Digital euro
The Eurosystem is preparing for the potential issuance of a digital euro to complement physical cash.
INTERVIEW
15 January 2026
Simplification and financial stability
European banks hold the correct levels of capital, Vice-President Luis de Guindos tells Politico. Our approach is to simplify the bureaucratic burden on banks in terms of the capital stack, regulation, supervision and reporting.
Read the Vice-President’s interview
ECONOMIC BULLETIN
15 January 2026
ECB publishes Economic Bulletin
This publication presents the economic and monetary information which forms the basis for the Governing Council’s policy decisions. It is released eight times a year, two weeks after each monetary policy meeting.
Read the new Economic Bulletin
THE ECB BLOG
16 January 2026
Repricing of euro area yields in 2025
The euro area yield curve steepened significantly in 2025 as long-term and especially very long-term interest rates increased. This ECB Blog post dissects what happened and explores key drivers behind the unusually strong shift.
Read The ECB Blog- 16 January 2026
- PRESS RELEASE
- 13 January 2026
- WEEKLY FINANCIAL STATEMENTEnglishOTHER LANGUAGES (22) +Annexes
- 13 January 2026
- WEEKLY FINANCIAL STATEMENT - COMMENTARY
- 13 January 2026
- PRESS RELEASE
- 13 January 2026
- EURO AREA ECONOMIC AND FINANCIAL DEVELOPMENTS BY INSTITUTIONAL SECTOR (EARLY)
- 13 January 2026
- BALANCE OF PAYMENTS (QUARTERLY)
- 14 January 2026
- Speech by Luis de Guindos, Vice-President of the ECB, at the 16th edition of Spain Investors Day
- 9 January 2026
- Keynote speech by Philip R. Lane, Member of the Executive Board of the ECB, at the Danish Economic Society Conference
- 19 December 2025
- Lecture by Mr Lane at Economics Winter Workshop organised by the Central Bank of Ireland in Dublin, Ireland
- 19 December 2025
- Contribution by Piero Cipollone, Member of the Executive Board of the ECB, to a roundtable at Aspen Institute Italia
- 18 December 2025
- Christine Lagarde, President of the ECB, Luis de Guindos, Vice-President of the ECB, Frankfurt am Main, 18 December 2025EnglishOTHER LANGUAGES (23) +Related
- 18 December 2025
- 15 January 2026
- Interview with Luis de Guindos, Vice-President of the ECB, conducted by Kathryn Carlson, Geoffrey Smith and Johanna Treeck
- 12 January 2026
- Interview with Philip R. Lane, Member of the Executive Board of the ECB, conducted by Fabrizio Goria on 12 January 2026
- 8 December 2025
- Interview with Isabel Schnabel, Member of the Executive Board of the ECB, conducted by Jana Randow and Mark Schrörs on 3 December 2025
- 4 December 2025
- Interview with Piero Cipollone, Member of the Executive Board of the ECB, conducted by Takerou Minami on 26 November 2025
- 1 December 2025
- Interview with Luis de Guindos, Vice-President of the ECB, conducted by Pablo Allendesalazar
- 16 January 2026
- The euro area yield curve steepened significantly in 2025 as long-term and especially very long-term interest rates increased. This ECB Blog post dissects what happened and explores key drivers behind the unusually strong shift.Details
- JEL Code
- E43 : Macroeconomics and Monetary Economics→Money and Interest Rates→Interest Rates: Determination, Term Structure, and Effects
- 15 January 2026
- The ESCB has strengthened its climate indicators, introducing new breakdowns of sustainable bonds, data on how inflation affects banks’ carbon intensity metrics, and improved data and models assessing physical risks. This ECB Blog post offers a quick overview of the enhancements.Details
- JEL Code
- E50 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→General
Q50 : Agricultural and Natural Resource Economics, Environmental and Ecological Economics→Environmental Economics→General
- 6 January 2026
- Central banks often struggle to make themselves understood to the wider public. Visuals can help to change this. The ECB Blog travels across the globe to showcase the creative ways in which central banks communicate monetary policy.Details
- JEL Code
- E50 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→General
- 23 December 2025
- Are independent central banks better at ensuring price stability? A study of 155 central banks over 50 years shows why independence makes a difference. Central banks that are shielded from government control are able to pursue more credible monetary policies and are therefore better at keeping inflation at target.Details
