ECB - European Central Bankhttps://www.ecb.europa.eu/Latest releases on the ECB website - Press releases, speeches and interviews, press conferences.enCopyright 2024, European Central Bank webmaster@ecb.europa.eu (ECB Webmaster)Mon, 18 Mar 2024 13:40:26 +0100 Press Automatic http://blogs.law.harvard.edu/tech/rss Determinants of currency choice in cross-border bank loansThis paper provides insights into the determinants of currency choice in cross-border bank lending, such as bilateral distance, financial and trade linkages to issuer countries of major currencies, and invoicing currency patterns. Cross-border bank lending in US dollars, and particularly in euro, is highly concentrated in a small number of countries. The UK is central in the international network of loans denominated in euro, although there are tentative signs that this role has diminished for lending to non-banks since Brexit. Offshore financial centres are pivotal for US dollars loans, reflecting, in particular, lending to non-bank financial intermediaries in the Cayman Islands, possibly as a result of regulatory and tax optimisation strategies. The empirical analysis suggests that euro-denominated loans face the “tyranny of distance”, in line with predictions of gravity models of trade, in contrast to US dollar loans. Complementarities between trade invoicing and bank lending are found for both the euro and the US dollar.https://www.ecb.europa.eu//pub/pdf/scpwps/ecb.wp2918~6602d9ff72.en.pdfhttps://www.ecb.europa.eu//pub/pdf/scpwps/ecb.wp2918~6602d9ff72.en.pdfMon, 18 Mar 2024 11:00:00 +0100 Spare tyres with a hole: investment funds under stress and credit to firmsWe study the impact of a liquidity shock affecting investment funds on the financing conditions of firms. The abrupt liquidity needs of investment funds, triggered by the outbreak of the Covid-19 pandemic, prompted a retrenchment from bond purchases of firms and a withdrawal of short term funds from banks, impacting firm financing costs directly via bond markets, and indirectly via banks. According to our results, the spreads of corporate bonds held by investment funds increased. Furthermore, an increase in the short term funding exposure of a bank to investment funds triggered a contraction in new loans to euro area firms. Overall, our results show that while non-banks in general support firm financing by acting as a spare tyre when banks do not, their own stress can trigger a contractionary credit supply effect for firms.https://www.ecb.europa.eu//pub/pdf/scpwps/ecb.wp2917~448d567a5f.en.pdfhttps://www.ecb.europa.eu//pub/pdf/scpwps/ecb.wp2917~448d567a5f.en.pdfThu, 14 Mar 2024 11:00:00 +0100 Greening the economy: how public-guaranteed loans influence firm-level resource allocationThis study investigates the underlying reasons for banks’ continued support of fossil fuel-based firms and examines the role of public guaranteed loans (PGLs) in redirecting resources towards greener economic activities, thereby facilitating the climate transition process. Using a unique pan-European credit register dataset, we combine supervisory bank data with firm-level greenhouse gas emission data and financial information. Our analysis yields three main findings. Firstly, European banks perceive lending to green companies as riskier compared to their brown counterparts, a phenomenon we term as the “green-transition risk.” Secondly, we provide evidence that during the COVID-19 pandemic, European banks have strategically leveraged PGLs to channel resources towards environmentally sustainable activities, thereby augmenting the proportion of green loans in their portfolios and partially shifting the inherent “green-transition risk” to European governments and citizens. Lastly, our investigation reveals a banking preference for awarding PGLs to financially robust green firms over less profitable, highly indebted green firms, which could pose significant challenges for green businesses requiring financial support during the COVID-19 crisis.https://www.ecb.europa.eu//pub/pdf/scpwps/ecb.wp2916~f95e083a6e.en.pdfhttps://www.ecb.europa.eu//pub/pdf/scpwps/ecb.wp2916~f95e083a6e.en.pdfWed, 13 Mar 2024 12:00:00 +0100 Consumers' payment preferences and banking digitalisation in the euro areaThis paper contributes to understanding consumers' retail payment preferences and digitalisation in personal finances. We focus on the acceptance of cashless payments in everyday situations and the use of mobile banking apps in the euro area, where the payment services market has changed significantly in recent years. In particular, we study app-based tools for day-to-day (offline) purchases that involve small amounts of money as well as digital tools for managing personal