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Macroprudential Bulletin

26 July 2021
MACROPRUDENTIAL BULLETIN - ARTICLE - No. 14
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Abstract
This article assesses the economic costs and benefits of the Basel III finalisation package for the euro area and shows that the transitory costs of the reform are outweighed by its permanent long-term benefits. Implementing EU-specific modifications to the Basel III reform, such as the small and medium-sized enterprise (SME) supporting factor, credit valuation adjustment (CVA) exemptions and discretion with regard to the operational risk capital charge, reduce the already moderate transitory costs of the reform, although they also reduce its long-run benefits. Approaches that, in addition, modify the implementation of the output floor fail to further reduce the short-term economic costs of the reform while again decreasing its long-term benefits.
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
28 June 2021
MACROPRUDENTIAL BULLETIN - ARTICLE - No. 13
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This contribution reviews historical drivers of bank dividend payouts in the euro area. Economic literature presents three main reasons for adjustments to dividend payouts: asymmetric information between shareholders and management, the presence of agency costs, and regulatory constraints. Using a panel data approach, the article finds evidence supporting all three hypotheses. Banks lower dividends after facing a decline in profits and capital, but counterfactual simulations show that this adjustment could be small. Regulatory restrictions may therefore be warranted in the event of large expected losses or heavy uncertainty.
JEL Code
G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
G35 : Financial Economics→Corporate Finance and Governance→Payout Policy
28 June 2021
MACROPRUDENTIAL BULLETIN - ARTICLE - No. 13
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This article evaluates the impact on euro area bank valuations of the March 2020 European Central Bank (ECB) recommendation not to pay dividends or buy back shares. The analysis provides evidence of a negative impact on bank valuations in the order of magnitude of 7%. That impact is not, however, homogenous across banks: institutions that pay out dividends but fail to generate returns commensurate with investor requirements are found to be more strongly affected than those generating shareholder value or banks that are too weak to pay out dividends even in the absence of dividend restrictions. Further, the analysis suggests that uncertainty over future distributions arising from the SSM recommendation, rather than the suspension of dividends per se, explains most of the negative impact on bank valuations. By construction, this analysis captures the side effects of the measure, notwithstanding its overall merit in preserving bank capital and sustaining bank intermediation capacity during the COVID-19 period.
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
C31 : Mathematical and Quantitative Methods→Multiple or Simultaneous Equation Models, Multiple Variables→Cross-Sectional Models, Spatial Models, Treatment Effect Models, Quantile Regressions, Social Interaction Models
28 June 2021
MACROPRUDENTIAL BULLETIN - ARTICLE - No. 13
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This article studies the impact of the ECB’s dividend recommendations on banks’ lending and loss-absorption capacity during the COVID-19 crisis. It finds that the policy has been effective in mitigating the potential procyclical adjustment of banks. Banks that did not distribute previously planned dividends increased their lending by around 2.4% and their provisions by approximately 5.5%, thus strengthening their capacity to absorb losses. Notably, the recommendations appear to have mitigated the procyclical behaviour of banks closer to the threshold for automatic restrictions on distributions. Overall, the recommendations were successful in conserving capital and helping the banking system support the real economy and facilitate the recognition of future losses.
JEL Code
E51 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Money Supply, Credit, Money Multipliers
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
G35 : Financial Economics→Corporate Finance and Governance→Payout Policy
G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation
28 June 2021
MACROPRUDENTIAL BULLETIN - ARTICLE - No. 13
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This article provides an overview of the actions aimed at reducing or suspending banks’ distributions on a system-wide basis. It finds that such measures imply a number of pros and cons which deserve further analysis. On the one hand, system-wide restrictions on distributions complement and enhance the effectiveness of other public support measures, including prudential relief measures, by ensuring that the “freed-up” capital is used for the purposes of supporting the real economy and absorbing losses. Furthermore, system-wide measures simultaneously address adverse incentives to deleverage by removing the stigma effects associated with institution-specific restrictions. On the other hand, the implementation of system-wide restrictions on distributions presents several concomitant drawbacks and challenges. In particular, investors may be reluctant to invest in banks which are subject to restrictions, which may hamper banks ’ability to raise capital in the longer term. Other challenges include interference with the smooth functioning of the internal market and the possibility of the measures becoming less effective over time when introduced via soft-law instruments.
