Euro Area Banks Research Articles

The performance of the euro area banking system: the pandemic in perspective

AbstractThis research explores the performance of the euro area banking system between 2002:Q3 and 2021:Q1 using banks’ return on assets as a gauge. It finds that despite the Covid-19 pandemic, the banking sector’s performance has not been negatively affected in a statistically significant way. In addition, it shows that while the global financial crisis and the sovereign crisis both introduced significant uncertainty in the performance of the banking system in the euro area, such uncertainty has not been replicated during the worst part of the Covid-19 pandemic. From a purely technical viewpoint, uncertainty in the banking system’s performance in the euro area highlights the relevance of using methodological approaches that control for the endogeneity of most bank-specific determinants of return on assets and that are robust to changes in unconditional variance due to regime changes, to future random shocks or both.

Extracting implied volatilities from bank bonds

In this work, we explore the information content of senior, subordinated and additional tier 1 (or contingent convertible) bonds issued by euro-area banks. We analyze both the asset volatility implied in senior and subordinated bonds and credit default swap market spreads, and the common equity tier 1 (CET1) ratio volatility extracted from additional tier 1 bonds secondary market spreads in the period from December 31, 2012 to March 31, 2021. Furthermore, we jointly consider the following important bank variables: asset, equity and CET1 ratio volatilities. In doing so, we can obtain the market view on credit spreads, banks balance sheet and capital ratio dynamics on a daily basis even if bank data are released quarterly. The approach can be used to monitor the risk of each bank, as perceived by the market, and to investigate banking fragility at a stand-alone or at a country level. Finally, we compare our estimated equity implied volatilities with the volatilities implied in equity option quotes and we show that this indicator depends on the model and the financial instruments considered in the calibration.

Situación macrofinanciera de Turquía

RationaleTürkiye is identified annually as a material country for the Spanish and euro area banking systems. Moreover, both are linked to Türkiye by major trade and financial flows. It is therefore important to monitor the country’s macro-financial situation and main weaknesses.Takeaways•The Turkish economy has continued to post very high, albeit slowing, inflation rates since late 2022, and economic activity has slowed, against a background of sizeable external financing needs, foreign currency debt and low international reserves.•Fiscal policy kept the country’s accounts healthy in 2022, although a significant downturn is expected in 2023. In terms of monetary policy, the Central Bank of the Republic of Türkiye cut the policy interest rate again in February, with the real interest rate standing at -35.2% in April.•The banking system remains healthy, although some indicators have worsened. Furthermore, to keep credit growth in check and encourage more widespread use of the lira in the financial system, the macroprudential and regulatory measures introduced in 2021 and 2022 remained in place and were strengthened.

Non-significant in life but significant in death: Spillover effects to euro area banks from the SVB fallout

Did Silicon Valley Bank (SVB) fallout spillover to the euro area banking sector? We find that euro area banks’ cumulative abnormal returns declined by about 10% on average after the collapse of SVB. Surprisingly, we also find that investors did not react to euro area banks sharing similar vulnerabilities as SVB, such as lower liquidity and less stable funding sources. Instead, they were more concerned about the possible negative repercussions on banks’ balance sheets coming from the pace of the current monetary policy tightening.

Monetary policy transmission through banks when liquidity is abundant but unevenly distributed

We study how the distribution of excess liquidity amongst banks alters the transmission of policy rate hikes to bank interest rates. Using a difference-in-difference approach, we measure the difference in the pricing behavior of the 19 euro-area banking systems depending on their excess liquidity holdings when the European Central Bank’s Deposit Facility Rate (DFR) increases. According to our estimations, every 100 bp increase in the DFR, banking systems holding one additional standard deviation of excess liquidity apply a 1.9 bp higher interest rate on new checking accounts and between 3.2 and 6.8 bp lower interest rates on new loans.

