Publications published in 2022
- 8 December 2022
- RISK DASHBOARDAnnexes
- 8 December 2022
- RISK DASHBOARD
- 8 December 2022
- RISK DASHBOARD
- 1 December 2022
- OCCASIONAL PAPER SERIES - No. 21Details
- Abstract
- In March 2020, against the backdrop of a worsening Covid crisis, some segments of the money market fund (MMF) industry faced severe redemption pressures. Given their central role within the short term funding market, MMFs were at the heart of financial stability concerns, and legitimately underwent careful reviews by macroprudential bodies and market supervisors to assess their vulnerabilities and propose policy options to remediate them. Yet it is clear that MMFs are only one part of a wider ecosystem. These funds collect excess cash from some economic agents, which is predominantly invested in the markets for short-term debt securities, thus providing funding to a wide array of entities in need for short-term funding (banks, non-financial corporates, States, local governments, etc.). And clearly, beyond funds, vulnerabilities were also identified both on the underlying market and on the investors’ side. In order to complement the recommendations issued in January 2022 by the ESRB ahead of the scheduled revision of the MMF Regulation, and so as to provide a better understanding of vulnerabilities still widely unaddressed, the AMF conducted a stock-take analysis of the public information available on the very fragmented and opaque market for short-term debt instruments in Europe. Thanks to a fruitful collaboration with ESRB who shared internal databases, it was able to fill in some data gaps and provide new insights on this market. In particular, this stock-take gives the first comprehensive and consolidated estimate of the outstanding in question (more than EUR 2.2 trillion as of Dec.2020), with a breakdown according to issuer types, instrument types and currencies. The analysis highlights the still unaddressed vulnerabilities such as the fragmentation of the market and of its supervision as well as the lack of a robust identification of Euro-CP and emphasizes the lack of transparency in the secondary market operations.
- JEL Code
- D53 : Microeconomics→General Equilibrium and Disequilibrium→Financial Markets
E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies
E65 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Studies of Particular Policy Episodes
G15 : Financial Economics→General Financial Markets→International Financial Markets
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
H63 : Public Economics→National Budget, Deficit, and Debt→Debt, Debt Management, Sovereign Debt
- 21 November 2022
- REPORTS
- 14 November 2022
- ASC INSIGHT - No. 3
- 29 September 2022
- RISK DASHBOARDAnnexes
- 29 September 2022
- RISK DASHBOARD
- 29 September 2022
- RISK DASHBOARD
- 28 September 2022
- WORKING PAPER SERIES - No. 139Details
- Abstract
- This paper studies optimal second-best corrective regulation, when some agents/activities cannot be perfectly regulated. We show that policy elasticities and Pigouvian wedges are sufficient statistics to characterize the marginal welfare impact of regulatory policies in a large class of environments. We show that a subset of policy elasticities, leakage elasticities, determine optimal second-best policy, and characterize the marginal value of relaxing regulatory constraints. We apply our results to scenarios with unregulated agents/activities, uniform regulation across agents/activities, and costly regulation. We illustrate our results in applications to financial regulation with environmental externalities, shadow banking, behavioral distortions, asset substitution, and fire sales.
- JEL Code
- H23 : Public Economics→Taxation, Subsidies, and Revenue→Externalities, Redistributive Effects, Environmental Taxes and Subsidies
Q58 : Agricultural and Natural Resource Economics, Environmental and Ecological Economics→Environmental Economics→Government Policy
G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation
D62 : Microeconomics→Welfare Economics→Externalities
- 28 September 2022
- WORKING PAPER SERIES - No. 138Details
- Abstract
- We investigate the extent to which various structural risks exacerbate the materialization of cyclical risk. We use a large database covering all sorts of cyclical and structural features of the financial sector and the real economy for a panel of 30 countries over the period 2006Q1–2019Q4. We show that elevated levels of structural risks may have an important role in explaining the severity of cyclical and credit risk materialization during financial cycle contractions. Among these risks, private and public sector indebtedness, banking sector resilience and concentration of real estate exposures stand out. Moreover, we show that the elevated levels of some of the structural risks identified may be related to long-standing accommodative economic policy. Our evidence implies a stronger role for macroprudential policy, especially in countries with higher levels of structural risks.
