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Sam Langfield

Economics

Division

Supply Side, Labour and Surveillance

Current Position

Lead Economist

Fields of interest

Financial Economics

Email

sam.langfield@ecb.europa.eu

Education
2006-09

MA and BA, University of Oxford

Professional experience
2015-20

Principal, European Central Bank

2015-16

Visiting Professional, Princeton University

2012-15

Economist, European Central Bank

2009-12

Associate, UK Financial Services Authority

28 September 2012
OCCASIONAL PAPER SERIES - No. 136
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Abstract
This Occasional Paper reviews financial stability challenges in countries preparing for EU membership with a candidate country status, i.e. Croatia (planned to accede to the EU on 1 July 2013), Iceland, the former Yugoslav Republic of Macedonia, Montenegro and Turkey. It follows a macro-prudential approach, emphasising systemic risks of financial systems as a whole. After recalling that some EU candidate countries went through a pronounced boom-and-bust credit cycle in recent years, the paper identifies current challenges for the bank-based financial sectors as mainly stemming from: (i) high or rising domestic credit risk; (ii) unhedged borrowing in foreign currencies; and (iii) strains related to the euro area debt crisis, which is impacting the EU candidate countries via a number of channels. The main channels of transmission of the euro area debt crisis to the EU candidate countries operate via: (i) trade and foreign direct investment; (ii) an increased market focus on sovereign risk; and (iii) "deleveraging", e.g. via a decline of external funding to local subsidiaries of EU parent banks. A macro-stress-test exercise performed by the national authorities of the EU candidate countries in February 2012 suggests that large capital buffers can absorb a shock to credit quality stemming from a drop in economic activity in the EU and renewed strains from the euro area debt crisis. With respect to supervisory practices, the paper finds that the EU candidate countries have made good progress, but some gaps with respect to international and EU standards remain.
JEL Code
F32 : International Economics→International Finance→Current Account Adjustment, Short-Term Capital Movements
F41 : International Economics→Macroeconomic Aspects of International Trade and Finance→Open Economy Macroeconomics
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
18 October 2012
WORKING PAPER SERIES - No. 1484
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Abstract
This paper examines the quality of credit ratings assigned to banks in Europe and the United States by the three largest rating agencies over the past two decades. We interpret credit ratings as relative assessments of creditworthiness, and define a new ordinal metric of rating error based on banks' expected default frequencies. Our results suggest that rating agencies assign more positive ratings to large banks and to those institutions more likely to provide the rating agency with additional securities rating business (as indicated by private structured credit origination activity). These competitive distortions are economically significant and contribute to perpetuate the existence of
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
16 September 2013
OCCASIONAL PAPER SERIES - No. 3
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Abstract
Financial institutions are connected to each other by a series of bilateral transactions. In normal times, institutions’ connections may result in efficient risk transfer. But in crises, connections can facilitate contagion – as initial problems lead to chains of defaults and liquidity shortages – sparked by shocks which might arise within the financial system or from the real economy. Institutions are also interconnected in indirect ways, since they are exposed to common risk factors that can result in concurrent losses. For example, most banks extend loans secured by real estate: they are thus collectively exposed to falls in house prices. Resulting bank distress can then exacerbate initial problems: banks might simultaneously sell collateral (houses), thus worsening downward price spirals. Less tangibly, institutions can also be connected through perceptions of counterparties’ creditworthiness. Given uncertainty, financial institutions may in general become reluctant to lend to each other and hoard liquidity. Potential for contagion due to interconnectedness is a key component of systemic risk. As a first step towards understanding the mechanisms of contagion, this paper abstracts from complex indirect connections between banks, and rather focuses on direct linkages between 53 large EU banks, based on unique data on interbank exposures collected by national regulators as of the end of 2011.
JEL Code
G01 : Financial Economics→General→Financial Crises
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
2 June 2014
ADVISORY SCIENTIFIC COMMITTEE REPORT - No. 4
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Abstract
Banking has grown too much in Europe - in three senses. First, the European banking system has reached a size where its contribution to real economic growth is likely to be nil or negative. Second, the European financial structure is biased towards banks (rather than securities markets), which results in excessively volatile credit creation and lower economic growth. Third, large universal banks - which perform a wide range of banking services, and are peculiarly common in Europe - contribute more to systemic risk than small and narrowly focused banks. To deal with these problems, policymakers should consider new measures such as aggressive anti-trust policy, structural reform of the banking sector, and a capital markets union to address Europe's overbanking problem.
JEL Code
G10 : Financial Economics→General Financial Markets→General
