European Central Bank

Communication for financial crisis prevention: a tale of two decades

11/20/2024 European Central Bank Central banks

This edition of the ECB’s Financial Stability Review (FSR) marks the 20th anniversary of its inaugural publication. The FSR was originally launched to help in preventing financial crises, and this special feature draws lessons from two decades of experience in identifying, analysing and communicating about systemic risks via this publication. Although risk analysis and risk communication are distinct processes, the special feature emphasises that they are inextricably intertwined in a seamless cycle where each informs and enhances the other.

Low firm productivity: the role of finance and the implications for financial stability

11/18/2024 European Central Bank Central banks

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.

Keep calm, but watch the outliers: deposit flows in recent crisis episodes and beyond

11/15/2024 European Central Bank Central banks

Since the March 2023 banking turmoil, a policy debate has emerged concerning the unprecedented scale and speed of the observed deposit outflows. Have recent stress episodes and developments in technology structurally changed depositors’ behaviour? Are the Basel III liquidity coverage ratio (LCR) run-off assumptions for cash outflows still fit for purpose? Leveraging on monthly liquidity reporting for a sample of 110 significant institutions (SIs) between 2016 and 2024, we shed light on some stylised facts pertaining to the composition of deposit flows in the banking union.

Banks and non-banks stressed: liquidity shocks and the mitigating role of insurance companies

11/14/2024 European Central Bank Central banks

This paper documents the extension of the system-wide stress testing framework of the ECB with the insurance sector for a more thorough assessment of risks to financial stability. The special nature of insurers is captured by the modelling of the liability side and its loss absorbing capacity of technical provisions as the main novel feature of the model.

Real effects of credit supply shocks: evidence from Danish banks, firms, and workers

11/14/2024 European Central Bank Central banks

Contractions in credit supply can lead firms to reduce their level of employment, yet little is known about how these shocks affect the composition of firms’ employees and outcomes at the worker level. This paper investigates how bank distress affects credit provision and its effects on employment beyond firm-level aggregates. To do so, we use a novel dataset built from administrative and tax records linking all banks, firms, and workers in Denmark.

Real effects of credit supply shocks: evidence from Danish banks, firms, and workers

11/14/2024 European Central Bank Central banks

Banks and non-banks stressed: liquidity shocks and the mitigating role of insurance companies

11/14/2024 European Central Bank Central banks

The impact of central bank digital currency on central bank profitability, risk-taking and capital

11/13/2024 European Central Bank Central banks

As digital payments become increasingly popular, many central banks are looking into the issuance of retail central bank digital currency (CBDC) as a new central bank monetary liability in addition to banknotes and commercial bank reserves. CBDC will have broadly the same balance sheet and profit implications as the issuance of banknotes.

For whom the bill tolls: redistributive consequences of a monetary-fiscal stimulus

11/08/2024 European Central Bank Central banks

During the COVID-19 pandemic, governments in the euro area sharply increased spending while the European Central Bank eased financing conditions. We use this episode to assess how such a concerted monetary-fiscal stimulus redistributes welfare between various age cohorts. Our assessment involves not only the income side of household balance sheets (mainly direct effects of transfers) but also the more obscure financing side that, to a substantial degree, occurred via indirect effects (with a prominent role of the inflation tax).

Financial returns, sentiment and market volatility. A dynamic assessment.

11/08/2024 European Central Bank Central banks

In 1936, John Maynard Keynes proposed that emotions and instincts are pivotal in decision-making, particularly for investors. Both positive and negative moods can influence judgments and decisions, extending to economic and financial choices. Intuitions, emotional states, and biases significantly shape how people think and act. Measuring mood or sentiment is challenging, but surveys and data collection methods, such as confidence indices and consensus forecasts, offer some solutions.

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