- JEL Code
- E32 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Business Fluctuations, Cycles
G15 : Financial Economics→General Financial Markets→International Financial Markets
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
- 30 August 2022
- REPORTS
- 15 August 2022
- WORKING PAPER SERIES - No. 137Details
- Abstract
- Since the onset of the Global Financial Crisis, the presence of institutional investors in housing markets has steadily increased over time. Real estate funds (REIFs) and other housing investment •rms leverage large-scale buy-to-rent real estate investments that enable them to set prices in rental markets. A significant fraction of this funding is being provided in the form of non-bank lending - which is not subject to regulatory LTV ratios - and REIFs are generally not constrained by leverage limits. We develop a quantitative DSGE model that incorporates the main features of the REIF industry and identify leakages of existing macroprudential policy: (i) already existing countercyclical LTV rules on residential mortgages trigger a credit reallocation towards the REIF sector that can amplify financial and business cycles; while (ii) "non-existent" countercyclical LTV rules on lending to REIFs are particularly effective in taming such cycles. Due to the different mechanisms through which they operate, both types of LTV rules complement each other and jointly yield larger welfare gains (for savers and borrowers) than in isolation.
- 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
G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation
- 15 August 2022
- WORKING PAPER SERIES - No. 136Details
- Abstract
- This paper investigates how interbank credit exposures affect financial stability. Policy makers often see such exposures as undermining stability by exacerbating cascading losses through the financial system. I develop a model that features a trade-off between cascading losses and risk-sharing. In contrast to previous studies I find that reducing interbank connectivity may destabilize the financial system via the bank-run channel. This is because it decreases the risk-sharing benefits of interbank connectivity. A bank-run model features two islands that are connected via a long term debt claim. Varying the size of this claim (interbank connectivity), I study how the decision to `run on the bank' is affected. I run a simulation of the model, calibrated to the U.S. banking system between 1997-2007. I find that large bankruptcy costs are required to trump the risk-sharing benefits of interbank credit exposures.
- JEL Code
- G01 : Financial Economics→General→Financial Crises
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
- 26 July 2022
- REPORTS
- 15 July 2022
- NBFI MONITOR REPORT
- 15 July 2022
- ANNUAL REPORTEnglishOTHER LANGUAGES (23) +
- 1 July 2022
- WORKING PAPER SERIES - No. 134Details
- Abstract
- The investment fund sector has expanded dramatically since the crisis of 2008-2009. As the sector grows, so do the implications of its risk-taking for the wider financial system and real economy. This paper provides empirical evidence for the existence of wide- spread risk-taking incentives in the investment fund sector, with a particular focus on incentives for synchronised, cyclical risk-taking which could have systemic effects. Incentives arise from the positive response of investors to returns achieved through cyclical risk-taking and non-linearities in the relationship between fund returns and fund flows, which may keep managers from fully internalising the effects of adverse outcomes on their portfolios. The fact that market discipline may not be sufficient to ensure prudential behaviour among managers, combined with the externalities of this risk-taking for the wider system, creates a clear case for macroprudential regulatory intervention.
- JEL Code
- G23 : Financial Economics→Financial Institutions and Services→Non-bank Financial Institutions, Financial Instruments, Institutional Investors
G11 : Financial Economics→General Financial Markets→Portfolio Choice, Investment Decisions
G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation
- 1 July 2022
- WORKING PAPER SERIES - No. 135Details
- Abstract
- During the COVID-19 pandemic, house prices and mortgage credit rose at a long unseen pace. It is unclear, however, whether such increases are warranted by the underlying market and macroeconomic fundamentals. This paper offers a new structural two-market disequilibrium model that can be estimated using full-information methods and applied to analyse housing and credit dynamics. Dealing with econometric specification uncertainty, we estimate a large ensemble o f t he two-market disequilibrium model specifications f or Lithuanian monthly data. U sing the model estimates, we identify the historical drivers of Lithuania’s housing and credit demand and supply, as well as price and market quantity variables. The paper provides a novel approach in the financial stability literature to jointly measure house price overvaluation and mortgage credit flow g aps. We find that, by mid-2021, Lithuania was experiencing a heating-up in housing and mortgage credit markets, with home prices overvalued by around 16% and the volume of mortgage credit flow being 20% above its fundamentals.
