European Central Bank

Consumer confidence and household consumption decisions

08/06/2025 European Central Bank Central banks

Consumer confidence plays an important role in determining economic activity. This box presents a consumer confidence indicator derived from the ECB’s Consumer Expectations Survey to explore its relation with household consumption. Analysis reveals that confidence levels vary by income quintile, with high-income households demonstrating greater sensitivity to economic news, in line with their greater financial literacy and higher share of discretionary spending.

Should we mind the gap? An assessment of the benefits of equity markets and policy implications for Europe’s capital markets union

08/05/2025 European Central Bank Central banks

The European Union (EU) economy depends heavily on bank funding. For this reason, strengthening EU equity markets as an alternative funding source has been a policy priority under the Capital Markets Union (CMU) agenda, and more recently a key feature of the Savings and Investment Union (SIU). EU listed equity markets are smaller and structurally different from those in the United States (US), with differing market capitalisations of listed firms and differences in the number of companies listed, stemming from lower initial public offering (IPO) activity in Europe.

The impact of climate litigation risk on firms’ cost of bank loans

08/05/2025 European Central Bank Central banks

Using a novel worldwide dataset of 5,264 syndicated loans issued to 329 firms from 2006 to 2021, we study how climate-related litigation risk affects firm’s cost of borrowing. We find robust empirical evidence that firms targeted by climate lawsuits pay significantly higher spreads on their bank loans. These effects are more pronounced for firms with weaker environmental performance and higher ESG controversies. The results suggest that lender’s view climate litigation as a material risk factor, which is increasingly priced into debt contracts.

The impact of climate litigation risk on firms’ cost of bank loans

08/05/2025 European Central Bank Central banks

Using a novel worldwide dataset of 5,264 syndicated loans issued to 329 firms from 2006 to 2021, we study how climate-related litigation risk affects firm’s cost of borrowing. We find robust empirical evidence that firms targeted by climate lawsuits pay significantly higher spreads on their bank loans. These effects are more pronounced for firms with weaker environmental performance and higher ESG controversies. The results suggest that lender’s view climate litigation as a material risk factor, which is increasingly priced into debt contracts.

Enhancing the ECB’s O-SII framework

08/05/2025 European Central Bank Central banks

Capital buffers for other systemically important institutions (O-SIIs) are set by national authorities. They vary greatly across the EU Member States participating in the banking union. On 1 January 2025 the ECB started using an enhanced floor methodology to assess national O-SII buffer decisions. This methodology adopts a banking union (BU) perspective to address “too-big-to-fail”-related risks at the BU level. The aim is to reduce the heterogeneity in O-SII buffers and achieve a more consistent treatment of the most systemically important institutions.

Heterogeneity in buffers set for systemically important banks in the European banking union

08/05/2025 European Central Bank Central banks

Unwarranted heterogeneity in O-SII buffer levels across the European banking union may have adverse consequences for financial stability and the level playing field in the banking market. Analysis of national buffer-setting yields evidence of heterogeneity which does not result from differences in the size, concentration and funding structure of the domestic banking systems. From a banking union perspective, buffer-setting by national authorities results in heterogeneity at both the upper and the lower end of the distribution of a bank’s systemic relevance.

Hand-to-mouth banks: deposit inflows and the marginal propensity to lend

08/04/2025 European Central Bank Central banks

In modern macroeconomics, the marginal propensity to consume out of transitory income shocks is a central object of interest. This paper empirically explores a parallel concept in banking: the marginal propensity to lend out of unsolicited deposit inflows (MPLD). Using county-level dividend payouts as an instrument for deposit inflows, I estimate the MPLD for U.S. banks and show that before QE, the average bank operated “hand-to-mouth” — it transformed approximately every dollar of deposit inflow into new loans, consistent with tight liquidity constraints.

Beyond averages: heterogeneous effects of monetary policy in a HANK model for the euro area

08/04/2025 European Central Bank Central banks

We introduce an estimated medium scale Heterogeneous-Agent New Keynesian model for forecasting and policy analysis in the Euro Area and discuss the applications of this type of models in central banks, focusing on two main exercises. First, we examine an alternative scenario for monetary policy during the early 2020s inflationary episode, showing that earlier hikes in interest rates would have affected more strongly households at the lower end of the wealth distribution, whose consumption our model suggests was already depressed relative to the rest of the population.

Hand-to-mouth banks: deposit inflows and the marginal propensity to lend

08/04/2025 European Central Bank Central banks

In modern macroeconomics, the marginal propensity to consume out of transitory income shocks is a central object of interest. This paper empirically explores a parallel concept in banking: the marginal propensity to lend out of unsolicited deposit inflows (MPLD). Using county-level dividend payouts as an instrument for deposit inflows, I estimate the MPLD for U.S. banks and show that before QE, the average bank operated “hand-to-mouth” — it transformed approximately every dollar of deposit inflow into new loans, consistent with tight liquidity constraints.

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