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Francesca Lenoci
- 18 November 2024
- FINANCIAL STABILITY REVIEW - ARTICLEFinancial Stability Review Issue 2, 2024Details
- Abstract
- Productivity growth in the euro area has been declining for several decades. In light of the importance of bank lending as a source of external funding for euro area firms, this special feature investigates the link between firm productivity and bank credit allocation. Bank credit in the euro area has been skewed towards sectors that have contributed only marginally to aggregate productivity growth, such as real estate. Additionally, bank loans tilted towards less-productive firms within the same sectors during the COVID-19 pandemic, supported by state credit guarantees. Banks with weaker balance sheets lent more to less-productive firms during this period than other banks did. The tilt towards less-productive firms could have an indirect effect on aggregate productivity if the survival of less-productive firms suppresses the profitability of more-productive competitors, discouraging market entry and investment. A more diversified external funding structure could help boost the productivity of euro area firms, to the benefit of financial stability.
- JEL Code
- D24 : Microeconomics→Production and Organizations→Production, Cost, Capital, Capital, Total Factor, and Multifactor Productivity, Capacity
E22 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Capital, Investment, Capacity
E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy
G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
- 18 June 2024
- FINANCIAL INTEGRATION AND STRUCTURE BOXFinancial Integration and Structure in the Euro Area 2024Details
- Abstract
- The box highlights the importance of cross-border bank lending to non-banks in the euro area. Comparing the domicile of euro area banks and borrowers, we estimate the scale of direct cross-border lending to represent 14.1% of euro area bank lending to non-banks which increases to 23% when we include indirect cross-border lending. Direct cross-border lending represents an important driver for enhancing banking market integration. It also constitutes an instrument to improve banks’ risk diversification and the resilience of borrowers’ funding structure. Finally, the box discusses the implications of different lending approaches, and sheds light on the sectors relying more on cross-border lending.
- JEL Code
- G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
F02 : International Economics→General→International Economic Order
F34 : International Economics→International Finance→International Lending and Debt Problems
F36 : International Economics→International Finance→Financial Aspects of Economic Integration
O52. : Economic Development, Technological Change, and Growth→Economywide Country Studies→Europe
- 16 May 2024
- FINANCIAL STABILITY REVIEW - BOXFinancial Stability Review Issue 1, 2024Details
- Abstract
- Around 20% of euro area bank funding is provided by the non-bank financial intermediation (NBFI) sector, mainly via market-based instruments such as bonds and repurchase agreements. The reliance on NBFI funding varies in line with banks’ business models, with some banks obtaining about a third of their funds from the NBFI sector. NBFI entities also display a strong preference for some types of funding instruments, suggesting limited substitutability across sectors and financing sources. Focusing on the repo market, we test funding substitution by euro area banks across sectors when facing a reduction in repo funds. Banks can only replace about 25% of the outflows after repo funding falls. When the outflow comes from an investment fund, banks face an even larger reduction in repo funds. These results and some recent episodes of liquidity turmoil in the NBFI sector suggest that more widespread shocks could affect the ability of banks to secure funding.
- JEL Code
- 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
- 16 May 2024
- FINANCIAL STABILITY REVIEW - BOXFinancial stability risks from basis trades in the US Treasury and euro area government bond marketsFinancial Stability Review Issue 1, 2024Details
- Abstract
- Basis trades are arbitrage strategies which exploit mispricing between the spot price and the futures price of a given security. They improve market functioning but are also subject to funding and liquidity risks, especially when excessively leveraged. Hedge funds have built up leveraged exposures in the US Treasury market, giving rise to financial stability concerns. While risks are partly mitigated by already elevated margin requirements in the futures market, disruptions in the repo market could still force some entities to unwind their basis trades. Given the role of US Treasury bonds as global risk-free assets, dislocations resulting from widespread unwinding of basis trades could spill over into other jurisdictions and asset classes. Furthermore, a build-up of hedge fund exposures has also been observed in the euro area government bond market, but the size of basis trade activity seems contained.
- JEL Code
- G10 : Financial Economics→General Financial Markets→General
G11 : Financial Economics→General Financial Markets→Portfolio Choice, Investment Decisions
G12 : Financial Economics→General Financial Markets→Asset Pricing, Trading Volume, Bond Interest Rates
G13 : Financial Economics→General Financial Markets→Contingent Pricing, Futures Pricing
G15 : Financial Economics→General Financial Markets→International Financial Markets
- 22 November 2023
- FINANCIAL STABILITY REVIEW - ARTICLEFinancial Stability Review Issue 2, 2023Details
- Abstract
- This special feature builds on the concept of maturity gap as a metric of banks’ maturity mismatch to shed light on how banks’ engagement in maturity transformation differs across euro area countries and bank types. Banks can mitigate the interest rate risk stemming from their maturity mismatch by using derivatives for hedging purposes. Euro area banks increased their positions in interest rate derivatives over the last two years in anticipation of the start of monetary policy normalisation. Significant institutions rely more than cooperative and savings banks on interest rate derivatives and have a more diversified positioning. A box within the special feature finds that this greater reliance on derivatives was not sufficient to compensate for the material increase in interest rate risk. The extent of banks’ maturity mismatch determines the sensitivity of their net interest income to changes in interest rates and the slope of the yield curve. This special feature provides empirical evidence that the more banks engage in maturity transformation, the more their net interest margin benefits from a steepening of the yield curve, boosting bank profits. This effect might dissipate going forward, especially for banks in countries where variable-rate lending predominates.
