ECB Decision Research Articles

Presentation of the SSM guide to the method of setting administrative pecuniary penalties

Article 18 of the SSM Regulation and Article 132 of the SSM Framework Regulation set out the basis for the ECB’s administrative pecuniary penalties’ regime. Under Article 18(1) and (7) of SSM Regulation, the ECB (via its decision making body, Governing Council) may, impose administrative pecuniary penalties on supervised entities, in case of an intentional or negligent breach of (i) a requirement established by directly-applicable acts of Union law where administrative pecuniary penalties are available to competent authorities or (ii) a requirement provided for in ECB regulations and decisions. Within the exercise of its power to impose such penalties, the ECB enjoys a wide margin of discretion within the limits set by SSM Regulation and Regulation (EC) No. 2532/98. In this respect, the penalties applied must meet the criteria set out in Article 18(3) of SSM Regulation: they must be therefore “effective, proportionate and dissuasive”. Furthermore, the ECB may not exceed the limits specified in Article 18(1) of SSM Regulation and Article 4a (1) (a) of Regulation (EC) No 2532/98. The ECB may impose penalties of up to 10% of a bank’s total annual turnover in the preceding business year, or twice the amount of profits gained or losses avoided as a result of the breach, where those can be determined, as set in Article 18 of the SSM Regulation.

Independence of the ECB and the ECJ during the Sovereign Debt Crisis: From Active Leadership to Rubber‐Stamping?

AbstractDuring the sovereign debt crisis the ECB and ECJ were constrained by two main factors: pressures from the Crisis Management Mechanism and the sovereign debt markets. Contributions claiming that the European Economic Constitution was transformed did not recognize that European policy makers managed to preserve its main features by reinforcing the role of the market. Other contributions, which claim that the sovereign debt crisis was solved only because of the active role assumed by independent institutions like the ECB and the ECJ, are also devoid of analysis of the underlying causes, which implicitly incentivized or hindered the responses from independent institutions. A unified synthetic approach could provide a better explanation for the trade‐offs faced by independent institutions during four peak moments of the sovereign debt crisis: the ECJ's decisions on the ESM and the OMT, and the ECB's decisions to start the OMT and emergency liquidity provision for Greek banks.

Weiss and EU Union Banking Law. A Test for the Fundamental Principles of the Treaty

The Weiss affair, which culminated in the BVerfG ruling of 5 May 2020, marks a break-up point in the long-standing dialogue between the BVerfG and the CJEU. The judges in Karlsruhe refused to follow the decision rendered by the CJUE in a preliminary ruling and admonished the German parliament and government to “work towards a proportionality analysis by the ECB” in relation to the so called “Public Sector Purchase Programme”. This paper claims that the arguments employed by the BVerfG in the Weiss judgement are quite similar to those employed in the Gauweiler and Landeskreditbank-Banking Union cases and that the Weiss judgment must therefore by read in conjunction with those precedents. Considering that background, it will be argued that the construction of the principles employed by the BVerfG for the judicial review of the EU acts have not undergone any substantial changes over time. The different outcome in the Weiss judgement rather depends on the fact that, in Weiss, the BVerfG believes that insufficient elements of explanation and justification were provided by the ECB and the CJEU. Therefore, the problem of the Weiss case ends up being a procedural question of statement of reasons. Eventually, it will be pointed out that these judgements show that a common standard for the judicial review of the ECB’s decision exists, although the intensity of the review still varies depending on whether the ECB decision concerns monetary policy or banking supervision and resolution.

Karlsruhe über alles? The Reasoning On The Principle Of Proportionality In The Judgment Of 5 May 2020 Of The German BVerfG and Its Consequences

The judgment of 5 May 2020 of the Zweiter Senat of the Bundesverfassungsgericht, to the extent that it expresses the German constitutional judge's claim to assess the legality of the ECB's decisions on the basis of the principles of attribution and proportionality, is more than questionable in point of law. Furthermore, it is extremely dangerous: and not only because it implies that the Zweiter Senat ultimately refuses, on the basis of the democratic principle and the control of the Union's competences, the uniformity of application of EU law. But also because it appears as the glaring demonstration of a form of “cultural bullying” many complain about, and which emerges in a crystal clear way in the reasoning carried out on proportionality. This is an attitude which, in the contingency caused by the COVID-19 emergency, could have truly tragic consequences for the future of the European Union.

