despite the severity of the financial and sovereign debt crisis and the large amounts of longer-term credit provided by the Eurosystem.

No. 188
2 May 2017
The use of the Eurosystem’s monetary policy instruments and operational framework since 2012

Abstract

JEL Classification

D02 : Microeconomics→General→Institutions: Design, Formation, and Operations

E43 : Macroeconomics and Monetary Economics→Money and Interest Rates→Interest Rates: Determination, Term Structure, and Effects

E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies

E65 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Studies of Particular Policy Episodes

G01 : Financial Economics→General→Financial Crises

Abstract

This paper provides a comprehensive overview of the use of the Eurosystem's monetary policy instruments and the operational framework from the third quarter of 2012 until the first quarter of 2016. The paper reviews the context of Eurosystem market operations, counterparty and collateral framework, participation in tender operations, recourse to standing facilities, patterns of reserve fulfilment, outright asset purchase programmes, as well as the impact of the ECB’s monetary policy implementation on the Eurosystem's balance sheet and liquidity conditions.

No. 187
28 April 2017
The Analytical Credit Dataset - A magnifying glass for analysing credit in the euro area

Abstract

JEL Classification

E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies

G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages

E51 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Money Supply, Credit, Money Multipliers

C81 : Mathematical and Quantitative Methods→Data Collection and Data Estimation Methodology, Computer Programs→Methodology for Collecting, Estimating, and Organizing Microeconomic Data, Data Access

E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy

Abstract

In May 2016 the Governing Council adopted the AnaCredit Regulation ECB/2016/13) providing the legal basis for the European System of Central Banks (ESCB) to collect granular information on loans from banks to corporates and other legal persons based on a core set of harmonised concepts and definitions. Starting with reference data from September 2018, credit institutions in the euro area, and possibly elsewhere in the EU, will report to the ECB via the national central banks (NCBs) individual credit exposures falling within the reporting scope. The reporting framework is the outcome of in-depth discussions within the ESCB involving several rounds of consultations with users, the industry and other stakeholders. As set out in the Regulation, AnaCredit will, already in Stage 1, significantly enhance the value for analysis on credit and credit risk in the euro area by providing detailed, timely and harmonised information on individual exposures to legal entities as counterparts. The new data will be useful for several key tasks of the ESCB for a better analysis of credit distribution to the economy, e.g. for monetary policy analysis and operation (risk and collateral management), financial stability, economic research and statistics. The scope of the project might be further expanded in future stages to cover additional lenders, borrowers and instruments. The purpose of this paper is to reflect and illustrate the methodological work and process leading to the definition of the AnaCredit requirements that were eventually included in the Regulation.

No. 186
19 April 2017
EU consumers’ quantitative inflation perceptions and expectations: an evaluation

Abstract

JEL Classification

D8 : Microeconomics→Information, Knowledge, and Uncertainty

D12 : Microeconomics→Household Behavior and Family Economics→Consumer Economics: Empirical Analysis

E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation

Abstract

This report updates and extends earlier assessments of quantitative inflation perceptions and expectations of consumers in the euro area and the EU using an anonymised micro data set collected by the European Commission in the context of the Harmonised EU Programme of Business and Consumer Surveys. Confirming earlier findings, consumers' quantitative estimates of inflation are found to be higher than actual HICP (Harmonised Index of Consumer Prices) inflation over the entire sample period (2004-2015). The analysis shows that European consumers hold different opinions of inflation depending on their income, age, education and gender. Although many of the features highlighted for the EU and the euro area aggregates are valid across individual Member States, differences exist also at the country level. Despite the higher inflation estimates, there is a high level of co-movement between measured and estimated (perceived/expected) inflation. Even respondents providing estimates largely above actual HICP inflation, demonstrate understanding of the relative level of inflation during both high and low inflation periods. Based on these economically plausible results, the report concludes that further work should be devoted to defining concrete aggregate indicators of consumers' quantitative inflation perceptions and expectations on the basis of the dataset used in this study. Moreover, it outlines a number of future research topics that can be addressed by exploiting the enormous potential of the data set.

No. 185
10 April 2017
Debt sustainability analysis for euro area sovereigns: a methodological framework

Abstract

JEL Classification

E62 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Fiscal Policy

H62 : Public Economics→National Budget, Deficit, and Debt→Deficit, Surplus

H63 : Public Economics→National Budget, Deficit, and Debt→Debt, Debt Management, Sovereign Debt

H68 : Public Economics→National Budget, Deficit, and Debt→Forecasts of Budgets, Deficits, and Debt

Abstract

The euro area sovereign debt crisis has highlighted the importance of reducing public debt levels and building up sufficient fiscal buffers during normal and good times. It has also reaffirmed the need for a thorough debt sustainability analysis (DSA) to act as a warning system for national policies. This paper introduces a comprehensive DSA framework for euro area sovereigns that could be used for analysis of fiscal risks and vulnerabilities. Specifically, this framework consists of three main building blocks: (i) a deterministic DSA, which embeds debt simulations under a benchmark and various narrative shock scenarios; (ii) a stochastic DSA, providing for a probabilistic approach to debt sustainability; and (iii) other relevant indicators capturing liquidity and solvency risks. The information embedded in the three main DSA blocks can be summarised in a heat map, which can provide guidance on the overall assessment of risks to debt sustainability. This method reflects the need to have a broad-based assessment, cross-checking information and perspectives from various sources with a view to deriving a robust debt sustainability assessment.

