European Central Bank
The European Central Bank (ECB) is the central bank of the European Union countries which have adopted the euro. Our main task is to maintain price stability in the euro area and so preserve the purchasing power of the single currency.
Are restrictions on fiscal policy necessary for monetary policy to be able to deliver price stability? When households are Ricardian, the net present value of future fiscal surpluses needs to equate the real value of government debt absent inflation. We show that when households are not Ricardian, fiscal requirements still exist but take the very different form of a limit on the debt-to-GDP ratio. The debt-to-GDP limit captures the idea that public debt cannot be so large that the wealth effect of public debt on aggregate spending can no longer be counter-balanced by interest rate hikes, however large. To implement price stability when the debt-to-GDP requirement is satisfied, monetary policy must respond to the level of public debt, not just to the inflation it creates.
During his reign from 1979 to 2005, Pope John Paul II visited 129 countries, more than the 263 Popes before him combined. I document a significant increase in exports to trading partners with a relatively high share of Catholics following a Pastoral visit, leading to a non-negligible increase in aggregate exports. The biggest beneficiaries in terms of increased trade are visited countries that are at lower stages of economic development and have relatively few Catholics and weak trade links. The effect is absent for other prominent episodes, such as global sports events or visits by political dignitaries.
The ECB Consumer Expectations Survey (CES) provides regular and timely information on household rent expenditure. This information has been used to analyse developments and to construct an indicator for rent growth that is largely free of composition effects from respondents entering or leaving the panel of survey respondents. Combined with the rich micro data from the CES, this new indicator allows for a detailed analysis of rent growth and its drivers. According to this novel CES-based indicator, rent growth in the euro area peaked in the third quarter of 2023. It then declined but has remained above 3% up to the third quarter of 2024. Given the ease with which rent adjustments can be made, rent growth per square metre has been more than proportionally driven by new rental contracts.
This article reviews developments in the euro area housing market during the recent house price cycle and compares them with previous cycles. The recent downturn in house prices was relatively mild and short-lived, as well as less pervasive, compared with the global financial crisis and the sovereign debt crisis and implied smaller adjustments to overvaluations. This limited decline in house prices effectively unwound the exceptional pandemic-related surge in housing demand and, therefore, did not bear the same hallmarks as an outright recession. This is because income remained solid owing to the favourable labour market conditions and excess savings had also accumulated during the pandemic. The role of tighter financing conditions in the adjustment of house prices was mitigated by relatively sound balance sheet positions, reflecting the macroprudential measures undertaken in the aftermath of the global financial crisis, a stronger prevalence of fixed rate mortgages and links between the housing and the rental market. With the combination of prevailing supply-side shortages and continuing sound demand fundamentals, house price developments may well continue on their upward path but still remain uncertain.
Greenwashing is a generic term used for breaches and misleading claims about the sustainability credentials of various legal provisions, ranging from unfair competition, securities laws infringements and unethical advertising to wrong corporate disclosure. This paper focuses on the latter. Against the background of the significant financial flows needed to finance the transition to meet the objectives of the Paris Agreement and the EU Climate law, the EU corporate sustainability reporting rules integrated in the Corporate Sustainability Reporting Directive (CSRD) and the Corporate Sustainability Due Diligence Directive (CSDDD), as well as the EU taxonomy constitute an ambitious legislative framework which is aimed at establishing common mandatory European Sustainability Reporting Standards for companies to report comparable and relevant information required by investors and other stakeholders. This framework’s aim is to support companies in the transition to a more sustainable economy and help stakeholders and investors understand the sustainability risks in their investments (and facilitate financial flows for the transition). This framework’s aim is to support companies in the transition to a more sustainable economy and help stakeholders and investors understand the sustainability risks in their investments (and facilitate financial flows for the transition). This will help mitigate greenwashing risks because this framework raises the responsibility for inaccurate disclosure. In addition, accurate data are important for central bank operations because they can ensure that prices and the risk control framework adequately reflect climate physical and transition risks. The success of the regulatory framework will rely heavily on its credible implementation, including penalties, which will help anchor expectations and condition the behaviour of economic agents. […]
Physical climate risks can have a large regional impact, which can influence mortgage loans’ credit risk and should be priced by the lenders. Motivated by the relevance of climate change for financial intermediaries, our paper aims at analysing if physical climate risks are being reflected in residential real estate loan rates of banks. We show that on average banks seem to demand a physical climate risk premium from mortgage borrowers and the premium has increased over recent years. However, there is significant heterogeneity in bank practices. Banks that were identified as “adequately” considering climate risk in the credit risk management by the ECB Banking Supervision charge higher risk premia which have been increasing particularly after the publication of supervisory expectations. In contrast, the lack of risk premia of certain banks shows that ECB diagnostics in the Thematic Review on Climate were accurate in identifying the banks that need stronger supervisory focus.