Measuring Monetary Policy with Residual Sign Restrictions at Known Shock Dates

We propose a novel identification strategy to measure monetary policy in a structural VAR. It is based exclusively on known past policy shocks, which are uncovered from high-frequency data, and does not rely on any theoretical a-priori restrictions. Our empirical analysis for the euro area reveals that interest rate decisions of the ECB surprised financial markets at least fifteen times since 1999. This information is used to restrict the sign and magnitude of the structural residuals of the policy rule equation at these shock dates accordingly. In spite of its utmost agnostic nature, this approach achieves strong identification, suggesting that unexpected ECB decisions have an immediate impact on the short-term money market rate, the narrow money stock, commodity prices, consumer prices and the Euro-Dollar exchange rate, and that real output responds gradually. Our close to assumption-free approach obtains as an outcome what traditional sign restrictions on impulse responses impose as an assumption.

The Unbearable Heaviness of the German Constitutional Judge on the Judgment of the Second Chamber of the German Federal Constitutional Court of 5 May 2020 Concerning the European Central Bank’s PSPP Programme

The reasoning of the German Constitutional Court judges to prohibit the Bundesbank from buying Sate securities on the secondary market if the ECB does not demonstrate within three months the proportionality of its decisions under the PSPP programme is not sustainable. Instead, the judges, who demonstrate unfounded intellectual arrogance in their claim to interpret EU law, make manifest errors in applying the principle of proportionality to the delimitation of competences between the Union and the Member States. They also make methodological errors in their application of the principle of proportionality to ECB decisions, while highlighting their prejudices in the field of monetary and economic policy. This paper has been published online on https://ceridap.eu/the-unbearable-heaviness-of-the-german-constitutional-judge-on-the-judgment-of-the-second-chamber-of-the-german-federal-constitutional-court-of-5-may-2020-concerning-the-european-central-banks-pspp/ The French version is available on http://rivista.eurojus.it/wp-content/uploads/pdf/Ziller-CorteCost-tedesca-PSPP.pdf The Italian versio is available on https://www.aisdue.eu/jacques-ziller-linsopportabile-pesantezza-del-giudice-costituzionale-tedesco-2/

The Monetary Policy of the ECB: Caring for the Weakest Links

SummaryThis paper investigates the extent to which national economic conditions matter in the ECB's decision process. We employ various decision models to aggregate counterfactual national interest rates based on Taylor rule estimates and test which of the resulting interest paths fits best to the actual monetary policy in the euro area. As a novel feature, we introduce decision models where countries that fare economically worse than the euro area average obtain a higher weight in the decision process. Our results suggest that these models explain actual ECB policy better than GDP‐based bargaining models that have been highlighted in the previous literature. Thus, the ECB seems to have emphasized the needs of countries that face an economic crisis disproportionately highly even before the advent of the financial crisis.

The eurozone (expected) inflation: An option's eyes view

We estimate inflation risk-neutral densities (RNDs) in the euro area, using inflation swaps and caps/floors options, and introduce a parsimonious approach to jointly estimate the RNDs across horizons. Thus, we obtain daily implicit RNDs for forward measures, such as the 5-year-on-5-year inflation rate, which, although not directly traded in the market, is a key reference for monetary policy. Then, we discuss several indicators derived from the information content of those historical RNDs that are relevant for policy makers, and compare them in light of the ECB's decisions and communication since 2009. Specifically, we study the evolution of tail risks (associated with deflation and high inflation), the balance of inflation risks, risk aversion, and how forward inflation rates react to the ECB's non-conventional monetary policies (Longer Term Refinancing Operations, LTRO; Securities Market Programme, SMP; Asset Purchase Programme, APP; and its variants and extensions).

Lower for longer: The case of the ECB

Research has suggested that monetary policy acts asymmetrically near zero interest rates. We match past ECB decisions with a simple forecast-based reaction function. The policy easing that started in 2013 has led to a deviation indicating a “lower for longer” approach.

