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16 November 2022
FINANCIAL STABILITY REVIEW - BOX
Financial Stability Review Issue 2, 2022
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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
15 November 2022
FINANCIAL STABILITY REVIEW - ARTICLE
Financial Stability Review Issue 2, 2022
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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
25 May 2022
FINANCIAL STABILITY REVIEW - BOX
Financial Stability Review Issue 1, 2022
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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
17 November 2021
FINANCIAL STABILITY REVIEW - BOX
Financial Stability Review Issue 2, 2021
Details
Abstract
Investment banking revenues have contributed markedly to the recent increase in euro area banks’ non-interest income growth and the rebound in bank profitability. Internationally, equity capital market (ECM) revenue has doubled in the last three years, while debt capital market (DCM) and merger and acquisition (M&A) revenue has increased by around 50%, with only syndicated lending remaining more subdued. In the euro area, however, the most significant volume increase has come from debt instruments, which have long been the preferred source of corporate funding in the euro area ahead of equity. Despite the international growth in capital market volumes, market commentary before the pandemic suggested that investment banking was the “problem child” of European banking, with many large banks retreating from various market segments as they faced the fallout from the global financial crisis. Against this background, this box considers the recent developments in investment banking of euro area banks in relation to some of the prior trends and considers how sustainable the recent strength might be.
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
G24 : Financial Economics→Financial Institutions and Services→Investment Banking, Venture Capital, Brokerage, Ratings and Ratings Agencies
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17 November 2021
FINANCIAL STABILITY REVIEW - BOX
Financial Stability Review Issue 2, 2021
Details
Abstract
Euro area sovereigns have issued significant amounts of new debt in response to the pandemic. While fiscal support was crucial to limit economic scarring and aid the recovery, it has also triggered concerns about medium to longer-term sovereign debt sustainability. One of the key factors for assessing sovereign debt sustainability is the interest rate-growth differential (
JEL Code
E43 : Macroeconomics and Monetary Economics→Money and Interest Rates→Interest Rates: Determination, Term Structure, and Effects
E6 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
H62 : Public Economics→National Budget, Deficit, and Debt→Deficit, Surplus
H63 : Public Economics→National Budget, Deficit, and Debt→Debt, Debt Management, Sovereign Debt
H68 : Public Economics→National Budget, Deficit, and Debt→Forecasts of Budgets, Deficits, and Debt