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
G35 : Financial Economics→Corporate Finance and Governance→Payout Policy
12 April 2021
MACROPRUDENTIAL BULLETIN - ARTICLE - No. 12
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Large differences between the liquidity of investment funds’ assets and liabilities (i.e. liquidity mismatches) can create vulnerabilities in the financial system and expose funds to a risk of large outflows and sudden drops in market liquidity. From a macroprudential perspective, the current regulatory framework may not sufficiently address the risks stemming from liquidity mismatches in investment funds. By modelling the liquidity management of an open-ended fund, this article provides theoretical justification for pre-emptive policy measures such as cash buffers that enhance financial stability by helping to increase the resilience of investment funds.
JEL Code
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
G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation
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12 April 2021
MACROPRUDENTIAL BULLETIN - ARTICLE - No. 12
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Following the onset of the coronavirus (COVID‑19) crisis, a significant number of European investment funds suspended redemptions. We find that many of those funds had invested in illiquid assets, were leveraged or had lower cash holdings than funds that were not suspended. Furthermore, suspensions were more likely to be seen in jurisdictions where pre-emptive liquidity measures were not available. Our findings also suggest that suspensions have spillover effects on other funds and sectors, highlighting the importance of pre-emptive liquidity management measures.
JEL Code
G23, G28, G01 : Financial Economics→Financial Institutions and Services→Non-bank Financial Institutions, Financial Instruments, Institutional Investors
12 April 2021
MACROPRUDENTIAL BULLETIN - ARTICLE - No. 12
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The turmoil seen in March 2020 highlighted key vulnerabilities in the money market fund (MMF) sector. This article assesses the effectiveness of the EU’s regulatory framework from a financial stability perspective and identifies three important lessons. First, investment in non-public debt assets exposes MMFs to liquidity risk, highlighting the need to limit investment in illiquid assets. Second, low-volatility net asset value (LVNAV) funds are particularly vulnerable to liquidity shocks, given that they invest in non-public debt assets while offering a stable net asset value (NAV). Enhanced portfolio requirements could strengthen their liquidity profile. And third, MMFs seem reluctant to draw down on their liquidity buffers during periods of stress, suggesting a need to make buffers more usable.
JEL Code
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
G01 : Financial Economics→General→Financial Crises
12 April 2021
MACROPRUDENTIAL BULLETIN - ARTICLE - No. 12
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Abstract
During the market turmoil of March 2020, many money market funds (MMFs) and other investment funds which were exposed to liquidity risk through a liquidity mismatch between their assets and liabilities experienced significant outflows. Those funds reacted in a procyclical manner by either selling assets in already stressed markets or curtailing investors’ access. That behaviour resulted in knock-on effects on other sectors of the economy and amplified the stress within the financial system. This overview article discusses financial stability risks arising from liquidity transformation by MMFs and other investment funds, a subject which is then explored in greater depth in the three other articles in this issue of the Macroprudential Bulletin. While the liquidity transformation carried out by investment funds serves an important economic function, by intermediating savings and real economy financing, it can also generate risks to financial stability. With this in mind, this article argues for a macroprudential approach to the regulation of investment funds to enhance their resilience and facilitate a stable provision of funding to the wider economy in both normal market conditions and periods of market stress.
JEL Code
G01 : Financial Economics→General→Financial Crises
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
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19 October 2020
MACROPRUDENTIAL BULLETIN - ANNEX - No. 11
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JEL Code
Click here to enter text. : Mathematical and Quantitative Methods
19 October 2020
MACROPRUDENTIAL BULLETIN - ARTICLE - No. 11
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Had authorities built up larger countercyclical buffers before the pandemic, it would have been easier to release capital in response to the crisis. The “lower for longer” interest rate environment reinforces the case for building up releasable buffers in good times. The article shows that enhancing countercyclical capacity can improve the policy mix available to achieve macro-financial stabilisation.
