Claudia Lambert
- 22 November 2023
- FINANCIAL STABILITY REVIEW - BOXFinancial Stability Review Issue 2, 2023Details
- Abstract
- Central banks around the world have stepped up their efforts to explore and develop their own digital currencies (known as CBDCs), an electronic equivalent to cash. In the euro area, the introduction of a CBDC (“digital euro”) could offer several financial stability benefits by providing an alternative to new forms of private digital money and spurring innovation. At the same time, a CBDC, if not properly designed, could prompt financial stability risks and affect the structure and scale of bank intermediation. In the absence of effective safeguards, such as caps on individual holdings, the materialisation of high deposit outflows could heighten liquidity risk for significant institutions. However, the envisaged design of a digital euro would address such financial stability concerns by applying adequate caps on individual holdings.
- JEL Code
- 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
- 6 November 2023
- WORKING PAPER SERIES - No. 2864Details
- Abstract
- This paper investigates the contribution of capital markets to international risk sharing in the euro area over the 2000Q1-2021Q1 period. It provides three main contributions: First, the estimation of country-specific vector autoregressions (VAR) shows that shock absorption through capital markets remains modest, particularly in the southern euro area. Second, we analyse the geographical patterns of the capital channel. While risk sharing between southern and northern euro area countries led the improvements in income smoothing at the beginning of the 2000s, intra-regional capital flows supported income smoothing in the recent past. Third, based on a panel threshold VAR, we analyse how the composition of external capital positions impacts the capital channel. Long-term portfolio debt assets and liabilities as well as equity liabilities significantly improved income smoothing. The effect is more pronounced for northern countries, in line with their larger cross-border portfolios, when compared to the southern countries. Regarding foreign direct investment, only northern countries benefited from inward positions.
- JEL Code
- C23 : Mathematical and Quantitative Methods→Single Equation Models, Single Variables→Panel Data Models, Spatio-temporal Models
E62 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Fiscal Policy
G11 : Financial Economics→General Financial Markets→Portfolio Choice, Investment Decisions
G15 : Financial Economics→General Financial Markets→International Financial Markets
- 11 July 2022
- MACROPRUDENTIAL BULLETIN - FOCUS - No. 18Details
- Abstract
- This article describes the main features and risks of decentralised finance (DeFi), focusing in particular on similarities and differences between DeFi and traditional finance. While the financial services provided through DeFi mainly replicate those of traditional financial services but within the crypto-asset ecosystem, they are provided in a novel way that relies on automated protocols and cuts out centralised intermediaries. The article explains how this novel method of service provision entails specific financial stability risks and regulatory challenges.
- 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
- 19 October 2021
- MACROPRUDENTIAL BULLETIN - FOCUS - No. 15Details
- Abstract
- Green capital markets are growing rapidly while being more resilient and integrated than traditional markets. Enhancing market structures and standards will help decrease greenwashing risk and foster further growth in green finance and the transition towards carbon neutrality.
- JEL Code
- G11 : Financial Economics→General Financial Markets→Portfolio Choice, Investment Decisions
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
Q54 : Agricultural and Natural Resource Economics, Environmental and Ecological Economics→Environmental Economics→Climate, Natural Disasters, Global Warming
Q56 : Agricultural and Natural Resource Economics, Environmental and Ecological Economics→Environmental Economics→Environment and Development, Environment and Trade, Sustainability, Environmental Accounts and Accounting, Environmental Equity, Population Growth
- 3 March 2020
- FINANCIAL INTEGRATION AND STRUCTURE ARTICLEFinancial Integration and Structure in the Euro Area 2020Details
- Abstract
- This special feature analyses euro area investment preferences in the investment fund sector and discusses the implications for financial integration. We investigate the traditional perception that investors tend to hold a disproportionate share of domestic assets in their portfolio, a phenomenon generally known as “home bias”. We argue that measures of home bias that neglect fund holders’ countries of origin are biased, in particular when investments are concentrated in financial centres. By taking into account fund holders’ country of origin rather than assuming the fund’s domicile as investment origin, this study revisits and corrects measures of home bias in the euro area.
