English
Menu

Occasional papers

The ESRB Occasional Paper Series features analytical and policy work on topics relevant for the ESRB’s policymaking activities. The series includes, but is not limited to, work conducted within ESRB expert groups.

Submissions to the Occasional Paper Series are welcomed when at least one co-author is affiliated with the ESRB or an ESRB member institution, or when the paper has been presented at an ESRB event. Submitted papers are reviewed by the ESRB’s Occasional Papers Series Editorial Board. To submit a paper for consideration, email your submission as a pdf file to ESRBoccasionalpapers@ecb.europa.eu

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 with which the authors may be affiliated.

No. 24
15 November 2023
Intermediation in US and EU bond and swap markets: stylised facts, trends and impact of the coronavirus (COVID-19) crisis in March 2020
Scheicher, Martin

Abstract

JEL Classification

G12 : Financial Economics→General Financial Markets→Asset Pricing, Trading Volume, Bond Interest Rates
G15 : Financial Economics→General Financial Markets→International Financial Markets

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.

No. 23
2 October 2023
The European significant risk transfer securitisation market
González, Fernando, Triandafil, Cristina Morar

Abstract

JEL Classification

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

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.

No. 22
15 September 2023
Insurers’ investment behaviour and the coronavirus (COVID-19) pandemic
Fay, Constanze, Ghiselli, Angelica

Abstract

JEL Classification

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

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.

No. 21
1 December 2022
The market for short-term debt securities in Europe: what we know and what we do not know
Darpeix, Pierre-Emmanuel

Abstract

JEL Classification

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

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.

No. 20
1 April 2022
The economics of debt relief during a pandemic: lessons from the experience in Ireland
Gaffney, Edward, McCann, Fergal

Abstract

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.

No. 19
1 September 2021
Growth-at-risk and macroprudential policy design
Suarez, Javier

Abstract

JEL Classification

G01 : Financial Economics→General→Financial Crises
G20 : Financial Economics→Financial Institutions and Services→General
G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation

No. 18
1 September 2021
The benefits of the Legal Entity Identifier for monitoring systemic risk
Calleja, Romain, Katsigianni, Eleni, Laurent, François, Kaminska, Beata, Aparicio, Carlos, Dworak, Bartosz, Garcia, Luis, Durant, Dominique, Ristori, Lucia, Kirchner, Robert, Vitellas, Dimitrios, Pistelli, Federico

Abstract

JEL Classification

C81 : Mathematical and Quantitative Methods→Data Collection and Data Estimation Methodology, Computer Programs→Methodology for Collecting, Estimating, and Organizing Microeconomic Data, Data Access
E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy
G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation

No. 17
13 July 2020
Pension schemes in the European Union: challenges and implications from macroeconomic and financial stability perspectives
Sánchez Serrano, Antonio, Peltonen, Tuomas

Abstract

JEL Classification

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
D15 : Microeconomics→Household Behavior and Family Economics
H55 : Public Economics→National Government Expenditures and Related Policies→Social Security and Public Pensions
J32 : Labor and Demographic Economics→Wages, Compensation, and Labor Costs→Nonwage Labor Costs and Benefits, Retirement Plans, Private Pensions

Abstract

Pension schemes have a significant influence on the saving and consumption decisions of households. Similarly, contributions to pension arrangements are substantial expenditures for national governments and also for corporations, depending on the prevailing pension system. Beyond this, pension schemes play an important role in the economy, channelling savings into investments through capital markets. However, demographic factors and the macroeconomic environment (low interest rates, low growth and low productivity) are raising concerns about the sustainability of pension schemes over the long term, in particular for those of a defined benefit type. Their impact on pension schemes and the way to adjust to them have been under the consideration of national and international institutions for some time. In principle, Pillar 1 pension schemes (i.e. those sponsored by the government) would be more affected by demographic factors, whereas the macroeconomic environment would pose a larger challenge to Pillar 2 and 3 pension schemes (i.e. those where the employer and employees contribute to the scheme, and the residual category, respectively).

No. 16
4 May 2020
The making of a cyber crash: a conceptual model for systemic risk in the financial sector
Ros, Greg

Abstract

JEL Classification

E17 : Macroeconomics and Monetary Economics→General Aggregative Models→Forecasting and Simulation: Models and Applications
G01 : Financial Economics→General→Financial Crises
G20 : Financial Economics→Financial Institutions and Services→General
K24 : Law and Economics→Regulation and Business Law
L86 : Industrial Organization→Industry Studies: Services→Information and Internet Services, Computer Software
M15 : Business Administration and Business Economics, Marketing, Accounting→Business Administration→IT Management
O33 : Economic Development, Technological Change, and Growth→Technological Change, Research and Development, Intellectual Property Rights→Technological Change: Choices and Consequences, Diffusion Processes

Abstract

In October 2017, the European Systemic Risk Board (ESRB) set up a group whose objective was to examine cyber security vulnerabilities within the financial sector, and their potential impact on financial stability and the real economy. In its first year, the European Systemic Cyber Group (ESCG) sought to develop a shared understanding of Common Individual Vulnerabilities (CIVs) across ESRB members, and to identify the unique characteristics of cyber risk that could contribute to a systemic event. Building on this work, this paper describes a conceptual model for systemic cyber risk.

No. 15
23 April 2018
From the horse’s mouth: surveying responses to stress by banks and insurers
Brinkhoff, Jeroen, Langfield, Sam, Weeken, Olaf

Abstract

JEL Classification

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

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.

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

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

Abstract

Abstract

This occasional paper has been prepared to complement the mandate of the European Systemic Risk Board (ESRB) Task Force on the Financial Stability Implications of the Introduction of IFRS 9. It develops a recursive model to assess how different approaches to measuring credit impairment losses affect the average levels and dynamics of the impairment allowances associated with a bank’s loan portfolio. The application of this model to a portfolio of European corporate loans suggests that IFRS 9 would tend to concentrate the impact of credit losses on profits and losses (P/L) and Common Equity Tier 1(CET1) capital at the very beginning of deteriorating phases of the economic cycle, which raises concerns about the procyclical effects of IFRS 9.

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, Hoffmann, Peter, Langfield, Sam, Neychev, Martin, Roukny, Tarik, Rousová, Linda

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, Wildmann, 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).