- JEL Code
- C34 : Mathematical and Quantitative Methods→Multiple or Simultaneous Equation Models, Multiple Variables→Truncated and Censored Models, Switching Regression Models
D50 : Microeconomics→General Equilibrium and Disequilibrium→General
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
- 1 July 2022
- REPORTS
- 30 June 2022
- RISK DASHBOARDAnnexes
- 30 June 2022
- RISK DASHBOARD
- 30 June 2022
- RISK DASHBOARD
- 1 April 2022
- OCCASIONAL PAPER SERIES - No. 20Details
- Abstract
- The coronavirus (COVID-19) macroeconomic shock was different from previous crises in terms of its speed, the severity of the resulting job losses, the fiscal support provided in response and the stability of house prices. In response to this sudden shock and in line with European Banking Authority guidance, lenders in Ireland offered temporary COVID-19 payment breaks, or moratoria, to homeowners with mortgages. COVID-19 payment breaks had minimal eligibility criteria, did not require a regulatory risk reclassification of loans and had no impact on borrower credit records. All of this enabled a rapid response that minimised costs to both borrowers and lenders. As the initial payment breaks have expired, lenders have typically responded to a relatively small number of requests for further arrears support or restructuring by extending moratoria or other temporary arrangements. Based on the lessons learned from research into the economics of debt relief since the global financial crisis, we view this initial response as appropriate for the specific, temporary economic shock that the Irish economy faced in March 2020. As the pandemic progresses, the optimal future response of policymakers will depend on how both the labour and housing markets evolve. In circumstances such as those that prevailed in early 2021, when uncertainty and additional temporary liquidity shocks affected some sectors, additional extensions of payment moratoria or other short-term arrangements may be appropriate for some borrowers. However, should it appear that income shocks were becoming more permanent, perhaps because of structural shifts in demand, or if house prices were to decline, longer-term solutions might be required, similar to those implemented after the global financial crisis. In light of the successful pandemic response, we also consider the benefits of mortgage contracts that allow households to opt into payment moratoria or reduced payment levels in certain situations. To avoid incentive problems, this optionality would ideally either (i) have to be triggered by the declaration of a national emergency or (ii) perhaps more simply be time-limited or tied to periodic amortisation requirements. In all cases, a major advantage of such optionality would be the automatic nature of the option. This would mean that there was no need for urgent coordination among policymakers or lenders to avoid issues such as credit records or risk classifications being altered as a result of the widespread requirement for payment relief.
- 31 March 2022
- REPORTS
- 31 March 2022
- RISK DASHBOARDAnnexes
- 31 March 2022
- RISK DASHBOARD
- 31 March 2022
- RISK DASHBOARD
- 15 March 2022
- WORKING PAPER SERIES - No. 133Details
- Abstract
- Through the compulsory participation of junior investors in bearing losses of their failing bank, the bail-in attempts to limit bail-outs’ side-effects in terms of market discipline, too-big-to-fail, bank-sovereign nexus and risk-taking. This paper assesses the consequences of bail-in expectations along these dimensions ensuring – through a bond pricing study – that bail-in expectations are not confounded by other factors. Using hand-collected details of EU bail-in events, I study both positive and negative exogenous shocks to bail-in expectations, offering three sets of findings. First, bail-in events can reinforce (or weaken) bail-in expectations, as shown by Khwaja-Mian tests (validated by placebo analyses). Second, bail-in expectations promote market discipline, and mitigate too-big-to-fail and bank-sovereign nexus. Third, bail-in effects on bank resilience appear mixed. While it incentivises banks to reduce risk-taking (e.g., increasing risk-weighted equity by a third of Basel III requirement), it also remarkably exacerbates total funding costs through an increase in equity cost (partially off-set by a debt cost reduction).
- 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
H81 : Public Economics→Miscellaneous Issues→Governmental Loans, Loan Guarantees, Credits, Grants, Bailouts
C23 : Mathematical and Quantitative Methods→Single Equation Models, Single Variables→Panel Data Models, Spatio-temporal Models
- 11 February 2022
- REPORTS
- 27 January 2022
- REPORTS
- 25 January 2022
- REPORTS
- 20 January 2022
- FINANCIAL CRISES DATABASERelated
- 31 July 2017
- OCCASIONAL PAPER SERIES
- 18 January 2022
- ADVISORY SCIENTIFIC COMMITTEE REPORT - No. 12Details
- Abstract
- This report discusses the impact of digitalization on the structure of the European banking system. The recent wave of financial innovation based on the opportunities digitalisation offers, however, has come mostly from outside the incumbent banking system in the form of new financial service providers, either in competition or cooperation with incumbent banks but with the potential for substantial disruption. After discussing how identified risks may evolve and the emergence of new sources of risks, the report introduces three different scenarios for the future European banking system: (i) incumbent banks continue their dominance; (ii) incumbent banks retrench; and (iii) central bank digital currencies (under certain specifications). It also derives macroprudential policy measures.