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Margherita Giuzio

21 September 2021
OCCASIONAL PAPER SERIES - No. 270
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Abstract
The financing structure of the euro area economy has evolved since the global financial crisis with non-bank financial intermediation taking a more prominent role. This shift affects the transmission of monetary policy. Compared with banks, non-bank financial intermediaries are more responsive to monetary policy measures that influence longer-term interest rates, such as asset purchases. The increasing role of debt securities in the financing structure of firms also leads to a stronger transmission of long-rate shocks. At the same time, short-term policy rates remain an effective tool to steer economic outcomes in the euro area, which is still highly reliant on bank loans. Amid a low interest rate environment, the growth of market-based finance has been accompanied by increased credit, liquidity and duration risk in the non-bank sector. Interconnections in the financial system can amplify contagion and impair the smooth transmission of monetary policy in periods of market distress. The growing importance of non-bank financial intermediaries has implications for the functioning of financial market segments relevant for monetary policy transmission, in particular the money markets and the bond markets.
JEL Code
E4 : Macroeconomics and Monetary Economics→Money and Interest Rates
E5 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit
G2 : Financial Economics→Financial Institutions and Services
G38 : Financial Economics→Corporate Finance and Governance→Government Policy and Regulation
19 May 2021
FINANCIAL STABILITY REVIEW - BOX
Financial Stability Review Issue 1, 2021
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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
17 May 2021
FINANCIAL STABILITY REVIEW - ARTICLE
Financial Stability Review Issue 1, 2021
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Abstract
The ECB has been intensifying its quantitative work aimed at capturing climate-related risks to financial stability. This includes estimating financial system exposures to climate-related risks, upgrading banking sector scenario analysis and monitoring developments in the financing of the green transition. Considerable progress has been made on capturing banking sector exposures to firms that are subject to physical risks from climate change. While data and methodological challenges are still a focus of ongoing debates, our analyses suggest (i) somewhat concentrated bank exposures to physical and transition risk drivers, (ii) a prevalence of exposures amongst more vulnerable banks and in specific regions, (iii) risk-mitigating potential for interactions across financial institutions, and (iv) strong inter-temporal dependency conditioning the interaction of transition and physical risks. At the same time, investor interest in “green finance” continues to grow – but so-called greenwashing concerns need to be addressed to foster efficient market mechanisms. Both the assessment of risks and the allocation of finance to support the orderly transition to a more sustainable economy can benefit from enhanced disclosures, including of firms’ forward-looking emission targets, better data and strengthened risk assessment methodologies, among other things.
JEL Code
G10 : Financial Economics→General Financial Markets→General
G18 : Financial Economics→General Financial Markets→Government Policy and Regulation
G20 : Financial Economics→Financial Institutions and Services→General
Q54 : Agricultural and Natural Resource Economics, Environmental and Ecological Economics→Environmental Economics→Climate, Natural Disasters, Global Warming
12 April 2021
MACROPRUDENTIAL BULLETIN - ARTICLE - No. 12
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Abstract
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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24 November 2020
FINANCIAL STABILITY REVIEW - BOX
Financial Stability Review Issue 2, 2020
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Abstract
Green financial markets are growing rapidly. Funds with an environmental, social and corporate governance mandate have grown by 170% since 2015 and 57% of them are domiciled in the euro area. The outstanding amount of green bonds issued by euro area residents has grown ten-fold over the same period. The large flows into ESG funds and green assets are expected to be sustained over time by increasing concerns around climate change, a gradual generational transfer of wealth towards millennials, and better disclosure and understanding of ESG risks. Given the financial stability risks from climate change, this box aims to understand the performance of such products and their potential for greening the economy. It focuses on the resilience of ESG funds and the absence of a consistent “greenium” – a lower yield for green bonds compared with conventional bonds of similar risk profile – reflecting the fact that green projects do not enjoy benefit from cheaper financing.
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
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
26 May 2020
FINANCIAL STABILITY REVIEW - BOX
Financial Stability Review Issue 1, 2020
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Abstract
Recent events have shown that stress in non-banks can affect other parts of the financial system, for example through forced asset sales and reduced short-term funding. This box examines the interconnections between banks and non-banks through direct exposures, overlapping portfolios and ownership links, and considers how these can increase the risk of systemic contagion.