finances. By looking at factors associated with using non-cash payment methods, and app-based financial services solutions, we shed light on the topic of financial inclusion in payment services that concern consumers’ everyday choices. Using granular microdata from the European Central Bank's Consumer Expectations Survey, we find that most people prefer to use only one payment instrument. After the COVID-19 pandemic, it has mostly been cash and contactless cards. The use of cash is partly due to limited perceived acceptance of non-cash payments by merchants. We also find substantial cross-country heterogeneity and highlight the prominent role of demographic factors in choosing non-cash payment options and app-based tools when managing personal finances. While mobile banking is already popular amongst euro area consumers, the use of smart payment methods remains very limited. Our findings suggest that financial service providers should recognize the growing preference of the younger generations for alternative payment methods. Creating awareness among consumers might also lead to positive feedback effects by reducing consumers’ reliance on cash through higher perceived availability of non-cash payment options.https://www.ecb.europa.eu//pub/pdf/scpwps/ecb.wp2915~85b11b83ed.en.pdfhttps://www.ecb.europa.eu//pub/pdf/scpwps/ecb.wp2915~85b11b83ed.en.pdfTue, 12 Mar 2024 11:00:00 +0100 Tell me something I don’t already know: learning in low and high-inflation settingsUsing randomized control trials (RCTs) applied over time in different countries, we study whether the economic environment affects how agents learn from new information. We show that as inflation rose in advanced economies, both households and firms became more attentive and informed about publicly available news about inflation, leading them to respond less to exogenously provided information about inflation and monetary policy. We also study the effects of RCTs in countries where inflation has been consistently high (Uruguay) and low (New Zealand) as well as what happens when the same agents are repeatedly provided information in both low-and high-inflation environments (Italy). Our results broadly support models in which inattention is an endogenous outcome that depends on the economic environment.https://www.ecb.europa.eu//pub/pdf/scpwps/ecb.wp2914~d6a8832bf5.en.pdfhttps://www.ecb.europa.eu//pub/pdf/scpwps/ecb.wp2914~d6a8832bf5.en.pdfMon, 11 Mar 2024 11:00:00 +0100 Public guarantees, private banks’ incentives, and corporate outcomes: evidence from the COVID-19 crisisWe show that public guaranteed loans (PGL) increase credit availability improving real effects, but private banks’ incentives imply that weaker banks shift riskier corporate loans to taxpayers. We exploit credit register data during the COVID-19 shock in Spain, and a stylized model guides the empirics. Unlike non-PGL, banks provide more PGL to riskier firms in which banks have higher pre-crisis shares of firm total credit. Importantly, these effects are stronger for weaker banks. Results using firm(-bank) fixed effects and loan volume versus price information suggest a credit supply-driven mechanism. Moreover, exploiting exogenous variation across similar firms with differing PGL access, we confirm these findings, and we additionally show that PGL increases banks’ overall lending and credit share, with positive effects for firm survival and investment.https://www.ecb.europa.eu//pub/pdf/scpwps/ecb.wp2913~6bf956d0d3.en.pdfhttps://www.ecb.europa.eu//pub/pdf/scpwps/ecb.wp2913~6bf956d0d3.en.pdfFri, 08 Mar 2024 11:00:00 +0100 The nonlinear effects of banks’ vulnerability to capital depletion in euro area countriesWhen capital in the banking system becomes depleted, the degree to which financial intermediation and the macroeconomy are adversely affected is likely to depend on the financial and macroeconomic environment. However, existing studies either assume that the effects of bank capital shocks are linear or ignore feedback effects and the impact on the macroeconomy. Using data on the largest euro area countries and Bayesian Panel Threshold VARs, we investigate the importance of different factors in amplifying shocks in banks’ vulnerability to capital depletion. Our results demonstrate that nonlinearities matter. When the banking sector is already vulnerable to large capital losses, it is more difficult for banks to accommodate a depletion in capital and lending and economic activity contract more severely. Similarly, low interest rates, which are typically associated with low bank margins and profitability, also lead to a larger decline in lending. De-risking is also more pronounced in these cases. The state of the business