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Occasional papers

The ESRB Occasional Paper Series is an outlet for the publication of analytical and policy work that has been conducted within ESRB expert groups. The papers are typically written by ESRB Secretariat staff or the staff of ESRB member institutions, sometimes in collaboration with Advisory Scientific Committee members or external experts.

Any views expressed in occasional papers are those of the authors and do not necessarily reflect the official stance of the ESRB, its member institutions, or any institution to which the authors may be affiliated.

No. 14
29 March 2018
Indicators for the monitoring of central counterparties in the EU
Alfranseder, Emanuel, Fiedor, Paweł, Lapschies, Sarah, Luciarszaghova, Sobolewski, Paweł

Abstract

JEL Classification

G10 : Financial Economics→General Financial Markets→General

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

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

Abstract

This ESRB Occasional Paper complements the publication of indicators on central counterparties (CCPs) in the ESRB's Risk Dashboard as part of its monitoring framework. It provides a methodological background to the development of the individual measures and discusses different aspects that should be considered when designing a monitoring framework for CCPs. The paper also highlights a number of areas in which more granular data are required in order, for example, to monitor the interconnectedness of CCPs within the broader financial system.CCPs play a key role in financial markets, as they reduce counterparty credit risk. This role is now heightened following post-crisis reforms of the over-the-counter (OTC) derivatives markets. Since CCPs may be viewed as systemically important institutions, it is crucial to ensure that they are regulated and monitored effectively. The ESRB has, therefore, sought to strengthen the framework used to analyse developments at CCPs in the EU from a macroprudential perspective.Each monitoring framework relies on the availability of suitable data. It is therefore positive that CCPs publish data on a quarterly basis under the CPMI-IOSCO public quantitative disclosure framework. These data provide a rich source of information covering several aspects of CCPs' functioning and are the basis of the indicators the ESRB has developed to analyse developments in central clearing in the EU.The indicators are designed to provide a macroprudential view over time of CCPs' resources, liquidity and collateral policies, margin and haircut requirements, interoperability arrangements as well as market structure and concentration at CCP level. The indicators cover all CCPs that are authorised within the EU, although the values of individual measures across CCPs should be analysed and interpreted with caution, bearing in mind that there are significant differences between individual CCPs’ business models, membership structures and products cleared.

No. 13
31 July 2017
A new database for financial crises in European countries
Lo Duca, Marco, Koban, Anne, Basten, Marisa, Bengtsson, Elias, Klaus, Benjamin, Kusmierczyk, Piotr, Lang, Jan Hannes, Detken, Carsten, Peltonen, Tuomas A.

Abstract

JEL Classification

G01 : Financial Economics→General→Financial Crises

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

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

H12 : Public Economics→Structure and Scope of Government→Crisis Management

Abstract

This paper presents a new database for financial crises in European countries, which serves as an important step towards establishing a common ground for macroprudential oversight and policymaking in the EU. The database focuses on providing precise chronological definitions of crisis periods to support the calibration of models in macroprudential analysis. An important contribution of this work is the identification of financial crises by combining a quantitative approach based on a financial stress index with expert judgement from national and European authorities. Key innovations of this database are (i) the inclusion of qualitative information about events and policy responses, (ii) the introduction of a broad set of non-exclusive categories to classify events, and (iii) a distinction between event and post-event adjustment periods. The paper explains the two-step approach for identifying crises and other key choices in the construction of the dataset. Moreover, stylised facts about the systemic crises in the dataset are presented together with estimations of output losses and fiscal costs associated with these crises. A preliminary assessment of the performance of standard early warning indicators based on the new crises dataset confirms findings in the literature that multivariate models can improve compared to univariate signalling models.

No. 12
17 July 2017
Assessing the cyclical implications of IFRS 9 - a recursive model
Abad, Jorge , Suarez, Javier
No. 11
22 September 2016
Shedding light on dark markets: First insights from the new EU-wide OTC derivatives dataset
Abad, Jorge , Aldasoro, Iñaki, Aymanns, Christoph, D'Errico, Marco, Fache Rousová, Linda, Hoffmann, Peter, Langfield, Sam, Neychev, Martin, Roukny, Tarik

Abstract

JEL Classification

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

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

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).