26 May 2020
FINANCIAL STABILITY REVIEW - BOX
Financial Stability Review Issue 1, 2020
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Abstract
Private equity (PE) funding, and buyout funds in particular, have grown rapidly as a form of corporate financing in recent years, as the search for yield intensified. The outstanding amount of PE managed by global funds amounted to close to USD 8 trillion in December 2019, of which buyout funds accounted for around a third. Buyout funds have grown faster than any other PE strategy over recent years, even as their managers have diversified their activities. Institutional investors’ demand for access to PE buyout funds has been reflected in increasing rates of oversubscription of buyout funds in the primary market (see Chart A, left panel). This box provides an overview of the main developments in the PE buyout market and assesses potential financial stability risks to both investors in PE funds and the overall financial system.
25 May 2020
FINANCIAL STABILITY REVIEW - BOX
Financial Stability Review Issue 1, 2020
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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
30 March 2020
WORKING PAPER SERIES - No. 2384
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Abstract
Recent policy discussion includes the introduction of diversification requirements for sovereign bond portfolios of European banks. In this paper, we evaluate the possible effects of these constraints on risk and diversification in the sovereign bond portfolios of the major European banks. First, we capture the dependence structure of European countries' sovereign risks and identify the common factors driving European sovereign CDS spreads by means of an independent component analysis. We then analyse the risk and diversification in the sovereign bond portfolios of the largest European banks and discuss the role of “home bias”, i.e. the tendency of banks to concentrate their sovereign bond holdings in their domicile country. Finally, we evaluate the effect of diversification requirements on the tail risk of sovereign bond portfolios. Under our assumptions about how banks rebalance their portfolio to respond to the new requirements, demanding that banks modify their holdings to increase their portfolio diversification may be ineffective in reducing portfolio risk, including tail risk.
JEL Code
G01 : Financial Economics→General→Financial Crises
G11 : Financial Economics→General Financial Markets→Portfolio Choice, Investment Decisions
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
3 March 2020
FINANCIAL INTEGRATION AND STRUCTURE ARTICLE
Financial Integration and Structure in the Euro Area 2020
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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.
3 March 2020
FINANCIAL INTEGRATION AND STRUCTURE ARTICLE
Financial Integration and Structure in the Euro Area 2020
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Abstract
This special feature discusses how a common sovereign safe asset in the euro area could benefit financial stability by fostering financial integration and development, and by changing the structure of asset markets. The discussion focuses on the potential benefits of a well-designed common safe asset that has certain desirable characteristics, while it does not provide an assessment of specific design options. This special feature should be viewed as part of a broader discussion on how to complete the banking union, which also includes considerations regarding a European deposit insurance scheme and changing the regulatory treatment of sovereign exposures.
20 November 2019
FINANCIAL STABILITY REVIEW - BOX
Financial Stability Review Issue 2, 2019
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Abstract
When investment funds face outflows, fund managers may have to liquidate parts of their portfolio, potentially changing its composition and riskiness as a result. If fund managers respond to outflows by selling securities proportionally to the initial asset allocation, i.e. selling a vertical slice of the portfolio, the liquidity and risk profile of the fund remains unchanged. But asset managers might have incentives to reduce the portfolio non-proportionally. For example, in trying to avoid incurring losses on illiquid assets, managers might choose to sell the most liquid securities first. And in the hope of increasing returns and attracting future inflows, they might choose to take on more risk in their portfolio. Other managers, worried about future outflows, might hoard liquid securities and de-risk their portfolios. However, large sales of illiquid securities may affect their market price at times of relatively low market liquidity, with possible spillovers to other financial institutions holding the same assets.
20 November 2019
FINANCIAL STABILITY REVIEW - BOX
Financial Stability Review Issue 2, 2019
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Abstract
Scarce and inconsistent information on the climate-related risk embedded in assets makes the pricing of climate risk difficult for investors and authorities.Recent studies have found that environmental disclosures can affect the market valuation of non-financial businesses operating in sectors that are sensitive to the risks related to the transition to a low-carbon economy. But the impact is less clear for financial institutions. This box investigates climate-related disclosures of large euro area banks and insurers and their impact on stock market valuations.