Situación macrofinanciera de Turquía

Rationale Turkey is identified annually as a material country for the Spanish and euro area banking systems. Moreover, Turkey and Spain are linked by major trade and financial flows. It is therefore important to monitor the country’s macro-financial situation and main weaknesses. Takeaways The Turkish economy continued to post very high inflation rates at end-2022, while economic activity began to slow in Q3, following its strong previous momentum. All of this in the context of sizeable external financing needs, foreign currency debt and low international reserves. Fiscal policy performed better than expected, and the country’s accounts remain healthy. In terms of monetary policy, in August the Turkish central bank resumed the process of reducing the policy interest rate initiated a year earlier, with the real interest rate standing at -75.5% in November. Nonetheless, macroprudential and regulatory measures were implemented to keep credit growth in check and encourage only lending to certain productive sectors. Meanwhile, the banking sector’s balance sheets remain relatively healthy, although some indicators have worsened.

Euro Area Banks’ Market Power, Lending Channel and Stability: The Effects of Negative Policy Rates

Euro Area Banks’ Market Power, Lending Channel and Stability: The Effects of Negative Policy Rates

Evaluating the Impact of Dividend Restrictions on Euro Area Bank Market Values

Evaluating the Impact of Dividend Restrictions on Euro Area Bank Market Values

Curse and Blessing: The Effect of the Dividend Ban on Euro Area Bank Valuations and Syndicated Lending

Curse and Blessing: The Effect of the Dividend Ban on Euro Area Bank Valuations and Syndicated Lending

Estimating Systemic Risk for Non-Listed Euro-Area Banks

Estimating Systemic Risk for Non-Listed Euro-Area Banks

Are monetary policy shocks causal to bank health? Evidence from the euro area

Despite considerable efforts of the European Central Bank (ECB) to support bank intermediation after the 2008 financial crisis, the recovery of euro area banks remained incomplete. Although many studies indicate that central banks can influence the stock prices of firms through their policy actions and communication, a knowledge gap exists as to whether the ECB's monetary policy can influence bank health. Through a high-frequency identification approach, this study reveals that the causal effect of conventional monetary policy action and communication by the ECB on bank stock prices differed over time, whereas its influence on bank financing costs was robust. This study provides new evidence showing that information effects related to policy easing surprises in the aftermath of the 2008 financial crisis hampered the ECB efforts to improve bank health and that its Odyssean communication signals (related to forward-looking announcements of policy easing) supported bank health during this phase. Local projections suggest that the response of banks to monetary policy shocks displayed some persistence, where ECB policy surprises and communications that shifted up (down) the yield curve were normally positive (negative) for bank health. The findings solicit a new perspective when assessing the influence of the ECB's monetary policy measures on euro area banks.

Is bank resilience affected by unconventional monetary policy in the Euro area?

This paper examines whether euro area unconventional monetary policies have influenced the overall resilience of the banking industry. We proxy bank resilience with a Z-score measure that reflects the size of banks’ loss-absorbing buffers. We employ two alternative strategies to construct instruments that allow us to identify the effect of monetary policy in this context. First, within a two-stage least squares framework, we rely on ECB balance sheet data to capture the effect of the broad array of programmes used by the ECB to implement quantitative easing, while we control for the effect of conventional and negative, or very low, interest rate policy. Second, relying on high-frequency identification methods on narrow time windows around ECB policy announcements, we compute three factors reflecting different types of monetary policy surprises and examine their impact on bank resilience. With both methodologies we find that loosening the monetary policy stance through UMPs had an overall positive impact on euro-area banks’ shock absorbing buffers. The first approach, the only one that allows us to consider the level of interest rates, suggests that such effect is moderated when policy rates approach and breach the nominal zero-lower bound. The second strategy, which allows us to analyse forward guidance surprises, indicates that looser forward guidance has a positive impact on resilience. Balance sheet easing policies also seem to enhance resilience in the full sample, according to both strategies. The results are heterogeneous across subsamples, with contrasts between banks headquartered in core countries of the euro area vis-à-vis banks in the periphery of the euro-area. The contours of this heterogeneity differ in both methodologies and shows that balance sheet easing policies is detrimental for euro-area periphery banks. We also study the differential impact of monetary policy tools on banks, depending on their specific business model and their strength (i.e., their position within the distribution of loss-absorbing buffers); and the timing and persistence of monetary policy effects, which also varies with policy tools and jurisdictions.