JEL Code
E32 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Business Fluctuations, Cycles
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
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
19 October 2020
MACROPRUDENTIAL BULLETIN - ARTICLE - No. 11
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This article discusses how market pressure can impede the usability of regulatory buffers. The capital relief measures in the euro area since the outbreak of the COVID-19 crisis had so far mixed effects on banks’ target CET1 ratio, suggesting an impeded pass-through. Market pressure can be a key explanatory factor, with pressure from credit and, critically, equity investors.
JEL Code
G01 : Financial Economics→General→Financial Crises
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
C58 : Mathematical and Quantitative Methods→Econometric Modeling→Financial Econometrics
19 October 2020
MACROPRUDENTIAL BULLETIN - ARTICLE - No. 11
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This article analyses the role of capital buffers in containing the reduction of lending to the real economy during the COVID-19 crisis. Our results show that banks’ use of capital buffers leads to better economic outcomes, without a negative impact on their resilience. Banks’ willingness to use capital buffers is reflected in higher lending, with positive effects on GDP and lower credit losses, while the resilience of the banking system is not compromised.
JEL Code
G01 : Financial Economics→General→Financial Crises
G17 : Financial Economics→General Financial Markets→Financial Forecasting and Simulation
C22 : Mathematical and Quantitative Methods→Single Equation Models, Single Variables→Time-Series Models, Dynamic Quantile Regressions, Dynamic Treatment Effect Models &bull Diffusion Processes
C54 : Mathematical and Quantitative Methods→Econometric Modeling→Quantitative Policy Modeling
G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
19 October 2020
MACROPRUDENTIAL BULLETIN - ARTICLE - No. 11
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This article discusses capital buffer usability in the Basel III framework. Although buffers are intended to be used in a crisis, a number of factors can prevent banks from drawing them down in case of need, with potentially adverse effects for the economy. The article reviews the functioning of the framework in the COVID-19 crisis and outlines possible implications for future policy design.
JEL Code
G01 : Financial Economics→General→Financial Crises
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
5 May 2020
MACROPRUDENTIAL BULLETIN - ARTICLE - No. 10
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Stablecoins provide an alternative to volatile crypto-assets. Depending on their asset management function, they may fall under different regulatory regimes or – with certain design features – under none at all. Given their potential size, global stablecoins could pose risks to financial stability. Such arrangements need a robust regulatory framework.
JEL Code
E42 : Macroeconomics and Monetary Economics→Money and Interest Rates→Monetary Systems, Standards, Regimes, Government and the Monetary System, Payment Systems
G15 : Financial Economics→General Financial Markets→International Financial Markets
G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation
29 October 2019
MACROPRUDENTIAL BULLETIN - ARTICLE - No. 9
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The post-crisis regulatory framework introduced multiple requirements on banks’ capital and liquidity positions, sparking a discussion among policymakers and academics on how the various requirements interact with one another. This article contributes to the discussion on the interaction of different regulatory metrics by empirically examining the interaction between the liquidity coverage ratio (LCR) and the net stable funding ratio (NSFR) for banks in the euro area. The findings suggest that the two liquidity requirements are complementary and constrain different types of banks in different ways, similarly to the risk-based and leverage ratio requirements in the capital framework. This dispels claims that the LCR and the NSFR are redundant and underlines the need for a faithful and consistent implementation of both measures (and the entire Basel III package more broadly) across all major jurisdictions, to maintain a level playing field at the global level and to ensure that the post-crisis regulatory framework delivers on its objectives.
JEL Code
G01 : Financial Economics→General→Financial Crises
G18 : Financial Economics→General Financial Markets→Government Policy and Regulation
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
29 October 2019
MACROPRUDENTIAL BULLETIN - ANNEX - No. 9
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JEL Code
Add JEL codes separated by semi-colon. : General Economics and Teaching
29 October 2019
MACROPRUDENTIAL BULLETIN - ARTICLE - No. 9
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Initial margin (IM) reduces counterparty credit risk in derivative markets. Notwithstanding efforts to limit potential procyclical effects of IM-setting practices, there is an ongoing debate about whether the current framework sufficiently addresses this concern, in particular when Value-at-Risk (VaR) models are used for setting IM. This article provides further insights into this issue. First, using EMIR data, we provide an overview of outstanding IM in the euro area derivative market and identify the most relevant sectors for the exchange of IM. Second, using a VaR IM model in line with industry practice, we show that aggregate IM can potentially vary substantially over a long-term horizon. Finally, we show that an IM floor based on a standardised IM model could be an effective tool for reducing IM procyclicality.
