Euro Area Banks Research Articles

The national segmentation of euro area bank balance sheets during the financial crisis

This paper analyses bank balance sheet data in conjunction with macroeconomic and other financial variables. Our aim is to understand the nature of the instability in financial intermediation in the euro area during the recent financial crises. We define “large changes” as significant departures in the actual evolution of balance sheet variables during the crisis from their historical association with the business and financial cycles. In the course of the global 2008–2009 financial crisis, such “large changes” were features of the behaviour of cross-border inter-bank flows, both within the euro area and between the euro area and the rest of the world. By contrast, retail assets and liabilities, as well as inter-bank flows among banks of the same country, did not significantly deviate from historical regularities. Since the euro area sovereign crisis of 2011–2012, “large changes” have been more pervasive. In particular, a significant home bias in the sovereign bond market has emerged.

Euro Area Banks' Interest Rate Risk Exposure to Level, Slope and Curvature Swings in the Yield Curve

This paper investigates interest rate risk exposures of listed euro area banks which fall under the Single Supervisory Mechanism (SSM). We analyze the period 2005 to 2014, as it includes times of very low interest rates in which banks may have pursued a more risky maturity transformation strategy. First, we use the Bayesian DCC M-GARCH model to assess banks' stock price sensitivities to principal components of changes in the yield curve describing shifts in its level, slope and curvature. Second, we investigate how these sensitivities vary depending on bank-level characteristics (e.g., balance sheet composition, reliance on interest income). Our findings reveal that, on average, banks benefit from positive level shifts and steepening yield curves. Curvature changes affect banks' share prices as well, particularly in times of crises. Further, these sensitivities change in time and depend heavily on the bank's business model and balance sheet composition. Our analysis reveals that banks with larger balance sheets, higher capital ratios, higher parts of customer loans and lower parts of deposits are particularly sensitive to interest rate movements.

Sources of the Small Firm Financing Premium: Evidence from Euro Area Banks

The post-2008 period in the euro area was characterised by sharp dispersion in borrowing costs faced by firms, across both countries and firm types. This dispersion was an important manifestation of the financial fragmentation which hampered the smooth transmission of accommodative monetary policy. Using bank level data from 2007 to 2015, we directly measure the borrowing cost dispersion across firm types by calculating the difference in the interest rate charged by the same bank in the same month for loans to small and large firms (the Small Firm Financing Premium, SFFP). We assess the role played by both bank and macroeconomic factors in explaining the variation in the SFFP across countries and through time. We provide evidence that bank market power, sovereign bond holdings and balance sheet weaknesses led to disproportionate borrowing cost increases for small firms, and exacerbated the impact of a weak macroeconomy during this period.

The International Bank Lending Channel of Unconventional Monetary Policy

We use a confidential euro area bank-level data set of close to 250 banks to assess outward and inward spillovers of unconventional monetary policies on bank lending. We find that euro area banks increase lending to the rest of the world in response to non-standard ECB monetary policy accommodation. We also find strong evidence that euro area banks increase lending to the domestic non-financial private sector in response to accommodative unconventional monetary policy measures in the US. Inward and outward spillovers are substantially stronger for euro area banks which are liquidity constrained and which rely more on internal capital markets. This suggests that bank-specific supply effects, stemming from banks’ increased ability to lend following a central bank balance sheet expansion, are a major driver of monetary policy spillovers, providing strong support to the existence of an international bank lending channel that prevails at the effective lower bound.

The Transmission Mechanism of Credit Support Policies in the Euro Area

We use an original monthly dataset of 131 individual euro area banks to examine the effectiveness and transmission mechanism of the Eurosystem?s credit support policies since the start of the crisis. First, we show that these policies have indeed been succesful in stimulating the credit ?ow of banks to the private sector. Second, we ?nd support for the lending view of monetary transmission. Speci?cally, the policies have had a greater impact on loan supply of banks that are more constrained to obtain unsecured external funding, i.e. small banks (size effect), banks with less liquid balance sheets (liquidity effect), banks that depend more on wholesale funding (retail effect) and low-capitalized banks (capital effect). The role of bank capital is, however, ambiguous. Besides the above favorable direct e¤ect on loan supply, lower levels of bank capitalization at the same time mitigate the size, retail and liquidity effects of the policies. The drag on the other channels has even been dominant during tthe sample period, i.e. better capitalized banks have on average responded more to the credit support policies of the Eurosystem as a result of more favourable size, retail and liquidity effects.

Macro Stress Testing Euro Area Banks' Fees and Commissions

Macro Stress Testing Euro Area Banks' Fees and Commissions

The Systemic Implications of Bail-In: A Multi-Layered Network Approach

We present a tractable framework to assess the systemic implications of bail-in. To this end, we construct a multi-layered network model where each layer represents the securities cross holdings of a specific seniority among the largest euro area banking groups. On this basis, the bail-in of a bank can be simulated to identify the direct contagion risk to the other banks in the network. We find that there is no direct contagion to creditor banks. Spill-overs also tend to be small due to low levels of securities cross-holdings in the interbank network. We also quantify the impact of a bail-in on the different liability holders. In the baseline scenario, shareholders and subordinated creditors are always affected by the bail-in, senior unsecured creditors in 75% of the cases. Finally, we compute the effect of the bail-in on the network topology in each layer. We find that a bail-in significantly reshapes interbank linkages within specific seniority layers.

