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PRESS RELEASE

53rd meeting of the ESRB General Board

At its meeting on 21 March, the General Board assessed the main risks to the EU financial stability. Read the full press release here.

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PUBLICATION 27 March 2024

ESRB risk dashboard

The ESRB risk dashboard is a set of indicators showing the extent and causes of systemic risk in the EU financial system. It is published quarterly.

Risk dashboard
PRESS RELEASE 1 February 2024

Residential real estate vulnerabilities

Accumulated risks remain significant in European Economic Area residential real estate sectors, even though the growth of cyclical risks has mostly slowed or stopped. Since 2021, several countries have taken steps to increase resilience.

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RESEARCH 20 December 2023

Call for papers: Ieke van den Burg prize

Call for papers: the ESRB is seeking academic papers related to its mission of preventing and mitigating systemic risks to financial stability. Interested? Submit your paper by 31 March 2024.

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28 March 2024
RISK DASHBOARD
Annexes
28 March 2024
RISK DASHBOARD
28 March 2024
RISK DASHBOARD
25 March 2024
OCCASIONAL PAPER SERIES - No. 25
  • André Ebner
  • Christiane Westhoff
Details
Abstract
We set out a stylised framework for the policies enacted to address the risks posed by systemically important institutions (SIIs) and to counter the too-big-to-fail (TBTF) problem, examining conceptually how far supervisory and resolution policies are complementary or substitutable. The Financial Stability Board (FSB) TBTF reforms comprise (i) a higher loss-absorbing capacity in the form of regulatory capital buffers for SIIs, (ii) more intensive and effective supervision and (iii) a recovery and resolution regime, including sufficient loss-absorbing and recapitalisation capacity in the form of capital and eligible liabilities, to deal with distressed or failing institutions. These reform strands are part of a fundamentally integrated concept, but were largely developed and implemented independently of each other. Therefore, they may fall short of fully taking interdependencies into account, rendering policies less effective and consistent than an integrated approach, which we outline as an alternative. The analysis discusses the regulatory interplay, its implications for policymaking based on the FSB TBTF reforms for banks and its operationalisation in the Basel framework at the global level and in the European Union.
JEL Code
G01 : Financial Economics→General→Financial Crises
G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation
G38 : Financial Economics→Corporate Finance and Governance→Government Policy and Regulation
1 March 2024
WORKING PAPER SERIES
  • Ismael Alexander Boudiaf
  • Martin Scheicher
  • Immo Frieden
Details
Abstract
This paper studies market liquidity in interest rate swaps (IRS) before and during the global tightening of monetary policy. IRS constitute the single largest derivatives segment globally. Banks and Pension Funds extensively rely on IRS to hedge interest rate risk. Hence, providing an understanding of this market and the drivers of market liquidity is a key research question in the current market context. We use price and volume data from around 338.000 trades in the most active long-horizon swap contract denominated in EUR to construct seven liquidity measures. Taking a comprehensive approach, we ap-ply linear regressions to determine the drivers of variation in liquidity. Our liquidity measures are significantly related to monetary policy, market-wide fixed income liquidity, EURIBOR rate volatility and Dealer behaviour. Indicators for generic market stress such as VIX which are often documented in the literature are not strongly connected to IRS trading conditions.
JEL Code
G12 : Financial Economics→General Financial Markets→Asset Pricing, Trading Volume, Bond Interest Rates
G15 : Financial Economics→General Financial Markets→International Financial Markets
15 February 2024
WORKING PAPER SERIES - No. 146
  • Manuel A. Muñoz
  • Oscar Soons
Details
Abstract
The bulk of cash is held for store of value purposes, with such holdings sharply increasing in times of high economic uncertainty and only a fraction of the population choosing to hoard cash. We develop a Diamond and Dybvig model with public money as a store of value and heterogeneous beliefs about bank stability that accounts for this evidence. Only consumers who are sufficiently pessimistic about bank stability hold cash. The introduction of a central bank digital currency (CBDC) as a store of value lowers the storage cost of public money and induces partial bank disintermediation, which is nevertheless mitigated by an increase in relative maturity transformation. This has heterogeneous welfare consequences across the population. While cash holders always benefit by switching to CBDC, each of all other consumers may be better off or not depending on the probability of a bank run, her (and all others’) belief about such probability and the degree of technological superiority of CBDC.
JEL Code
E41 : Macroeconomics and Monetary Economics→Money and Interest Rates→Demand for Money
E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies
G11 : Financial Economics→General Financial Markets→Portfolio Choice, Investment Decisions
G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
