Occasional papers

Communication device to a broad audience

Our Occasional Paper Series (OPS) disseminates work carried out by, as a rule, ECB staff on subjects that relate to the main tasks and functions of the ECB and the ESCB. Occasional Papers (OPs) are addressed to a wide audience, including other policy-makers, financial analysts, academics, the media and the interested general public. Understanding the papers will normally require some prior knowledge of the topic.

No. 228
12 August 2019
Role of cross currency swap markets in funding and investment decisions

Abstract

JEL Classification

D53 : Microeconomics→General Equilibrium and Disequilibrium→Financial Markets

E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy

G11 : Financial Economics→General Financial Markets→Portfolio Choice, Investment Decisions

G15 : Financial Economics→General Financial Markets→International Financial Markets

G18 : Financial Economics→General Financial Markets→Government Policy and Regulation

Abstract

A US dollar funding premium in the EUR/USD cross currency swap market has been in existence since 2008. Whilst there are many reasons behind this dislocation, since 2014 the divergence in monetary policy between the euro area and the United States has played a growing role. This paper aims at exploring and gaining more insight into the role the Eurosystem’s Expanded Asset purchase Programme (APP) has had in guiding investment and funding decisions and its influence on the cross currency basis. The downward pressure on yields, exerted by the APP, has made euro assets less attractive and has led investors to search for yield abroad. At the same time, the decline in yields and tighter credit spreads have attracted US corporate issuers to the euro market in search of cheaper funding costs. These cross-border flows from issuers and investors have played a strong role in driving the US dollar funding premium. The purpose of this study is to gauge whether these changing trends in cross-border flows have implications for the implementation of the Eurosystem’s APP. Beyond the structural increase in the US dollar funding premium described above, a cyclical component has led to an amplification of the premium over balance sheet reporting dates, due to new bank regulations. This paper also analyses the behaviour of euro area banks in cross currency swap markets over balance sheet reporting dates, using the money market statistical reporting (MMSR) dataset in order to discern whether the increase in the US dollar funding premium at these specific points in time has an adverse impact on the transmission of monetary policy.

No. 227
17 July 2019
Macroprudential policy at the ECB: Institutional framework, strategy, analytical tools and policies

Abstract

JEL Classification

E37 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Forecasting and Simulation: Models and Applications

F36 : International Economics→International Finance→Financial Aspects of Economic Integration

G20 : Financial Economics→Financial Institutions and Services→General

G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation

K23 : Law and Economics→Regulation and Business Law→Regulated Industries and Administrative Law

Abstract

This occasional paper describes how the financial stability and macroprudential policy functions are organised at the ECB. Financial stability has been a key policy function of the ECB since its inception. Macroprudential policy tasks were later conferred on the ECB by the Single Supervisory Mechanism (SSM) Regulation. The paper describes the ECB’s macroprudential governance framework in the new institutional set-up. After reviewing the concept and origins of systemic risk, it reflects on the emergence of macroprudential policy in the aftermath of the financial crisis, its objectives and instruments, as well as specific aspects of this policy area in a monetary union such as the euro area. The ECB’s responsibilities required new tools to be developed to measure systemic risk at financial institution, country and system-wide level. The paper discusses selected analytical tools supporting financial stability surveillance and assessment work, as well as macroprudential policy analysis at the ECB. The tools are grouped into three broad areas: (i) methods to gauge the state of financial instability or prospects of near-term systemic stress, (ii) measures to capture the build-up of systemic risk focused on country-level financial cycle measurement and early warning methods, and (iii) the ECB stress testing framework for macroprudential purposes.

No. 226
2 July 2019
Macroprudential stress test of the euro area banking system

Abstract

JEL Classification

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

No. 225
19 June 2019
Firm heterogeneity and trade in EU countries: a cross-country analysis

Abstract

JEL Classification

F14 : International Economics→Trade→Empirical Studies of Trade

L25 : Industrial Organization→Firm Objectives, Organization, and Behavior→Firm Performance: Size, Diversification, and Scope