No. 10
27 July 2016
Assessing shadow banking – non-bank financial intermediation in Europe
Grillet-Aubert, Laurent, Haquin, Jean-Baptiste, Jackson, Clive, Killeen, Neill, Weistroffer, Christian

Abstract

JEL Classification

G23 : Financial Economics→Financial Institutions and Services→Non-bank Financial Institutions, Financial Instruments, Institutional Investors

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

Abstract

Owing to the disruptive events in the shadow banking system during the global financial crisis, policymakers and regulators have sought to strengthen the monitoring framework and to identify any remaining regulatory gaps. In accordance with its mandate, the European Systemic Risk Board (ESRB) has engaged in developing a monitoring framework to assess systemic risks in the European Union (EU) shadow banking sector. This assessment framework provides the basis for the EU Shadow Banking Monitor, which will be published each year by the ESRB. The framework also feeds into the ESRB’s Risk Dashboard, internal risk assessment processes and the formulation and implementation of related macro-prudential policies. The ESRB’s Joint Advisory Technical Committee (ATC)-Advisory Scientific Committee (ASC) Expert Group on Shadow Banking (JEGS) has accordingly engaged in: conducting a stocktake of relevant available data and related data gaps; defining criteria for risk mapping in line with the work of the Financial Stability Board (FSB) in this area; deriving indicators using this methodology for the purposes of the ESRB’s risk monitoring and assessment. Shadow banking can be broadly defined as credit intermediation performed outside the traditional banking system. This is consistent with the definition used at the global level by the FSB. Against this background, this paper describes the structure of the shadow banking system in Europe and discusses a range of methodological issues which must be considered when designing a monitoring framework. The paper applies both an “entity-based” approach and an “activity-based” approach when mapping the broad shadow banking system in the EU. In turn, the analysis focuses primarily on examining liquidity and maturity transformation, leverage, interconnectedness with the regular banking system and credit intermediation when assessing the structural vulnerabilities within the shadow banking system in Europe. This approach appears the most appropriate for the purpose of assessing shadow banking related risks within the EU financial system. On this basis, the paper complements the EU Shadow Banking Monitor by providing further methodological detail on the development of risk metrics. The paper presents the analysis underpinning the construction of risk metrics for the shadow banking system in Europe and highlights a number of areas where more granular data are required in order to monitor risks related to certain market activities and interconnectedness within the broader financial system.

No. 9
26 January 2016
Indirect contagion: the policy problem
Clerc, Laurent, Giovannini, Alberto, Langfield, Sam, Peltonen, Tuomas A., Portes, Richard, Scheicher, Martin

Abstract

JEL Classification

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

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

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.

No. 8
27 August 2015
Identifying early warning indicators for real estate-related banking crises
Ferrari, Stijn, Pirovano, Mara, Cornacchia, Wanda

Abstract

JEL Classification

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

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

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

Abstract

This Occasional Paper presents a formal statistical evaluation of potential early warning indicators for real estate-related banking crises. Relying on data on real estate-related banking crises for 25 EU countries, a signalling approach is applied in both a non-parametric and a parametric (discrete choice) setting. Such an analysis evaluates the predictive power of potential early warning indicators on the basis of the trade-off between correctly predicting upcoming crisis events and issuing false alarms. The results in this paper provide an analytical underpinning for decision-making based on guided discretion with regard to the activation of macro-prudential instruments targeted to the real estate sector. After the publication of the ESRB Handbook and the Occasional Paper on the countercyclical capital buffer, it represents a next step in the ESRB’s work on the operationalisation of macroprudential policy in the banking sector. This Occasional Paper highlights the important role of both real estate price variables and credit developments in predicting real estate-related banking crises. The results indicate that, in addition to cyclical developments in these variables, it is crucial to monitor the structural dimension of real estate prices and credit. In multivariate settings macroeconomic and market variables such as the inflation rate and short-term interest rates may add to the early warning performance of these variables. Overall, the findings indicate that combining multiple variables improves early warning signalling performance compared with assessing each indicator separately, both in the non-parametric and the parametric approach. Combinations of the abovementioned indicators lead to lower probabilities of missing crises while at the same time not issuing too many false alarms. In addition to EU level, they also perform relatively well at individual country level. Even though the best performing indicators have relatively good signalling abilities at the individual country level, national authorities are encouraged to perform their own complementary analyses in a broader framework of systemic risk detection, which augments potential early warning indicators and methods with other relevant inputs and expert judgement.

No. 7
13 July 2015
Network analysis of the EU insurance sector
Alves, Iván, Brinkhoff, Jeroen, Georgiev, Stanislav, Héam, Jean-Cyprien, Moldovan, Iulia, Scotto di Carlo, Marco

Abstract

JEL Classification

L14 : Industrial Organization→Market Structure, Firm Strategy, and Market Performance→Transactional Relationships, Contracts and Reputation, Networks

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

Abstract

This paper contains an analysis of the network of the 29 largest European insurance groups and their financial counterparties. Insurance companies have direct exposures to other insurers, banks and other financial institutions through the holdings of debt, equity and other financial instruments. These exposures can cause direct contagion and thereby the spread of systemic risks. This analysis focuses on direct linkages between EU insurers and banks. Sectoral data show that at least 20% of insurers’ assets are investments in banks. As a result insurers are an important source of funding for banks. This paper adds to the expanding research on financial market networks and on systemic risks in the insurance sector.