No. 184
17 March 2017
Benchmarking institutional and structural indicators in EU candidate and potential candidate countries

Abstract

JEL Classification

F13 : International Economics→Trade→Trade Policy, International Trade Organizations

F15 : International Economics→Trade→Economic Integration

G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages

O11 : Economic Development, Technological Change, and Growth→Economic Development→Macroeconomic Analyses of Economic Development

O43 : Economic Development, Technological Change, and Growth→Economic Growth and Aggregate Productivity→Institutions and Growth

Abstract

This paper reviews institutional and structural challenges in countries preparing for EU membership, i.e. Albania, Bosnia and Herzegovina, Kosovo*, the former Yugoslav Republic of Macedonia, Montenegro, Serbia and Turkey. Sound institutions and solid economic structures are not only the cornerstones of EU accession (as defined by the Copenhagen political and economic criteria), but are also crucial for achieving higher income levels and sustainable long-term growth. This paper finds that the EU candidate and potential candidate countries (EU CC/PCC) fare worse than the majority of EU Member States in a number of institutional and structural metrics, such as business environment, access to finance, judicial system, trade and competitiveness, labour market and education and institutional governance. When comparing EU CC/PCC among themselves, large intra-group disparities emerge. Countries such as the former Yugoslav Republic of Macedonia, Montenegro and, to a certain extent, Serbia and Turkey, tend to score on average higher than Albania, Bosnia and Herzegovina and Kosovo. While many EU CC/PCC have improved the quality of their institutions and economic governance over the past decade, it is crucial that they preserve the reform momentum to enable a sustainable convergence with the EU. / / * This designation is without prejudice to positions on status, and is in line with UNSCR 1244 and the ICJ Opinion on the Kosovo Declaration of Independence.

No. 183
21 February 2017
Stress-Testing of liquidity risk in TARGET2

Abstract

JEL Classification

C63 : Mathematical and Quantitative Methods→Mathematical Methods, Programming Models, Mathematical and Simulation Modeling→Computational Techniques, Simulation Modeling

E42 : Macroeconomics and Monetary Economics→Money and Interest Rates→Monetary Systems, Standards, Regimes, Government and the Monetary System, Payment Systems

E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies

G01 : Financial Economics→General→Financial Crises

Abstract

The paper reports the outcome of the stress-testing of liquidity risk in the TARGET2 payment system, with the study having been conducted by an ad-hoc group composed of operators and overseers of TARGET2. The study aims to assess the resilience of the system, defined as the network of its participants, and the appropriateness of liquidity levels under tightened liquidity conditions. The scenarios analysed are based on extreme shocks to the value of collateral of different levels and types that lead to a decrease in the intraday credit lines available in TARGET2 and, as a result, the payment capacity of TARGET2 participants. The tool used to perform these stress tests is the TARGET2 simulator, which provides access to real transaction level data and allows simulations to be run by changing parameters, in this case the credit lines. The period under analysis is one maintenance period for the years 2008 to 2013. In general, the stress-testing indicates that the system is resilient under the stress scenarios; liquidity levels seem to be appropriate and supported by the efficient liquidity management features of TARGET2. Even in the worst simulated event of a 70% drop in all collateral value, 80-90% of TARGET2 turnover would have been settled. The scenario results take also into account that the period under analysis was characterised by unconventional monetary policy measures.

No. 182
31 January 2017
Euro area fiscal stance

Abstract

JEL Classification

E61 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Policy Objectives, Policy Designs and Consistency, Policy Coordination

Abstract

This paper analyses the appropriateness of the euro area fiscal stance. In this context, the paper presents the relevant definitions and how the euro area fiscal stance has evolved over time. Furthermore, it contains an evaluation of the appropriateness of the euro area aggregated fiscal stance set out in the European Commission

No. 181
25 January 2017
Low inflation in the euro area: Causes and consequences
Task force on low inflation (LIFT)

Abstract

JEL Classification

E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation

E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy

E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies

Abstract

After 2012, inflation has been unexpectedly low across much of the developed world and economists speak of a

Disclaimer: Please keep in mind that OPs are published in the name of the author(s). Their views do not necessarily reflect those of the ECB.