PUBLICATION
30 May 2023
The interplay of market and funding liquidity
Market liquidity and funding liquidity are inherently connected, and related liquidity spirals can entail systemic risk. A special feature in our Financial Stability Review explores how the two types of liquidity interact in the euro area.
Article
PUBLICATION
30 May 2023
Banks and non-bank financial institutions
Euro area banks are exposed to liquidity, market and credit risk through linkages to non-bank financial institutions. These links are concentrated in a small group of systemically important banks, whose strong capital and liquidity buffers can help ease spillover risks.
Article
ANNIVERSARY
25 May 2023
Our 25th anniversary
Together with distinguished guests from across Europe, we celebrated our 25th anniversary in Frankfurt. Visit our hub page to find out more.
Commemorating 25 years of the ECB- 31 May 2023
- PRESS RELEASERelated
- 31 May 2023
- FINANCIAL STABILITY REVIEW
- 30 May 2023
- WEEKLY FINANCIAL STATEMENTEnglishOTHER LANGUAGES (22) +Annexes
- 30 May 2023
- WEEKLY FINANCIAL STATEMENT - COMMENTARY
- 30 May 2023
- MONETARY DEVELOPMENTS IN THE EURO AREAAnnexes
- 30 May 2023
- MONETARY DEVELOPMENTS IN THE EURO AREA
- 26 May 2023
- OTHER GOVERNING COUNCIL DECISIONEnglishOTHER LANGUAGES (23) +
- 26 May 2023
- PRESS RELEASERelated
- 26 May 2023
- CARD FRAUD REPORT
- 26 May 2023
- Panel discussion by Philip R. Lane, Member of the Executive Board of the ECB, at the 29th Dubrovnik Economic Conference
- 25 May 2023
- Introductory remarks by Luis de Guindos, Vice-President of the ECB, at the ECON Committee of the European ParliamentRelated
- 24 May 2023
- Opening remarks by Christine Lagarde, President of the ECB, at the celebration to mark the 25th anniversary of the ECBEnglishOTHER LANGUAGES (23) +
- 23 May 2023
- Speech by Luis de Guindos, Vice-President of the ECB, at the Association for Financial Markets in Europe (AFME) and Official Monetary and Financial Institutions Forum (OMFIF) 3rd Annual European Financial Integration Conference
- 19 May 2023
- Speech by Isabel Schnabel, Member of the Executive Board of the ECB, at the Conference on Financial Stability and Monetary Policy in the honour of Charles Goodhart
- 24 May 2023
- Interview with Fabio Panetta, Member of the Executive Board of the ECB, conducted by Karl de Meyer
- 14 May 2023
- Interview with Luis de Guindos, Vice-President of the ECB, conducted by Isabella Bufacchi
- 10 May 2023
- Interview with Christine Lagarde, President of the ECB, conducted by Shogo Akagawa on 8 May 2023
- 25 April 2023
- Interview with Philip R. Lane, Member of the Executive Board of the ECB, conducted by Eric Albert on 18 April 2023
- 24 April 2023
- Interview with Isabel Schnabel, Member of the Executive Board of the ECB, conducted by Johanna Treeck on 20 April 2023
- 25 May 2023
- Carbon pricing is a central instrument in the EU’s fight against climate change, but it will also affect our economies. In this post on The ECB Blog, we use macroeconomic models to look at what higher prices for carbon emissions will do to growth and inflation.Details
- JEL Code
- Q54 : Agricultural and Natural Resource Economics, Environmental and Ecological Economics→Environmental Economics→Climate, Natural Disasters, Global Warming
- 24 May 2023
- The euro is more than a currency, says President Christine Lagarde. It is the strongest form of European integration and stands for a united Europe that works together, protecting and benefiting all its citizens. The ECB, with its commitment to price stability, will always be a cornerstone of that effort.EnglishOTHER LANGUAGES (23) +
- 19 May 2023
- At times, media reports on ECB monetary policy refer to information from unidentified Eurosystem sources. This ECB Blog post takes a closer look at such leaks. They tend to go against prevailing trends in short-term rates and can trigger major market reactions even though they are not generally informative about upcoming decisions.Details
- JEL Code
- E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy
- 9 May 2023
- Diversity is a matter of sound governance for banks and leads to better decision-making. That is why Frank Elderson, Member of the Executive Board of the ECB and Vice-Chair of the Supervisory Board of the ECB, and Elizabeth McCaul, Member of the Supervisory Board of the ECB, are encouraging banks to improve the diversity of their boards.Details
- JEL Code
