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Níl an t-ábhar seo ar fáil i nGaeilge.

Maciej Grodzicki

16 May 2024
FINANCIAL STABILITY REVIEW - BOX
Financial Stability Review Issue 1, 2024
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Abstract
The rapid increase in interest rates observed over the last few years could weaken the ability of firms to service and roll over their debt and, consequently, worsen the outlook for bank asset quality. This box combines firm-level balance sheet data with loan-level data to assess the joint impact of resilient post-pandemic profitability and higher financing costs on the debt servicing capacity of euro area firms. The interest burdens of euro area firms are estimated to have increased only slightly, as higher revenues largely offset their higher interest payments. The impact of higher debt service costs has been disproportionately strong in the real estate sector, which has faced weakened demand, as well as in countries where floating-rate lending is prevalent. Some vulnerable firms may benefit from refinancing in a more favourable environment if market rates fall as expected. Banks should recognise credit distress promptly and offer viable solutions to firms which struggle to service their debt. However, even among firms with low interest coverage ratios, the majority of bank loans have not been restructured and remain performing..
JEL Code
G32 : Financial Economics→Corporate Finance and Governance→Financing Policy, Financial Risk and Risk Management, Capital and Ownership Structure, Value of Firms, Goodwill
G33 : Financial Economics→Corporate Finance and Governance→Bankruptcy, Liquidation
22 November 2023
FINANCIAL STABILITY REVIEW - BOX
Financial Stability Review Issue 2, 2023
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Abstract
The smooth absorption of sovereign debt issuance by the financial sector is essential for financial stability. Newly issued government debt has been absorbed smoothly so far in 2023, despite the absence of net central bank purchases. Sovereign debt absorption patterns have been in line with empirical evidence, which suggests that investors tend to increase their bond purchases when yields rise. Non-bank investors tend to absorb less issuance in times of elevated financial market uncertainty, while accounting and leverage requirements influence the absorption capacity of banks. Higher government funding needs, especially in an environment of high market volatility, can imply rising yield levels and spreads.
JEL Code
G12 : Financial Economics→General Financial Markets→Asset Pricing, Trading Volume, Bond Interest Rates
G15 : Financial Economics→General Financial Markets→International Financial Markets
H63 : Public Economics→National Budget, Deficit, and Debt→Debt, Debt Management, Sovereign Debt
20 November 2023
FINANCIAL STABILITY REVIEW - BOX
Financial Stability Review Issue 2, 2023
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Abstract
Euro area bank earnings have reached multi-year highs, while bank equity valuations have not substantially exceeded pre-pandemic levels. Banks’ exposure to corporate credit risk and the perception of their stocks as value stocks have contributed to the stagnant valuations. However, valuations cannot be fully explained by fundamentals and may be due to heightened uncertainty about shareholder access to returns earned by banks. Overall, this increases the cost of lending to the real economy and makes it harder for banks to raise capital.
JEL Code
G12 : Financial Economics→General Financial Markets→Asset Pricing, Trading Volume, Bond Interest Rates
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
G35 : Financial Economics→Corporate Finance and Governance→Payout Policy
31 May 2023
FINANCIAL STABILITY REVIEW - BOX
Financial Stability Review Issue 1, 2023
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Abstract
This box investigates recent changes in the cost and the composition of bank deposits. It provides estimates of the sensitivity of banks’ deposit rates to changes in policy rates, demonstrating that this depends on the type of deposit and on bank-specific characteristics. Moreover, it finds that competition in the term deposit market has been increasing recently. It goes on to show that, since the beginning of 2022, higher interest rates have increased non-financial corporations’ appetite for better remunerated deposit types, shifting banks’ deposit mixes away from stickier overnight deposits towards rate-sensitive term deposits. Finally, it hints that, going forward, rising competition and a reallocation of funds from overnight to term deposits may lead to an increase in the cost of deposits that is faster and larger than expected.