We field a series of experiments in a population-representative survey of European consumers to examine their attitudes towards the possible introduction of a digital euro. First, we show that a short video explaining the key features of the digital euro is effective in changing consumers’ beliefs about such a new form of payment and increases the likelihood of adoption by 12pp relative to a control group that is not shown the video. Second, we find that on aggregate consumers would allocate a relatively small fraction from a positive wealth shock to digital euros and their allocation to other liquid assets would be little affected. Third, holding limits in the range of €1,000 to €10,000 have insignificant differential effects on the composition of liquid asset holdings. We also show that a non-trivial fraction of consumers report that they will not adopt the digital euro due to strong preferences for existing forms of payment.
The European Union requires a single market for capital. Well-developed and integrated capital markets support economic growth and resilience across the region, offering benefits for businesses, households, and financial stability. This paper examines the importance of CMU in achieving five strategic objectives: supporting innovation and productivity, financing the twin transition, shoring up pension savings, strengthening alternatives to bank financing, and fostering convergence and inclusion. It highlights the progress made over the past decade, the challenges encountered, and the renewed impetus behind the CMU initiative. The paper proposes concrete steps to move forward, building on long-standing priorities supported by the ECB and the current policy debate on CMU. First, it suggests facilitating access to capital markets, via the creation of a new standard for a European savings and investment product. Second, it emphasises the importance of expanding capital markets across-borders which would be facilitated by improvements towards a more integrated supervisory ecosystem, an integrated trading and post-trading landscape leveraging on the potential benefits of digitalisation, and a more active securitisation market that does not compromise on financial stability. Third, the paper highlights the need to channel capital towards innovative and competitive firms by increasing opportunities for equity and venture capital financing. These actions should be complemented by longer-term initiatives, including continuing to address barriers stemming from the lack of harmonisation in insolvency, corporate and taxation regimes, designing a safe asset for Europe, completing the Banking Union, and promoting financial literacy and inclusion.
Cyberattacks pose greater risk to financial stability than ever before as they have grown in both number and magnitude. A macroprudential perspective on cyber resilience stress testing is needed because cyber incidents can have a systemic impact as their effects spread across the financial sector via confidence, operational and financial mechanisms. While broader stress-testing principles also apply to cyber stress testing, stress testers need to focus in particular on clearly defining the overall objectives, determining the institutional perimeter, identifying material risk propagation channels, focusing on tail risks, considering relevant behavioural responses and combining the outcomes of bottom-up and top-down exercises. Based on these principles, cyber resilience stress tests can be executed following a bottom-up as well as a top-down approach. Top-down models can complement bottom-up results by providing harmonised modelling of system-wide financial interlinkages, behavioural responses and second-round effects.
This box explores the use of corporate earnings calls as a novel, high-frequency source of data for nowcasting and forecasting labour demand in the euro area. Labour demand has started to show signs of cooling following its post-pandemic peak. By applying textual analysis to transcripts of earnings calls, we construct an indicator that correlates strongly with the euro area job vacancy rate. This metric enables us to produce timely forecasts ahead of official data releases. Utilising a mixed data sampling (MIDAS) regression approach, we use this indicator to forecast the job vacancy rate. We also produce forecasts based on Indeed online job posting data. Our findings indicate a sustained moderation in labour demand, suggesting that the job vacancy rate will hover at around 2.5% through mid-2025. This method makes assessments of labour demand both more timely and more accurate.