From modelling to forecasting bank profitability: Evidence from euro area banks

Building on the established bank profitability literature, this paper develops models encompassing macroeconomic and banking variables and assesses their forecasting performance. Understanding factors underpinning bank profitability is important for the design and implementation of stress tests, which have become one of the integral elements of bank risk management frameworks and capital planning. Results from the data for euro area banks suggest that particular attention may need to be paid to quantifying and managing interest rate risk. In addition, with the identified relevance of capital position and credit risk, additional efforts may be needed to monitor the ensuing risks. Results also suggest that models relying solely on macroeconomic variables do not perform significantly worse in terms of forecasting accuracy compared to richer specifications and can beat the autoregressive models over the medium term. Bearing in mind the costs associated with development, validation, and maintenance of more complex models underpinned by richer specifications, the results point to the potential use of presented or similar models by regulators, supervisors, and banks in their respective roles in the context of supervisory review and evaluation processes.

Bank capital requirement shocks: A narrative perspective

We provide new estimates of the impact of shocks to bank capital requirements on lending supply and macroeconomic activity based on a Bayesian VAR estimated on Italian data and identified combining sign and narrative restrictions. Narrative restrictions are based on the EBA 2011 Stress Test (ST) and the ECB 2014 Comprehensive Assessment (CA) and are corroborated by evidence from the Euro Area Bank Lending Survey. IRFs show that shocks to required capital persistently reduce R.W.A. and loan supply and lead to a temporary decline in GDP. Based on historical decomposition, the ST and the CA increased banks’ Tier 1 ratio by 40 bps and determined a contraction in loan supply and GDP after two years of up to 1.5% and 0.5%, respectively. Results are robust to using alternative narrative restrictions and hold also when controlling for market pressure during the sovereign debt crisis and for global shocks to bank capitalization.

Euro area banking and monetary policy shocks in the QE era

This paper assesses the effects of monetary policy shocks on the macroeconomy and the euro area banking sector after the global financial crisis. First, financial risk-return indicators of the banking sector based on a compound option-based structural credit risk model are embedded in a large macro-financial quarterly database covering the period 2008Q4–2019Q4. Second, a SFAVAR identifies and estimates the shocks’ responses relating them to the endogenous build-up of banks’ vulnerabilities which are consistent with the internally coherent structure of the credit risk model. By introducing structure in the understanding of banks’ asset-liability management behavior following monetary policy shocks, the research strategy contributes to disentangling results that are often mixed in the empirical literature. The study finds that unconventional monetary policy, in particular the Asset Purchase Program of the European Central Bank, seems to have been more successful than conventional monetary policy in raising output and inflation. The desired boost to bank lending has been muted and loan cyclicality has varied across countries and loan types. The performance of the banking sector following monetary policy shocks can be characterized by a drop in expected return on equity and assets, a relaxation of lending conditions and increased correlation between banks’ assets return and the market return, a mechanism pointing to enhanced risk-taking. While banks’ probabilities of default fall following monetary policy shocks, the price of risk increases. Banks’ net worth rises via higher market capitalization and implied assets value together with lower volatility, despite often incurring more debt. Risk-taking in the banking sector may pose a risk to financial stability, especially if its effects on banks’ vulnerability spread and increase systemic risk. The unintended endogenous build-up of macro-financial vulnerabilities may need to become part of monetary policymaking.

Do banks fuel climate change?