JEL Code
G10 : Financial Economics→General Financial Markets→General
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
29 October 2019
MACROPRUDENTIAL BULLETIN - ARTICLE - No. 9
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A recent ECB study shows that leverage is an important driver in investors’ redemption decisions. Regulatory changes to the UCITS framework facilitated the use of derivatives, increasing leverage for some European mutual funds which amplified investors' responsiveness to negative returns in a procyclical manner.
JEL Code
G01 : Financial Economics→General→Financial Crises
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
29 October 2019
MACROPRUDENTIAL BULLETIN - ARTICLE - No. 9
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This article aims to contribute to the ongoing discussion about the long-term strategy for stress testing in the euro area. In particular, it highlights some of the strengths and weaknesses of the constrained bottom-up approach, which is currently used in the EU‑wide stress-testing exercise. Under this approach, banks use their own models to generate stress test projections on the basis of a common macroeconomic scenario and under the constraints imposed by the European Banking Authority methodology. This set-up provides banks with some scope to underestimate their vulnerabilities in order to appear more resilient than their peers. This article confirms previous empirical evidence showing that such behaviour may indeed be practised by banks. This, in turn, requires a robust quality assurance of banks’ stress test projections by the competent authorities (including the European Central Bank), to enforce more realistic results. Against this background, the article presents a novel empirical analysis providing indicative evidence that the “supervisory scrutiny” relating to the quality assurance may be having a disciplining effect on banks’ risk-taking.
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
29 October 2019
MACROPRUDENTIAL BULLETIN - ARTICLE - No. 9
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Cyclical systemic risk tends to build up well ahead of financial crises and is measured best by credit and asset price dynamics. This article shows that high levels of cyclical systemic risk lead to large downside risks to the bank-level return on assets three to five years ahead. Hence, exuberant credit and asset price dynamics tend to increase considerably the likelihood of large future bank losses. Given the tight link between bank losses and reductions in bank capital, the results presented in this article can be used to quantify the level of “Bank capital-at-risk” (BCaR) for a banking system. BCaR is a useful tool for macroprudential policy makers as it helps to quantify how much additional bank resilience could be needed if imbalances unwind and systemic risk materialises.
JEL Code
G01 : Financial Economics→General→Financial Crises
G17 : Financial Economics→General Financial Markets→Financial Forecasting and Simulation
C22 : Mathematical and Quantitative Methods→Single Equation Models, Single Variables→Time-Series Models, Dynamic Quantile Regressions, Dynamic Treatment Effect Models &bull Diffusion Processes
C54 : Mathematical and Quantitative Methods→Econometric Modeling→Quantitative Policy Modeling
G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
29 October 2019
MACROPRUDENTIAL BULLETIN - FOREWORD - No. 9
16 September 2019
MACROPRUDENTIAL BULLETIN - FOREWORD - No. 8
16 September 2019
MACROPRUDENTIAL BULLETIN - ARTICLE - No. 8
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How do changes in bank capital requirements affect bank lending, lending spreads and the broader macroeconomy? The answer to this question is important for calibrating and assessing macroprudential policies. There is, however, relatively little empirical evidence to answer this question in the case of the euro area countries. This article contributes to filling this gap by studying the effects of changes in economic bank capital buffers in the four largest euro area countries. We use bank-level data and macroeconomic information to estimate a bank-internal, target level of economic capital ratio, i.e. the capital ratio that a bank would like to hold considering its own characteristics (size, profitability, risk aversion of its creditors, risk exposure, etc.) and macroeconomic conditions (expected GDP growth, etc.). Economic bank capital buffers are then computed as the difference between the current and the target economic capital ratio. However, due to adjustment costs, banks cannot adjust the actual capital ratio to the target level instantaneously. As a result, a change in the target capital ratio will result in an instantaneous change in the economic capital buffer. These buffers are aggregated at the country level and included in a panel Bayesian vector auto regressive (VAR) model. With the VAR, it is then possible to compute the response of macroeconomic and banking variables to a change in the buffer. The idea is that changes in economic capital buffers mimic the effects a change in regulatory capital requirements would have on the economy. We find that a negative economic capital buffer shock, i.e. a decline in actual capital ratios below the target level, leads to a modest decline in output and prices and to a larger decline in bank lending growth. By affecting the difference between actual and target economic capital ratios, these findings suggest that countercyclical capital-based macroprudential policy measures can be useful to dampen the financial cycle.