- G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
O16 : Economic Development, Technological Change, and Growth→Economic Development→Financial Markets, Saving and Capital Investment, Corporate Finance and Governance
- 24 April 2023
- The EU has a problem with climate catastrophe insurance: only a quarter of the losses from climate-related disasters are covered. Greater coverage could reduce the economic damage that results from them. This joint ECB-EIOPA post for The ECB Blog looks at ways to make this happen.Details
- JEL Code
- Q54 : Agricultural and Natural Resource Economics, Environmental and Ecological Economics→Environmental Economics→Climate, Natural Disasters, Global Warming
- 31 May 2023
- FINANCIAL STABILITY REVIEW - BOXFinancial Stability Review Issue 1, 2023Details
- Abstract
- Recent stress episodes have shown how non-bank financial institutions can amplify stress in the wider financial system when faced with sudden increases in margin and collateral calls. The resulting spikes in the demand for liquidity and/or deleveraging can lead to disorderly asset sales or large cash withdrawals, from money market funds for instance, with spillovers to other financial institutions or markets. In several cases, extraordinary policy responses by public authorities and central banks helped to stabilise markets and limit contagion. This box examines two of the key vulnerabilities – excessive leverage and inadequate liquidity preparedness to meet margin and collateral calls – and discusses policy implications for enhancing the resilience of the non-bank financial sector.
- JEL Code
- G10 : Financial Economics→General Financial Markets→General
G18 : Financial Economics→General Financial Markets→Government Policy and Regulation
G22 : Financial Economics→Financial Institutions and Services→Insurance, Insurance Companies, Actuarial Studies
G23 : Financial Economics→Financial Institutions and Services→Non-bank Financial Institutions, Financial Instruments, Institutional Investors
G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation
- 31 May 2023
- FINANCIAL STABILITY REVIEW - BOXFinancial Stability Review Issue 1, 2023Details
- Abstract
- The box investigates whether banks step in when market-based credit declines in the face of increased market volatility and rising interest rates. Findings show that banks tend to offer lower rates than bond markets to larger, better-rated and more leveraged firms, but interest rates are not the only factor behind firms’ financial structure decisions. Many firms replaced bond funding with bank loans at the start of the pandemic, at the onset of the Russia-Ukraine war and during the recent monetary policy normalisation, potentially crowding out credit to riskier and smaller firms with limited ability to tap bond markets.
- JEL Code
- E51 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Money Supply, Credit, Money Multipliers
G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
G23 : Financial Economics→Financial Institutions and Services→Non-bank Financial Institutions, Financial Instruments, Institutional Investors
G30 : Financial Economics→Corporate Finance and Governance→General
- 31 May 2023
- FINANCIAL STABILITY REVIEW - BOXFinancial Stability Review Issue 1, 2023Details
- Abstract
- This box uses loan-level data from AnaCredit to examine the impact of IFRS 9 on provisioning dynamics around credit events and the role of accounting discretion. The results indicate that provisions for a performing IFRS 9 loan are higher than those for a comparable loan reported under national accounting standards, while the dynamics of provisioning ratios around credit events are similar under both approaches. Specifically, the bulk of provisioning occurs at the time of, or shortly after, default under both approaches, which suggests that IFRS 9 has not fundamentally changed provisioning patterns. Moreover, provisioning patterns for IFRS 9 loans around default events depend on banks’ capital headroom, with better capitalised banks generally provisioning more. This is consistent with banks with less capital using accounting discretion to provision less to preserve their capital. While it is difficult to arrive at firm conclusions on the overall adequacy of current provisions, banks with less capital headroom may be at greater risk of being under-provisioned, possibly due in part to the discretion offered by IFRS 9.