Abstract

Firms are heterogeneous, even within narrowly defined sectors. This paper surveys the relevant theoretical and empirical literature on firm heterogeneity and external trade. By innovatively exploiting rich cross-country micro-aggregated data sourced from the ECB Competitiveness Research Network (CompNet), this study then investigates the main implications of firm heterogeneity for trade of EU countries, showing a set of stylised facts. On the one hand, exporting firms are larger, more productive and pay higher wages than non-exporting firms. Only these firms are able to bear export costs, related to various factors, such as tariff and non-tariff trade barriers, the quality of the legal system or access to finance. Hence, only few enterprises actually export, and the intensity of aggregate export concentration within few large firms varies across countries and sectors. On the other hand, opening to trade boosts individual firms’ productivity growth, via a number of channels, and also enhances allocative efficiency across firms, in turn increasing aggregate productivity growth. One of the main standard determinants of export growth, namely changes in the real effective exchange rate, impacts aggregate performance differently across countries and sectors, depending on sectoral composition and on firm characteristics within a given sector

No. 224
13 June 2019
Economic structures 20 years into the euro

Abstract

JEL Classification

E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation

E32 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Business Fluctuations, Cycles

E60 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→General

E62 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Fiscal Policy

F10 : International Economics→Trade→General

J11 : Labor and Demographic Economics→Demographic Economics→Demographic Trends, Macroeconomic Effects, and Forecasts

O43 : Economic Development, Technological Change, and Growth→Economic Growth and Aggregate Productivity→Institutions and Growth

Abstract

Well-functioning economic structures are key for resilient and prospering euro area economies. The global financial and sovereign debt crises exposed the limited resilience of the euro area’s economic structures. Economic growth was masking underlying weaknesses in several euro area countries. With the inception of the crises, significant efforts have been undertaken by Member States individually and collectively to strengthen resilience of economic structures and the smooth functioning of the euro area. National fiscal policies were consolidated to keep the increase in government debt contained and structural reform momentum increased notably in the second decade, particularly in those countries most hit by the crisis. The strengthened national economic structures were supported by a reformed EU crisis and economic governance framework. However, overall economic structures in euro area countries are still not fully commensurate with the requirements of a monetary union. Moreover, remaining challenges, such as population ageing, low productivity and the implications of digitalisation, will need to be addressed to increase economic resilience and long-term growth.

No. 223
17 May 2019
Crypto-Assets: Implications for financial stability, monetary policy, and payments and market infrastructures

Abstract

JEL Classification

E42 : Macroeconomics and Monetary Economics→Money and Interest Rates→Monetary Systems, Standards, Regimes, Government and the Monetary System, Payment Systems

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

O33 : Economic Development, Technological Change, and Growth→Technological Change, Research and Development, Intellectual Property Rights→Technological Change: Choices and Consequences, Diffusion Processes

Abstract

This paper summarises the outcomes of the analysis of the ECB Crypto-Assets Task Force. First, it proposes a characterisation of crypto-assets in the absence of a common definition and as a basis for the consistent analysis of this phenomenon. Second, it analyses recent developments in the crypto-assets market and unfolding links with financial markets and the economy. Finally, it assesses the potential impact of crypto-assets on monetary policy, payments and market infrastructures, and financial stability. The analysis shows that, in the current market, crypto-assets’ risks or potential implications are limited and/or manageable on the basis of the existing regulatory and oversight frameworks. However, this assessment is subject to change and should not prevent the ECB from continuing to monitor crypto-assets, raise awareness and develop preparedness.

No. 222
3 May 2019
Monetary policy, credit institutions and the bank lending channel in the euro area

Abstract

JEL Classification

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

Abstract

As the euro area has a predominantly bank-based financial system, changes in the composition and strength of banks’ balance sheets can have very sizeable implications for the transmission of monetary policy. This paper provides an overview of developments in banks’ balance sheets, profitability and risk-bearing capacity and analyses their relevance for monetary policy. We show that, while the transmission of standard policy interest rate cuts to firms and households was diminished during the crisis, in a context of financial market stress and weak bank balance sheets, unconventional monetary policy measures have helped to restore monetary policy transmission and pass-through to interest rates. We also document the extent to which these non-standard measures were successful in stimulating lending and which bank business models were more strongly affected. Finally, we show that the estimated impact of recent monetary policy measures on bank profitability does not appear to be particularly strong when all the effects on the macroeconomy and asset quality are taken into account