No. 6
23 September 2014
Securities financing transactions and the (re)use of collateral in Europe – An analysis of the first data collection conducted by the ESRB from a sample of European banks and agent lenders
Keller, Joachim, Bouveret, Antoine, Picillo, Cristina, Liu, Zijun, Mazzacurati, Julien, Molitor, Philippe, Söderberg, Jonas, Theal, John, de Rossi, Francesco, Calleja, Romain

Abstract

JEL Classification

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

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

Abstract

Securities financing transaction (SFT) markets and the management and usage of collateral are elements of the financial system which are of systemic relevance. As such, there is a clear need for enhanced transparency and regulatory oversight. The European Systemic Risk board (ESRB) mandated a task force to identify the potential risks related to SFTs in Europe and to develop policy proposals to better monitor any vulnerabilities identified by the analysis. This report presents the results of two data collection exercises that were conducted to gain some initial insights into the structure of the SFT market and the correlated practices adopted by market participants concerning the re-investment or the re-use of the collateral sourced through SFTs or via equivalent transactions. A description of this landscape is, in fact, crucial as a first step in assessing the risks emanating from the cash and securities collateral markets and their potential implications for macro-prudential policy in Europe. By providing a description of the SFT landscape, the data collection exercises undertaken by the ESRB have a macro-prudential dimension in that they provide data at an aggregated level. The first data collection exercise encompassed a sample of 38 EU banks, representing approximately 60% of the EU banking system’s total assets. The institutions covered by this sample are the main players in the management of securities collateral. The second data collection targeted 13 agent lenders that are considered to be the largest re-investors of cash collateral in Europe. The sample period of the data is fixed at the end of February 2013. The ESRB templates yielded a unique set of data on the sources and use of securities collateral (non-cash collateral) by banks, as well as on the re-investment of cash collateral by agent lenders. The data collections were intended to fit in the broader policy context initiated by the Financial Stability Board (FSB) and the resulting analyses ultimately address a number of theFSB’s recommendations. The first element of the analysis in this report is specifically related to the FSB’s fourth recommendation (disclosure of collateral management activities) (FSB, 2013) and, to a certain extent, to the first recommendation (authorities to collect granular information on SFTs of large international financial institutions). The second element is similarly related to the first of the FSB’s recommendations, but also the sixth, which requests better disclosure ofsecurities lending activities. The analysis contained thereafter is relevant for the European Commission’s proposal on the reporting of SFTs to trade repositories (EC, 2014), which will greatly enhance transparency and regulatory oversight of SFT activities in the European Union. Finally, the report is in line with the ESRB’s outline of a monitoring framework (ESRB, 2013).

No. 5
30 June 2014
Operationalising the countercyclical capital buffer: indicator selection, threshold identification and calibration options
Detken, Carsten, Weeken, Olaf, Alessi, Lucia, Bonfim, Diana, Boucinha, Miguel, Castro, Christian, Frontczak, Sebastian, Giordana, Gaston, Giese, Julia, Jahn, Nadya, Kakes, Jan, Klaus, Benjamin, Lang, Jan Hannes, Puzanova, Natalia, Welz, Peter

Abstract

JEL Classification

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

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

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

Abstract

This paper presents the analysis underpinning the ESRB Recommendation on guidance on setting countercyclical buffer rates (ESRB 2014/1). The Recommendation is designed to help authorities tasked with setting the countercyclical capital buffer (CCB) to operationalise this new macroprudential instrument. It follows on from the EU prudential rules for the banking system that came into effect on 1 January 2014.