- JEL Code
- 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
G32 : Financial Economics→Corporate Finance and Governance→Financing Policy, Financial Risk and Risk Management, Capital and Ownership Structure, Value of Firms, Goodwill
- 31 May 2023
- FINANCIAL STABILITY REVIEW - BOXFinancial Stability Review Issue 1, 2023Details
- Abstract
- This box investigates recent changes in the cost and the composition of bank deposits. It provides estimates of the sensitivity of banks’ deposit rates to changes in policy rates, demonstrating that this depends on the type of deposit and on bank-specific characteristics. Moreover, it finds that competition in the term deposit market has been increasing recently. It goes on to show that, since the beginning of 2022, higher interest rates have increased non-financial corporations’ appetite for better remunerated deposit types, shifting banks’ deposit mixes away from stickier overnight deposits towards rate-sensitive term deposits. Finally, it hints that, going forward, rising competition and a reallocation of funds from overnight to term deposits may lead to an increase in the cost of deposits that is faster and larger than expected.
- JEL Code
- E5 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit
G21. : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
- 31 May 2023
- FINANCIAL STABILITY REVIEW - BOXFinancial Stability Review Issue 1, 2023Details
- Abstract
- Foreign investors have a significant footprint in euro area government bond markets, but this has fallen since the Eurosystem launched its asset purchase programmes. Against this background, this box analyses the role and behaviour of global and domestic investment funds in euro area government bond markets. The results indicate that after global risk shocks, domestic investment funds tend to turn to euro area government bonds, while global funds cut back their exposures. Moreover, after events that lead to spreads widening among euro area government bond markets, global investment funds tend to play a stabilising role in euro area government bond markets since they typically increase their exposure to medium or lower-rated euro area government bonds.
- JEL Code
- E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy
F30 : International Economics→International Finance→General
G11 : Financial Economics→General Financial Markets→Portfolio Choice, Investment Decisions
G23 : Financial Economics→Financial Institutions and Services→Non-bank Financial Institutions, Financial Instruments, Institutional Investors
- 31 May 2023
- FINANCIAL STABILITY REVIEW - BOXFinancial Stability Review Issue 1, 2023Details
- Abstract
- The presence of institutional investors, particularly investment funds, in euro area residential real estate (RRE) markets has increased markedly in recent years. Yet the implications for housing markets, as well as for financial stability more broadly, remain largely unstudied. This box shows that a positive (negative) demand shock from institutional investors has a positive (negative) and persistent impact on RRE prices between 2007 and 2021. Also, the link between local economic fundamentals and house price growth appears to weaken in regions with a greater presence of institutional investors. This may reinforce the build-up of financial vulnerabilities, as investor demand falls and the cycle turns. It also raises concerns that vulnerabilities in the investment fund sector may amplify any real estate market correction, with potential implications for the financial resilience of banks, households and exposed firms. For this reason, it is important to develop policies aimed at enhancing the resilience of real estate investment funds – such as lower redemption frequencies, longer notice and settlement periods, and longer minimum holding periods.
- JEL Code
- G23 : Financial Economics→Financial Institutions and Services→Non-bank Financial Institutions, Financial Instruments, Institutional Investors
R33. : Urban, Rural, Regional, Real Estate, and Transportation Economics→Real Estate Markets, Spatial Production Analysis, and Firm Location→Nonagricultural and Nonresidential Real Estate Markets
- 31 May 2023
- FINANCIAL STABILITY REVIEW - BOXFinancial Stability Review Issue 1, 2023Details
- Abstract
- Following a strong post-pandemic recovery in profits, euro area non-financial corporations (NFCs) are now facing the risk of stagnating economic activity combined with tightening financial conditions. NFC vulnerabilities might increase as higher interest rates start to weigh on the ability of firms to cover their interest expenses, with highly indebted firms being particularly affected. This box shows that the share of vulnerable loans has been increasing since the second half of 2022 as financial conditions tighten, with those sectors of the economy that were impacted the most by the pandemic being significantly more affected than others. It also finds that higher interest rates could increase corporate vulnerabilities during periods of low or negative economic growth, while there is no statistically significant impact of higher rates on firms’ health during periods of economic expansion.