Do climate-oriented regulatory policies affect the flow of credit towards polluting firms? We match loan-level data to firm-level greenhouse gas emissions to assess the impact of the Paris Agreement. We find that, following this agreement, European banks reallocated credit away from polluting firms in relative terms. Specifically, euro area banks’ loan share to more polluting firms decreased by about 3percentage points compared to less polluting (or “green”) firms after the 2015 Paris Agreement (COP21). This result is stronger for banks that are well capitalized, have lower credit quality, and are less profitable.

Playing by the rules: Do the post‐crisis regulations influence banks' funding model in the EU?

AbstractIn the article, we assess the impact of the regulatory framework on banks' funding models in the European Union in the period 2011–2018. We put particular emphasis on the capital requirements captured by two different types of regulatory measures: individual and sectoral. Moreover, we include a country‐level regulatory variable to assess if the overall lawmaking conditions impact banks' funding models. Our estimates indicate that after the Global Financial Crisis, all regulatory measures had a significant impact on the deposits to total assets ratio, which we assume to be the best proxy for banks' funding models. Having divided the sample of the EU banks into four subsamples according to their specialization (i.e. commercial, cooperative, savings, and investment banks), we identified significant differences in strength and direction of regulatory variables' impact on banks' funding model within selected subsamples. In particular, due to the specific nature of investment banks, prudential regulations contribute to a change in the funding model towards safer deposit funding. Moreover, our results indicate that in the case of the non‐euro area banking sector, the regulatory environment measured by the regulatory quality index has an adverse impact on the Deposits to total assets ratio in comparison with both the entire sample as well as the euro area banking sector.

European bank profitability: The great convergence?

Have euro area banks restored viability in the post-crisis era? We investigate profitability convergence for euro area banks over the period 2009–2020 using the concepts of β and σ convergence and a club clustering algorithm. Our evidence is consistent with a slow catch up of the weaker banks, but we also document that better performing banks converge towards a lower profit level, suggesting a ‘great convergence’ towards the middle. Moreover, we identify a cluster of banks exhibiting dismal profit dynamics, characterized by high cost-to-income and non-performing loans ratios, indicating the need for a restructuring of part of the euro area banking sector.

Euro area banks' interest rate risk exposure to level, slope and curvature swings in the yield curve

We investigate the interest rate risk exposures of euro area banks during times of crises and very low interest rates. First, we assess sensitivities of banks' stock prices to changes in the level, slope and curvature of the yield curve using the Bayesian DCC M-GARCH model. Our findings reveal that stock price sensitivities change over time and that, on average, banks benefit from increases in the level, slope and curvature of the yield curve. Second, we observe that banks with higher capital ratios, more customer lending and less deposit financing are particularly sensitive to interest rate movements.

CAN HIGH-TECH INVESTMENTS IMPROVE BANKING EFFICIENCY?

This study examines the high-tech investment activity of the banking system in the period following the Global Financial Crisis, from 2009 to 2020. To gain an understanding of the effect of the increasing interest of banks in high-tech investments, this research provides evidence of the relationship between the level of efficiency achieved by Euro Area banking groups and their high-tech investment aptitude. This paper is purely exploratory given that, to the best of our knowledge, it is one of the first to address this specific research question. We analyze in detail the association between bank efficiency (measured using a stochastic frontier approach) and different high-tech investment indicators, as well as the direction of this connection to provide an explanation for the relationship. We find a stable and overall significant relationship between banks’ efficiency and their high-tech investment aptitude. Moreover, we find that only medium efficiency banking groups that adopt a more diversified investment acquisition strategy have a positive relationship with high-tech investment aptitude; otherwise, the relationship between bank efficiency and high-tech investment indicators seems to be negative. Regulators should be aware of this bank acceleration in the enhancement of high-tech investment because it can reduce the stability of banking groups and because an increase in intangibles assets (e.g. patents) could also be motivated by an interest rather than an earnings management strategy.