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Costanza Rodriguez d’Acri

12 May 2022
OCCASIONAL PAPER SERIES - No. 293
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Abstract
In July 2021 the Eurosystem decided to launch the investigation phase of the digital euro project, which aims to provide euro area citizens with access to central bank money in an increasingly digitalised world. While a digital euro could offer a wide range of benefits, it could prompt changes in the demand for bank deposits and services from private financial entities (ECB, 2020a), with knock-on consequences for bank lending and resilience. By inducing bank disintermediation, a central bank digital currency, or CBDC, could in principle alter the transmission of monetary policy and impact financial stability. To prevent this risk, options to moderate CBDC take-up are being discussed widely.In view of the significant degree of uncertainty surrounding the design of a potential digital euro, its demand and the prevailing environment in which it would be introduced, this paper explores a set of analytical exercises that can offer insights into the consequences it could have for bank intermediation in the euro area.Based on assumptions about the degree of substitution between different forms of money in normal times, several take-up scenarios are calculated to illustrate how the potential demand for a digital euro might shape up. The paper then analyses the mechanisms through which commercial banks and the central bank could react to the introduction of a digital euro. Overall, effects on bank intermediation are found to vary across credit institutions in normal times and to be potentially larger in stressed times. Further, a potential digital euro’s capacity to alter system-wide bank run dynamics appears to depend on a few crucial factors, such as CBDC remuneration and usage limits.
JEL Code
E42 : Macroeconomics and Monetary Economics→Money and Interest Rates→Monetary Systems, Standards, Regimes, Government and the Monetary System, Payment Systems
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
16 February 2022
WORKING PAPER SERIES - No. 2644
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Abstract
While regulatory capital buffers are expected to be drawn to absorb losses and meet credit demand during crises, this paper shows that banks were unwilling to do so during the pandemic. To the contrary, banks engaged in forms of pro-cyclical behaviour to preserve capital ratios. By employing granular data from the credit register of the European System of Central Banks, we isolate credit supply effects and find that banks with little headroom above regulatory buffers reduced their lending relative to other banks, also when controlling for a broad range of pandemic support measures. Firms’ inability to reallocate their credit needs to less constrained banks had real economic effects, as their headcount went down, although state guarantee schemes acted as partial mitigants. These findings point to some unintended effects of the capital framework which may create incentives for pro-cyclical behaviour by banks during downturns. They also shed light on the interactions between fiscal and prudential policies which took place during the pandemic.
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
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
17 November 2021
FINANCIAL STABILITY REVIEW - ARTICLE
Financial Stability Review Issue 2, 2021
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Abstract
Bank capital buffers are supposed to help banks to absorb losses while maintaining the provision of key financial services to the real economy in times of stress. Capital buffers that are usable along these lines should lessen the damaging effects that can arise from credit supply shortages. Making use of buffers entails using the capital space above regulatory buffers and minimum requirements and, in case of need, also using regulatory buffers. This special feature analyses bank lending behaviour during the pandemic to gain insights into banks’ propensity to use capital buffers and the impact of the regulatory capital relief measures implemented by the authorities. From a macro perspective, the euro area banking system was able to meet credit demand and withstand stress. However, this aggregate view reflects several factors, including the impact of extraordinary policy measures. A micro perspective thus can help to comprehend how the capital buffer framework and capital releases affected banks’ behaviour during the pandemic. A microeconometric analysis shows that the banks with limited capital space above regulatory buffers adjusted their balance sheets by reducing lending, which could be interpreted as an attempt to defend capital ratios, suggesting unwillingness to use capital buffers. The results also show that the regulatory capital relief measures adopted during in the pandemic, which added to banks’ existing capital space, were associated with higher credit supply. while more research is desirable, this suggests that more releasable capital could enhance macroprudential authorities’ ability to act countercyclically when a crisis occurs.