JEL Code
E5 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit
G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
30 May 2023
FINANCIAL STABILITY REVIEW - ARTICLE
Financial Stability Review Issue 1, 2023
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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
23 January 2023
WORKING PAPER SERIES - No. 2765
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Abstract
Economic literature suggests that banks change their dividend payouts for three main reasons. They may be willing to signal good future profitability to shareholders to address information asymmetry, or use dividends to mitigate the agency costs, or could come under pressure from prudential supervisors and regulators to retain earnings. The COVID-19 pandemic led to introduction of sector-wide recommendation by regulators to suspend dividend payouts in view of prevailing large uncertainty. Using a panel data approach for two samples of listed and unlisted European banks, this paper provides evidence that, over a decade and a half preceding the pandemic, bank dividend payouts were adjusted in line with the three motivations found in the literature. The results are robust to selection of alternative variables representing these motivations. Banks are found not to discount expectations about future economic conditions or their own profitability when making payouts. Simulations shown in the paper suggest that, in the absence of supervisory recommendations, banks would likely have reduced the payouts only slightly in the first year of the pandemic.
JEL Code
G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
G35 : Financial Economics→Corporate Finance and Governance→Payout Policy
17 November 2021
FINANCIAL STABILITY REVIEW - ARTICLE
Financial Stability Review Issue 2, 2021
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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
15 November 2021
FINANCIAL STABILITY REVIEW - ARTICLE
Financial Stability Review Issue 2, 2021
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Abstract
This special feature reviews recent trends in the consolidation of the euro area banking sector, examines the characteristics and drivers of bank M&A transactions, and analyses the impact of bank mergers and acquisitions on the performance of euro area banks. Bank mergers and acquisitions (M&As) have been subdued in the euro area since the global financial crisis. Most M&A activity has had a domestic focus and involved smaller targets, with larger and sounder acquirers acting as consolidators. Consolidation seems on average to have had a moderately positive impact on the profitability of the banks involved, although high levels of variance reveal the presence of large execution and design risks amid low overall returns on capital in the banking sector. Improved post-transaction profitability can be linked to targets’ lower cost efficiency, liquidity and capitalisation. Cross-border M&A transactions have been concentrated within a few small groups of euro area countries, supported by prior financial links and geographical proximity. Such transactions tend to be followed by a stronger improvement in profitability than domestic mergers, although this effect has diminished since the global financial crisis.
JEL Code
G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
G34 : Financial Economics→Corporate Finance and Governance→Mergers, Acquisitions, Restructuring, Corporate Governance
F36 : International Economics→International Finance→Financial Aspects of Economic Integration
28 June 2021
MACROPRUDENTIAL BULLETIN - ARTICLE - No. 13
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Abstract
This contribution reviews historical drivers of bank dividend payouts in the euro area. Economic literature presents three main reasons for adjustments to dividend payouts: asymmetric information between shareholders and management, the presence of agency costs, and regulatory constraints. Using a panel data approach, the article finds evidence supporting all three hypotheses. Banks lower dividends after facing a decline in profits and capital, but counterfactual simulations show that this adjustment could be small. Regulatory restrictions may therefore be warranted in the event of large expected losses or heavy uncertainty.
JEL Code
G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
G35 : Financial Economics→Corporate Finance and Governance→Payout Policy
22 January 2021
OCCASIONAL PAPER SERIES - No. 254
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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
24 November 2020
FINANCIAL STABILITY REVIEW - ARTICLE
Financial Stability Review Issue 2, 2020
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Abstract
Fiscal, prudential and monetary authorities have responded to the coronavirus (COVID-19) pandemic by providing unprecedented support to the real economy. Importantly, the combination of policy actions has done more to limit the materialisation of risks to households and firms than each policy individually. Exploiting complementarities and ensuring the most effective combination of policies will, however, be equally important when authorities start to phase out the various related relief measures. The fact that in particular the enacted fiscal and labour market measures, as well as their phase-out schedules, differ substantially across the largest euro area economies further complicates the challenge of obtaining the most effective policy combination. Along with the reduction in support to the real economy, the phasing-out of policy measures could adversely affect banks’ balance sheets and capitalisation. Resulting cliff effects in policy support are relevant for prudential authorities in the context of their future decisions on the replenishment of capital buffers. The results of the analysis suggest there are substantial risks associated with the early withdrawal of policy support, although the analysis does not account for the medium-term risks of protracted policy support.
