Determinants of the Eurosystem's Central Banks Provisions

Abstract

AbstractCentral bank provisions may be used as a measure of the perceived risk of the balance sheet composition by a central bank. We identify three possible sources that may change the size of the provisions. These are: The length of the balance sheet, the central bank revenues, and measures of fiscal stress. Using data of the 11 founding members of the Eurosystem for the years 1999–2015, we are able to test each of the three determinants. We find that provisions are increased with the size of the balance sheet especially in the recent financial crisis. Moreover, provisions are increased at the cost of lower central bank revenues. While this holds for the pre‐crisis period this relationship seems to be less pronounced in the crisis period probably because of the more active collateral policy. Finally, central banks do not tend to lower provisions because of fiscal tensions. This is even more true in the crisis period.