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Spyros Palligkinis
- 24 October 2024
- OCCASIONAL PAPER SERIES - No. 358Details
- Abstract
- In recent years, monetary policy and inflation considerations have been playing an increasingly important role for macroprudential authorities in their policy setting. This paper aims to assess the implications of high inflation and rising interest rates for macroprudential policy stance. The conceptual discussions and model-based analyses included in this paper reflect on the appropriate direction and impact of macroprudential policies at the different stages of financial and business cycles, given cross-country and banking system heterogeneities. In this context, a key objective of the paper is to assess to what extent the interaction between macroprudential and monetary policies differs, given the heterogeneity across euro area countries exposed to a homogenous monetary policy. While both policies are to a large extent complementary, monetary policy may generate relevant spillovers due to its impact on the financial cycle and, potentially, on financial stability. The paper argues that the recent focus of macroprudential policy on resilience, when banking sector conditions ensure no unwarranted procyclical effects of macroprudential tightening, suggests an expansion of the notion of “complementarity” with monetary policy. Specifically, with the build-up of resilience, macroprudential policy acts de facto countercyclically, supporting monetary policy in its pursuit of price stability. In this regard, the paper stresses that the source of the inflationary shock (supply versus demand side) and the monetary environment primarily affect the intensity, speed and extent of buffer build-up or release within each stage of the financial cycle while affecting borrower-based measures in their bindingness.
- JEL Code
- E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy
G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation
- 22 January 2021
- OCCASIONAL PAPER SERIES - No. 254Details
- Abstract
- The cost of equity for banks equates to the compensation that market participants demand for investing in and holding banks’ equity, and has important implications for the transmission of monetary policy and for financial stability. Notwithstanding its importance, the cost of equity is unobservable and therefore needs to be estimated. This occasional paper provides estimates of the cost of equity for listed and unlisted euro area banks using a three-step methodology. In the first step, ten different models are estimated. In the second step, the models’ results are combined applying an equal-weighting procedure. In the third step, the combined costs of equity for individual banks are aggregated at the euro area level and according to banks’ business models. The results suggest that, since the Great Financial Crisis of 2007-08, the premia that investors demand to compensate them for the risk they bear when financing banks’ equity has been persistently higher than the return on equity (ROE) generated by banks. We show that our estimates of cost of equity have plausible relationships to banks’ fundamentals. The cost of equity tends to be higher for banks that are riskier (higher non-performing loan ratios), less efficient (higher cost-to-income ratio), and with more unstable funding sources (higher relative reliance on interbank deposits). Finally, we use bank fundamentals to estimate the cost of equity for unlisted banks. In general, unlisted banks are found to have a somewhat lower cost of equity compared to listed banks, with business model characteristics accounting for part of the estimated difference.
- JEL Code
- G20 : Financial Economics→Financial Institutions and Services→General
G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy
G1 : Financial Economics→General Financial Markets
- 23 November 2020
- WORKING PAPER SERIES - No. 2491Details
- Abstract
- The assets under management of investment funds have soared in recent years, triggering a debate on their possible implications for financial stability. We contribute to this debate assessing the asset price impact of fire sales in a novel partial equilibrium model of euro area funds and banks calibrated over the period between 2008 and 2017. An initial shock to yields causes funds to sell assets to address investor redemptions, while both banks and funds sell assets to keep their leverage constant. These fire sales generate second-round price effects. We find that the potential losses due to the price impact of fire sales have decreased over time for the system. The contribution of funds to this impact is lower than that of banks. However, funds’ relative contribution has risen due to their increased assets under management and banks’ lower leverage and rebalancing towards loans. Should this trend continue, funds will become an increasingly important source of systemic risk.
- JEL Code
- G1 : Financial Economics→General Financial Markets
G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
G23 : Financial Economics→Financial Institutions and Services→Non-bank Financial Institutions, Financial Instruments, Institutional Investors
- 2 July 2019
- OCCASIONAL PAPER SERIES - No. 226Details
- Abstract
- This paper presents an approach to a macroprudential stress test for the euro area banking system, comprising the 91 largest euro area credit institutions across 19 countries. The approach involves modelling banks’ reactions to changing economic conditions. It also examines the effects of adverse scenarios on economies and the financial system as a whole by acknowledging a broad set of interactions and interdependencies between banks, other market participants, and the real economy. Our results highlight the importance of the starting level of bank capital, bank asset quality, and banks’ adjustments for the propagation of shocks to the financial sector and real economy.
- JEL Code
- E37 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Forecasting and Simulation: Models and Applications
E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies
G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation
- 12 October 2018
- WORKING PAPER SERIES - No. 2184Details
- Abstract
- We examine the role of trust in households’ decisions to hold a bank account and to switch to a new bank. We explore Italian household-level data that contain restricted information on the banks that the households are doing business with, as well as measures of trust in the households’ main bank and the banking sector. We find that households who distrust the banking sector are less likely to hold a bank account. Moreover, account holders are more likely to switch to a new main bank if they do not trust their current one. The estimated relationships persist over and above a range of socioeconomic variables.
- JEL Code
- G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation
D14 : Microeconomics→Household Behavior and Family Economics→Household Saving; Personal Finance - Network
- Household Finance and Consumption Network (HFCN)
- 24 May 2018
- FINANCIAL STABILITY REVIEW - BOXFinancial Stability Review Issue 1, 2018Details
- Abstract
- The market for leveraged loans is significant and recent developments may be generating financial stability risks.25 In both Europe and the United States, the markets for leveraged loans issued by non-financial corporates are about five times larger than high-yield bond markets. In 2017 US leveraged loan issuance rose well above its pre-crisis levels, with gross issuance, depending on methodology and data source, estimated at between €500 billion and €1 trillion, while EU issuance, estimated at between €120 billion and €320 billion, is around the previous highs recorded in 2007 and 2014.
- 24 May 2018
- FINANCIAL STABILITY REVIEW - BOXFinancial Stability Review Issue 1, 2018Details
- Abstract
- This box assesses potential financial stability concerns related to the rapidly growing market for crypto-assets. Crypto-assets (e.g. bitcoin, ether and ripple) are a new, innovative and high-risk digital asset class.21 Recent price developments and market interest in crypto-assets have given rise to concerns about potential financial stability implications. This box presents key facts on crypto-assets, concluding that they do not currently pose a material risk to financial stability in the euro area, but warrant careful monitoring.