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Ellen Ryan
- 5 June 2023
- WORKING PAPER SERIES - No. 2823Details
- Abstract
- Our paper uses credit registry data for the euro area to examine how the banking system transmits asset price shocks to credit via revaluation of collateral and subsequent lending decisions. Specifically we examine banks’ treatment of real estate collateral during the Covid-19 crisis. First we find evidence of significant frictions in the trans-mission of asset price dynamics to collateral values. Despite this we find that lending relationships reliant on real estate collateral received one third less credit following the outbreak of the pandemic and that firms experiencing downward revaluations of their collateral were significantly less likely to be given new loans. Our findings confirm that the collateral channel does create an economically significant link between real estate values and credit but suggest that the banking system’s role in transmission may be more complex than traditional economic theory would imply.
- JEL Code
- G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
R3 : Urban, Rural, Regional, Real Estate, and Transportation Economics→Real Estate Markets, Spatial Production Analysis, and Firm Location
C55 : Mathematical and Quantitative Methods→Econometric Modeling→Modeling with Large Data Sets?
- 31 May 2023
- FINANCIAL STABILITY REVIEW - BOXFinancial Stability Review Issue 1, 2023Details
- Abstract
- The presence of institutional investors, particularly investment funds, in euro area residential real estate (RRE) markets has increased markedly in recent years. Yet the implications for housing markets, as well as for financial stability more broadly, remain largely unstudied. This box shows that a positive (negative) demand shock from institutional investors has a positive (negative) and persistent impact on RRE prices between 2007 and 2021. Also, the link between local economic fundamentals and house price growth appears to weaken in regions with a greater presence of institutional investors. This may reinforce the build-up of financial vulnerabilities, as investor demand falls and the cycle turns. It also raises concerns that vulnerabilities in the investment fund sector may amplify any real estate market correction, with potential implications for the financial resilience of banks, households and exposed firms. For this reason, it is important to develop policies aimed at enhancing the resilience of real estate investment funds – such as lower redemption frequencies, longer notice and settlement periods, and longer minimum holding periods.
- JEL Code
- G23 : Financial Economics→Financial Institutions and Services→Non-bank Financial Institutions, Financial Instruments, Institutional Investors
R33. : Urban, Rural, Regional, Real Estate, and Transportation Economics→Real Estate Markets, Spatial Production Analysis, and Firm Location→Nonagricultural and Nonresidential Real Estate Markets
- 3 April 2023
- MACROPRUDENTIAL BULLETIN - ARTICLE - No. 20Details
- Abstract
- This article analyses the financial stability risks of investment funds active in euro area commercial real estate (CRE) markets. It finds that real estate investment funds (REIFs) have grown significantly in the past decade, and have a large market footprint in several euro area countries where the outlook for CRE markets has deteriorated sharply. In addition, REIFs are exposed to liquidity risk when they offer frequent redemptions, which could affect the stability of CRE markets. REIFs should therefore be subject to a common and comprehensive policy framework to reduce the liquidity mismatch and risks to financial stability.
- JEL Code
- G23 : Financial Economics→Financial Institutions and Services→Non-bank Financial Institutions, Financial Instruments, Institutional Investors
R33 : Urban, Rural, Regional, Real Estate, and Transportation Economics→Real Estate Markets, Spatial Production Analysis, and Firm Location→Nonagricultural and Nonresidential Real Estate Markets
- 10 October 2022
- MACROPRUDENTIAL BULLETIN - FOCUS - No. 19Details
- Abstract
- During the Covid-19 pandemic banks appear to have avoided lending to firms reliant on real estate as collateral. When banks applied downward revaluations to existing real estate collateral they were also less likely to extend loans, particularly to highly leveraged borrowers.
- JEL Code
- G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
E51 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Money Supply, Credit, Money Multipliers
G20 : Financial Economics→Financial Institutions and Services→General
- 10 October 2022
- MACROPRUDENTIAL BULLETIN - ARTICLE - No. 19Details
- Abstract
- This article examines links between Commercial Real Estate (CRE) markets and financial stability. The global financial crisis demonstrated the implications of CRE boom-bust cycles for the stability of many countries’ financial systems. However, CRE risk assessment and macroprudential policy frameworks remain in their infancy due to both the markets’ complexity and the persistence of data gaps. This article takes steps towards closing a number of data gaps by using euro area credit register data to examine the size and nature of links between euro area (EA) banks and CRE markets. Moreover, given that this dataset covers the COVID-19 pandemic crisis period, the operation of these transmission channels can be seen in action, providing insight into how economic theory plays out in practice.
- JEL Code
- G00 : Financial Economics→General→General
C55 : Mathematical and Quantitative Methods→Econometric Modeling→Modeling with Large Data Sets?