cycle, though, does not influence the propagation of shocks to the same extent. We conclude that financial factors play a larger role than the macroeconomic environment in heightening shocks to banks’ vulnerability to capital depletion.https://www.ecb.europa.eu//pub/pdf/scpwps/ecb.wp2912~509bec90c2.en.pdfhttps://www.ecb.europa.eu//pub/pdf/scpwps/ecb.wp2912~509bec90c2.en.pdfWed, 21 Feb 2024 11:00:00 +0100 Aggregate uncertainty, HANK, and the ZLBWe propose a novel methodology for solving Heterogeneous Agents New Keynesian (HANK) models with aggregate uncertainty and the Zero Lower Bound (ZLB) on nominal interest rates. Our efficient solution strategy combines the sequence-state Jacobian methodology in Auclert et al. (2021) with a tractable structure for aggregate uncertainty by means of a two-regimes shock structure. We apply the method to a simple HANK model to show that: 1) in the presence of aggregate non-linearities such as the ZLB, a dichotomy emerges between the aggregate impulse responses under aggregate uncertainty against the deterministic case; 2) aggregate uncertainty amplifies downturns at the ZLB, and household heterogeneity increases the strength of this amplification; 3) the effects of forward guidance are stronger when there is aggregate uncertainty.https://www.ecb.europa.eu//pub/pdf/scpwps/ecb.wp2911~5d21f9056f.en.pdfhttps://www.ecb.europa.eu//pub/pdf/scpwps/ecb.wp2911~5d21f9056f.en.pdfWed, 21 Feb 2024 11:00:00 +0100 Climate transition risk in the banking sector: what can prudential regulation do?Climate-related risks are due to increase in coming years and can pose serious threats to financial stability. This paper, by means of a DSGE model including heterogeneous firms and banks, financial frictions and prudential regulation, first shows the need of climate-related capital requirements in the existing prudential framework. Indeed, we find that without specific climate prudential policies, transition risk can generate excessive risk-taking by banks, which in turn increases the volatility of lending and output. We further show that relying on microprudential regulation alone would not be enough to account for the systemic dimension of transition risk. Implementing macroprudential policies in addition to microprudential regulation, leads to a Pareto improvement.https://www.ecb.europa.eu//pub/pdf/scpwps/ecb.wp2910~c4d2c82f8c.en.pdfhttps://www.ecb.europa.eu//pub/pdf/scpwps/ecb.wp2910~c4d2c82f8c.en.pdfFri, 16 Feb 2024 11:00:00 +0100 Mortgage borrowing limits and house prices: evidence from a policy change in IrelandThis paper studies how mortgage borrowers and house prices react to a tightening of mortgage limits following a policy change in Ireland in 2015. The policy introduced limits to the loan-to-income and loan-to-value ratios of new mortgages issued. In response to a tightening borrowing constraint, borrowers can choose to purchase a cheaper house or to reduce the leverage (LTV) of the mortgage. Using a difference-in-difference methodology, I find that groups of (poorer) borrowers, who were more likely to be above the loan-to-income threshold before the policy, responded primarily by buying cheaper houses after the policy change. On the other hand, groups of (richer) borrowers, who were more likely to be above the loan-to-value threshold, responded primarily by reducing the LTV of the mortgage. Borrowers who purchase cheaper houses could be buying smaller houses or the same size houses at a lower equilibrium price. To test for changes in equilibrium prices, I compare prices across postcodes and find that houses prices fell after the policy change in postcodes where a higher fraction of borrowers were above the loan-to-income threshold before the policy.https://www.ecb.europa.eu//pub/pdf/scpwps/ecb.wp2909~aac6428413.en.pdfhttps://www.ecb.europa.eu//pub/pdf/scpwps/ecb.wp2909~aac6428413.en.pdfThu, 15 Feb 2024 11:00:00 +0100 Measuring market-based core inflation expectationsWe build a novel term structure model for pricing synthetic euro area core inflation-linked swaps, a hypothetical swap contract indexed to core inflation. Our approach relies on a term structure model of traded headline inflation-linked swap rates, which we assume span core inflation. The model provides estimates of market-based expectations for core inflation, as well as core inflation risk premia, at daily frequency, whereas core inflation expectations from surveys or macroeconomic projections are typically only available monthly or quarterly. We find that core inflation-linked swap rates are generally less volatile than headline inflation linked swap rates and that market participants expected core inflation to be substantially more persistent than headline