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
E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy
E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy
E41 : Macroeconomics and Monetary Economics→Money and Interest Rates→Demand for Money
28 June 2021
MACROPRUDENTIAL BULLETIN - ARTICLE - No. 13
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Abstract
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
14 May 2021
WORKING PAPER SERIES - No. 2550
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Abstract
Do climate-oriented regulatory policies affect the flow of credit towards polluting corporations? We match loan-level data to firm-level greenhouse gas emissions to assess the impact of the Paris Agreement. We find that, following this agreement, European banks reallocated credit away from polluting firms. In the aftermath of President Trump’s 2017 announcement that the United States was withdrawing from the Paris Agreement, lending by European banks to polluting firms in the United States decreased even further in relative terms. It follows that green regulatory initiatives in banking can have a significant impact combating climate change.
JEL Code
E51 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Money Supply, Credit, Money Multipliers
G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation
H23 : Public Economics→Taxation, Subsidies, and Revenue→Externalities, Redistributive Effects, Environmental Taxes and Subsidies
27 November 2020
WORKING PAPER SERIES - No. 2496
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Abstract
In the current low interest rate environment in the euro area there is potential for a sudden increase in interest rates and heightened interest rate risk (IRR). By using a sample of 81 euro area banks during the period 2014Q4-2018Q1 and a confidential supervisory measure of IRR, this paper identifies which bank-specific characteristics can amplify or weaken the impact of a 200 basis points positive shock in interest rates. We find that banks reliant on core deposits, that hold more floating-interest rate loans and that diversify their lending, either by sector or geography, are less exposed to a positive change in interest rates. Interestingly, we discover that banks that did not exploit the exceptional financing provided by the European Central Bank (ECB) reveal greater IRR exposure. These findings advance the debate on the impact on euro area banking of a possible return to a normalised monetary policy.
JEL Code
E43 : Macroeconomics and Monetary Economics→Money and Interest Rates→Interest Rates: Determination, Term Structure, and Effects
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
G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
F44 : International Economics→Macroeconomic Aspects of International Trade and Finance→International Business Cycles
25 November 2020
FINANCIAL STABILITY REVIEW - BOX
Financial Stability Review Issue 2, 2020
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Abstract
This box explores the potential macroeconomic impact of different capital buffer replenishment paths. Model simulations show that replenishing capital buffers too early or too aggressively could be counterproductive and prolong the economic downturn. While the costs of restoring capital buffers to pre-crisis levels are not excessive if the economy moves along the central projection scenario, a weaker economic environment would increase bank losses and result in a more extensive use of capital buffers. In such a scenario, a later and more gradual restoration of capital buffers would be warranted.
JEL Code
G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
E17 : Macroeconomics and Monetary Economics→General Aggregative Models→Forecasting and Simulation: Models and Applications
E51 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Money Supply, Credit, Money Multipliers
C68 : Mathematical and Quantitative Methods→Mathematical Methods, Programming Models, Mathematical and Simulation Modeling→Computable General Equilibrium Models
19 October 2020
MACROPRUDENTIAL BULLETIN - ARTICLE - No. 11
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Abstract
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
6 July 2020
WORKING PAPER SERIES - No. 2440
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Abstract
We investigate the impact of macroprudential capital requirements on bank lending behaviour across economic sectors, focusing on their potentially heterogenous effects and transmission channel. By employing confidential loan-level data for the euro area over 2015-18, we find that the reaction of banks to structural capital surcharges depends on the level of the required capital buffer and the economic sector of the borrowing counterpart. Although tighter buffer requirements correspond to stronger lending contractions, targeted banks curtail their lending towards credit institutions the most, while leaving loan supply to non-financial corporations almost unchanged. We find that this lending is mitigated when banks resort to central bank funding. These results have important policy implications as they provide evidence on the impact of macroprudential policy frameworks and their interaction with unconventional monetary policies.