R30 : Urban, Rural, Regional, Real Estate, and Transportation Economics→Real Estate Markets, Spatial Production Analysis, and Firm Location→General
- 2 March 2022
- WORKING PAPER SERIES - No. 2652Details
- Abstract
- The investment fund sector has expanded dramatically since the crisis of 2008-2009. As the sector grows, so do the implications of its risk-taking for the wider financial system and real economy. This paper provides empirical evidence for the existence of widespread risk-taking incentives in the investment fund sector, with a particular focus on incentives for synchronised, cyclical risk-taking which could have systemic effects. Incentives arise from the positive response of investors to returns achieved through cyclical risk-taking and non-linearities in the relationship between fund returns and fund flows, which may keep managers from fully internalising the effects of adverse outcomes on their portfolios. The fact that market discipline may not be sufficient to ensure prudential behaviour among managers, combined with the externalities of this risk-taking for the wider system, creates a clear case for macroprudential regulatory intervention.
- JEL Code
- G23 : Financial Economics→Financial Institutions and Services→Non-bank Financial Institutions, Financial Instruments, Institutional Investors
G11 : Financial Economics→General Financial Markets→Portfolio Choice, Investment Decisions
G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation
- 12 October 2021
- WORKING PAPER SERIES - No. 2605Details
- Abstract
- We examine the transmission of monetary policy via the euro area investment fund sector using a BVAR framework. We find that expansionary shocks are associated with net inflows and that these are strongest for riskier fund types, reflecting search for yield among euro area investors. Search for yield behaviour by fund managers is also evident, as they shift away from low yielding cash assets following an expansionary shock. While higher risk-taking is an intended consequence of expansionary monetary policy, this dynamic may give rise to a build-up in liquidity risk over time, leaving the fund sector less resilient to large outflows in the face of a crisis.
- JEL Code
- E32 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Business Fluctuations, Cycles
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
- 19 May 2021
- FINANCIAL STABILITY REVIEW - BOXFinancial Stability Review Issue 1, 2021Details
- Abstract
- This box examines the response of the investment fund sector to monetary policy shocks and the implications for financial stability. As the fund sector grows, so does its importance for the funding of economic activity and the transmission of monetary policy. But excessive risk-taking can also have damaging effects for the wider financial system. The box shows that expansionary shocks are associated with net inflows, which are strongest for riskier fund types, reflecting search for yield among euro area investors. Risk-taking by fund managers is also evident, as they shift away from low-yielding cash assets following an expansionary shock. While higher risk-taking is an intended consequence of expansionary monetary policy, this dynamic may give rise to a build-up of liquidity risk over time, leaving the fund sector less resilient to large outflows in the face of a crisis. For this reason, macroprudential policies that help restrict risk building up in the fund sector during extended periods of accommodative monetary policy should be developed.
- JEL Code
- E32 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Business Fluctuations, Cycles
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
- 25 November 2020
- FINANCIAL STABILITY REVIEW - BOXFinancial Stability Review Issue 2, 2020Details
- 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
- 25 May 2020
- FINANCIAL STABILITY REVIEW - BOXFinancial Stability Review Issue 1, 2020Details
- Abstract
- Euro area money market funds (MMFs) provide short-term credit to banks and non-financial corporations (NFCs) through purchases of commercial paper (CP). MMFs also play an important role in non-banks’ cash and liquidity management, given that the funds offer stable value and the possibility to redeem at short notice. As the coronavirus crisis deepened, euro area MMFs experienced large outflows and a number of them had difficulties in raising sufficient cash from maturing assets and liquid positions. Stress in MMFs can impair the financial system’s and the real economy’s access to short-term funding and liquidity during crises. Monetary policy action helped to improve financial market conditions more broadly, thereby also alleviating liquidity strains in the MMF sector.
- JEL Code
- G10 : Financial Economics→General Financial Markets→General
G11 : Financial Economics→General Financial Markets→Portfolio Choice, Investment Decisions
G23 : Financial Economics→Financial Institutions and Services→Non-bank Financial Institutions, Financial Instruments, Institutional Investors
- 3 March 2020
- FINANCIAL INTEGRATION AND STRUCTURE ARTICLEFinancial Integration and Structure in the Euro Area 2020Details
- Abstract
- Brexit will result in a substantial structural change to the EU’s financial architecture over the coming years. It could be particularly significant for derivatives clearing, investment banking activities and securities and derivatives trading as the reliance on service provision by UK financial firms is more pronounced in these areas and the provision of such services is currently linked to the EU passporting regime. At the same time, the precise overall impact of Brexit on the EU’s future financial architecture in general – and on these specific areas in particular – is difficult to predict at this stage, and may change over time. This special feature makes a first attempt at analysing some of the factors that may affect the EU’s financial architecture post-Brexit. It focuses on areas which currently show strong reliance on the UK and are of particular relevance for the ECB under its various mandates.