Drivers of Systemic Risk: Do National and European Perspectives Differ?

In Europe, the financial stability mandate generally rests at the national level. But there is an important exception. Since the establishment of the Banking Union in 2014, the European Central Bank (ECB) can impose stricter regulations than the national regulator. The precondition is that the ECB identifies systemic risks which are not adequately addressed by the macroprudential regulator at the national level. In this paper, we ask whether the drivers of systemic risk differ when applying a national versus a European perspective. We use market data for 80 listed euro-area banks to measure each bank's contribution to systemic risk (SRISK) at the national and the euro-area level. Our research delivers three main findings. First, on average, systemic risk increased during the financial crisis. The difference between systemic risk at the national and the euro-area level is not very large, but there is considerable heterogeneity across countries and banks. Second, an exploration of the drivers of systemic risk shows that a bank's contribution to systemic risk is positively related to its size and profitability. It decreases in a bank's share of loans to total assets. Third, the qualitative determinants of systemic risk are similar at the national and euro-area level, whereas the quantitative importance of some determinants differs.

Sectoral Sales of Government Securities During the ECB's Asset Purchase Programme

The transmission channels of quantitative easing programmes partly depend on which sectors sell the securities that the central bank purchases. This note examines the behaviour of the main euro area sectors in response to the public sector leg of the ECB’s extended asset purchase (APP) programme. For each sector we compare realised net flows of government securities to those that would have occurred in the absence of the programme. We find that most sales are attributable to sectors other than euro area banks, with non-euro area residents standing out as the most responsive sector. We discuss the implications of this finding for the transmission of the QE policy in the euro area.

Complexity and bank risk during the financial crisis

We construct a novel dataset to measure banks’ complexity and relate it to banks’ riskiness. The sample covers stock listed Euro area banks from 2007 to 2014. Bank stability is significantly affected by complexity, whereas the direction of the effect differs across complexity measures.

Bank Market Power and Monetary Policy Transmission

This paper examines empirically the role of bank market power as an internal factor influencing banks’ reaction in terms of lending and risk taking to monetary policy impulses. The analysis is carried out for the U.S. and euro-area banking sectors over the period 1997–2010. Market power is estimated at the bank-year level, using a method that allows the efficient estimation of marginal cost of banks also at the bank-year level. The findings show that banks with even moderate levels of market power are able to buffer the negative impact of a monetary policy change on bank loans and credit risk. This effect is somewhat more pronounced in the euro area compared with the United States. However, following the sub-prime mortgage crisis of 2007, the level of market power needed to shield bank loans and credit risk from the impact of a change in monetary policy increased substantially. This is clear evidence that the financial crisis reinforced the mechanisms of the bank lending and the risk-taking channels.

Financial crisis and international supervision: New evidence on the discretionary use of loan loss provisions at Euro Area commercial banks

We examine the discretionary use of loan loss provisions during the recent financial crisis, when Euro Area banks experienced not only a negative effect on the quality of their loans and a reduction in their profitability, but were also subject to a new form of stricter supervision, namely the EBA 2010 and 2011 stress test exercises. Overall, we find support for the only income smoothing hypothesis and we do not observe any difference in listed banks’ behavior when compared to unlisted banks. Banks subject to EBA stress tests had higher incentives to smooth income only for the 2011 EBA exercise, when a larger and more detailed set of information was released. This may suggest an unwilled side effect that accounting setters and banking regulators and supervisors should account for.

The Existential Search of the European Banking Authority

The European Banking Authority (EBA), an EU agency that works to ensure effective and consistent prudential regulation and supervision across the European banking sector as a whole, was established several years before the European Central Bank (ECB) became responsible for the prudential supervision of euro area banks. The ECB’s assumption of supervisory responsibilities has prompted searching questions about whether the EBA can continue to add value. The EBA could function as the bridge between the ECB and the supervisory authorities of the Member States that do not participate in European Banking Union and, as such, could help to preserve the integrity of the Single Market. This article locates the EBA’s prospects for success in this role more in its ability to manage co-existence than to direct the conduct of supervision. The inquiry is placed within lines of governance scholarship that have moved away from simple ‘command and control’ models to more complex frameworks. The inquiry is supported by detailed examination of the EBA’s performance in key areas, including rule-making, interpretation, and stress testing. Close study reveals that the EBA cannot be expected significantly to prove its value on the supervisory side through its use of formal intervention powers because these powers are an uneasy fit with its hybrid structure and governance arrangements. This finding does not mean that the EBA is incapacitated: rather, the fact that its effectiveness relies more on facilitation than on threats suggests that the EBA is actually well-equipped to make progress in its unifying role.