The European Central Bank (ECB) is the central bank of the European Union countries which have adopted the euro. Our main task is to maintain price stability in the euro area and so preserve the purchasing power of the single currency.
Large-scale debt forbearance is a key policy tool during crises, yet targeting is challenging due to information asymmetries. Using transaction-level data from a Portuguese bank during COVID-19, we find that financially fragile households are more likely to enter forbearance, irrespective of income shocks. Mortgage payment suspension increases consumption and savings, but effects differ across households. Low liquid wealth and income are associated with a higher marginal propensity to consume. Additionally, ineligible households accessing forbearance show a higher propensity to consume than eligible ones. Our results suggest that observable household characteristics can help in the design of effective debt relief policies.
This paper provides an overview of recent analytical work conducted, under their own aegis, by experts from various European authorities and institutions in the field of crypto-asset monitoring. Currently, risks stemming from crypto-assets and the potential implications for central banking domains are limited and/or manageable, including as regards the existing regulatory and oversight frameworks. Nevertheless, the importance of monitoring developments in crypto-assets, raising awareness of the potential risks and fostering preparedness cannot be overstated. In light of this, this paper sets out the background to the establishment of the Crypto-Asset Monitoring Expert Group (CAMEG) in late 2023 to bring together experts from the Eurosystem’s central banks and from the European Systemic Risk Board (ESRB). It also provides abstracts of various papers and other analytical works presented at the inaugural CAMEG conference held on 24 and 25 October 2024. The conference aimed to take stock of analytical work and data issues in this area, while fostering European collaboration and monitoring in the field of crypto-assets. Finally, this paper outlines the prospective way forward for the CAMEG, focusing on gaining greater insight into data in this area and deepening analytical work on interlinkages, crypto-asset adoption and the latest trends.
The European Central Bank (ECB) is the central bank of the European Union countries which have adopted the euro. Our main task is to maintain price stability in the euro area and so preserve the purchasing power of the single currency.
The European Central Bank (ECB) is the central bank of the European Union countries which have adopted the euro. Our main task is to maintain price stability in the euro area and so preserve the purchasing power of the single currency.
Questions about market power have become salient in macroeconomics. We consider the role of institutional structures in addressing these within a dynamic general equilibrium framework. Standard models account for monopoly profits as a lump-sum transfer to the representative agent. We label this an "incentive leakage," and show this to be a general characteristic of firm-optimal arrangements. We show that shareholder-operated or worker-operated firms that eliminate leakage can generate within-firm incentives that effectively reduce monopoly distortion in equilibrium. When all firms operate similarly, an additional general equilibrium effect arises through internalization of an aggregate demand externality. We characterize steady-state welfare across structures, and show how zero-leakage institutions lead to improvements towards the Golden Rule benchmark. Overall, our paper takes the first step towards an analysis of the macroeconomics of institutions without incentive leakage.
We construct a New-Keynesian E-DSGE model with energy disaggregation and financial intermediaries to show how energy-related fiscal and macroprudential policies interact in affecting the euro area macroeconomy and carbon emissions. When a shock to the price of fossil resources propagates through the energy and banking sector, it leads to a surge in inflation while lowering output and carbon emissions, absent policy interventions. By contrast, imposing energy production subsidies reduces both CPI and core inflation and increases aggregate output, while energy consumption subsidies only lower CPI inflation and reduce aggregate output. Carbon subsidies instead produce an intermediate effect. Given that both energy subsidies raise carbon emissions and delay the “green transition,” accompanying them with parallel macroprudential policy that taxes dirty energy assets in bank portfolios promotes “green” investment while enabling energy subsidies to effectively mitigate the adverse effects of supply-type shocks, witnessed in recent years in the EA.