JEL Code
C11 : Mathematical and Quantitative Methods→Econometric and Statistical Methods and Methodology: General→Bayesian Analysis: General
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
16 September 2019
MACROPRUDENTIAL BULLETIN - ARTICLE - No. 8
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The expansion of the EU macroprudential toolkit to also include capital buffers applied at sectoral level may require the cross-border recognition of these instruments. This article explores the relevance of sectoral cross-border credit provided via foreign branches or direct cross-border lending in the SSM area and analyses the effects of the implementation of mandatory reciprocity arrangements. Our findings provide some evidence supporting the introduction of mandatory reciprocity arrangements for sectoral capital buffers where exposures are material in order to ensure a level playing field and pre-empt future leakages. This is important to foster the effectiveness of macroprudential policies because financial services provided via foreign branches or direct cross-border exposures would otherwise not be subject to a macroprudential measure taken in a host Member State.
JEL Code
C68 : Mathematical and Quantitative Methods→Mathematical Methods, Programming Models, Mathematical and Simulation Modeling→Computable General Equilibrium Models
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
G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation
16 September 2019
MACROPRUDENTIAL BULLETIN - ARTICLE - No. 8
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As discussions progress on the potential design of sectoral capital buffers both at the Basel Committee on Banking Supervision (BCBS) and European levels, this article discusses the advantages and shortcomings of the sectoral application of the countercyclical capital buffer for addressing sectoral systemic risks. A dynamic stochastic general equilibrium (DGSE) model is used to explore and compare the transmission channels of the countercyclical capital buffer (CCyB) and the sectoral countercyclical capital buffer (SCCyB), as well as their role in enhancing the resilience of banks and taming the procyclicality of credit. The model-based policy exercise indicates that, if risks are confined to one particular credit sector, a SCCyB could prove more effective than the CCyB in strengthening bank resilience to the target sector and in mitigating sectoral credit imbalances.
JEL Code
C68 : Mathematical and Quantitative Methods→Mathematical Methods, Programming Models, Mathematical and Simulation Modeling→Computable General Equilibrium Models
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
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
27 March 2019
MACROPRUDENTIAL BULLETIN - FOREWORD - No. 7
27 March 2019
MACROPRUDENTIAL BULLETIN - ARTICLE - No. 7
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This study analyses whether the ability of the euro area banking system to withstand potential shocks while minimising taxpayers’ costs has changed in the ten years since the financial crisis as a consequence of the impact of post-crisis reforms on bank capital and loss-absorbing capacity. The results show that the average probability of default of banks decreased from 3.5% in 2007 to 1.1% in 2017, less than a third of its pre-crisis value. In addition, under conservative assumptions on the scope of liabilities affected by the bail-in tool, banks’ loss-absorbing capacity has increased from 7.2% to 12.0% of total assets owing to the introduction of larger capital buffers and the new resolution framework, which enhances banks’ loss-absorbing capacity via the bail-in tool. Finally, the potential intervention of the Single Resolution Fund has further increased the loss-absorbing capacity of the system to 16.9% of total assets. Considering all these three factors, the ability of the banking system to absorb losses while minimising costs to taxpayers has increased more than 3-fold over the last ten years. When considering a broader scope for the bail-in tool, the system’s loss-absorbing capacity has increased to 55.5% of total assets, which corresponds to an overall 12-fold increase in its ability to absorb losses while minimising taxpayers’ costs.
