Financial markets

Stefano Borgioli, Carl-Wolfram Horn, Urszula Kochanska, Philippe Molitor, Francesco Paolo Mongelli, Eva Mulder, Alessandro Zito, 03 December 2020

The COVID-19 shock is unprecedented in terms of the scale and speed of its effects. This column provides an overview of financial fragmentation in the euro area during the crisis through the lens of a novel high-frequency composite indicator. It reveals that after an initial sharp deterioration, euro area financial integration broadly recovered to pre-crisis levels by mid-September, thanks to unprecedented fiscal, monetary and prudential policy responses.

Giulio Cornelli, Jon Frost, Leonardo Gambacorta, Raghavendra Rau, Robert Wardrop, Tania Ziegler, 20 November 2020

Credit markets around the world are undergoing a transformation. Fintech and big tech firms are providing more lending to households and small businesses. Using a new database, this column estimates that fintech credit flows reached $223 billion in 2019, while big tech credit reached $572 billion. Both forms of credit are larger where there is greater (unmet) demand for credit and where economic and institutional factors favour the supply of such lending. The Covid-19 pandemic represents an important test for these new business models.

Timo B. Daehler, Joshua Aizenman, Yothin Jinjarak, 15 November 2020

Covid-19 was predicted to hit emerging markets particularly hard, as many containment measures were deemed less effective in an emerging market context. This column examines emerging market sovereign credit default swaps spreads during the pandemic and assesses the relative importance of global factors, sovereign fundamentals, COVID-19 mortality, and policy responses. The analysis suggests that while emerging market sovereign CDS spreads can be explained by regional and global risk factor before COVID-19, they were driven by fiscal space, commodity revenues and mobility dynamics during the pandemic, but not directly through variation in country-specific COVID-19 mortality rates.

Manuel A. Muñoz, 14 November 2020

Institutional real estate investment has more than quadrupled in the euro area since 2013, financed largely through non-bank lending, which is not subject to regulatory loan-to-value limits. This column uses a two-sector model of institutional real estate investors calibrated to quarterly data from the euro area economy to show that optimised (countercyclical) loan-to-value rules limiting the borrowing capacity of such investors are more effective in smoothing property price, credit, and business cycles than the well investigated dynamic loan-to-value rules that affect (indebted) households’ borrowing limit. The findings call for a strengthening of the macroprudential regulatory framework for non-banks.

Puriya Abbassi, Falk Bräuning, 31 October 2020

The recent and persistent failure of covered interest parity is inconsistent with the standard view of international finance textbooks. Current thinking relates this violation mostly to supply-side effects. This column argues that demand effects associated with banks’ management of foreign exchange exposure are also an important but are often overlooked driver. This result has implications for the current policy debate concerning global funding and foreign exchange markets, as well as the important role of the US dollar in international finance and banking.

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