This paper explores the impact of bank transparency on market efficiency by comparing banks that disclose supervisory capital requirements to those that remain opaque. Due to the informational content of supervisory capital requirements for the market this opacity might hinder market efficiency. The paper estimates an average 11.5% reduction in funding costs for transparent versus opaque banks. However, there is some heterogeneity in those effects. Transparency helps the market to sort across safer and riskier banks. Conditional on disclosure, the safest quartile of banks, those with a CET1 P2R lower than 1.5% of risk-weighted assets, benefits in average from 31.1% lower funding costs. The paper concludes that supervisory transparency is beneficial, supporting the view that supervisory transparency enhances market discipline by allowing markets to better evaluate and price the risk associated with each bank.
Does it pay to invest in green companies? In countries where a market for carbon is functioning, such as those within the European Union, our findings suggest that it should be beneficial. Using a sample of green and brown European firms, we initially demonstrate that green companies have outperformed brown ones in recent times. Subsequently, we develop a production economy model in which brown firms acquire permits to emit carbon into the atmosphere. We find that the presence of a well-functioning carbon market could account for the green equity premium observed in our data. Incorporating a preference for green financial assets is also unlikely to overturn our results.
We document that compared to all other investor groups investment funds exhibit a distinctly procyclical behavior when financial-market beliefs about the probability of a euro-related, institutional rare disaster spike. In response to such euro disaster risk shocks, investment funds shed periphery but do not adjust core sovereign debt holdings. The periphery debt shed by investment funds is picked up by investors domiciled in the issuing country, namely banks in the short term and insurance corporations and households in the medium term.
We document that inflation risk in the U.S. varies significantly over time and is often asymmetric. To analyze the macroeconomic effects of these asymmetric risks within a tractable framework, we construct the beliefs representation of a general equilibrium model with skewed distribution of markup shocks. Optimal policy requires shifting agents’ expectations counter to the direction of inflation risks. We perform counterfactual analyses using a quantitative general equilibrium model to evaluate the implications of incorporating real-time estimates of the balance of inflation risks into monetary policy communications and decisions.
Climate change is a global-scale structural change, affecting economies across the world, alongside global fragmentation, digitalisation and demographics. This paper analyses the diffusion of climate policies and technologies and the role of institutions and governance in that process. It discusses theory, models and data available to date, and the empirical evidence for the 20 European Union and all 40 countries covered by the OECD’s Environmental Policy Stringency index. The results indicate that institutions and governance have significant effects towards a greater speed and spread of diffusion of climate policies and technologies, and that separating the speed and spread effects is essential for assessing the green transition.
Institutional investors, such as investment funds, are playing an increasingly important role in residential real estate markets. This raises the possibility that their actions might drive aggregate market outcomes and may change how and which macrofinancial shocks transmit to house prices. In a Bayesian vector autoregression setting, we show that a demand shock from institutional investors has a positive and persistent effect on aggregate euro area house price growth and mortgage lending volumes. Institutional investors also increase their purchase activity following a loosening of monetary policy. Exploiting regional heterogeneity in eight euro area countries, we show in a panel regression setting that institutional investors weaken the link between house price growth and local economic fundamentals, but strengthen the sensitivity to monetary policy and financial market developments.
Using supervisory data of alternative investment funds investing in bonds, I exploit the COVID-19 crisis to examine the effectiveness of redemption restrictions from a financial stability perspective. First, I find that redemption restrictions reduced outflows during the March 2020 market turmoil but did not result in higher outflows in the periods following the crisis episode. Second, I find that funds with higher redemption restrictions engaged less in procyclical cash hoarding during the COVID-19 crisis period, even after controlling for the size of their outflows. Third, I find that redemption restrictions do not have a significant impact on the sensitivity of investor inflows to good performance, but they significantly reduce the sensitivity of outflows to bad performance. These findings suggest that redemption restrictions can mitigate fragility in open-ended investment funds.