- JEL Code
- E50 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→General
- 9 December 2025
- The ECB plans to prepare for the potential issuance of the digital euro by 2029, assuming the European co-legislators adopt the necessary regulation by 2026. Preparatory steps, including pilot exercises and initial transactions, could begin as early as mid-2027.EnglishOTHER LANGUAGES (21) +Details
- JEL Code
- E42 : Macroeconomics and Monetary Economics→Money and Interest Rates→Monetary Systems, Standards, Regimes, Government and the Monetary System, Payment Systems
- 15 January 2026
- CONSULTATION RESPONSE
- 15 January 2026
- ECONOMIC BULLETINEnglishOTHER LANGUAGES (20) +
- 15 January 2026
- ECONOMIC BULLETIN - BOXEconomic Bulletin Issue 8, 2025Details
- Abstract
- This box describes the Eurosystem liquidity conditions and monetary policy operations in the fifth and sixth reserve maintenance periods of 2025, from 30 July to 4 November 2025.
- JEL Code
- E40 : Macroeconomics and Monetary Economics→Money and Interest Rates→General
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
- 15 January 2026
- ECONOMIC BULLETIN - BOXEconomic Bulletin Issue 8, 2025Details
- Abstract
- Firms that have faced adverse shocks to their business activity can decide to either shed labour or hold on to their workforce, i.e. “hoard labour”. This choice can be related to expectations about the future business outlook, prices and costs. Evidence suggests that there is a clear link, in particular, between recent labour hoarding decisions taken by firms and their labour cost growth expectations. With regard to the outlook for pricing, firms that have experienced a deterioration in their overall business conditions are also less optimistic about increasing their selling prices.
- JEL Code
- J23 : Labor and Demographic Economics→Demand and Supply of Labor→Labor Demand
J31 : Labor and Demographic Economics→Wages, Compensation, and Labor Costs→Wage Level and Structure, Wage Differentials
J63 : Labor and Demographic Economics→Mobility, Unemployment, Vacancies, and Immigrant Workers→Turnover, Vacancies, Layoffs
D84 : Microeconomics→Information, Knowledge, and Uncertainty→Expectations, Speculations
- 15 January 2026
- ECONOMIC BULLETIN - BOXEconomic Bulletin Issue 8, 2025Details
- Abstract
- This box provides updated evidence on developments in the household saving rate and its recent drivers. It shows that income and consumption have grown at similar rates since mid-2024, stabilising the saving rate at a level well above its pre-pandemic average. Model-based evidence suggests that lower real interest rates and rising real net wealth have increased incentives to consume, but that these effects have not fully offset the fact that savings continue to be supported by strong labour income growth. Complementing this macroeconomic evidence, survey data from the Consumer Expectations Survey suggests that heightened policy-related and individual uncertainty may also have contributed to the persistence of elevated saving.
- JEL Code
- D11 : Microeconomics→Household Behavior and Family Economics→Consumer Economics: Theory
D84 : Microeconomics→Information, Knowledge, and Uncertainty→Expectations, Speculations
E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation
- 15 January 2026
- ECONOMIC BULLETIN - BOXEconomic Bulletin Issue 8, 2025Details
- Abstract
- Uncertainty surrounding trade policy has become a key factor shaping the investment and production decisions of firms. While text-based measures such as the trade policy uncertainty (TPU) index are widely used to track these developments, their readings can be misinterpreted when treated as direct measures of uncertainty shocks. Keyword-driven co-mentions might, for example, inflate the index in periods of heightened trade tensions. This box introduces an alternative text-based measure, constructed by regressing the raw TPU index on a set of covariates, that can be more reliably incorporated into standard macroeconomic models by removing some of the contamination and offers a clearer view of how trade policy uncertainty affects economic activity.