G20 : Financial Economics→Financial Institutions and Services→General
5 November 2014
ADVISORY SCIENTIFIC COMMITTEE REPORT - No. 5
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Abstract
Monetary, macro-prudential and micro-prudential policies are intimately linked. The macroprudential authority should be allocated to the body where the overall balance of synergies (between policy objectives) over conflicts and the required expertise are the largest. This report reviews the pros and cons of the four institutional models for the allocation of macro-prudential powers: (1) the government, (2) the central bank, (3) the financial authority and (4) a committee with representatives from these three bodies.
JEL Code
G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation
28 May 2015
WORKING PAPER SERIES - No. 1797
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Abstract
Europe
JEL Code
G1 : Financial Economics→General Financial Markets
G2 : Financial Economics→Financial Institutions and Services
26 January 2016
OCCASIONAL PAPER SERIES - No. 9
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Abstract
An epidemiologist calculating the risk of a localised epidemic becoming a global pandemic would investigate every possible channel of contagion from the infected region to the rest of the world. Focusing on, say, the incidence of close human contact would underestimate the pandemic risk if the disease could also spread through the air. Likewise, calculating the quantity of financial system risk requires practitioners to understand all of the channels through which small and local shocks can become big and global. Much of the empirical finance literature has focused only on “direct” contagion arising from firms’ contractual obligations. Direct contagion occurs if one firm’s default on its contractual obligations triggers distress (such as illiquidity or insolvency) at a counterparty firm. But contractual obligations are not the only means by which financial distress can spread, just as close human contact is not the only way that many infectious diseases are transmitted. Focusing only on direct contagion underestimates the risk of financial crisis given that other important channels exist. This paper represents an attempt to move systemic risk analysis closer to the holism of epidemiology. In doing so, we begin by identifying the fundamental channels of indirect contagion, which manifest even in the absence of direct contractual links. The first is the market price channel, in which scarce funding liquidity and low market liquidity reinforce each other, generating a vicious spiral. The second is information spillovers, in which bad news can adversely affect a broad range of financial firms and markets. Indirect contagion spreads market failure through these two channels. In the case of illiquidity spirals, firms do not internalise the negative externality of holding low levels of funding liquidity or of fire-selling assets into a thin market. Lack of information and information asymmetries can cause markets to unravel, even following a relatively small piece of bad news. In both cases, market players act in ways that are privately optimal but socially harmful. The spreading of market failure by indirect contagion motivates policy intervention. Substantial progress has been made in legislating for policies that will improve systemic resilience to indirect contagion. But more tools might be needed to achieve a fully effective and efficient macroprudential policy framework. This paper aims to frame a high-level policy discussion on three policy tools that could be effective and efficient in ensuring systemic resilience to indirect contagion – namely macroprudential liquidity regulation; restrictions on margins and haircuts; and information disclosure.
JEL Code
G15 : Financial Economics→General Financial Markets→International Financial Markets
G18 : Financial Economics→General Financial Markets→Government Policy and Regulation
11 February 2016
ADVISORY SCIENTIFIC COMMITTEE REPORT - No. 6
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Abstract
Keeping global warming below 2°C will require substantial reductions in global greenhouse gas emissions over the next few decades. To reduce emissions, economies must reduce their carbon intensity; given current technology, this implies a decisive shift away from fossil-fuel energy and related physical capital. In an adverse scenario, the transition to a low-carbon economy occurs late and abruptly. Belated awareness about the importance of controlling emissions could result in an abrupt implementation of quantity constraints on the use of carbon-intensive energy sources. The costs of the transition will be correspondingly higher. This adverse scenario could affect systemic risk via three main channels. First, a sudden transition away from fossil-fuel energy could harm GDP, as alternative sources of energy would be restricted in supply and more expensive at the margin. Second, there could be a sudden repricing of carbon-intensive assets, which are financed in large part by debt. Third, there could be a concomitant rise in the incidence of natural catastrophes related to climate change, raising general insurers' and reinsurers' liabilities. To quantify the importance of these channels, policymakers could aim for enhanced disclosure of the carbon intensity of non-financial firms. The related exposures of financial firms could then be stress-tested under the adverse scenario of a late and sudden transition. In the short-term, joint research efforts of energy experts and macroeconomists could help to better quantify macroeconomic risks and inform the design of scenarios for stress testing. In the medium-term, the availability of granular data and dedicated low-frequency stress tests will provide information about the impact of the adverse scenario on the financial system.
JEL Code
G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation
19 September 2016
WORKING PAPER SERIES - No. 21
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Abstract
The euro crisis was fueled by the diabolic loop between sovereign risk and bank risk, coupled with cross-border flight-to-safety capital flows. European Safe Bonds (ESBies), a union-wide safe asset without joint liability, would help to resolve these problems. We make three contributions. First, numerical simulations show that ESBies would be at least as safe as German bunds and approximately double the supply of euro safe assets when protected by a 30%-thick junior tranche. Second, a model shows how, when and why the two features of ESBies—diversification and seniority—can weaken the diabolic loop and its diffusion across countries. Third, we propose a step-by-step guide on how to create ESBies, starting with limited issuance by public or private-sector entities.
JEL Code
E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy
G01 : Financial Economics→General→Financial Crises
G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation
22 September 2016
OCCASIONAL PAPER SERIES - No. 11
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Abstract
Policy is only as good as the information at the disposal of policymakers. Few moments illustrate this better than the uncertainty before and after the default of Lehman Brothers and the subsequent decision to stand behind AIG. Authorities were forced to make critical policy decisions, despite being uncertain about counterparties’ exposures and the protection sold against their default. Opacity has been a defining characteristic of over-the-counter derivatives markets – to the extent that they have been labelled “dark markets” (Duffie, 2012). Motivated by the concern that opacity exercerbates crises, the G20 leaders made a decisive push in 2009 for greater transparency in derivatives markets. In Europe, this initiative was formalised in 2012 in the European Markets Infrastructure Regulation (EMIR), which requires EU entities engaging in derivatives transactions to report them to trade repositories authorised by the European Securities Markets Authority (ESMA). Derivatives markets are thus in the process of becoming one of the most transparent markets for regulators. This paper represents a first analysis of the EU-wide data collected under EMIR. We start by describing the structure of the dataset, drawing comparisons with existing survey-based evidence on derivatives markets. The rest of the paper is divided into three sections, focusing on the three largest derivatives markets (interest rates, foreign exchange and credit).
JEL Code
G15 : Financial Economics→General Financial Markets→International Financial Markets
G18 : Financial Economics→General Financial Markets→Government Policy and Regulation
15 December 2017
WORKING PAPER SERIES - No. 61
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Abstract
New regulatory data reveal extensive discriminatory pricing in the foreign exchange derivatives market, in which dealer-banks and their non-financial clients trade over-the-counter. After controlling for contract characteristics, dealer fixed effects, and market conditions, we find that the client at the 75th percentile of the spread distribution pays an average of 30 pips over the market mid-price, compared to competitive spreads of less than 2.5 pips paid by the bottom 25% of clients. Higher spreads are paid by less sophisticated clients. However, trades on multi-dealer request-for-quote platforms exhibit competitive spreads regardless of client sophistication, thereby eliminating discriminatory pricing.
JEL Code
G14 : Financial Economics→General Financial Markets→Information and Market Efficiency, Event Studies, Insider Trading
G18 : Financial Economics→General Financial Markets→Government Policy and Regulation
D4 : Microeconomics→Market Structure and Pricing
23 April 2018
OCCASIONAL PAPER SERIES - No. 15
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Abstract
Existing stress tests do not capture feedback loops between individual institutions and the financial system. To identify feedback loops, the European Systemic Risk Board has developed macroprudential surveys that ask banks and insurers how they would behave in a macroeconomic stress scenario. In a pilot application of these surveys, we find evidence of herding behaviour in the banking sector, notably concerning credit retrenchment. Results show that the consequences can be large, potentially undoing the initial effects of banks’ remedial actions by worsening their solvency position. In contrast, insurers’ responses to the survey provide little evidence of herding in response to macroeconomic stress. These results highlight the usefulness of macroprudential surveys in identifying feedback loops.
JEL Code
E30 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→General
E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy
G10 : Financial Economics→General Financial Markets→General
G18 : Financial Economics→General Financial Markets→Government Policy and Regulation
G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
G22 : Financial Economics→Financial Institutions and Services→Insurance, Insurance Companies, Actuarial Studies
G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation
15 May 2018
WORKING PAPER SERIES - No. 74
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Abstract
Euro area governments have committed to break the doom loop between bank risk and sovereign risk. But policymakers have not reached consensus on whether and how to reform the regulatory treatment of banks’ sovereign exposures. To inform policy discussions, this paper simulates portfolio reallocations by euro area banks under scenarios for regulatory reform. Simulations highlight a tension in regulatory design between concentration and credit risk. An area-wide low-risk asset—created by pooling and tranching cross-border portfolios of government debt securities— would resolve this tension by expanding the portfolio opportunity set. Banks could therefore reinvest into an asset that has both low concentration and low credit 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