The European Central Bank (ECB) is the central bank of the European Union countries which have adopted the euro. Our main task is to maintain price stability in the euro area and so preserve the purchasing power of the single currency.
Monetary policy communication is important for managing policy expectations and enhancing the effectiveness of central bank policy decisions. The prevalence of topics in the ECB’s communication has shifted over time with the focus of its work: from the creation and introduction of the euro to addressing financial crises with new policy instruments, and more recently, to tackling the effects of the 2021-22 inflation surges. The analysis shows that, while press releases and monetary policy statements following Governing Council meetings lead to significant immediate changes in asset prices, communication taking place between these meetings also has a meaningful impact, with a substantial cumulative effect over time. A holistic understanding of the impact of Governing Council communication – both immediately after its meetings and between one meeting and the next – is central for managing expectations and shaping monetary policy outcomes.
The collateral framework for Eurosystem credit operations contributes to an effective, robust, flexible and efficient implementation of the ECB’s monetary policy. The framework has evolved over time, primarily in response to economic and financial market developments, supporting bank lending and the provision of liquidity. Recent Governing Council decisions will increase the harmonisation of the framework, while simultaneously preserving a broad collateral basis.
Major floods have become recurrent events in Europe and their frequency is set to increase with climate change. Drawing on several pieces of ECB analysis, we show that the economic effects depend largely on economic and institutional factors at the regional level. There is evidence of high-income regions “building back better”, whereas lower-income regions can suffer prolonged periods of lower activity. Insurance and spending on adaptation measures like flood defences can already contain the potential damages from further extreme weather events in the near future.
The euro area unemployment rate has been declining for the past two years. This box explores the role of labour supply factors in driving this decline. To this end, it examines in particular whether changes in the labour force composition of certain demographic groups have contributed to this trend. The results show that, even within the relatively short time frame considered, shifts in the labour force composition – and especially the rising proportions of older workers and workers with a tertiary education – have contributed to reducing the unemployment rate.
The inflation surge seen in the past few years has had a negative impact on consumer perceptions about real incomes. These perceptions seem to persist even as real income has actually improved over time. This behaviour, which can be seen as a form of pessimism, is particularly strong among lower and middle-income households and has had a negative impact on actual consumption. These findings underscore the importance of perceptions in economic behaviour. As pessimism following large economic shocks typically disappears, albeit gradually, consumption should gain momentum as perceptions about real incomes improve.
While headline inflation has decelerated significantly across advanced economies in the past two years, services inflation has remained high. This box examines the key factors influencing services inflation in the United States and the United Kingdom, highlighting the role of labour market tightness and catch-up dynamics in non-rent services inflation, and the contribution of rent inflation to overall services inflation. Looking ahead, services inflation is expected to moderate amid a lower contribution from catch-up inflation dynamics, a cooling of labour markets and decreasing inflation for new rental agreements.
We study the heterogeneous pass-through of monetary policy across firms with different labor shares. The goal is to obtain evidence on a labor-intensity transmission channel that should in fact be operating for other kinds of demand shocks as well. Our basic idea is that labor is special: unlike capital, it cannot be pledged against loans as collateral due to property rights. Based on a sample of over one million European firms, we document substantial heterogeneity in terms of firms’ investment response: when conditions tighten, fixed capital stock of labor-intensive firms decreases relative to capital-intensive production. These findings cannot be explained by other proxies for financial constraints such as age, size or financial leverage. Our results suggest that the impact of monetary policy is driven by borrowing constraints of high labor share firms, and that monetary policy is more potent in an economy characterized by a high labor share.