- JEL Code
- F13 : International Economics→Trade→Trade Policy, International Trade Organizations
E66 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→General Outlook and Conditions
E32 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Business Fluctuations, Cycles
- 15 January 2026
- ECONOMIC BULLETIN - BOXEconomic Bulletin Issue 8, 2025Details
- Abstract
- On 1 January 2026 Bulgaria adopted the euro and became the 21st member of the euro area. For the Bulgarian economy this is expected to bring lower transaction and borrowing costs, as well as greater investor confidence. While Bulgaria has made significant progress in achieving convergence towards the euro area, continued reforms will help the country to fully benefit from euro adoption and support a smooth participation within the enlarged euro area.
- JEL Code
- E42 : Macroeconomics and Monetary Economics→Money and Interest Rates→Monetary Systems, Standards, Regimes, Government and the Monetary System, Payment Systems
F33 : International Economics→International Finance→International Monetary Arrangements and Institutions
F45 : International Economics→Macroeconomic Aspects of International Trade and Finance
O47 : Economic Development, Technological Change, and Growth→Economic Growth and Aggregate Productivity→Measurement of Economic Growth, Aggregate Productivity, Cross-Country Output Convergence
- 15 January 2026
- ECONOMIC BULLETIN - ARTICLEEconomic Bulletin Issue 8, 2025Details
- Abstract
- This article examines the key challenges for short-term forecasting of euro area economic activity since the COVID-19 pandemic, highlighting the persistently elevated levels of uncertainty. It details the significant enhancements made to the short-term forecasting models of the ECB as part of a general review aimed at improving their accuracy. It also highlights exploratory work on alternative approaches using advanced machine learning methods, which offer promising avenues to address the complexities of economic forecasting in times of high uncertainty.
- JEL Code
- C53 : Mathematical and Quantitative Methods→Econometric Modeling→Forecasting and Prediction Methods, Simulation Methods
E32 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Business Fluctuations, Cycles
E37 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Forecasting and Simulation: Models and Applications
E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy
- 14 January 2026
- ECONOMIC BULLETIN - ARTICLEEconomic Bulletin Issue 8, 2025Details
- Abstract
- The European Union (EU) Single Market has significantly enhanced economic welfare, competitiveness and resilience by facilitating the free movement of goods, services, capital and labour. Its achievements notwithstanding, the Single Market still has untapped potential, as persistent structural barriers hinder deeper integration, particularly in the cross-border trade of goods and services. Using a gravity model, this paper quantifies the economic impact of these barriers. The findings reveal that barriers could be reduced by 8 percentage points for goods and 9 percentage points for services if all EU countries were to achieve the same degree of trade integration as the Netherlands, a country estimated to be one of the most integrated EU Member States. In the long term, this would lead to significant welfare, i.e. real income, gains of up to 1.3% and 1.8%, respectively, compared with a baseline of no further integration. Furthermore, simulation results suggest that a modest 2% reduction in Single Market barriers could offset projected GDP losses from higher US tariffs. The study emphasises that these estimates are conservative and that deeper integration, particularly in the services sector, could unlock even greater economic benefits.
- JEL Code
- F13 : International Economics→Trade→Trade Policy, International Trade Organizations
F14 : International Economics→Trade→Empirical Studies of Trade
F15 : International Economics→Trade→Economic Integration
O52 : Economic Development, Technological Change, and Growth→Economywide Country Studies→Europe
F17 : International Economics→Trade→Trade Forecasting and Simulation
E61 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Policy Objectives, Policy Designs and Consistency, Policy Coordination
- 14 January 2026
- WORKING PAPER SERIES - No. 3174Details
- Abstract
- This paper studies the international macro-financial implications of U.S. dollar-backed payment stablecoins. These digital assets create a new global safe asset channel that links private money creation and global payment needs directly to U.S. public debt. By reshaping the demand for safe assets and the geography of dollar intermediation, stablecoins transform the dynamics of global financial markets, generating new trade-offs, also for the U.S.: even if they widen the dollar’s global footprint and compress U.S. risk-free yields, they entail non-trivial macro-financial costs. Stablecoins dampen the domestic real effects of U.S. monetary policy and increase both U.S. and foreign exposure to cross-country shocks, making a more digital, dollar-centric reserve system less stable. These effects are limited at low adoption levels but rise non-linearly with stablecoin capitalization, reshaping the functioning of the international financial system.