24 May 2018
FINANCIAL STABILITY REVIEW - ARTICLE
Financial Stability Review Issue 1, 2018
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Abstract
This special feature analyses the distribution of interest rate risk in the euro area economy using balance sheet data and information on derivatives positions from significant credit institutions. On aggregate, banks’ interest rate risk exposure is small relative to their loss absorption capacity, but exposure varies across institutions. This variation is driven by loan rate fixation practices at country level. Banks use derivatives for hedging, but retain residual interest rate risk exposures. In fixed-rate countries the main vulnerability to rising interest rates lies with the banks that have the greatest interest rate risk, while households would be directly affected in countries with predominantly variable-rate loans. In the latter case, increased loan servicing costs due to rising interest rates could affect banks through lower asset quality.
JEL Code
G00 : Financial Economics→General→General
24 September 2018
WORKING PAPER SERIES - No. 2176
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Abstract
We study the allocation of interest rate risk within the European banking sector using novel data. Banks’ exposure to interest rate risk is small on aggregate, but heterogeneous in the cross-section. In contrast to conventional wisdom, net worth is increasing in interest rates for approximately half of the institutions in our sample. Cross-sectional variation in banks’ exposures is driven by cross-country differences in loan-rate fixation conventions for mortgages. Banks use derivatives to partially hedge on-balance sheet exposures. Residual exposures imply that changes in interest rates have redistributive effects within the banking sector.
JEL Code
G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
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
15 November 2018
WORKING PAPER SERIES - No. 86
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Abstract
We study systemic illiquidity using a unique dataset on banks’ daily cash flows, short-term interbank funding and liquid asset buffers. Failure to roll-over short-term funding or repay obligations when they fall due generates an externality in the form of systemic illiquidity. We simulate a model in which systemic illiquidity propagates in the interbank funding network over multiple days. In this setting, systemic illiquidity is minimised by a macroprudential policy that skews the distribution of liquid assets towards banks that are important in the network.
JEL Code
D85 : Microeconomics→Information, Knowledge, and Uncertainty→Network Formation and Analysis: Theory
E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy
E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies
G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation
4 September 2019
WORKING PAPER SERIES - No. 2313
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Abstract
Euro area governments have committed to break the doom loop between banks and sovereigns.But policymakers disagree on how to treat sovereign exposures in bank regulation. Our contributionis to model endogenous sovereign portfolio reallocation by banks in response toregulatory reform. Simulations highlight a tension between concentration and credit risk inportfolio reallocation. Resolving this tension requires regulatory reform to be complementedby an expansion in the portfolio opportunity set to include an area-wide low-risk asset. Byreinvesting into such an asset, banks would reduce both their concentration and credit riskexposure.
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
2020
Management Science
  • Harald Hau, Peter Hoffmann, Sam Langfield, Yannick Timmer
2020
International Journal of Central Banking
  • Spyros Alogoskoufis, Sam Langfield
2019
Review of Financial Studies
  • Peter Hoffmann, Sam Langfield, Federico Pierobon, Guillaume Vuillemey
2019
Quantitative Finance
  • Gerardo Ferrara, Sam Langfield, Zijun Liu, Tomohiro Ota
2017
Economic Policy
  • Markus Brunnermeier, Sam Langfield, Marco Pagano, Ricardo Reis, Stijn Van Nieuwerburgh, Dimitri Vayanos
2016
Computational Economics
  • Sam Langfield, Kimmo Soramäki
2016
Economic Policy
  • Sam Langfield, Marco Pagano
2014
Journal of Banking & Finance
  • Sam Langfield, Zijun Liu, Tomohiro Ota
2013
Economic Policy
  • Harald Hau, Sam Langfield, David Marqués
2018
ESRB Occasional Paper 15
  • Jeroen Brinkhoff, Sam Langfield, Olaf Weeken
2018
VoxEU
  • Philip Lane, Sam Langfield
2016
Palgrave Handbook of European Banking
  • Sam Langfield, Marco Pagano
2016
ESRB Occasional Paper 11
  • Jorge Abad, Iñaki Aldasoro, Christoph Aymanns, Marco D’Errico, Linda Fache Rousová, Peter Hoffmann, Sam Langfield, Martin Neychev, Tarik Roukny
2016
ESRB Advisory Scientific Committee Report 6
  • Daniel Gros, Dirk Schoenmaker, Philip Lane, Sam Langfield, Sini Matikainen, Marco Pagano, Javier Suarez
2016
ESRB Occasional Paper 9
  • Laurent Clerc, Alberto Giovannini, Sam Langfield, Tuomas Peltonen, Richard Portes, Martin Scheicher
2016
Bank Underground
  • Iñaki Aldasoro, Ester Faia, Gerardo Ferrara, Sam Langfield, Zijun Liu, Tomohiro Ota
2014
ESRB Advisory Scientific Committee Report 4
  • Marco Pagano, Sam Langfield, Viral Acharya, Arnoud Boot, Markus Brunnermeier, Claudia Buch, Martin Hellwig, André Sapir, Ieke van den Burg
2014
ESRB Advisory Scientific Committee Report 5
  • Dirk Schoenmaker, Daniel Gros, Sam Langfield, Marco Pagano
2013
ESRB Occasional Paper 3
  • Ivan Alves, Stijn Ferrari, Pietro Franchini, Jean-Cyprien Heam, Pavol Jurca, Sam Langfield, Sebastiano Laviola, Franka Liedorp, Antonio Sánchez, Santiago Tavolaro, Guillaume Vuillemey