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
E60 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→General
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
20 February 2020
WORKING PAPER SERIES - No. 2377
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Abstract
The response of major central banks to the global financial crisis has revived the debate around the interactions between monetary policy (MP) and bank stability. This technical paper sheds light, quantitatively, on the different mechanisms underlying the relationship between MP and bank stability. It does so by reviewing microeconometric studies from the academic literature as well as those conducted internally at the ECB. The paper proceeds chronologically, using the recent crisis as a touchstone. First, it provides a brief overview of the main theoretical channels linking bank stability and the transmission of MP. It then analyses the evidence from the pre-crisis period in the light of the structural trends leading up to the crisis. As the crisis erupted, unconventional monetary policy (UMP) measures were deployed, and the paper suggests that these were essential to buttress bank stability and halt a systemic crisis. At the same time, these measures involved trade-offs, and the adverse spillovers on banks’ intermediation capacity and risk-taking require close monitoring. The paper ends by offering a critical review of the methodologies employed and suggestions for the areas where analytical efforts should be focussed in the future.
JEL Code
E4 : Macroeconomics and Monetary Economics→Money and Interest Rates
E43 : Macroeconomics and Monetary Economics→Money and Interest Rates→Interest Rates: Determination, Term Structure, and Effects
E5 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit
E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy
G20 : Financial Economics→Financial Institutions and Services→General
G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
20 November 2019
FINANCIAL STABILITY REVIEW - ARTICLE
Financial Stability Review Issue 2, 2019
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Abstract
This special feature discusses several ways in which the measurement of banks’ systemic footprint can be complemented with new indicators. The international approach is largely mechanical, but is intended to be complemented by expert judgement. The proposed additional systemic footprint measures may help macroprudential authorities in exercising that judgement. Using loan-level data matched with individual corporate balance sheet information allows macroprudential authorities to gain a better understanding of how a bank’s failure may affect employment and economic activity. Similar data, used in a model of network contagion, help assess the impact of a bank’s failure on the rest of the system. While the measures proposed in this special feature are not embedded in O-SII or G-SII scores, some evidence suggests that the concepts discussed have informed decisions of macroprudential authorities.
29 May 2019
FINANCIAL STABILITY REVIEW - BOX
Financial Stability Review Issue 1, 2019
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Abstract
The market valuations of euro area banks have remained low since the global financial crisis, lagging behind those of many international peers. Price-to-book (P/B) ratios offer a yardstick of bank franchise value, where a P/B ratio greater than one suggests that a bank can generate market value commensurate to the value of its tangible assets. In this way, a P/B ratio lower than unity suggests investor concern about shareholder value, and manifests itself in a higher cost of capital should the bank opt to issue additional equity. This box investigates the determinants of P/B ratios, assessing to what extent bank and country-specific factors have contributed to hampering their recovery.
18 September 2015
WORKING PAPER SERIES - No. 1850
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Abstract
The financial crisis has been characterised by fragmentation in the transmission of monetary policy, reflected in high dispersion in the cost of bank finance for euro area firms. Using micro-level bank data across a number of euro area countries, we identify individual bank balance sheet characteristics that contributed to this fragmentation. Interest rate pass-through heterogeneity is estimated using an error correction framework, which captures banks' funding constraints and balance sheet structures. Results show incomplete pass-through of changes in money market rates targeted by the central bank to firms' lending rates, with increases in sovereign bond yields affecting the cost of finance for firms, particularly in stressed countries. Individual bank characteristics have an effect on pass-through during the crisis, even after controlling for changes in macroeconomic conditions. The effect is greatest when looking at characteristics that capture bank funding difficulties, suggesting that a recovery in banks' funding capacities is an important element in reducing fragmentation in the transmission of monetary policy.
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
G01 : Financial Economics→General→Financial Crises
G20 : Financial Economics→Financial Institutions and Services→General
E43 : Macroeconomics and Monetary Economics→Money and Interest Rates→Interest Rates: Determination, Term Structure, and Effects