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)Wed, 27 Mar 2024 16:50:23 +0100 Press Automatic http://blogs.law.harvard.edu/tech/rss Consumer participation in the credit market during the COVID-19 pandemic and beyondThis paper analyses the consumer’s decision to apply for credit and the probability of the credit being accepted in the euro area during a period characterized by the unprecedented concomitance of events and changing borrowing conditions linked to the global COVID-19 pandemic and the Russian invasion of Ukraine. We use data between 2020Q1 and 2023Q2 from the ECB’s Consumer Expectations Survey. We find that the credit demand is highest when the first lockdown ends and drops when supportive monetary compensation schemes are implemented. There is evidence that constrained households are significantly less likely to apply for credit. Credit is more likely to be accepted under favourable borrowing conditions and after the approval of national recovery plans. We also find that demographic, economic factors, perceptions and expectations are associated with the demand for credit and the credit grant.https://www.ecb.europa.eu//pub/pdf/scpwps/ecb.wp2922~1f550b10fb.en.pdfhttps://www.ecb.europa.eu//pub/pdf/scpwps/ecb.wp2922~1f550b10fb.en.pdfWed, 27 Mar 2024 11:00:00 +0100 Business as usual: bank climate commitments, lending, and engagementThis paper studies the impact of voluntary climate commitments by banks on their lending activity. We use administrative data on the universe of bank lending from 19 European countries. There is strong selection into commitments, with increased participation by the largest banks and banks with the most pre-existing exposure to high-polluting industries. Setting a commitment leads to a boost in a lender’s ESG rating. Lenders reduce credit in sectors they have targeted as high priority for decarbonization. However, climate-aligned banks do not change their lending or loan pricing differentially compared to banks without climate commitments, suggesting they are not actively divesting. We can reject that climate-aligned lenders divest from firms in targeted sectors by more than 2.6%. Firm borrowers are no more likely to set climate targets after their lender sets a climate target, which casts doubt on active engagement by lenders. These results call into question the efficacy of voluntary commitments.https://www.ecb.europa.eu//pub/pdf/scpwps/ecb.wp2921~603e225101.en.pdfhttps://www.ecb.europa.eu//pub/pdf/scpwps/ecb.wp2921~603e225101.en.pdfFri, 22 Mar 2024 11:00:00 +0100 The impact of regulatory changes on rating behaviourWe examine rating behaviour after the introduction of new regulations regarding Credit Rating Agencies (CRAs) in the European securitisation market. Employing a large sample of 12,469 ABS tranches issued between 1998 and 2018, we examine the information content of yield spreads of ABS at the issuance and compare the pre- and post-GFC periods. We find that the regulatory changes have been effective in tackling conflicts of interest between issuers and CRAs in securitisation. Rating catering seems to have disappeared in the post-GFC period. Yet we see limited effectiveness on rating shopping. It follows that rating over-reliance might be an issue, especially for investors of higher-quality ABS.https://www.ecb.europa.eu//pub/pdf/scpwps/ecb.wp2920~f44cdd68b2.en.pdfhttps://www.ecb.europa.eu//pub/pdf/scpwps/ecb.wp2920~f44cdd68b2.en.pdfThu, 21 Mar 2024 11:00:00 +0100 US monetary policy is more powerful in low economic growth regimesWe use nonlinear empirical methods to uncover non-linearities in the propagation of monetary policy shocks. We find that the transmission on output, goods prices and asset prices is stronger in a low growth regime, contrary to the findings of Tenreyro and Thwaites (2016). The impact is stronger on private investment and durables and milder on the consumption of nondurable goods and services. In periods of low growth, a contractionary monetary policy implies lower expected Treasury rates and higher premia along the entire Treasury yield curve. Similarly, the corporate excess bond premium rises and the stock market drops substantially during recessions. We use the monetary policy surprises and their predictors provided by Bauer and Swanson (2023a), and identify an additional predictor, the National Financial Condition Index (NFCI), which is relevant in the nonlinear setting. A Threshold VAR, a Smooth-Transition VAR and nonlinear local projection methods all corroborate the findings.https://www.ecb.europa.eu//pub/pdf/scpwps/ecb.wp2919~6772f94014.en.pdfhttps://www.ecb.europa.eu//pub/pdf/scpwps/ecb.wp2919~6772f94014.en.pdfThu, 21 Mar 2024 11:00:00 +0100 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