Following the Global Financial Crisis of 2007-8, Ireland, Slovenia, and Spain set up public Asset Management Companies (AMCs), purchasing delinquent loans equal to 44%, 16%, and 10% of GDP, respectively. Though deemed successful, it’s unclear if this was de facto traditional capital and liquidity support. We show that AMCs have a systematic advantage in reducing pecuniary externalities and costs associated with loan delinquencies. AMCs enhance average returns to bank lending, promoting additional lending (bank lending channel) and improving corporate borrowers’ balance sheets (balance sheet channel). The welfare gains of well-designed and well-managed AMCs are between 0.2% and 0.5% of steady-state consumption, independent of whether they are financed through fiscal transfers or sterilized monetary transfers; AMCs can complement traditional fiscal and monetary policies in managing financial crises.
The green transition of the EU economy will require substantial investment to 2030 and beyond, to reduce greenhouse gas (GHG) emissions by 55% from 1990 levels by 2030 and reach net-zero emissions by 2050. Estimates of green investment needs vary and are surrounded by high uncertainty, but these all point to a requirement for faster and more ambitious action. Green investment will need to be financed primarily by the private sector, with support from the public sector. While banks are expected to make a key contribution to funding the green transition, capital markets need to deepen further, especially to support innovation financing. Public funds will be vital to complement and de-risk private green investment. Finally, structural reforms should be tailored to encourage firms, households and investors to step up their green investment activities.
This article describes developments in wage indicators during and after the high inflation period. It illustrates that, following high volatility during the pandemic, all wage indicators recorded levels well in excess of historical averages in 2023-24. The drivers of wage growth, namely inflation, labour market tightness and productivity growth, also developed differently from how they have developed in the past, and there is a need to reassess how they are reflected in wage developments. Using the augmented wage Phillips curve we find that the inflationary shock was the main driver of wage growth dynamics in the period under investigation, while labour market tightness supported workers in recovering real wage losses. We illustrate the link between wage growth and inflation in the euro area through the lens of the Bernanke-Blanchard model. ECB wage tracker data confirm the important role of catching up in recent wage growth and point to labour market institutions having a strong role in the speed of pass-through of prices to wages. Meanwhile, wage pressures are expected to ease as real wage catch-up becomes less significant and labour demand eases.
This article discusses the role institutions play in supporting European competitiveness and makes the case for urgent and concrete structural reforms. Productivity growth in Europe has been disappointingly low in the last three decades, which is closely linked to the shortcomings in firm dynamism, investment, breakthrough innovation and the diffusion of digital technology. Efficient and effective institutions at the national and EU levels are needed to support innovation and investment and boost productivity, which in turn will raise competitiveness. This is particularly important in the context of increased geopolitical tensions and the need to facilitate the digital and green transitions.
Homeownership rates and holdings of housing wealth differ immensely across countries. Using micro data from five economies, we estimate a life-cycle model with illiquid housing in which households face a discrete–continuous choice between renting and owning a house. We use the model to decompose the cross-country differences in the homeownership rate and the value of housing wealth into three groups of explanatory factors: house price expectations, the institutional set-up of the housing market and preferences. We find that all three groups of factors matter, although preferences less so. Differences in homeownership rates are strongly affected by (i) house price beliefs and (ii) the rental wedge, the difference between rents and housing maintenance costs, which reflects the quality of the rental market. Differences in the value of housing wealth are substantially driven by maintenance costs.
This box provides an update on estimates of the natural rate of interest, or r*, published in Issue 1, 2024 of the Economic Bulletin. r* is commonly referred to as the real rate of interest that is neither expansionary nor contractionary. Broad trends in r* can be used to gauge economic risks, such as the potential constraint of the lower bound on interest rates. However, estimating r* is fraught with wide-ranging uncertainties and conceptual limitations. These uncertainties stem from model selection, parameter estimation, filter techniques and variation in real-time data. The inherent uncertainty in estimating r* and its conceptual challenges limit its practical use to determine the appropriate stance of monetary policy at a specific point in time.