inflation following the 2022 energy price spike. Using an event-study methodology, we also find that monetary policy shocks significantly lower core inflation expectations.https://www.ecb.europa.eu//pub/pdf/scpwps/ecb.wp2908~be0bc7b58e.en.pdfhttps://www.ecb.europa.eu//pub/pdf/scpwps/ecb.wp2908~be0bc7b58e.en.pdfWed, 14 Feb 2024 11:00:00 +0100 Managing the transition to central bank digital currencyWe develop a two-country DSGE model with financial frictions to study the transition from a steady-state without CBDC to one in which the home country issues a CBDC. The CBDC provides households with a liquid, convenient and storage-cost free means of payments which reduces the market power of banks on deposits. In the steady-state CBDC unambiguously improves welfare without disintermediating the banking sector. But macroeconomic volatility in the transition period to the new steady-state increases for plausible values of the latter. Demand for CBDC and money overshoot, thereby crowding out bank deposits and leading to initial declines in investment, consumption and output. We use non-linear solution methods with occasionally binding constraints to explore how alternative policies reduce volatility in the transition, contrasting the effects of restrictions on non-residents, binding caps, tiered remuneration and central bank asset purchases. Binding caps reduce disintermediation and output losses in the transition most effectively, with an optimal level of around 40% of steady-state CBDC demand.https://www.ecb.europa.eu//pub/pdf/scpwps/ecb.wp2907~99a3b6f7cc.en.pdfhttps://www.ecb.europa.eu//pub/pdf/scpwps/ecb.wp2907~99a3b6f7cc.en.pdfTue, 13 Feb 2024 11:00:00 +0100 Demographics, labor market power and the spatial equilibriumThis paper studies how demographics affect aggregate labor market power, the urban wage premium and the spatial concentration of population. I develop a quantitative spatial model in which labor market competitiveness depends on the demographic composition of the local workforce. Using highly disaggregated administrative data from Germany, I find that firms have more labor market power over older workers: The labor supply elasticity decreases from more than 2 to 1 from age 20 to 64. Calibrating the model with the reduced-form elasticity estimates, I find that differences in labor supply elasticities across age groups can explain 4% of the urban wage premium and 2% of the spatial concentration of population. Demographics and skill together account for 10% of the urban wage premium and 2% of agglomeration.https://www.ecb.europa.eu//pub/pdf/scpwps/ecb.wp2906~5da887294e.en.pdfhttps://www.ecb.europa.eu//pub/pdf/scpwps/ecb.wp2906~5da887294e.en.pdfMon, 12 Feb 2024 11:00:00 +0100 Gas price shocks and euro area inflationThis paper develops a Bayesian VAR model to identify three structural shocks driving the European gas market: demand, supply and inventory shocks. We document how gas price fluctuations have a heterogeneous pass-through to euro area prices depending on the underlying shock driving them. The pass-through is stronger and more persistent when gas prices are driven by aggregate demand or supply pressures, while inventory shocks have a weaker impact. Supply shocks, moreover, are found to pass through to all components of euro area inflation – producer prices, wages and core inflation, which has implications for monetary policy. We finally document how the response of gas prices to shocks is non-linear and is significantly magnified in periods of low unemployment.https://www.ecb.europa.eu//pub/pdf/scpwps/ecb.wp2905~6b246d6bf4.en.pdfhttps://www.ecb.europa.eu//pub/pdf/scpwps/ecb.wp2905~6b246d6bf4.en.pdfMon, 12 Feb 2024 11:00:00 +0100 Households' response to the wealth effects of inflationWe study the redistributive effects of surprise inflation combining administrative bank data with an information provision experiment during an episode of historic inflation. On average, households are well-informed about prevailing inflation and are concerned about its impact on their wealth; yet, while many households know about inflation eroding nominal assets, most are unaware of nominal-debt erosion. Once they receive information on the debt-erosion channel, households view nominal debt more positively and increase estimates of their own real net wealth. These changes causally affect actual consumption and hypothetical debt decisions. Our findings suggest that real wealth mediates the sensitivity of consumption to inflation once households are aware of the wealth effects of inflationhttps://www.ecb.europa.eu//pub/pdf/scpwps/ecb.wp2904~27941cd33f.en.pdfhttps://www.ecb.europa.eu//pub/pdf/scpwps/ecb.wp2904~27941cd33f.en.pdfThu, 08 Feb 2024 11:00:00 +0100