John Fell
- 15 November 2022
- FINANCIAL STABILITY REVIEW - ARTICLEFinancial Stability Review Issue 2, 2022Details
- Abstract
- Digitalisation is transforming the global economy, including by raising productivity and broadening consumer access to information. While these forces are facilitating greater competition, supporting economic growth and lowering prices, the benefits are not without risks – the flip side of digitalisation can be greater vulnerability to cyberattacks. For these to be a source of risk to financial stability, substitutability, risk correlation and interconnectedness are all key dimensions. A cyberattack on a critical infrastructure or an attack on one service that unearths vulnerabilities in another could quickly lead to system-wide stresses. Negative externalities arising from the effectiveness of financial institutions’ management of cyber risk could provide grounds for a public policy response. While the existing macroprudential policy toolkit has limited capacity to address cyber risks, their growing relevance nevertheless calls for macroprudential overseers to anticipate them, assess the capacity of the financial system to absorb them, and to issue risk warnings when warranted. In this vein, econometric evidence suggests that cyberattacks are not random, but are driven by factors such as economic strength, the degree of financial globalisation as well as policy and political uncertainty. This underscores how important it is for authorities to foster the sharing of information and the closing of data gaps on cyberattacks.
- JEL Code
- D43 : Microeconomics→Market Structure and Pricing→Oligopoly and Other Forms of Market Imperfection
D62 : Microeconomics→Welfare Economics→Externalities
D82 : Microeconomics→Information, Knowledge, and Uncertainty→Asymmetric and Private Information, Mechanism Design
E6 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
G22 : Financial Economics→Financial Institutions and Services→Insurance, Insurance Companies, Actuarial Studies
G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation
H41 : Public Economics→Publicly Provided Goods→Public Goods
- 17 November 2021
- FINANCIAL STABILITY REVIEW - ARTICLEFinancial Stability Review Issue 2, 2021Details
- Abstract
- Numerous European and national initiatives have been deployed since 2014 to reduce non-performing loan (NPL) stocks on euro area bank balance sheets. NPL ratios have fallen as a result, but very gradually, mainly thanks to sales to non-bank investors. Despite stronger market activity, prices paid by NPL investors have only improved marginally and continue to stand well below values assigned to NPLs by banks. One type of NPL that has proven particularly difficult to resolve is loans to non-financial firms that have borrowed from multiple banks – multi-creditor loans. Analysis of these loans relative to others finds lower provision coverage by the lending banks, reflecting more optimistic valuations by individual banks and limited recognition of the expected costs of multi-creditor coordination. This special feature proposes a strategy to overcome creditor coordination failures and costs, through the use of data platforms providing ex ante transparency to NPL investors. These, together with NPL securitisation, could substantially reduce the gap between the value of the loans booked on banks’ balance sheets and the prices offered by investors for NPL portfolios.
- 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
- 17 July 2019
- OCCASIONAL PAPER SERIES - No. 227Details
- Abstract
- This occasional paper describes how the financial stability and macroprudential policy functions are organised at the ECB. Financial stability has been a key policy function of the ECB since its inception. Macroprudential policy tasks were later conferred on the ECB by the Single Supervisory Mechanism (SSM) Regulation. The paper describes the ECB’s macroprudential governance framework in the new institutional set-up. After reviewing the concept and origins of systemic risk, it reflects on the emergence of macroprudential policy in the aftermath of the financial crisis, its objectives and instruments, as well as specific aspects of this policy area in a monetary union such as the euro area. The ECB’s responsibilities required new tools to be developed to measure systemic risk at financial institution, country and system-wide level. The paper discusses selected analytical tools supporting financial stability surveillance and assessment work, as well as macroprudential policy analysis at the ECB. The tools are grouped into three broad areas: (i) methods to gauge the state of financial instability or prospects of near-term systemic stress, (ii) measures to capture the build-up of systemic risk focused on country-level financial cycle measurement and early warning methods, and (iii) the ECB stress testing framework for macroprudential purposes.