An increase of e100 per tonne in the EU carbon price reduces the carbon footprint but lowers GDP due to higher energy costs and carbon leakage. Using a dynamic multi-sector, multi-country model augmented with an energy block that includes endogenous renewable energy investment, we analyze the macroeconomic and emissions effects of a carbon price. Investment in renewable energy mitigates electricity price increases in the medium term, leading to a smaller GDP loss (up to -0.4%) and a larger emissions reduction (24%) in the EU. Neglecting renewable energy investment overestimates the negative economic impact. We also find that a Carbon Border Adjustment Mechanism (CBAM) reduces carbon leakage but slightly hurts GDP and inflation as the competitive gain is offset by the higher costs of imported intermediate inputs.
This paper investigates the role of banking networks in the transmission of shocks across borders. Combining banking deregulation in the US with state-level idiosyncratic demand shocks, we show that geographically diversified banks reallocate funds from economies experiencing negative shocks to unaffected regions. Our findings indicate that in the presence of idiosyncratic shocks, financial integration reduces business cycle comovement and synchronizes consumption patterns. Our findings contribute to explaining the Great Moderation and provide empirical support for theories that predict that banking integration facilitates the insurance of region-specific risk and the efficient allocation of resources as markets become more complete.
Housing expenditure shares decline with income. A household’s income determines its sensitivity to housing costs and drives its location decision. Has spatial skill sorting increased because low income individuals are avoiding increasingly expensive regions? I augment a standard quantitative spatial model with flexible non-homothetic preferences to estimate the effect of the national increase in the relative supply of high skilled workers that has put upward pressure on housing costs in skill-intensive cities. My model explains 10% of the increase in average house prices in Germany from 2007 to 2017 and 11% of the regional differences in house price increases. One third of the effects is due to an increase in spatial skill sorting driven by differences in housing expenditure shares. The observed degree of skill sorting was not significantly different from the optimal allocation in 2007 while skill sorting was larger than optimal in 2017.
We study the implications of deviations from covered interest rate parity for international capital flows using novel data covering euro-area derivatives and securities holdings. Consistent with a dynamic model of currency risk hedging, we document that investors’ holdings of USD bonds decrease following a widening in the USD-EUR cross-currency basis (CCB). This effect is driven by investors with larger FX rollover risk and hedging mandates, and it is robust to instrumenting the CCB. These shifts in bond demand significantly affect bond prices. Our findings shed light on a new determinant of international capital flows with important consequences for financial stability.
This paper explores the impact of the regulatory leverage ratio (LR) on banks’ demand for reserves and thus the pricing of overnight liquidity in the euro area money markets. We use daily transaction-level money market data during the period between January 2017 - February 2023 and examine the two major overnight money market segments – the unsecured and the secured one, distinguishing between over-the-counter (OTC) and CCP-cleared trades for the latter. We find a significant positive link between a bank’s LR and the spread between its money market borrowing rate and the DFR. Banks with a higher LR offer deposits at higher interest rates, thereby reducing the markdown vis-à-vis the DFR. The impact of the LR dampens during the period in which central bank reserves did not count towards the LR exposure measure (or the denominator of the ratio). It is stronger for G-SIBs, who need to comply with a G-SIB LR add-on on top of the minimum requirement applicable to all euro area banks. Moreover, the impact is weaker for CCP-cleared transactions compared to OTC trades, likely reflecting the possibility to net bilateral exposures if cleared via CCPs, which effectively allows banks to finance the respective gross money market exposures with a smaller share of Tier 1 capital.
This paper examines the great supply shock following the pandemic and the invasion of Ukraine, using a novel suite of supply indices. The suite has indices for the euro area total economy, euro area industries, sectors and countries. The suite also computes the contributions to the indices from supply drivers at origin, in transport, or at destination. The results from the suite show that the supply shock has had wide-spread effects, and that their dynamics have been industry-, sector- and country-specific. Supply conditions have been tighter for longer in the euro area than other areas, in automobile than digital and food industries, in services relative to other sectors, and in some countries than others. The drivers at home appear to account for an increasing share of the specificity at the end of the sample, and a broader data set helps to better capture these drivers. The results also confirm that the supply indices in the suite lag supply shocks and lead variables susceptible to the effects of supply shocks.
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