JEL Code
C68 : Mathematical and Quantitative Methods→Mathematical Methods, Programming Models, Mathematical and Simulation Modeling→Computable General Equilibrium Models
E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy
E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies
E62 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Fiscal Policy
E63 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Comparative or Joint Analysis of Fiscal and Monetary Policy, Stabilization, Treasury Policy
G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
H81 : Public Economics→Miscellaneous Issues→Governmental Loans, Loan Guarantees, Credits, Grants, Bailouts
26 May 2020
FINANCIAL STABILITY REVIEW - BOX
Financial Stability Review Issue 1, 2020
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Abstract
Many euro area countries have made loan guarantee schemes a central element of their support packages in response to the coronavirus shock (see Chapter 1). In the face of acute revenue and income losses, these temporary schemes can support the flow of credit to the real economy and thereby help stabilise the banking system. This box sets out an illustrative assessment of how the announced schemes are intended to operate, and how they might affect the scale of losses that banks may face in the quarters ahead.
25 May 2020
FINANCIAL STABILITY REVIEW - BOX
Financial Stability Review Issue 1, 2020
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Abstract
On 27 March, ECB Banking Supervision recommended that banks refrain from paying out dividends and buying back shares until 1 October 2020, following earlier announcements of temporary capital and operational relief measures. All national authorities in the euro area had made similar requests to banks under their direct supervision. In recent years, euro area banks have increased dividend payouts and share buybacks. Had this continued under the current circumstances, it may have weakened the ability of banks to use retained earnings to absorb losses and support lending to the real economy. This box reviews patterns in global banks’ payouts to shareholders and the contribution that lower payouts may make towards improving bank resilience.
25 May 2020
FINANCIAL STABILITY REVIEW - BOX
Financial Stability Review Issue 1, 2020
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Abstract
Euro area money market funds (MMFs) provide short-term credit to banks and non-financial corporations (NFCs) through purchases of commercial paper (CP). MMFs also play an important role in non-banks’ cash and liquidity management, given that the funds offer stable value and the possibility to redeem at short notice. As the coronavirus crisis deepened, euro area MMFs experienced large outflows and a number of them had difficulties in raising sufficient cash from maturing assets and liquid positions. Stress in MMFs can impair the financial system’s and the real economy’s access to short-term funding and liquidity during crises. Monetary policy action helped to improve financial market conditions more broadly, thereby also alleviating liquidity strains in the MMF sector.
JEL Code
G10 : Financial Economics→General Financial Markets→General
G11 : Financial Economics→General Financial Markets→Portfolio Choice, Investment Decisions
G23 : Financial Economics→Financial Institutions and Services→Non-bank Financial Institutions, Financial Instruments, Institutional Investors
20 November 2019
FINANCIAL STABILITY REVIEW - ARTICLE
Financial Stability Review Issue 2, 2019
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Abstract
This special feature discusses several ways in which the measurement of banks’ systemic footprint can be complemented with new indicators. The international approach is largely mechanical, but is intended to be complemented by expert judgement. The proposed additional systemic footprint measures may help macroprudential authorities in exercising that judgement. Using loan-level data matched with individual corporate balance sheet information allows macroprudential authorities to gain a better understanding of how a bank’s failure may affect employment and economic activity. Similar data, used in a model of network contagion, help assess the impact of a bank’s failure on the rest of the system. While the measures proposed in this special feature are not embedded in O-SII or G-SII scores, some evidence suggests that the concepts discussed have informed decisions of macroprudential authorities.
18 November 2019
FINANCIAL STABILITY REVIEW - ARTICLE
Financial Stability Review Issue 2, 2019
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Abstract
Low aggregate bank profitability in the euro area, which weakens the resilience of the euro area banking sector, is partly explained by the persistent underperformance of a sub-set of banks. These banks all stand out in terms of elevated cost-to-income ratios. But there also appear to be three distinct groups: (i) banks struggling with legacy asset problems; (ii) banks with weak income-generation capacity; and (iii) banks suffering from a combination of cost and revenue-side problems. The common cost inefficiency problem seems most pronounced for the largest and smallest banks. Three strategies, all of which should reduce overcapacity, could address the root causes, while avoiding increasing market power or the systemic footprint of institutions which are already systemically important. For some banks, the focus should be on targeting continued high stocks of NPLs. But in systems with many weak-performing small banks, consolidation within their domestic system could improve performance. Finally, a combination of bank-level restructuring and cross-border M&A activity could help reduce the costs and diversify the revenues of large banks that are performing poorly., (ii) banks with weak income-generation capacity, and (iii) banks suffering from a combination of cost and revenue-side problems. The common cost inefficiency problem seems most pronounced for the largest and smallest banks. Three strategies, all of which should reduce overcapacity, could address the root causes, while avoiding increasing market power or the systemic footprint of institutions which are already systemically important. For some banks, the focus should be on targeting continued high stocks of NPLs. But in systems with many weak-performing small banks, consolidation within their domestic system could improve performance. Finally, a combination of bank-level restructuring and cross-border M&A activity could help reduce the costs and diversify the revenues of large banks that are performing poorly.
