Financial institutions

Flexible asset purchases and repo market functioning

01/15/2025 European Central Bank Central banks

Flexibility has progressively become a distinctive feature of the implementation of the Eurosystem’s asset purchases. In its many manifestations, flexibility has also been used by asset managers in the daily selection of sovereign bonds to limit the impact of asset purchases on repo market specialness. This study shows that, since the inception of the Public Sector Purchase Programme, flexible purchases of bonds greatly mitigated the Eurosystem’s footprint on the repo market.

FEDS Paper: Spatially Mapping Banks' Commercial & Industrial Loan Exposures: Including an Application to Climate-Related Risks

01/13/2025 Federal Reserve Central banks

Benjamin N. Dennis, Gurubala Kotta, and Caroline Conley NorrisThe correlation of the spatial distribution of banking exposures with changes in spatial patterns of economic activity (e.g., internal migration, changes in agglomeration patterns, climate change, etc.) may have financial stability implications. We therefore study the spatial distribution of large U.S. banks' commercial and industrial (C&I) lending portfolios.

FEDS Paper: Impact of the Volcker Rule on the Trading Revenue of Largest U.S. Trading Firms During the COVID-19 Crisis Period

01/13/2025 Federal Reserve Central banks

Zach Modig, Hulusi Inanoglu, and David LynchUsing a novel data collection, we examine the impact of the Volcker Rule on trading revenue of the 21 largest U.S. trading firms during the 100 day stress period centered on the COVID-19 financial crisis.

Time-varying risk aversion and inflation-consumption correlation in an equilibrium term structure model

01/13/2025 European Central Bank Central banks

Inflation risk premiums tend to be positive in an economy mainly hit by supply shocks, and negative if demand shocks dominate. Risk premiums also fluctuate with risk aversion. We shed light on this nexus in a linear-quadratic equilibrium microfinance model featuring time variation in inflation-consumption correlation and risk aversion. We obtain analytical solutions for real and nominal yield curves and for risk premiums. While changes in the inflation-consumption correlation drive nominal yields, changes in risk aversion drive real yields and act as amplifier on nominal yields.

Climate-linked bonds

01/09/2025 European Central Bank Central banks

Climate-linked bonds, issued by governments and supranational organizations, are pivotal in advancing towards a net-zero economy. These bonds adjust their payoffs based on climate variables such as average temperature and greenhouse gas emissions, providing investors a hedge against long-term climate risks. They also signal government commitment to climate action and incentivize stronger policies. The price differential between climate-linked bonds and nominal bonds reflects market expectations of climate risks.

Why gradual and predictable? Bank lending during the sharpest quantitative tightening ever

01/09/2025 European Central Bank Central banks

Exploiting the recalibration of ECB’s outstanding central bank funding in 2022, we show that a sharp reabsorption of bank liquidity induces a tightening impact on credit supply, as intended when centralbanks reduce their balance sheets. The tightening originates from the sudden relative convenience for banks accustomed to large liquidity holdings to more rapidly adapt to the new environment. Moreover, we show that the associated reduction in credit supply has real economic effects.

Statistical Notice 2025/01 - Bank of England Levy: Deadline for Eligible Liabilities Return form submission for the Levy Year 2025/26

01/07/2025 Bank of England Central banks

Statistical Notices update the definitions and guidance contained in the Banking Statistics Yellow Folder

When banks hold back: credit and liquidity provision

01/07/2025 European Central Bank Central banks

Banks are reluctant to tap central bank backup liquidity facilities and use the borrowed funds for loans to the real economy. We show that excessively parsimonious borrowing and lending can arise in a stigma-free model where the banking sector has an incentive to overissue deposits. Banks don’t heed the central bank’s call for more credit to finance investment because they simply ignore the collective gains from stronger activity in their atomistic decisions. Central banks can address this market failure by disintermediating market-based finance.

Equity financing in a banking crisis: evidence from private firms

01/07/2025 European Central Bank Central banks

To what extent can private firms’ external equity substitute for debt financing in a banking crisis? To answer this question, I use firm-level data and firm-bank linkages to estimate the causal effect of an imported lending cut from a large German bank on firms’ capital structure and real outcomes. The estimates imply that for every 1 euro reduction in debt, private firms in Germany received 0.27 euros of external equity.

FEDS Paper: Nonparametric Time Varying IV-SVARs: Estimation and Inference

01/06/2025 Federal Reserve Central banks

Robin Braun, George Kapetanios, Massimiliano MarcellinoThis paper studies the estimation and inference of time-varying impulse response functions in structural vector autoregressions (SVARs) identified with external instruments. Building on kernel estimators that allow for nonparametric time variation, we derive the asymptotic distributions of the relevant quantities. Our estimators are simple and computationally trivial and allow for potentially weak instruments.

Financial institutions

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