No. 4
17 September 2013
Assessing contagion risks from the CDS market
Brunnermeier, Markus K., Clerc, Laurent, El Omari, Yanis, Gabrieli, Silvia, Kern, Steffen, Memmel, Christoph, Peltonen, Tuomas A., Podlich, Natalia, Scheicher, Martin, Vuillemey, Guillaume

Abstract

JEL Classification

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

G33 : Financial Economics→Corporate Finance and Governance→Bankruptcy, Liquidation

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

Abstract

Over the past few years the CDS market’s role has evolved from mostly providing default protection towards credit risk trading. The first-ever credit event in a developed country’s sovereign CDS has further highlighted the importance of the CDS market from a macro-prudential perspective. Developments in the European sovereign CDS market are a part of the major structural shift in euro sovereign debt: in the market’s view, there has been a significant shift from sovereign debt as a (default-free) risk-free benchmark (i.e. bearing interest rate risk only) to sovereign debt as a credit risk asset. Therefore, a significant repricing of the entire asset category has taken place, with major implications ranging from asset allocation to risk management. This implies that some policy issues are not necessarily and exclusively related to the CDS market, but are part of broader developments in the EU financial system. This Occasional Paper aims to provide a comprehensive analysis of the CDS market from a macroprudential perspective. In order to so, a wide range of analytical approaches is applied: Structural analysis of the EU CDS market: description of the market structure, key segments, concentration and evolution over time. Network analysis of bilateral CDS exposures: description of the structure and resilience of the network at an aggregate level as well as of sub-samples. In particular, analysis is conducted on: (i) the aggregated CDS network; (ii) various sub-networks, such as the sovereign CDS network; and (iii) networks for particular CDS reference entities. In order to carry out this analysis, we applied the established literature on interbank and payment systems networks to the CDS exposures network. “Super-spreader” analysis: identification of key “too interconnected to fail” market participants, their activities in the CDS market and their risk-bearing capacity. Scenario analysis of sovereign credit risk: the impact of sovereign credit events on the EU banking system and their potential spillovers. Domino effects in the CDS market: estimation of default chain scenarios for major participants in the CDS market; again, following the literature on interbank networks, we analysed the network impact of the collapse of a major market participant. Comparison of market- and exposure-based assessments of contagion: systemic risk rankings based on market price estimates (e.g. CoVaR) are compared with the rankings obtained using confidential DTCC exposure data in order to understand to what extent market participants are aware of who is a systemically relevant trader in the CDS market and whether these measures of systemic risk are consistent.

No. 3
16 September 2013
The structure and resilience of the European interbank market
Alves, Iván, Ferrari, Stijn, Franchini, Pietro, Héam, Jean-Cyprien, Jurca, Pavol, Langfield, Sam, Laviola, Sebastiano, Liedorp, Franka, Sánchez, Antonio, Tavolaro, Santiago, Vuillemey, Guillaume

Abstract

JEL Classification

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

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.

No. 2
18 March 2013
Towards a monitoring framework for securities financing transactions
Bouveret, Antoine, Jardelot, Julien, Keller, Joachim, Molitor, Philippe, Thea, John, Vital, Mathieu

Abstract

JEL Classification

E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy

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

Abstract

Supervisory authorities around the world are currently engaged in a policy debate over how to improve the information available on repurchase agreements (repos) and securities lending markets. Repo and securities lending transactions commonly referred to as securities financing transactions (SFTs), play a major role in the financial system. Although these can be relatively low-risk transactions by themselves, their pervasive use may give rise to systemic risk, as was observed during the recent financial crisis. In order to establish and implement a monitoring framework that allows for an effective assessment of the financial stability risks associated with SFTs, a number of considerable hurdles must be overcome and important decisions must be made. One contribution of this paper is to identify the potential obstacles and difficulties that may hinder the implementation of a monitoring framework in Europe.

No. 1
22 June 2012
Money market funds in Europe and financial stability
Bengtsson, Elias, Ansidei, Julie, Frison, Daniele, Ward, Giles

Abstract

JEL Classification

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

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

Abstract

Money market funds (MMFs) are investment funds whose primary objectives are to maintain the principal value of the funds and offer a return in line with money market rates, while providing daily liquidity to their investors. In Europe, MMFs manage approximately EUR 1 trillion in assets, with three countries (France, Ireland and Luxembourg) representing an aggregate market share of over 90%. MMFs were at the heart of dramatic episodes of the financial crisis of 2007-08, prompting regulators on both sides of the Atlantic to extensively review the regulatory framework applicable to them. In Europe, new guidelines were adopted in 2010, imposing strict standards in terms of the credit quality and maturity of underlying securities and better disclosure to investors. Although these initiatives are considered to have considerably improved MMF regulation, discussions are still ongoing, both in the United States (US) and at the international level, as to how to reduce the systemic risks associated with MMFs and, in particular, their vulnerability to runs. The Financial Stability Board (FSB) has identified MMFs as a key component of the shadow banking system and has asked the International Organization of Securities Commissions (IOSCO) to submit policy recommendations by July 2012 for further regulatory reform of such funds. The purpose of this occasional paper is to provide a first assessment of the systemic importance of MMFs within the European context, as well as of the main areas of risk, policy implications and the possible role for the European Systemic Risk Board (ESRB).