1 February 2024
REPORTS
15 January 2024
REPORTS
18 December 2023
REPORTS
Annexes
18 December 2023
REPORTS
18 December 2023
REPORTS
7 December 2023
RISK DASHBOARD
Annexes
7 December 2023
RISK DASHBOARD
7 December 2023
RISK DASHBOARD
15 November 2023
OCCASIONAL PAPER SERIES - No. 24
  • Martin Scheicher
Details
Abstract
The trading of bonds and swaps largely relies on bank dealers as core market-makers. Dealers provide liquidity and trade the instruments with smaller or less active firms, in part by using their own balance sheets for inventory holding or hedging purposes. The reforms carried out in the aftermath of the global financial crisis (GFC) and the low interest rate environment have extensively changed the mechanisms and costs of trading fixed income instruments. This paper sets out to analyse the structure of trading in key over-the-counter (OTC) fixed income markets. We focus on three questions: (1) how are bonds and swaps currently traded and how liquid are these markets?, (2) how do the structural changes affect the dealer business model and market functioning?, and (3) how did the coronavirus (COVID-19) shock in March 2020 affect the OTC bond and swap market in its new post-reform set-up? To answer these questions, we combine an institutional and research perspective with a focus on key EU markets. We use public data and findings from the rich body of academic literature to describe the dealer business model and its post-GFC evolution. Overall, we argue that OTC fixed income trading is becoming “faster” due to the progress of electronic trading and the rise of non-bank traders, which has led bank dealers to make some adjustments to their market-making activities. The ongoing challenges faced in ensuring resilient provision of liquidity were also highlighted by the US bond market dislocation in March 2020.
JEL Code
G12 : Financial Economics→General Financial Markets→Asset Pricing, Trading Volume, Bond Interest Rates
G15 : Financial Economics→General Financial Markets→International Financial Markets
15 November 2023
WORKING PAPER SERIES - No. 145
  • Simon Lloyd
  • Álvaro Fernández-Gallardo
  • Ed Manuel
Details
Abstract
We estimate the causal effects of macroprudential policies on the entire distribution of GDP growth for advanced European economies using a narrative-identification strategy in a quantile-regression framework. While macroprudential policy has near-zero effects on the centre of the GDP-growth distribution, tighter policy brings benefits by reducing the variance of future growth, significantly boosting the left tail while simultaneously reducing the right. Assessing a range of channels through which these effects materialise, we find that macroprudential policy particularly operates through ‘credit-at-risk’: it reduces the right tail of future credit growth, dampening booms, in turn reducing the likelihood of extreme GDP-growth outturns.
JEL Code
E32 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Business Fluctuations, Cycles
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
5 October 2023
RISK DASHBOARD
Annexes
5 October 2023
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5 October 2023
RISK DASHBOARD
2 October 2023
OCCASIONAL PAPER SERIES - No. 23
  • Fernando González
  • Cristina Morar Triandafil
Details
Abstract
The European significant risk transfer (SRT) securitisation market is increasingly being used by major EU banks to manage risk and capital, but is not well known. SRT can provide an extra source of capital, flexibly and at a reasonable cost. Despite the bespoke nature of transactions, the SRT market has expanded significantly in the recent past to the point where it has now become a dependable way for banks to release capital, manage their balance sheets and improve their capital ratios. Banking supervisors assess SRT transactions to evaluate the degree of risk transfer from banks to investors, allowing institutions to achieve capital relief when this is considered sufficient. The market has become a permanent feature in European banks’ capital management toolkit, alongside other standard but better-known instruments. Drawing on the ECB’s unique and comprehensive database of SRT securitisations issued by large European banks supervised by the Single Supervisory Mechanism (SSM), we provide an overview of the main features of the European SRT market, a typology of the structures currently in use and an account of the market’s evolution over the past five years. In so doing, we attempt to shed light on the main conceptual features of SRT securitisations in relation to non-SRT securitisation structures, as well as the regulatory processes behind capital relief that have been instrumental in supporting their increased use by European banks.
JEL Code
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
G29 : Financial Economics→Financial Institutions and Services→Other
15 September 2023
OCCASIONAL PAPER SERIES - No. 22
  • Constanze Fay
  • Angelica Ghiselli
Details
Abstract