The Administrative and Judicial Review of Decisions of the ECB in the Supervisory Field

The paper examines the administrative and judicial review of the ECB decisions in the banking supervisory field. In the first part the core characteristics of the functioning of the internal administrative review carried out by the Administrative Board of Review (ABoR) are described, and the paper highlights the differences between the ABoR and similar bodies that are already in place for reviewing decisions of some European agencies. In the second part the paper explores the specific features of the judicial review of ECB decisions in this field.

Country Shocks, Monetary Policy Expectations and ECB Decisions. A Dynamic Non-Linear Approach

Previous studies have shown that the effectiveness of monetary policy depends, to a large extent, on the market expectations of its future actions. This paper proposes an econometric framework to address the effect of the current state of the economy on monetary policy expectations. Specifically, we study the effect of contractionary (or expansionary) demand (or supply) shocks hitting the euro area countries on the expectations of the ECB’s monetary policy in two stages. In the first stage, we construct indexes of real activity and inflation dynamics for each country, based on soft and hard indicators. In the second stage, we use those indexes to provide assessments on the type of aggregate shock hitting each country and assess its effect on monetary policy expectations at different horizons. Our results indicate that expectations are responsive to aggregate contractionary shocks, but not to expansionary shocks. Particularly, contractionary demand shocks have a negative effect on short term monetary policy expectations, while contractionary supply shocks have negative effect on medium and long term expectations. Moreover, shocks to different economies do not have significantly different effects on expectations, although some differences across countries arise.

To bail out or not to bail out? Crisis politics, credibility, and default risk in the Eurozone

We examine the impact of signals regarding the Eurozone’s bail-out commitment on government bond spreads in the Eurozone’s periphery, analysing the effect of positive, negative and mixed statements and decisions by the EU, the ECB and Germany. We construct a dataset of relevant events, and estimate their effects using distributed lag models, providing a number of robustness checks. Our main argument is that investors react to statements from credible actors, but largely ignore statements from less-credible actors, awaiting actual decisions. Accordingly, positive statements from the ECB have clear effects, while those from Germany and the EU do not. Furthermore, ECB decisions appear to be anticipated and thus have no short-term effects, while we find clear effects of positive decisions by Germany and the EU.

Shifts in Competences between Member States and the EU in the New Supervisory System for Credit Institutions and their Consequences for Judicial Protection

The Single Supervisory Mechanism (SSM) is a striking example of the tendency within the EU to transfer decisive, regulatory and enforcement powers to the EU level. The SSM involves a complex system of mixed administration in order to ensure effective banking supervision within the Eurozone. Whereas such mixed administration might be necessary in order to achieve effective cross-border supervision, it also creates legal uncertainties due to the different legal orders involved. In this paper, the effect of the mixed administration on formal and substantive judicial protection is discussed. The paper analyses the right of access to the courts in the case of common procedures and certain ECB decisions. Furthermore, it is examined whether the ECB and national competent authorities have adequate powers to carry out supervision within the SSM. Lastly, the paper pursues the issues with regard to substantive judicial protection in greater depth, in particular the right of respect for the home and the rights of defence.

Behind closed doors: Revealing the ECB's decision rule

This paper aims at discovering the decision rule the Governing Council of the ECB uses to set interest rates. We construct a Taylor rule for each member of the council and for the euro area as a whole, and aggregate the interest rates they produce using several classes of decision-making mechanisms: chairman dominance, bargaining, consensus, voting, and voting with a chairman. We test alternative scenarios in which individual members of the council pursue either a national or a federal objective. We then compare the interest-rate path predicted by each scenario with the observed euro area's interest rate. We find that scenarios in which all members of the Governing Council are assumed to pursue Euro-area-wide objectives are dominated by scenarios in which decisions are made collectively by a council consisting of members pursuing national objectives. The best-performing scenario is the one in which individual members of the Governing Council follow national objectives, bargain over the interest rate, and their weights are based on their country's share of the zone's GDP.