- JEL Code
- G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
G33 : Financial Economics→Corporate Finance and Governance→Bankruptcy, Liquidation
H32 : Public Economics→Fiscal Policies and Behavior of Economic Agents→Firm
- 31 May 2023
- FINANCIAL STABILITY REVIEW - ARTICLEFinancial Stability Review Issue 1, 2023Details
- Abstract
- Climate change can have a negative effect on sovereign balance sheets directly (when contingent liabilities materialise) and indirectly (when it has an impact on the real economy and the financial system). This special feature highlights the contingent sovereign risks that stem from an untimely or disorderly transition to a net-zero economy and from more frequent and severe natural catastrophes. It also looks at the positive role that governments can play in reducing climate-related financial risks and incentivising adaptation. If the recent trend of ever-lower emissions across the EU is to be sustained, further public sector investment is essential. In this context, the progress made to strengthen green capital markets has fostered government issuance of green and sustainable bonds to finance the transition. While putting significant resources into adaptation projects can increase countries’ resilience to climate change, the economic costs of extreme climate-related events are still set to rise materially in the EU. Only a quarter of disaster losses are currently insured and fiscal support has mitigated related macroeconomic and financial stability risks in the past. Looking ahead, vulnerabilities arising from contingent liabilities may increase in countries with high physical risk and a large insurance protection gap. If these risks rise alongside sovereign debt sustainability concerns, the impact on financial stability could be amplified by feedback loops that see sovereign credit conditions and ratings deteriorate.
- JEL Code
- G10 : Financial Economics→General Financial Markets→General
G18 : Financial Economics→General Financial Markets→Government Policy and Regulation
G20 : Financial Economics→Financial Institutions and Services→General
G32 : Financial Economics→Corporate Finance and Governance→Financing Policy, Financial Risk and Risk Management, Capital and Ownership Structure, Value of Firms, Goodwill
Q51 : Agricultural and Natural Resource Economics, Environmental and Ecological Economics→Environmental Economics→Valuation of Environmental Effects
Q54 : Agricultural and Natural Resource Economics, Environmental and Ecological Economics→Environmental Economics→Climate, Natural Disasters, Global Warming
Q58. : Agricultural and Natural Resource Economics, Environmental and Ecological Economics→Environmental Economics→Government Policy
- 31 May 2023
- FINANCIAL STABILITY REVIEWAnnexes
- 31 May 2023
- FINANCIAL STABILITY REVIEW
Related- 31 May 2023
- PRESS RELEASE
- 30 May 2023
- FINANCIAL STABILITY REVIEW - ARTICLEFinancial Stability Review Issue 1, 2023Details
- Abstract
- Banks are connected to non-bank financial intermediation (NBFI) sector entities via loans, securities and derivatives exposures, as well as funding dependencies. Linkages with the NBFI sector expose banks to liquidity, market and credit risks. Funding from NBFI entities would appear to be the most likely and strongest spillover channel, considering that NBFI entities maintain their liquidity buffers primarily as deposits and very short-term repo transactions with banks. At the same time, direct credit exposures are smaller and are often related to NBFI entities associated with banking groups. Links with NBFI entities are highly concentrated in a small group of systemically important banks, whose sizeable capital and liquidity buffers are essential to mitigate spillover risks.
- JEL Code
- G21, G22, G23 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
- 30 May 2023
- SURVEY OF MONETARY ANALYSTS
- 30 May 2023
- FINANCIAL STABILITY REVIEW - ARTICLEFinancial Stability Review Issue 1, 2023Details
- Abstract
- The ability of market participants to access funding and conduct transactions in an efficient way is a prerequisite for financial stability, providing shock-absorption capacity and, in turn, limiting the scope for shock amplification. Market liquidity and funding liquidity are inherently connected. When market liquidity evaporates, financial market pricing becomes less reliable and tends to overreact, leading to increased market volatility and higher funding costs. Funding liquidity enables market participants to take exposures onto their balance sheets, thus absorbing fluctuations in demand and supply in the name of efficient market functioning. Under extreme conditions, markets can stop functioning altogether. While liquidity has many dimensions, from a systemic perspective the interplay between market liquidity and funding liquidity is key, as these two dimensions can reinforce each other in ways that generate liquidity spirals. Cyclical factors such as the business cycle, systemic leverage and monetary and fiscal policy affect the probability of liquidity stress arising. In the light of the current challenges of high financial market volatility, increased risk of recession, bouts of heightened risk aversion and monetary policy normalisation, this special feature constructs composite indicators for market liquidity and funding liquidity. It attempts also to identify the causes of poor market and funding liquidity conditions and to show how the two dimensions interact in the euro area.