- JEL Code
- E37 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Forecasting and Simulation: Models and Applications
F36 : International Economics→International Finance→Financial Aspects of Economic Integration
G20 : Financial Economics→Financial Institutions and Services→General
G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation
K23 : Law and Economics→Regulation and Business Law→Regulated Industries and Administrative Law
- 29 November 2017
- FINANCIAL STABILITY REVIEW - ARTICLEFinancial Stability Review Issue 2, 2017Details
- Abstract
- When banks judge that more value can be extracted by offering non-performing loans (NPLs) for sale rather than working them out themselves, potential investors cannot be sure that the credit quality of the assets is as good as the banks portray it to be. Such information asymmetries in the NPL market drive a wedge between the prices that investors are prepared to pay for NPLs and the prices that banks are prepared to sell them for. While information asymmetries can be overcome through investor due diligence, this requires specialist expertise and the costs of valuing NPL portfolios can be very high. As few investors have the resources to absorb such costs, barriers to entering the market are compounded. This appears to explain why the euro area NPL markets display the features of an oligopsony, a situation where there is a concentration of market power among a limited number of investors, which pushes traded prices even lower. At the same time, potential NPL investors can face coordination challenges when debtors have multiple loans with different banks. In such situations, investors must face the prospect of competing with other creditors for the debtor’s resources. While coordination between banks for common exposures may alleviate this problem, this too can be costly, weighing further on market prices. By offering the prospect of greater transparency in NPL markets, fostering wider investor participation and addressing coordination issues, NPL transaction platforms could help in overcoming all three of these market failures. The attendant improvement in market liquidity would allow banks to achieve better prices for NPL sales, preserve their capital and mitigate financial stability risks. This special feature outlines the desirable features of NPL transaction platforms and discusses their operational implementation.
- JEL Code
- G00 : Financial Economics→General→General
- 24 May 2017
- FINANCIAL STABILITY REVIEW - ARTICLEFinancial Stability Review Issue 1, 2017Details
- Abstract
- Large stocks of non-performing loans (NPLs) on euro area bank balance sheets continue to present risks to financial stability. Significant legal and administrative reforms have been undertaken over recent years in countries with high levels of NPLs to streamline insolvency proceedings and maximise NPL recovery values. Yet, the market continues to provide low NPL valuations that result in wide bid-ask spreads, thus impeding large-scale NPL sales. This special feature highlights the potential role and benefits of co-investment strategies (between the private sector and the state) for addressing NPLs. These co-investment strategies may reduce information asymmetries between buyers and sellers, thereby enabling transactions that might otherwise not occur, or facilitate sales at higher prices. Moreover, the proposed schemes are priced at market levels and may, therefore, be free of state aid.
- JEL Code
- G00 : Financial Economics→General→General
- 24 November 2016
- FINANCIAL STABILITY REVIEW - ARTICLEFinancial Stability Review Issue 2, 2016Details
- Abstract
- The high stock of non-performing loans (NPLs) on the balance sheets of euro area banks continues to be an important cause for concern for policymakers. Efforts to resolve this problem have increased significantly in the course of 2016, by supervisors and macroprudential policymakers alike. To relieve capital constraints, these efforts, however, must be complemented with structural reforms to recover the value of NPLs in some countries. Against this background, this special feature focuses on impediments to the functioning of a market for NPL sales. It highlights sources of informational asymmetry and structural inefficiencies. Among indicators of market failure, it distinguishes between supply and demand factors that impede market functioning. In light of the identified externalities, public policy responses are warranted to reduce the cost and duration of debt recovery while also addressing information asymmetries between better-informed banks and potential investors. In certain circumstances the establishment of asset management companies (AMCs) may help to accelerate the value recovery process for banks, while avoiding adverse macroeconomic side effects. Constraints on and limitations of AMCs are also reviewed in this special feature.
- JEL Code
- G00 : Financial Economics→General→General