- JEL Code
- 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
- 31 May 2023
- FINANCIAL STABILITY REVIEW - BOXFinancial Stability Review Issue 1, 2023Details
- Abstract
- The box investigates whether banks step in when market-based credit declines in the face of increased market volatility and rising interest rates. Findings show that banks tend to offer lower rates than bond markets to larger, better-rated and more leveraged firms, but interest rates are not the only factor behind firms’ financial structure decisions. Many firms replaced bond funding with bank loans at the start of the pandemic, at the onset of the Russia-Ukraine war and during the recent monetary policy normalisation, potentially crowding out credit to riskier and smaller firms with limited ability to tap bond markets.
- 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
G23 : Financial Economics→Financial Institutions and Services→Non-bank Financial Institutions, Financial Instruments, Institutional Investors
G30 : Financial Economics→Corporate Finance and Governance→General
- 30 May 2023
- FINANCIAL STABILITY REVIEW - ARTICLEFinancial Stability Review Issue 1, 2023Details
- Abstract
- Banks are connected to non-bank financial intermediation (NBFI) sector entities via loans, securities and derivatives exposures, as well as funding dependencies. Linkages with the NBFI sector expose banks to liquidity, market and credit risks. Funding from NBFI entities would appear to be the most likely and strongest spillover channel, considering that NBFI entities maintain their liquidity buffers primarily as deposits and very short-term repo transactions with banks. At the same time, direct credit exposures are smaller and are often related to NBFI entities associated with banking groups. Links with NBFI entities are highly concentrated in a small group of systemically important banks, whose sizeable capital and liquidity buffers are essential to mitigate spillover risks.
- JEL Code
- G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
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
- 16 November 2022
- FINANCIAL STABILITY REVIEW - ARTICLEFinancial Stability Review Issue 2, 2022Details
- Abstract
- Energy sector firms use energy derivatives under different strategies depending on their main area of activity, business model and exposure to risk in physical markets. The significant volatility and skyrocketing prices seen in energy markets since March 2022 have resulted in large margin calls, generating liquidity risks for derivatives users. Strategies employed by companies to alleviate liquidity stress may lead to an accumulation of credit risk for their lenders or their counterparties in less collateralised segments of the derivatives market. Further price increases would accentuate nascent vulnerabilities, creating additional stress in a concentrated market. These issues underline the need to review margining practices and enhance the liquidity preparedness of all market participants to deal with large margin calls.
- JEL Code
- Q02 : Agricultural and Natural Resource Economics, Environmental and Ecological Economics→General→Global Commodity Markets
G13 : Financial Economics→General Financial Markets→Contingent Pricing, Futures Pricing
G20 : Financial Economics→Financial Institutions and Services→General
- 16 November 2022
- FINANCIAL STABILITY REVIEW - BOXFinancial Stability Review Issue 2, 2022Details
- Abstract
- Interest rate swaps account for the largest share of the euro area derivatives market. Outstanding contracts on EURIBOR swaps have risen sharply since 2021, possibly reflecting expectations of monetary policy normalisation. Using trade repository data on individual EURIBOR swap trades between 2019 and 2022, this box identifies how the risk is being shared across sectors in the interest rate swaps market and who would pay margins to whom should rates change. Empirical findings show that euro area banks are among the most active counterparties in EURIBOR swaps, due to either their role as market-makers or their need to hedge interest rate risk. Investment funds, insurance companies and pension funds would need to make margin payments in the event of rising interest rates.
- JEL Code
- G12 : Financial Economics→General Financial Markets→Asset Pricing, Trading Volume, Bond Interest Rates
G13 : Financial Economics→General Financial Markets→Contingent Pricing, Futures Pricing
G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
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
G24 : Financial Economics→Financial Institutions and Services→Investment Banking, Venture Capital, Brokerage, Ratings and Ratings Agencies
E43 : Macroeconomics and Monetary Economics→Money and Interest Rates→Interest Rates: Determination, Term Structure, and Effects
E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy
- 25 May 2022
- FINANCIAL STABILITY REVIEW - BOXFinancial Stability Review Issue 1, 2022Details
- Abstract
- Relying on an economic value approach and exploiting granular supervisory data on euro area banks, this box finds that the aggregate impact of higher interest rates on bank net worth would be moderately negative, but wide variations exist at the level of individual banks. Over time, derivatives have played an offsetting role, allowing banks to reduce their interest rate risk exposures arising from on- and off-balance-sheet positioning. In line with the expectation of higher interest rates, empirical evidence from EMIR data shows that banks have increased the volume of longer-dated interest rate swaps on which they receive floating rates, mainly trading these contracts with insurance companies and pension funds.
- JEL Code
- G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
G12 : Financial Economics→General Financial Markets→Asset Pricing, Trading Volume, Bond Interest Rates
- 20 November 2019
- FINANCIAL STABILITY REVIEW - BOXFinancial Stability Review Issue 2, 2019Details
- Abstract
- When investment funds face outflows, fund managers may have to liquidate parts of their portfolio, potentially changing its composition and riskiness as a result. If fund managers respond to outflows by selling securities proportionally to the initial asset allocation, i.e. selling a vertical slice of the portfolio, the liquidity and risk profile of the fund remains unchanged. But asset managers might have incentives to reduce the portfolio non-proportionally. For example, in trying to avoid incurring losses on illiquid assets, managers might choose to sell the most liquid securities first. And in the hope of increasing returns and attracting future inflows, they might choose to take on more risk in their portfolio. Other managers, worried about future outflows, might hoard liquid securities and de-risk their portfolios. However, large sales of illiquid securities may affect their market price at times of relatively low market liquidity, with possible spillovers to other financial institutions holding the same assets.