New Measures of Monetary Policy Surprises and Jumps in Interest Rates

The paper proposes new measures of unexpected monetary decisions to characterise two important dimensions of the European Central Bank's monetary policy. Our new surprise measures outperform compellingly the traditionally used monetary shocks in explaining daily variation of euro area interest rates in the standard event-study framework. We also build an econometric model which disentangles diffusive information arrivals from jumps, and study the extent to which the ECB's decisions caused jumps in euro area interest rates. The new surprise variables prevail again in most cases upon the traditional surprises. Jumps play a great role in the variation of interest rates and the ECB induced several jumps with its decisions, especially in the first half of the sample, but its predictability has improved considerably later. We extend our analysis to the period of the recent financial turmoil and find that, although the market-based measures become somewhat distorted due to money market tensions, our model still provides a meaningful characterisation of market rates and an interesting insight into interest rate behaviour during the crisis.

ECB Policy Making and the Financial Crisis

We estimate Taylor rule models for the euro area using Consensus Economics forecasts of inflation and output growth for the period 1998.6-2010.8. We first examine whether the recent financial crisis has affected ECB policies. Our results indicate that the ECB puts stronger emphasis on maintaining price stability than earlier point estimates suggested. Next, we analyse whether economic developments in individual euro area countries affect ECB decisions. Despite the diverging economic developments in the countries in the euro area, notably during the recent financial crisis, we do not find support for the view that policy decisions have been influenced by regional developments.

Forward Rates, Monetary Policy and the Economic Cycle

The short end of the yield curve incorporates essential pieces of information to forecast the next decisions of Central Banks, but in a biased manner. I therefore propose a new method to forecast the Fed and the ECB decision rate by correcting the swap rates for their cyclical economic premium, using an affine term structure model. The corrected yields offer a higher out-of-sample forecasting power than the yields themselves. They also deliver forecast that are either comparable or better than those obtained with a Factor Augmented VAR, underlying the fact that yields are likely to contain at least as much information regarding monetary policy as in a pure economic dataset.

L’impact des signaux de politique monétaire sur la rentabilité, la volatilité et la prime de risque : le cas du marché boursier français

The aim of this paper is to investigate the response of the French stock market to US and European central banks’ monetary policy announcements, by distinguishing between different financial cycles. To this end, we rely on both the event-study methodology and the International Capital Asset Pricing theory, and decompose the monetary policy announcements into anticipated and unanticipated components. We show that the response of the French stock market is asymmetric. The impact of ECB decisions - which generally aim at limiting the inflation risk - is stronger during high financial states, whereas, the effect of US announcements-centred on the management of the global risk-is stronger in slump periods.

Is the impact of the ECB Monetary Policy on EMU stock market returns asymmetric?

This paper explore, using Markov switching models, the dynamic relationship between stock market returns and the monetary policy innovation in 11 EUM countries and, for five of them, at each single industry portfolios. It also investigates the possibility of asymmetric effects of the ECB decision when stock markets are not fully integrated. The findings indicate that there is statistically significant relationship between policy innovations and stock markets returns. The findings from country size and industry portfolios indicate that monetary policy has larger asymmetric effect on the industry portfolios of big countries (Italy, France and Germany) compared to the same sectors of small countries (Netherlands and Belgium).

Running an enlarged euro-zone – reforming the European Central Bank: Efficiency, legitimacy and national economic interest

ABSTRACT This article analyses the December 2002 reform of decision making in the European Central Bank's (ECB) Governing Council in terms of national economy size reflected in the bargaining power of the ECB Governing Council members and member state macroeconomic interest. The National Central Bank (NCB) governors of the largest member states were concerned about the impact upon ECB monetary policy making of equal representation being extended to future member states. By eliminating equal voting rights, the reform distorts the meaning of equality, representativeness and ad personam participation as guiding principles of ECB decision making, moving from equal member state representation towards an emphasis placed upon Euro-zone economy representation. At the same time, two possible concerns watered down efforts to modify ‘representativeness’ and prevent enlargement contributing to inefficiency in Governing Council decision making. First, the current smaller member state NCB governors opposed a significant reduction of their ‘voice’ in ECB monetary policy making. Second, legitimacy concerns ensured persistent support for the maintenance of a large and ‘decentralised’ Governing Council.