This research explores two aspects of European insurers’ investment behaviour related to crises. While they are often considered as financial market stabilisers and long-term investors, there is currently a lack of knowledge about insurers’ investment behaviour in crises under the regulatory Solvency II regime implemented in 2016. With assets of nearly €9 trillion and bond holdings of more than €3 trillion in Q2 2022, European insurers are important financial intermediaries and finance European economies. With an empirical study, we investigate their reaction to the asset price shock at the onset of the coronavirus (COVID-19) pandemic in the first quarter of 2020 and explore cyclical investment behaviour by replicating Timmer’s (2018) study with fixed effects panel regressions. We use a large cross-country dataset, with the novelty of exploiting cross-country heterogeneity for European countries with 458,758 security-level observations from 2017 to 2022. Overall, our findings are very relevant from a policy perspective as they suggest active and heterogeneous cyclical investment behaviour in the European insurance market with differences across issuer and holder countries of domicile.
JEL Code
G01 : Financial Economics→General→Financial Crises
G11 : Financial Economics→General Financial Markets→Portfolio Choice, Investment Decisions
G15 : Financial Economics→General Financial Markets→International Financial Markets
G22 : Financial Economics→Financial Institutions and Services→Insurance, Insurance Companies, Actuarial Studies
G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation
4 September 2023
REPORTS
1 August 2023
WORKING PAPER SERIES - No. 144
  • Andrea Orame
  • Rodney Ramcharan
  • Roberto Robatto
Details
Abstract
We study whether regulation that relies on historical cost accounting (HCA) rather than mark-to-market accounting (MMA) to insulate banks’ net worth from financial market volatility affects the transmission of quantitative easing (QE) through the bank lending channel. Using detailed supervisory data from Italian banks and taking advantage of a change in accounting rules, we find that HCA makes banks significantly less responsive to QE than MMA. Hence, while HCA can insulate banks’ balance sheets during periods of distress, it also weakens the effectiveness of unconventional monetary policy in reducing firms’ credit constraints through the bank lending channel.
JEL Code
G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation
E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy
M48 : Business Administration and Business Economics, Marketing, Accounting→Accounting and Auditing→Government Policy and Regulation
3 July 2023
ANNUAL REPORT
1 July 2023
WORKING PAPER SERIES - No. 143
  • Lea Katharina Havemeister
  • Kristian Horn
Details
Abstract
Zombie firms may adversely impact healthy firms through several transmission channels. Besides real spillover effects on productivity or investment, zombies may also cause negative financial spillover effects, where zombies receive credit at more favourable conditions than healthy firms. We investigate characteristics of zombie firms in the euro area and whether they cause spillovers on healthy firms’ credit conditions, focusing on two variables: new credit and interest rates. Contrary to existing findings, our results indicate that zombie firms pay higher interest rates and receive less new credit than healthy firms. The spillover effect of zombie firms on healthy firms’ new credit is not significant. For interest rates, the spillover effect is even reversed: Zombie existence significantly lowers healthy firms’ interest rates. Zombie firms across the euro area are smaller, less profitable, and more leveraged with lower credit quality than healthy firms. Yet, they do not seem to pose significant negative externalities on the credit conditions of healthy firms. Novel loan-by-loan data from the European credit registry (AnaCredit) allows our analysis to be over a broad set of countries and firms, on a new level of granularity. This may explain the divergence of our findings from the existing literature.
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
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
G32 : Financial Economics→Corporate Finance and Governance→Financing Policy, Financial Risk and Risk Management, Capital and Ownership Structure, Value of Firms, Goodwill
1 July 2023
WORKING PAPER SERIES - No. 142
  • Lu Liu
Details
Abstract
Long-term fixed-rate mortgage contracts protect households against interest rate risk, yet most countries have relatively short interest rate fixation lengths. Using administrative data from the UK, the paper finds that the choice of fixation length tracks the life-cycle decline of credit risk in the mortgage market: the loan-to-value (LTV) ratio decreases and collateral coverage improves over the life of the loan due to principal repayment and house price apprecia-tion. High-LTV borrowers, who pay large initial credit spreads, trade off their insurance motive against reducing credit spreads over time using shorter-term contracts. To quantify demand for long-term contracts, I develop a life-cycle model of optimal mortgage fixation choice. With baseline house price growth and interest rate risk, households prefer shorter-term contracts at high LTV levels, and longer-term contracts once LTV is sufficiently low, in line with the data. The mechanism helps explain reduced and heterogeneous demand for long-term mortgage contracts.
JEL Code
D15 : Microeconomics→Household Behavior and Family Economics
E43 : Macroeconomics and Monetary Economics→Money and Interest Rates→Interest Rates: Determination, Term Structure, and Effects
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
G5 : Financial Economics
G52 : Financial Economics
29 June 2023
ADVISORY SCIENTIFIC COMMITTEE REPORT - No. 14
  • Thorsten Beck
  • Tuomas Peltonen
  • Enrico Perotti
  • Antonio Sánchez Serrano
  • Javier Suarez