JEL Code
G01 : Financial Economics→General→Financial Crises
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
27 March 2019
MACROPRUDENTIAL BULLETIN - ARTICLE - No. 7
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The macroprudential stress test of the euro area banking system examines the effects of the baseline and adverse scenarios on the 91 largest euro area credit institutions across 19 countries. The analysis looks at the financial system as a whole and acknowledges the interdependencies between banks and the real economy. In particular, it takes into account banks’ reaction to changing economic conditions and to deterioration in their balance sheets. The results indicate substantial resilience of the euro area banking system at the current juncture. The macroprudential stress test predicts a lower negative impact on capital ratios, though higher capital depletion, in billions of euro, than a static balance-sheet stress test. It also shows that banks’ deleveraging tied to deteriorating capitalisation and asset quality leads to further deterioration in economic conditions in an adverse scenario.
JEL Code
E37 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Forecasting and Simulation: Models and Applications
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
G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation
27 March 2019
MACROPRUDENTIAL BULLETIN - ARTICLE - No. 7
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This article presents the ECB framework for assessing financial stability risks stemming from residential real estate markets and for designing macroprudential policy responses. It reviews recent developments in residential real estate markets and policy initiatives to address risks.
JEL Code
G01 : Financial Economics→General→Financial Crises
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
R30 : Urban, Rural, Regional, Real Estate, and Transportation Economics→Real Estate Markets, Spatial Production Analysis, and Firm Location→General
27 March 2019
MACROPRUDENTIAL BULLETIN - ARTICLE - No. 7
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When living by the ocean, instead of trying to calm the waves and tides, building a levee or a breakwater is the safest option. This article reviews the country-specific strategic choices and decisions regarding timing and calibration of the countercyclical capital buffer (CCyB) in countries participating in the Single Supervisory Mechanism (SSM). It identifies commonalities across countries and country specificities that influence decisions by national designated authorities. In so doing, it summarises the limitations encountered with the credit-to-GDP gap and the role of other indicators and factors in calibrating the appropriate CCyB rate on the basis of “guided discretion”. Ultimately, assessing risks across euro area countries consistently, while taking into account country-specific factors, supports the effective use of the CCyB as a macroprudential instrument and ensures that similar risk exposures are subject to the same set of macroprudential requirements.
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
E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies
F42 : International Economics→Macroeconomic Aspects of International Trade and Finance→International Policy Coordination and Transmission
27 March 2019
MACROPRUDENTIAL BULLETIN - ANNEX - No. 7
2 October 2018
MACROPRUDENTIAL BULLETIN - FOREWORD - No. 6
2 October 2018
MACROPRUDENTIAL BULLETIN - ARTICLE - No. 6
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This article summarises the key findings from a counterfactual exercise where the effect of removing repo assets from the leverage ratio on banks’ default probabilities is considered. The findings suggest that granting such an exemption may have adverse effects on the stability of the financial system, even when measures are introduced to compensate for the decline in capital required by the leverage ratio framework. Increases in probabilities of default are mainly seen for larger banks which are more active in the repo market. Moreover, it is observed that the predictive power of the model improves when repo assets are included. Overall, the analysis in this article does not support a more lenient treatment of repo assets in the leverage ratio framework, e.g. by exempting them or allowing for more netting with repo liabilities or against high-quality government bonds.
JEL Code
G01 : Financial Economics→General→Financial Crises
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
2 October 2018
MACROPRUDENTIAL BULLETIN - ARTICLE - No. 6
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This article evaluates whether the global systemically important bank (G-SIB) framework has incentivised banks to adopt window-dressing behaviour, and whether their engagement in capital market activities has facilitated it. Window-dressing behaviour could have detrimental effects on financial stability, for at least two reasons: first, it may imply an underestimation of banks’ overall systemic importance and a distortion of the relative ranking in favour of banks that engage in more window-dressing behaviour; second, overall market functioning may be adversely affected if banks reduce the provision of certain services towards the end of the year. The evidence presented in this article suggests that both G-SIBs and banks with reporting obligations have reduced their overall risk score and some of their individual risk indicators at the end of a calendar year, both in absolute terms and relative to the other banks in the sample. The results also indicate that year-end reductions in capital market activities are a main driver of the observed window-dressing behaviour.