- JEL Code
- G15 : Financial Economics→General Financial Markets→International Financial Markets
E42 : Macroeconomics and Monetary Economics→Money and Interest Rates→Monetary Systems, Standards, Regimes, Government and the Monetary System, Payment Systems
E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy
E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy
F3 : International Economics→International Finance
- 14 January 2026
- WORKING PAPER SERIES - No. 3173Details
- Abstract
- This study investigates how credit supply shocks impact firm-level investment across the euro area using the novel AnaCredit database. Employing the methodology developed by Amiti and Weinstein (2018), we decompose loan growth rates into four components: bank-specific, firm-specific, industry-specific, and common shocks. Our findings show that idiosyncratic bank supply shocks significantly affect firm-level investment, particularly among firms that are highly dependent on bank loans. Furthermore, these granular bank-specific shocks explain most of the aggregate loan dynamics. We also find that the effects of bank shocks vary depending on firm characteristics, such as firm size, loan portfolio composition, and reliance on external financing. These results underscore the critical role banks play in shaping investment dynamics, especially under varying economic conditions.
- JEL Code
- E22 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Capital, Investment, Capacity
E50 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→General
G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
G31 : Financial Economics→Corporate Finance and Governance→Capital Budgeting, Fixed Investment and Inventory Studies, Capacity
- 14 January 2026
- ECONOMIC BULLETIN - BOXEconomic Bulletin Issue 8, 2025Details
- Abstract
- Data from the ECB Consumer Expectations Survey allow the construction of a housing Sharpe ratio, which relates the return on housing investment to its risk. Over time, the housing Sharpe ratio has mostly been driven by house price growth expectations (in excess of a riskless return), with changes in house price uncertainty playing a more limited role. However, varying perceptions of price uncertainty do drive differences in the housing Sharpe ratio across household groups: lower uncertainty explains higher ratios for male, older, wealthier, employed and more financially literate households as well as renters relative to their counterparts. Households living in urban areas also have higher ratios, driven by higher house price expectations. The housing Sharpe ratio has been steadily recovering from its trough in 2023 and points to a further moderate recovery in housing investment in the euro area.
- JEL Code
- R21 : Urban, Rural, Regional, Real Estate, and Transportation Economics→Household Analysis→Housing Demand
D84 : Microeconomics→Information, Knowledge, and Uncertainty→Expectations, Speculations
D14 : Microeconomics→Household Behavior and Family Economics→Household Saving; Personal Finance
- 13 January 2026
- WORKING PAPER SERIES - No. 3172Details
- Abstract
- This paper examines how fiscal policy in the euro area reacts to monetary policy, by estimating fiscal policy reaction functions for the period 1999-2019. Inclusion of the monetary policy stance in the fiscal reaction function, approximated by a shadow interest rate, is a relatively novel aspect in this type of analysis. The findings suggest that fiscal policy acts in a substitutive manner, its stance moving in the opposite direction of monetary policy, though this effect may have ceased operating during ECB’s quantitative easing. Using local projections, the substitutive effect is found to increase over time before turning broadly neutral. Analysing the fiscal response to other monetary policy relevant variables - government debt and the output gap -, outcomes suggests that budget balances react positively to government debt, supporting fiscal sustainability, and that fiscal policy acts countercyclically in recessions.