- 6 February 2020
- ECONOMIC BULLETIN - BOXEconomic Bulletin Issue 1, 2020Details
- Abstract
- The analysis provides empirical evidence that repo market liquidity is an important determinant of bond market liquidity and arbitrage opportunities in swap markets. The first part of the analysis is concerned with the role of repo market liquidity in funding bonds used as collateral in repo transactions. It explores whether tense repo markets reduce the liquidity in bond markets. The second part examines how lower liquidity in repo markets hampers arbitrage in swap markets. The results presented show that repo markets support both bond market liquidity and swap market efficiency, highlighting their important role in financial markets.
- 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 November 2018
- FINANCIAL STABILITY REVIEW - ARTICLEFinancial Stability Review Issue 2, 2018Details
- Abstract
- Over the last decade, exchange-traded funds (ETFs) have grown at a fast pace both globally and in the euro area. ETFs typically offer low-cost diversified investment opportunities for investors. ETF shares can be bought and sold at short notice, making them efficient and flexible instruments for trading and hedging purposes. At the same time, the wider use of ETFs may also come with a growing potential for transmission and amplification of risks in the financial system. This special feature focuses on two such channels arising from (i) liquidity risk in ETF primary and secondary markets and (ii) counterparty risk in ETFs using derivatives and those engaging in securities lending. While ETFs still only account for a small fraction of investment fund asset holdings, their growth has been strong, suggesting a need for close monitoring from a financial stability and regulatory perspective, including prospective interactions with other parts of the financial system.
- 2 October 2018
- MACROPRUDENTIAL BULLETIN - ARTICLE - No. 6Details
- Abstract
- 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. 6Details
- Abstract
- 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
- 30 April 2018
- MACROPRUDENTIAL BULLETIN - ARTICLE - No. 5Details
- 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 November 2017
- OCCASIONAL PAPER SERIES - No. 202Details
- Abstract
- This joint ECB-DNB Occasional Paper aims to inform the ongoing discussions about an EU-level framework for operationalising macroprudential leverage limits for alternative investment funds (AIFs). It builds on, and extends, the analysis of an ECB-DNB special feature article published in the ECB’s Financial Stability Review in November 2016. First, this Occasional Paper presents new EU-level evidence suggesting that leveraged funds exhibit stronger sensitivity of investor outflows to bad past performance than unleveraged funds, which has the potential to exacerbate systemic risk. Second, it devises a framework for assessing financial stability risks from leverage in investment funds. This is applied to leveraged AIFs managed by asset managers in the Netherlands using Alternative Investment Fund Managers Directive (AIFMD) data for the two-year period from the first quarter of 2015 to the fourth quarter of 2016. Third, it discusses the potential effectiveness and efficiency of various designs for macroprudential leverage limits. To this end, it builds on the findings for the Dutch AIF sector and suggests design options for further exploration at EU level. Beyond assessing financial stability risks from leverage in the Dutch AIF sector, the case study aims to show how equivalent information on AIFs at the European level – which will be made available to the European Securities Markets Authority (ESMA) and the European Systemic Risk Board (ESRB) in the coming years – could be used when developing an EU-level framework for operationalising macroprudential leverage limits.
- 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
- 29 November 2017
- FINANCIAL STABILITY REVIEW - ARTICLEFinancial Stability Review Issue 2, 2017Details
- Abstract
- Effectively functioning repo markets are of key importance for both financial stability and monetary policy, but the excessive use of repos may also be a source of systemic risk as witnessed during the recent financial crisis. Regulatory reforms introduced since the start of the crisis have aimed to contain systemic risk related to the excessive build-up of leverage and unstable funding, but recently some concerns have been raised about their potential effects on the functioning of the repo market. This special feature presents new evidence on the drivers of banks’ activity in the repo market with respect to regulatory reforms. In addition, it takes a closer look at the repo market structure and pricing dynamics, in particular around banks’ balance sheet reporting dates. While the observed volatility around reporting dates suggests that the calculation methodology for some regulatory metrics should be reviewed, overall, the findings indicate that unintended consequences of regulatory reforms on the provision of repo services by euro area banks have not been material.
- JEL Code
- G00 : Financial Economics→General→General