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
G38 : Financial Economics→Corporate Finance and Governance→Government Policy and Regulation
2 October 2018
MACROPRUDENTIAL BULLETIN - ARTICLE - No. 6
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This article aims to facilitate discussion on potential macroprudential tools for investment funds. To this end, the article puts forward an initial assessment based on the application of a conceptual framework and aims to inform the debate on the potential design aspects of macroprudential liquidity tools. In line with the ESRB’s approach to developing macroprudential instruments, the effectiveness and efficiency of various macroprudential liquidity tools for investment funds are thoroughly assessed. The article provides an overview of the various liquidity tools and assesses the suitability of these tools for containing the materialisation of systemic risks through various channels.
JEL Code
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
E61 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Policy Objectives, Policy Designs and Consistency, Policy Coordination
2 October 2018
MACROPRUDENTIAL BULLETIN - ANNEX - No. 6
30 April 2018
MACROPRUDENTIAL BULLETIN - FOREWORD - No. 5
30 April 2018
MACROPRUDENTIAL BULLETIN - ARTICLE - No. 5
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Abstract
This article presents stylised facts from the euro area network of large exposures and derives model-based interconnectedness measures of SSM significant institutions. The article has three main findings. First, the interbank network is relatively sparse and suggests a core-periphery network structure. Second, the more complex network measures on average correlate highly with the more simple size-based interconnectedness indicators, constructed following the EBA guidelines on the calibration of O-SII buffers. Third, there is nevertheless value for policymakers to take into account network-based measures in addition to the size-based interconnectedness indicators, as for some individual banks those measures can deviate considerably.
JEL Code
C63 : Mathematical and Quantitative Methods→Mathematical Methods, Programming Models, Mathematical and Simulation Modeling→Computational Techniques, Simulation Modeling
G01 : Financial Economics→General→Financial Crises
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
30 April 2018
MACROPRUDENTIAL BULLETIN - ARTICLE - No. 5
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Abstract
The rapid growth of the asset management sector over recent years has raised questions about the interaction between traditional banks and investment funds, as well as the drivers behind this trend. Our analysis contributes to this debate by shedding light on the implications of increased competition between the two sectors. We first examine how competition between banks and investment funds drives the risk profiles and market shares of these two sectors. In a second step, we assess whether and how capital requirements for banks influence the relative market shares of the two sectors, contributing to both the analysis of the drivers behind the structural developments in the euro area financial sector and the work on the evaluation of the impact of post-crisis reforms.
JEL Code
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
30 April 2018
MACROPRUDENTIAL BULLETIN - ARTICLE - No. 5
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Abstract
The European Commission’s proposals for the reform of EU banking rules aim to complete the post-crisis reform agenda and to address shortcomings in the current regulatory framework, notably in the Capital Requirements Regulation (CRR) and the Capital Requirements Directive (CRD IV). Once implemented, the changes will strengthen the regulatory architecture in the European Union, thereby contributing to the reduction of risks in the banking sector and paving the way for commensurate progress in completing the banking union. This article outlines and explains the ECB’s key messages concerning these proposals that are of particular importance for macroprudential regulation and policy. In particular, the ECB considers that the ongoing discussions on the CRR/CRD IV package provide the opportunity to make targeted changes to the macroprudential toolkit to make it more efficient and consistent. In the medium term, a comprehensive review of the macroprudential toolkit is still necessary to streamline procedures within the framework and to complement it with tools to address risks in the real estate and non-banking sectors.
JEL Code
E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies
G18 : Financial Economics→General Financial Markets→Government Policy and Regulation
G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation
30 April 2018
MACROPRUDENTIAL BULLETIN - ANNEX - No. 5
19 December 2017
MACROPRUDENTIAL BULLETIN - No. 4
9 June 2017
MACROPRUDENTIAL BULLETIN - No. 3
25 October 2016
MACROPRUDENTIAL BULLETIN - No. 2
23 March 2016
MACROPRUDENTIAL BULLETIN - No. 1