content here is the anonymously transparent proxied version of ecb.europa.eu   X
European Central Bank - eurosystem
Search Options
Home Media Explainers Research & Publications Statistics Monetary Policy The €uro Payments & Markets Careers
Suggestions
Sort by

Benjamin Mosk

16 November 2022
FINANCIAL STABILITY REVIEW - BOX
Financial Stability Review Issue 2, 2022
Details
Abstract
In many previous editions of the FSR, we have warned about the risk of a “disorderly correction in asset markets”. In the most recent publication, we argued that higher than expected inflation can increase this risk and provide some arguments to substantiate this claim. However, with the inflation remaining a key topic, our “warning” needs to be better substantiated and more specific. The analytics in the box do exactly this. In both 2021 2022, the 12-month correlation between daily US bond and stock returns has crossed into positive territory. The assumption of having a low correlation between stock and bond returns has historically been one of the bedrocks of strategic asset allocation (e.g. the “standard” 60-40 split). The resulting diversification benefits, however, are contingent on the low correlation between asset classes. Higher or unstable cross-asset correlations complicate portfolio optimisation and risk management, and could also destabilise bond markets, where volatility is already elevated. We discuss the challenges that this poses for portfolio management and the implications for financial stability. Then we go on to investigate the direct and indirect drivers of the stock-bond correlation. We find empirical evidence that the current higher correlation, with its associated financial stability risks, may be driven by the present high inflation environment and related monetary policy expectations.
JEL Code
C21 : Mathematical and Quantitative Methods→Single Equation Models, Single Variables→Cross-Sectional Models, Spatial Models, Treatment Effect Models, Quantile Regressions
C58 : Mathematical and Quantitative Methods→Econometric Modeling→Financial Econometrics
E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy
F65 : International Economics→Economic Impacts of Globalization→Finance
G11 : Financial Economics→General Financial Markets→Portfolio Choice, Investment Decisions
G12 : Financial Economics→General Financial Markets→Asset Pricing, Trading Volume, Bond Interest Rates
16 November 2022
FINANCIAL STABILITY REVIEW - BOX
Financial Stability Review Issue 2, 2022
Details
Abstract
When financial fragmentation becomes a self-reinforcing dynamic, it can present a risk to financial stability. Moreover, when markets are fragmented, differences in risk premia can emerge beyond those that can be explained by an asset’s fundamentals, and some market segments may display different dynamics from others. This box constructs an indicator of such divergent dynamics for euro area bond markets, assesses the resilience of bond markets under different regimes of this indicator and discusses financial stability risks associated with financial fragmentation.
JEL Code
G01 : Financial Economics→General→Financial Crises
G15 : Financial Economics→General Financial Markets→International Financial Markets
F15 : International Economics→Trade→Economic Integration
F65 : International Economics→Economic Impacts of Globalization→Finance
G12 : Financial Economics→General Financial Markets→Asset Pricing, Trading Volume, Bond Interest Rates
25 May 2022
FINANCIAL STABILITY REVIEW - BOX
Financial Stability Review Issue 1, 2022
Details
Abstract
Global inflation rates have increased substantially over the past year, driven by high energy prices, supply chain constraints and a rebound in demand. Inflation in the euro area is expected to remain elevated throughout 2022. Since the end of 2020, professional forecasters have repeatedly revised up their inflation projections as outturns surprised to the upside. Future developments in terms of energy prices and supply bottlenecks present upside risks to inflation. This box assesses the channels through which higher than expected inflation could affect financial stability, taking into account the effects for governments, firms, households and financial markets. All else being equal, higher inflation reduces the real value of outstanding debt but also for real incomes. At the same time, cost for expenses and debt servicing costs are rising. The combination of higher inflation and subdued growth can exacerbate the negative impact of inflation on financial stability amid limited scope for offsetting income increases.
JEL Code
E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation
E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies
E64 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Incomes Policy, Price Policy
G12 : Financial Economics→General Financial Markets→Asset Pricing, Trading Volume, Bond Interest Rates
25 May 2022
FINANCIAL STABILITY REVIEW - BOX
Financial Stability Review Issue 1, 2022
Details
Abstract
By the end of 2021, the aggregate profitability and debt positions of euro area non-financial corporations (NFCs) had recovered to pre-pandemic levels. However, these aggregate developments mask considerable heterogeneity among firms; smaller firms and firms with business models heavily impacted by the COVID-19 pandemic had not fully recovered. Against this backdrop, this box uses firm-level data for euro area NFCs to identify vulnerable firms based on the Altman Z-score, a measure of insolvency risk that uses five balance sheet and income statement ratios and their joint importance. It then matches bank and sovereign exposures to consider related risks associated with the sovereign-bank-corporate nexus., smaller firms and firms with business models heavily impacted by the COVID-19 pandemic had not fully recovered. Against this backdrop, this box uses firm-level data for euro area NFCs to identify vulnerable firms based on the Altman Z-score, a measure of insolvency risk that uses five balance sheet and income statement ratios and their joint importance. It then matches bank and sovereign exposures to consider related risks associated with the sovereign-bank-corporate nexus.