29 July 2019
WORKING PAPER SERIES - No. 2299
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Abstract
Traditionally, insurers are seen as stabilisers of financial markets that act countercyclically by buying assets whose price falls. Recent studies challenge this view by providing empirical evidence of procyclicality. This paper sheds new light on the underlying reasons for these opposing views. Our model predicts procyclicality when prices fall due to increasing risk premia, and countercyclicality in response to rises in the risk-free rate. Using granular data on insurers’ government bond holdings, we validate these predictions empirically. Our findings contribute to the current policy discussion on macroprudential measures beyond banking.
JEL Code
G01 : Financial Economics→General→Financial Crises
G11 : Financial Economics→General Financial Markets→Portfolio Choice, Investment Decisions
G12 : Financial Economics→General Financial Markets→Asset Pricing, Trading Volume, Bond Interest Rates
G22 : Financial Economics→Financial Institutions and Services→Insurance, Insurance Companies, Actuarial Studies
G23 : Financial Economics→Financial Institutions and Services→Non-bank Financial Institutions, Financial Instruments, Institutional Investors
2 July 2019
OCCASIONAL PAPER SERIES - No. 226
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Abstract
This paper presents an approach to a macroprudential stress test for the euro area banking system, comprising the 91 largest euro area credit institutions across 19 countries. The approach involves modelling banks’ reactions to changing economic conditions. It also examines the effects of adverse scenarios on economies and the financial system as a whole by acknowledging a broad set of interactions and interdependencies between banks, other market participants, and the real economy. Our results highlight the importance of the starting level of bank capital, bank asset quality, and banks’ adjustments for the propagation of shocks to the financial sector and real economy.
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
29 May 2019
FINANCIAL STABILITY REVIEW - BOX
Financial Stability Review Issue 1, 2019
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Abstract
In the current low interest rate environment, euro area insurers have been venturing into alternative asset classes such as alternative, infrastructure and private equity funds, loans and real estate holdings. This move helps insurers diversify their portfolios. It may also boost their investment returns and limit the duration mismatch in their balance sheets. More broadly, it contributes to the diversification of the financing sources of the real economy (see Chart 4.1). But the portfolio shift towards alternative investments also raises financial stability concerns, which is the focus of this box. In particular, the shift may increase insurers’ credit and liquidity risks and contribute to wider financial sector exuberance in some parts of the real economy as well as amplify market shocks in the event of (abrupt) price corrections.
29 May 2019
FINANCIAL STABILITY REVIEW - BOX
Financial Stability Review Issue 1, 2019
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Abstract
The Eurosystem’s asset purchase programme (APP) has contributed to a portfolio rebalancing of securities holdings within the euro area. The ECB’s asset purchases, with their largest component initiated in March 2015, have compressed the yields of securities across a wide range of asset classes. In line with the portfolio rebalancing transmission channel of monetary policy, many investors responded to these lower yields by shifting their holdings towards riskier securities with higher expected returns. Non-banks, in particular, have moved increasingly into less-liquid and lower-rated bonds as well as longer-term securities in a search for yield. To the extent that a slowdown in growth or other market or policy developments lead to an increase in term or risk premia, investors may rebalance back towards safer assets.
29 May 2019
FINANCIAL STABILITY REVIEW - ARTICLE
Financial Stability Review Issue 1, 2019
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Abstract
This special feature discusses the channels through which climate change can affect financial stability and illustrates the exposure of euro area financial institutions to risks from climate change with the help of granular data. Notwithstanding currently limited data availability, the analysis shows that climate change-related risks have the potential to become systemic for the euro area, in particular if markets are not pricing the risks correctly. A deeper understanding of the relevance of climate change-related risks for the euro area financial system at large is therefore needed. Better data availability and comparability and the development of a forward-looking framework for risk assessments are important aspects of this work going forward.
JEL Code
G01 : Financial Economics→General→Financial Crises
G18 : Financial Economics→General Financial Markets→Government Policy and Regulation
G20 : Financial Economics→Financial Institutions and Services→General
Q54 : Agricultural and Natural Resource Economics, Environmental and Ecological Economics→Environmental Economics→Climate, Natural Disasters, Global Warming