29 May 2019
FINANCIAL STABILITY REVIEW - BOX
Financial Stability Review Issue 1, 2019
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Abstract
The market valuations of euro area banks have remained low since the global financial crisis, lagging behind those of many international peers. Price-to-book (P/B) ratios offer a yardstick of bank franchise value, where a P/B ratio greater than one suggests that a bank can generate market value commensurate to the value of its tangible assets. In this way, a P/B ratio lower than unity suggests investor concern about shareholder value, and manifests itself in a higher cost of capital should the bank opt to issue additional equity. This box investigates the determinants of P/B ratios, assessing to what extent bank and country-specific factors have contributed to hampering their recovery.
29 May 2019
FINANCIAL STABILITY REVIEW - BOX
Financial Stability Review Issue 1, 2019
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Abstract
Weak corporate asset quality is a concern from a financial stability perspective. Distressed corporate debt has been the centrepiece of the high stock of non-performing loans (NPLs) of euro area banks. NPL stocks are a symptom of balance sheet difficulties faced by a large proportion of firms, which in turn may depress investment and employment, deprive banks of profitable lending opportunities, and therefore weigh on economic growth and the health of the banking sector itself.
24 May 2018
FINANCIAL STABILITY REVIEW - BOX
Financial Stability Review Issue 1, 2018
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Abstract
The market for NPLs in Europe has become more active in recent years. The total amount and volume of transactions has continuously increased in the last three years, although part of the increase in volumes can be attributed to just a few large transactions. Italy and Spain account for the majority of the market turnover. However, the geographical scope of NPL markets in the euro area has also widened, with transactions starting in Greece in 2017 and in Cyprus in 2018. At the same time, market activity in more mature NPL markets, such as Ireland, has weakened against the backdrop of a diminishing supply of NPLs.
29 November 2017
FINANCIAL STABILITY REVIEW - ARTICLE
Financial Stability Review Issue 2, 2017
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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 November 2016
FINANCIAL STABILITY REVIEW - ARTICLE
Financial Stability Review Issue 2, 2016
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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
28 May 2015
FINANCIAL STABILITY REVIEW - ARTICLE
Financial Stability Review Issue 1, 2015
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Abstract
The weight of non-performing exposures (NPEs) on the balance sheets of European banks is a cause for concern for policy-makers; yet resolving the issue presents a number of challenges. This special feature presents an overview of the scale of the NPE problem, highlights several operational aspects that are critical for effectively resolving the problem, and outlines the merits of various resolution strategies.
JEL Code
G00 : Financial Economics→General→General
11 October 2013
OCCASIONAL PAPER SERIES - No. 152
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Abstract
The use of macro stress tests to assess bank solvency has developed rapidly over the past few years. This development was reinforced by the financial crisis, which resulted in substantial losses for banks and created general uncertainty about the banking sector's loss-bearing capacity. Macro stress testing has proved a useful instrument to help identify potential vulnerabilities within the banking sector and to gauge its resilience to adverse developments. To support its contribution to safeguarding financial stability and its financial sector-related work in the context of EU/IMF Financial Assistance Programmes, and looking ahead to the establishment of the Single Supervisory Mechanism (SSM), the ECB has developed a top-down macro stress testing framework that is used regularly for forward-looking bank solvency assessments. This paper comprehensively presents the main features of this framework and illustrates how it can be employed for various policy analysis purposes.
JEL Code
C53 : Mathematical and Quantitative Methods→Econometric Modeling→Forecasting and Prediction Methods, Simulation Methods
D85 : Microeconomics→Information, Knowledge, and Uncertainty→Network Formation and Analysis: Theory
E37 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Forecasting and Simulation: Models and Applications
E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy
E47 : Macroeconomics and Monetary Economics→Money and Interest Rates→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
G01 : Financial Economics→General→Financial Crises
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