The World Economy: Forecast Summary

The world economy is expected to grow by 3.0 per cent in 2016, an unchanged forecast from the May Review. However, world growth in 2017 is revised down to 3.3 per cent from 3.5 per cent.A number of financial sector risks remain. Many large Euro Area banks are fragile, with the banking system in Italy particularly weak. This is likely to test the viability of the Single Rulebook covering financial services.Inflation is likely to be below target in the OECD economies in 2017. The European Central Bank (ECB) stands ready to ease monetary conditions while the Federal Reserve is likely to raise interest rates very gradually.

Determinants of non-performing loans: Evidence from Euro-area countries

The objective of this paper is to identify the main determinants of non-performing loans in the euro-area banking system for the period 1990Q1-2015Q2 using GMM estimations. On top of the bank- and country-specific variables proposed by the literature the roles of income tax and output gap are for the first time examined and found to be significant. Our results could be helpful when designing macro-prudential and fiscal policies.

Lenders on the Storm of Wholesale Funding Shocks: Saved by the Central Bank?

We provide empirical evidence on banks’ responses to shocks in wholesale funding, using data of 181 euro area banks over the period August 2007 to June 2013. Banks’ adjustments of loan volumes and lending rates in response to funding liquidity shocks are analysed in a panel VAR framework. The results show that shocks in the securities and interbank markets have significant effects on loan rates and credit supply, particularly of banks in stressed countries. The results also suggest that central bank liquidity has mitigated this effect most clearly on lending volumes. Lending to non-financial corporations is more sensitive to wholesale funding shocks than lending to households. Moreover, bank characteristics matter for monetary transmission: loan growth of large banks that are typically more dependent on wholesale funding and of banks with large exposure to government bonds shows relatively stronger responses to wholesale funding shocks.

Interaction between Monetary Policy and Bank Regulation: Lessons for the ECB

The European Central Bank (ECB) recently became engaged in macro-prudential policies and the micro-prudential supervision of the largest Euro area banks. These new tasks should help complete financial integration, and make the Euro area more resilient to financial instability risks. However, the multiplicity of mandates and instruments involves a risk of their inconsistency which could compromise the ECB’s core price-stability mandate as well as its independence. The experience of central banks during the recent global financial crisis confirms that such risks are not purely hypothetical.

Bank Interest Rate Setting in the Euro Area During the Great Recession

This paper sheds light on how recent financial tensions in the euro area were ultimately reflected in bank interest rate setting. We make two new contributions. First, we develop a theoretical model capturing banks financing and the rate setting choices. Banks in the model can finance themselves through deposits, on the money market and/or by issuing bonds. Second, we assemble a novel database and put our model to test. Our model extends that of Gambacorta (2004), as we formalise banks' decision to issue debt endogenously. Gambacorta's analysis was conducted for Italian banks and did not include the recent financial crisis. Instead, we focus our analysis on the Great Recession period (July 2007 to October 2014) and euro area banks. From a monetary policy perspective, both our theoretical model and the empirical results provide useful information on the impact of some of the measures introduced by the ECB during the financial crisis. First, the ECB introduced specific measures to alleviate tensions in money markets. To the extent that these measures fostered stability in money markets, and reduced the volatility of money market rates, this paper shows that they were also channelled to bank rates. Second, the ECB also introduced measures to address tensions in bond markets. Our results also show that having access to debt financing has important implications for bank rate setting.

The Euro Area Bank Lending Survey

The euro area bank lending survey (BLS) serves as an important tool in the analysis of bank lending conditions in the euro area and across euro area countries, providing otherwise unobservable qualitative information on bank loan demand and supply from/to euro area enterprises and households. Since its introduction in 2003, the BLS has received growing attention and has become of key importance for the analysis and assessment of bank lending conditions in the euro area and at the national level. In particular in the context of the financial crisis, the BLS was used to gather additional information on the impact of the crisis and of the ECB JEL Classification: E44, E5, G21

Lending-of-Last-Resort is as Lending-of-Last-Resort Does: Central Bank Liquidity Provision and Interbank Market Functioning in the Euro Area

This paper investigates the impact of ample liquidity provision by the European Central Bank on the functioning of the overnight unsecured interbank market from 2008 to 2014. We use novel data on interbank transactions derived from TARGET2, the main euro area payment system. To identify exogenous shocks to central bank liquidity, we exploit the timing of ECB liquidity operations and use a simple structural vector auto-regression framework. We argue that the ECB acted as a de-facto lender-of-last-resort to the euro area banking system and identify two main effects of central bank liquidity provision on interbank markets. First, central bank liquidity replaces the demand for liquidity in the interbank market, especially during the financial crisis (2008-2010). Second, it increases the supply of liquidity in the interbank market in stressed countries (Greece, Italy and Spain) during the sovereign debt crisis (2011-2013). JEL Classification: E58, F36, G01, G21