No. 221
30 April 2019
The impact of global value chains on the euro area economy

Abstract

JEL Classification

F6 : International Economics→Economic Impacts of Globalization

F10 : International Economics→Trade→General

F14 : International Economics→Trade→Empirical Studies of Trade

F16 : International Economics→Trade→Trade and Labor Market Interactions

E3 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles

Abstract

The studies summarised in this paper focus on the economic implications of euro area firms’ participation in global value chains (GVCs). They show how, and to what extent, a large set of economic variables and inter-linkages have been affected by international production sharing. The core conclusion is that GVC participation has major implications for the euro area economy. Consequently, there is a case for making adjustments to standard macroeconomic analysis and forecasting for the euro area, taking due account of data availability and constraints.

No. 220
19 March 2019
The impact of lending standards on default rates of residential real estate loans

Abstract

JEL Classification

C25 : Mathematical and Quantitative Methods→Single Equation Models, Single Variables→Discrete Regression and Qualitative Choice Models, Discrete Regressors, Proportions

G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages

Abstract

This paper analyses the impact of lending standards for residential real estate (RRE) loans on default rates, using a novel loan-level dataset from the European DataWarehouse (EDW) that covers eight euro area countries. To the best of the authors’ knowledge, this paper is the first to use, for this purpose, a consistent set of loan-level data on loans originated in multiple euro area countries. Previous literature has used either national loan-level data, which does not allow for cross-country comparisons, or aggregate cross-country data. The dataset is first explored through an extensive descriptive analysis and this is followed by static probit regressions. The findings confirm the key influence of lending standards – in particular, loan-to-value and loan-to-income ratios at origination, original loan maturity and borrower employment status – on loan default rates. The impact of other variables, such as interest rate fixation and payment type, varies depending on the country of loan origination. These results are particularly relevant for microprudential supervisors in their ongoing assessment of banks’ credit policies. The highlighted country specificities should be taken into account in macroprudential policymaking.

No. 219
14 February 2019
Anticipating the bust: a new cyclical systemic risk indicator to assess the likelihood and severity of financial crises

Abstract

JEL Classification

G01 : Financial Economics→General→Financial Crises

G17 : Financial Economics→General Financial Markets→Financial Forecasting and Simulation

C22 : Mathematical and Quantitative Methods→Single Equation Models, Single Variables→Time-Series Models, Dynamic Quantile Regressions, Dynamic Treatment Effect Models &bull Diffusion Processes

C54 : Mathematical and Quantitative Methods→Econometric Modeling→Quantitative Policy Modeling

Abstract

This paper presents a tractable, transparent and broad-based domestic cyclical systemic risk indicator (d-SRI) that captures risks stemming from domestic credit, real estate markets, asset prices, and external imbalances. The d-SRI increases on average several years before the onset of systemic financial crises, and its early warning properties for euro area countries are superior to those of the total credit-to-GDP gap. In addition, the level of the d-SRI around the start of financial crises is highly correlated with measures of subsequent crisis severity, such as GDP declines. Model estimates suggest that the d-SRI has significant predictive power for large declines in real GDP growth three to four years down the line, as it precedes shifts in the entire distribution of future real GDP growth and especially of its left tail. The d-SRI therefore provides useful information about both the probability and the likely cost of systemic financial crises many years in advance. Given its timely signals, the d-SRI is a useful analytical tool for macroprudential policymakers.

No. 218
1 February 2019
Availability of high-quality liquid assets and monetary policy operations: an analysis for the euro area

Abstract

JEL Classification

D41 : Microeconomics→Market Structure and Pricing→Perfect Competition

E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies

G1 : Financial Economics→General Financial Markets

G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation

Abstract

This paper provides an overview of supply and demand factors influencing the availability of euro-denominated debt instruments that qualify as high-quality liquid assets (HQLA) in the euro area. The paper estimates the supply of HQLA issued by the public and private sectors as well as the aggregated impact of Eurosystem monetary policy operations on the amount and composition of HQLA held by banks and other economic agents. An assessment of the main demand factors is also presented. Finally, the paper provides some insights into the interaction with and implications for the Eurosystem monetary policy implementation framework in the longer run.

Disclaimer: Please keep in mind that OPs are published in the name of the author(s). Their views do not necessarily reflect those of the ECB.