Details
Abstract
This report presents a long-term view of the evolution of financing of EU non-financial corporations (NFCs) in recent decades. It finds a decline in NFC leverage since at least 2008, and across countries, size categories and industries. It also documents a growing role of non-bank financial intermediaries in the provision of credit to NFCs. After exploring supply and demand drivers of the observed evolution, the report considers potential general equilibrium outcomes in terms of a reallocation of credit to other sectors or assets. This could generate greater systemic risk through unsustainable valuations or exposures to more highly correlated negative shocks. The report also stresses the urgency of developing a comprehensive macroprudential framework for non-bank financial intermediaries and calls macroprudential authorities to closely monitor the NFC sector.
29 June 2023
RISK DASHBOARD
Annexes
29 June 2023
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29 June 2023
RISK DASHBOARD
6 June 2023
NBFI MONITOR REPORT
Annexes
6 June 2023
NBFI MONITOR REPORT
25 May 2023
REPORTS
11 April 2023
RISK DASHBOARD
Annexes
11 April 2023
RISK DASHBOARD
11 April 2023
RISK DASHBOARD
1 March 2023
WORKING PAPER SERIES - No. 141
  • Shohini Kundu
Details
Abstract
This paper investigates how covenants, intrinsic to Collateralized Loan Obligation (CLO) indentures, may amplify idiosyncratic shocks, imposing negative externalities on unrelated firms in CLO portfo-lios. Following a negative shock to the oil & gas industry, CLOs with exposure to oil and gas loans are pushed closer to their covenant thresholds and fire-sell unrelated loans in the secondary loan market to alleviate these constraints. These fire sales exert price pressure on the securities of unrelated firms, creating market dislocations. The erosion in the liquidity positions of exposed firms spills over into real economic activity. The findings highlight the real effects from fire sales arising due to contracting frictions.
JEL Code
E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy
G23 : Financial Economics→Financial Institutions and Services→Non-bank Financial Institutions, Financial Instruments, Institutional Investors
E32 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Business Fluctuations, Cycles
1 March 2023
WORKING PAPER SERIES - No. 140
  • Peter Dunne
  • Lorenz Emter
  • Falko Fecht
  • Raffaele Giuliana
  • Oana Peia
Details
Abstract
We study the role of liquidity management tools (LMTs) in mitigating financial fragility in investment funds during the COVID-19 market distress. We employ a unique dataset that reports the availability of different types of LMTs in a sample of Irish-domiciled corporate bond funds. We find that funds with access to price-based tools such as redemption fees or anti-dilution levies experienced lower net outflows in March 2020, as compared to funds with only quantity-based tools such as redemption gates, temporary suspensions or redemption in kind. This difference is stronger among funds with a high sensitivity of flows to past-performance and reflects both higher gross in-flows and lower gross outflows during this episode. Funds with price-based LMTs also rebalance their portfolios towards less liquid bonds, which results in lower price fragility among bonds held disproportionally by our sample of Irish-domiciled funds.
JEL Code
G2 : Financial Economics→Financial Institutions and Services
G23 : Financial Economics→Financial Institutions and Services→Non-bank Financial Institutions, Financial Instruments, Institutional Investors
6 March 2024
RESPONSES AND LETTERS
17 January 2024
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17 January 2024
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16 January 2024
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16 January 2024
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19 December 2023
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19 December 2023
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19 December 2023
STRESS TESTING
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5 December 2023
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19 December 2023
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19 December 2023
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19 December 2023
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5 October 2023
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5 October 2023
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5 October 2023
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2 October 2023
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2 October 2023
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29 September 2023
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29 September 2023
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28 September 2023
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27 September 2023
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14 September 2023
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14 September 2023
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19 July 2023
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19 July 2023
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31 May 2023
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17 May 2023
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30 March 2023
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