- JEL Code
- 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
G15 : Financial Economics→General Financial Markets→International Financial Markets
G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
- 26 May 2023
- MEP LETTER
- 26 May 2023
- OTHER PUBLICATIONAnnexes
- 26 May 2023
- PRESS RELEASE
- 26 May 2023
- CARD FRAUD REPORTRelated
- 26 May 2023
- PRESS RELEASE
- 26 May 2023
- RESEARCH BULLETIN - No. 107Details
- Abstract
- At the onset of the outbreak of the coronavirus (COVID-19) pandemic, central banks and supervisors introduced dividend restrictions as a new policy instrument aimed at supporting lending to the real economy and strengthening banks' capacity to absorb losses. In this paper we estimate the impact of the ECB's dividend recommendationon on bank lending and risk-taking. To address identification issues, we rely on credit registry data and a direct measure that captures variation in compliance with the recommendation across banks in the euro area. The analysis disentangles the confounding effects stemming from the wide range of monetary and fiscal policies that supported credit during the pandemic-related downturn and investigates their interaction with the dividend recommendation. We find that dividend restrictions have been an effective policy in supporting financially constrained firms, adding capital space to banks, and limiting procyclical behaviour. The effects on lending are greater for small and medium-sized enterprises and for firms operating in sectors more vulnerable to the effects of the pandemic. At the same time, we do not find evidence of a significant increase in lending to riskier borrowers and "zombie" firms.
- JEL Code
- E5 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit
E51 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Money Supply, Credit, Money Multipliers
G18 : Financial Economics→General Financial Markets→Government Policy and Regulation
G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
- 25 May 2023
- OTHER PUBLICATIONRelated
- 25 May 2023
- OTHER PUBLICATIONEnglishOTHER LANGUAGES (21) +Related
- 25 May 2023
- ANNUAL REPORTEnglishOTHER LANGUAGES (22) +
- 25 May 2023
- OTHER PUBLICATION
- 25 May 2023
- SPEECH
- 25 May 2023
- ANNUAL REPORTEnglishOTHER LANGUAGES (22) +Related
- 24 May 2023
- WORKING PAPER SERIES - No. 2822Details
- Abstract
- This paper empirically investigates the effect of the EU-South Korea free trade agreement (FTA) on manufacturing trade flows. By applying a state-of-the-art structural gravity model with intranational (i.e., domestic) trade and using disaggregated data, we quantify both the trade impact and the observed heterogeneity in the FTA estimates. In line with literature, we find that the FTA exerted asymmetric effects in bilateral exports across directions of trade. Compared to previous studies, our findings suggest a different explanation for the poor performances of Korean exports to the EU in the post-FTA period, namely offshoring patterns in electronics and a broad-based decline in the shipbuilding industry. When we drop these two export categories from the analysis, we show that the FTA exerted a large effect on trade in both directions, increasing bilateral exports by about 30 percent. We then investigate heterogeneity in pair-industry-specific estimates of the FTA. The main source of variation is represented by asymmetries in ex ante trade barriers across sectors, with a prominent role for non-tariff instruments. Stronger pre-FTA regulatory intensity is associated to a high liberalization potential, favouring larger FTA estimates.
- JEL Code
- F10 : International Economics→Trade→General
F13 : International Economics→Trade→Trade Policy, International Trade Organizations
F14 : International Economics→Trade→Empirical Studies of Trade
Interest rates
| Marginal lending facility | 4.00 % |
| Main refinancing operations (fixed rate) | 3.75 % |
| Deposit facility | 3.25 % |
Inflation rate
Inflation dashboardExchange rates
| USD | US dollar | 1.0683 | |
| JPY | Japanese yen | 149.13 | |
| GBP | Pound sterling | 0.86405 | |
| CHF | Swiss franc | 0.9724 |
Financial stability
Our tasks Institutional framework Financial Stability Review Macroprudential policy measuresMarket operations
Open market operations Asset purchase programmes Lendings of holdings under PSPPNOT AN EXPERT? CHECK OUT OUR EXPLAINERS
LEARN MORE
What is the European Central Bank?