- JEL Code
- E61 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Policy Objectives, Policy Designs and Consistency, Policy Coordination
H11 : Public Economics→Structure and Scope of Government→Structure, Scope, and Performance of Government
H62 : Public Economics→National Budget, Deficit, and Debt→Deficit, Surplus
- 13 January 2026
- WORKING PAPER SERIES - No. 3171Details
- Abstract
- We investigate the impact of structural shocks on the joint distribution of future real GDP growth and inflation in the euro area. We model the conditional mean of these variables, along with selected financial indicators, using a VAR and perform quantile regressions on the VAR residuals to estimate their time-varying variance as a function of macroeconomic and financial variables. Through impulse response analysis, we find that demand and financial shocks reduce expected GDP growth and increase its conditional variance, leading to negatively skewed future growth distributions. By enabling this mean-volatility interaction, demand and financial shocks drive significant time variation in downside risk to euro area GDP growth, while supply shocks result in broadly symmetric movements. For inflation, supply shocks drive instead a positive mean-volatility co-movement, where higher inflation is associated with increased uncertainty, causing time variation in upside risk.
- JEL Code
- C32 : Mathematical and Quantitative Methods→Multiple or Simultaneous Equation Models, Multiple Variables→Time-Series Models, Dynamic Quantile Regressions, Dynamic Treatment Effect Models, Diffusion Processes
C58 : Mathematical and Quantitative Methods→Econometric Modeling→Financial Econometrics
E32 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Business Fluctuations, Cycles
G17 : Financial Economics→General Financial Markets→Financial Forecasting and Simulation
- 13 January 2026
- ECONOMIC BULLETIN - BOXEconomic Bulletin Issue 8, 2025Details
- Abstract
- This box presents the ECB’s new global trade tracker, which combines real-time satellite data on vessel movements with traditional high-frequency financial and survey data. The satellite component uses the automatic identification system, which records the positions of ships and cargo activity in near real time, thereby providing detailed information on trade flows by country and by commodity. Augmenting the tracker with satellite-based indicators enhances markedly its ability to capture shifts in global trade dynamics. Compared with a previous version that relied mainly on financial indicators, the satellite-data-enhanced tracker improves forecast accuracy, with gains being particularly pronounced during episodes of rapid disruption to international trade.
- JEL Code
- F10 : International Economics→Trade→General
C55 : Mathematical and Quantitative Methods→Econometric Modeling→Modeling with Large Data Sets?
E32 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Business Fluctuations, Cycles
- 12 January 2026
- WORKING PAPER SERIES - No. 3170Details
- Abstract
- This paper develops a model of AT1 CoCos and corporate securities analysing the role of CoCos as replacements of Equity or of Debt. Our results show that, in terms of value creation, CoCos perform better when they replace vanilla corporate debt rather than when they replace common Equity. Moreover, we show as well that although debt increases the probability of bankruptcy, given the coupon suspension possibility, with CoCos the probability of financial distress is higher. Our paper also highlights the considerable complexity of this instrument, something at odds with its role as a potential solution to a financial crisis in part triggered by less complex securities.
- JEL Code
- K22 : Law and Economics→Regulation and Business Law→Business and Securities Law
G01 : Financial Economics→General→Financial Crises
G13 : Financial Economics→General Financial Markets→Contingent Pricing, Futures Pricing
G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
G33 : Financial Economics→Corporate Finance and Governance→Bankruptcy, Liquidation
- 12 January 2026
- WORKING PAPER SERIES - No. 3169Details
- Abstract
- The financial crisis of 2007-2008 highlighted the risks that liquidity spirals pose to financial stability. We introduce a novel method for studying liquidity spirals and use this method to identify spirals before stock prices plummet and funding markets lock up. We show that liquidity spirals may be underestimated or completely overlooked when interactions between different types of contagion channels or institutions are ignored. We also find that financial stability is greatly affected by how institutions choose to respond to liquidity shocks, with some strategies yielding a “robust-yet-fragile" system. To demonstrate the method, we apply it to a highly granular data set on the South African banking sector and investment fund sector. We find that the risk of a liquidity spiral emerging increases when the pool of institutions' most liquid assets is reduced, while a liquidity injection by the central bank can dampen the spiral. We further show that a liquidity spiral may be due to the banking and fund sectors' collective dynamics, but can also be driven by an individual sector under some market conditions. The approach developed here canbe used to formulate interventions that specifically target the sector(s) causing the liquidity spiral.