JEL Code
G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
G33 : Financial Economics→Corporate Finance and Governance→Bankruptcy, Liquidation
G38 : Financial Economics→Corporate Finance and Governance→Government Policy and Regulation
H32 : Public Economics→Fiscal Policies and Behavior of Economic Agents→Firm
5 August 2021
ECONOMIC BULLETIN - BOX
Economic Bulletin Issue 5, 2021
Details
Abstract
This box studies the potential consequences of the ongoing shift away from defined benefit (DB) towards defined contribution (DC) products in the insurance and pension fund (ICPF) sector. In view of the different risks associated with these products, their portfolio allocations differ, with DB products being more heavily invested in long-duration fixed-income assets. Given the sizeable amount of ICPFs’ assets under management, the move from DB to DC products can reduce the demand for these assets, potentially having profound effects on the financial system and the economy. Such effects may include a steeper yield curve, a boost to equity financing, and more uncertainty in the build-up of retirement savings.
JEL Code
G22 : Financial Economics→Financial Institutions and Services→Insurance, Insurance Companies, Actuarial Studies
G23 : Financial Economics→Financial Institutions and Services→Non-bank Financial Institutions, Financial Instruments, Institutional Investors
H55 : Public Economics→National Government Expenditures and Related Policies→Social Security and Public Pensions
E34 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles
E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy
18 May 2021
FINANCIAL STABILITY REVIEW - ARTICLE
Financial Stability Review Issue 1, 2021
Details
Abstract
Policy measures aimed at supporting corporates and the economy through the coronavirus pandemic may have supported not just otherwise viable firms, but also unprofitable but still operating firms – often referred to as “zombies”. This has in turn raised questions about an increased risk of zombification in the euro area economy, which could constrain the post-pandemic recovery. Firm-level, loan-level and supervisory data for euro area companies suggest that zombie firms may have temporarily benefited from loan schemes and accommodative credit conditions – but likely only to a modest degree. These firms may face tighter eligibility criteria for schemes and more recognition of credit risk in debt and loan pricing in the future. Tackling the risk of zombification more fundamentally requires the consideration of suggested reforms to insolvency frameworks and better infrastructure for banks to manage non-performing loans.
JEL Code
E51 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Money Supply, Credit, Money Multipliers
G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
G32 : Financial Economics→Corporate Finance and Governance→Financing Policy, Financial Risk and Risk Management, Capital and Ownership Structure, Value of Firms, Goodwill
G38 : Financial Economics→Corporate Finance and Governance→Government Policy and Regulation
L25 : Industrial Organization→Firm Objectives, Organization, and Behavior→Firm Performance: Size, Diversification, and Scope
23 November 2020
FINANCIAL STABILITY REVIEW - BOX
Financial Stability Review Issue 2, 2020
Details
Abstract
Credit rating downgrades - especially downgrades from investment grade to high yield (“fallen angels”) - can adversely affect the price and ease of a firm’s debt issuance. Such a downgrade can force (institutional) investors to sell securities, as investment mandates may restrict the securities that they are allowed to hold. We find that market repricing does not typically happen instantaneously after a downgrade, but instead over an extended period which preceding the actual downgrade. The impact of sales by institutional investors is softened by differences in the definition of “investment grade” and flexibility in investment funds’ mandates. Fallen angels since February 2020 follow this pattern, but with a swifter and stronger increase in the credit premium before the first downgrade. Securities of pandemic-related fallen angels show some post-event illiquidity which may be explained by the relatively sudden change in the broader economic outlook and wider market stress. Downgrades to below investment grade are typically also associated with lower bond issuance volumes. If a larger cohort of firms were to face funding pressures, this increases their vulnerability to shocks in the near term and, in the long term, could weigh on investment, creating wider macroeconomic costs.
JEL Code
G12 : Financial Economics→General Financial Markets→Asset Pricing, Trading Volume, Bond Interest Rates
G24 : Financial Economics→Financial Institutions and Services→Investment Banking, Venture Capital, Brokerage, Ratings and Ratings Agencies
G32 : Financial Economics→Corporate Finance and Governance→Financing Policy, Financial Risk and Risk Management, Capital and Ownership Structure, Value of Firms, Goodwill
20 June 2019
ECONOMIC BULLETIN - BOX
Economic Bulletin Issue 4, 2019
Details
Abstract
Economic agents’ confidence and developments in the real economy are intrinsically linked. Confidence largely reflects broad economic conditions but, at times, may also become an autonomous source of business cycle fluctuations. This box looks at the potential propagation effects of lower confidence on investment in recent times. Isolating the structural confidence shocks from the euro area Economic Sentiment Indicator and applying them in the ECB’s main macroeconomic projection model suggests that confidence shocks had a positive impact on business investment growth in the last two years and a negative one in 2019.
JEL Code
E22 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Capital, Investment, Capacity
E37 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Forecasting and Simulation: Models and Applications
D84 : Microeconomics→Information, Knowledge, and Uncertainty→Expectations, Speculations
4 February 2019
ECONOMIC BULLETIN - BOX
Economic Bulletin Issue 1, 2019
Details
Abstract
Activity in the euro area is expected to continue to expand at a moderate pace, while more elevated uncertainty points to intensified downside risks to the growth outlook. In the context of a maturing business cycle, growth in both private consumption and business investment are expected to continue, despite a more uncertain environment. Nevertheless, the resilience of the domestic demand components, in particular investment, could be particularly challenged by increasing global uncertainty related inter alia to an escalation in trade tensions.
JEL Code
E21 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Consumption, Saving, Wealth
E22 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Capital, Investment, Capacity
E32 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Business Fluctuations, Cycles