- JEL Code
- G01 : Financial Economics→General→Financial Crises
G17 : Financial Economics→General Financial Markets→Financial Forecasting and Simulation
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
G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation
- 12 January 2026
- ECONOMIC BULLETIN - BOXEconomic Bulletin Issue 8, 2025Details
- Abstract
- Understanding food price dynamics is important both for monitoring overall inflation and for assessing consumers’ inflation expectations. Food inflation was 2.4% in November 2025, having declined from its March 2023 peak of 15.5%, but it remains above its pre-pandemic average. Key contributors to consumer food inflation include price rises of specific items, such as coffee, cocoa, meat and fruit. Commodity price increases have played a role – particularly coffee and cocoa commodities, reflecting extreme weather – as have factors such as wage growth in food-related sectors. While selling price expectations among food manufacturers and retailers indicate some near-term easing, the extent of this moderation remains uncertain owing to some persistent cost pressures in food retail.
- JEL Code
- D84 : Microeconomics→Information, Knowledge, and Uncertainty→Expectations, Speculations
E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation
Q02 : Agricultural and Natural Resource Economics, Environmental and Ecological Economics→General→Global Commodity Markets
Q11 : Agricultural and Natural Resource Economics, Environmental and Ecological Economics→Agriculture→Aggregate Supply and Demand Analysis, Prices
- 7 January 2026
- WORKING PAPER SERIES - No. 3168Details
- Abstract
- This paper examines the relevance of banks’ exposure to climate transition risk in the interbank lending market. Using transaction-level data on repo agreements, we first establish that banks with higher exposure to transition risk face significantly higher borrowing costs. This premium is a combination of a risk premium, compensating lenders for increased credit risk, and an inconvenience premium, reflecting the sustainability preferences of key dealer banks. We also find that the transition risk premium intensifies during periods of financial stress, indicating that climate-induced risks amplify existing vulnerabilities in financial markets. Furthermore, the rate segmentation caused by transition risk premium has implications for the transmission of monetary policy. Transition risk is an important factor in financial stability and policy design.
- JEL Code
- Q54 : Agricultural and Natural Resource Economics, Environmental and Ecological Economics→Environmental Economics→Climate, Natural Disasters, Global Warming
G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
G32 : Financial Economics→Corporate Finance and Governance→Financing Policy, Financial Risk and Risk Management, Capital and Ownership Structure, Value of Firms, Goodwill
Q58 : Agricultural and Natural Resource Economics, Environmental and Ecological Economics→Environmental Economics→Government Policy
- 7 January 2026
- WORKING PAPER SERIES - No. 3167Details
- Abstract
- We use a novel data set containing all corporate loans throughout the Eurozone to document a series of novel stylized facts on the relationship between collateral and the probability of default. First, we show that the pervasive empirical finding that riskier borrowers pledge collateral is driven by economists’ informational disadvantage relative to banks. Accounting for time-varying bank- and firm-specific risk factors produces negative correlations consistent with theory. Second, the relationship between pledging collateral and the probability of default is non-linear. Increasing the ex-ante collateral-to-loan ratio initially lowers the default likelihood but increases it as loans become overcollateralized. Third, this is driven by the riskiness of collateral. We estimate that an increase in the ex-ante collateral-to-loan ratio correlates with greater variance in the underlying collateral’s market value after loan origination. We develop a model featuring risk-neutral agents and risky collateral that provides intuition for these empirical patterns. Pledging risky collateral lowers lenders’ expected returns in case of default, leading them to demand more collateral to originate a loan but this diminishes a borrower’s return when a project is successful leading to less effort and a higher probability of default.
- JEL Code
- D82 : Microeconomics→Information, Knowledge, and Uncertainty→Asymmetric and Private Information, Mechanism Design
G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
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