Luc Laeven, Angela Maddaloni, Caterina Mendicino, 12 April 2022

Monetary and macroprudential policies are key components of the central bank toolkit. This column argues that, when evaluating these policies, their trade-offs and interactions must be taken into account. Macroprudential policy may face a trade-off between credit growth and risk, whereas the trade-off in monetary policy concerns the intermediation capacity of banks and their risk taking. While monetary and macroprudential policies can both safeguard financial stability, the authors argue that the latter should be the first line of defence. These considerations have significant implications for central banks when deciding policy actions.    

Markus K Brunnermeier, Harold James, Jean-Pierre Landau, 05 April 2022

The freezing of Russian foreign exchange reserves will have long-term and systemic consequences. This column argues, however, that the dominant role of the dollar as a reserve currency will be unaffected. No other country can provide the world with a large, liquid government bond market and a fully open capital account. Sanctions may have significant long-term effects on the demand for reserves. Countries may reduce their dependence on reserves by limiting their exposure to financial shocks and partially restricting capital movements. The international monetary system may evolve towards to a new architecture, where cross-border financial integration is reduced.

Alejandro Van der Ghote, 15 December 2021

Short-term interest rates, particularly the natural rate, have been in steady decline in the euro area and the US. This column argues that in economies with low natural rates, such as the euro area today, macroprudential policy can have benefits for the effectiveness of conventional monetary policy, in addition to safeguarding financial stability. Notably, macroprudential policies that curb leverage of financial intermediaries during upturns can also help stimulate aggregate demand during downturns, by containing systemic risk in financial markets.

Erik Feyen, Jon Frost, Leonardo Gambacorta, Harish Natarajan, Matthew Saal, 23 October 2021

Big Techs’ expansion into financial services can bring competition, efficiency, and inclusion, particularly in emerging market and developing economics. But it also gives rise to issues concerning a level playing field with banks, operational risk, too-big-to-fail issues, as well as challenges for antitrust rules and consumer protection. This column presents a policy triangle that highlights the trade-offs between three objectives: financial stability, competition, and data privacy. Handling these challenges requires more coordination on rules and standards, both between domestic authorities and across international borders. 

Davide Porcellacchia, 18 October 2021

Policy rates in advanced economies are unusually low. This phenomenon has competing effects: low rates harm bank profits by squeezing interest margins, but also boost the value of long-term assets held by banks. Using a standard banking model, this column determines the policy rate level at which these two forces cancel out, or the ‘tipping point’. Past this tipping point, the net effect of low rates on bank capital is negative. Applying the model to the US economy, the tipping point in August 2007 is estimated as a policy rate of 0.55%.

Maurice Obstfeld, 15 October 2021

Even after their role in the global financial crisis, globalised, minimally regulated financial markets are still regarded as inevitable and, on balance, good for us. Maurice Obstfeld of Berkeley tells Tim Phillips about the short but action-packed history of financial globalisation and asks whether we should be rethinking this aspect of capitalism too.

Read more about the research presented and download the free discussion paper:

Obstfeld, M. 2021. 'The Global Capital Market Reconsidered'. CEPR

Paul Hiebert, 13 July 2021

Climate change will impact those parts of the financial system most exposed to its disruptive effects. This column analyses a new financial stability risk mapping for the EU financial system, linking financial exposures of thousands of banks, insurance companies, and investment funds to millions of firms subject to climate risk. It highlights a high level of risk concentration, both in European regions subject to climate hazards as well as economic sectors with diverse carbon emission intensities. Long-term scenario analyses suggest that the risks will be best addressed through proactive policies that directly contain global temperature rises. 

Timo Löyttyniemi, 08 July 2021

Financial stability is at the core of central banking. This column assesses the various risks to financial stability stemming from climate change, which arise from physical risks, transition risks, and the chosen transition path towards a net zero economy. Additional risks arise from the changes in government policies, risks in green investments, mispricing of assets, and potential changes in metrics. The channels for financial instability are, as usual, the sustainability of government debt, the vulnerability of banking, and the volatility and liquidity of securities markets. Awareness of these additional financial stability risks could increase financial stability.

Markus Eberhardt, Andrea Presbitero, 26 April 2021

Commodity prices are one of the most important drivers of output fluctuations in developing countries. This column shows that a major channel through which commodity price movements can affect the real economy is their effect on financial stability. Commodity price volatility is likely to trigger financial instability and banking crises through a reduction in government revenues and a shortening of sovereign debt maturity, which in turn are likely to weaken banks’ balance sheets.

Eric Jondeau, Benoit Mojon, Cyril Monnet, 16 April 2021

The momentum towards greening the economy implies transition risks that represent new threats to financial stability. The risk of a run on brown assets, similar to that seen during the subprime crisis, can have widespread destabilising effects. This column proposes a liquidity backstop with an access fee proportional to carbon emissions, and a borrowing rate independent of emissions. It argues that such a facility will help green the economy, re-establish production efficiency, and avoid highly inefficient runs. An orderly reallocation of capital to a greener economy can lift long-term growth and facilitate the post-Covid recovery.

Sümeyra Atmaca, Karolin Kirschenmann, Steven Ongena, Koen Schoors, 16 January 2021

Deposit insurance has the potential to preserve and even restore financial stability in times of crises. This column uses evidence from more than 300,000 Belgian depositors of a large European bank during 2008 and 2009 to examine whether increasing deposit insurance coverage supported financial stability during the global financial crisis. It finds that the increase in deposit insurance coverage together with the nationalisation of a bank at the height of the financial crisis in the autumn of 2008 was effective in calming depositors. The effect of increased deposit insurance kicks in most strongly once the bank is reprivatised, and close bank-customer relationships and trust in the government reinforce the effect.

Tomáš Konečný, Lukáš Pfeifer, 19 November 2020

The financial sector has an essential role to play in addressing the economic fallout from the Covid-19 pandemic. This column discusses the link between financial stability and restrictions on the mobility of capital along national borders of cross-border banking groups in the context of macroprudential capital buffers. It argues that apart from the direct absorption of systemic shocks, such macroprudential policies also enhance the performance of existing risk-sharing mechanisms, in particular in the case of synchronous shocks in the EU. The ESRB recommendation for restrictions of distributions during the pandemic contributes to the stabilising role of macroprudential capital buffers in the EU.

Luis Garicano, Jesus Saa-Requejo, Tano Santos, 06 October 2020

One lasting effect of the Global Crisis and the Covid-19 crisis will be a large increase in general government debt worldwide. This may lead to a scenario of ‘fiscal dominance’, in which expansionary fiscal policies are combined with accommodating monetary policies to alleviate the debt burden. This column argues that such a situation would put central banks in a precarious position of having to contain inflationary pressures and maintain financial stability. Expanding the independence of central banks and reaffirming the commitment to fighting inflation may be necessary in case of an unexpected inflation shock. 

Signe Krogstrup, Andreas Kuchler, Morten Spange, 02 October 2020

Negative policy rates are controversial and raise questions about their transmission to the economy and financial markets. This column presents emerging evidence from Denmark, where the central bank's objective of maintaining a fixed exchange rate against the euro means that the key policy rate has been negative almost continuously since 2012. Recent and ongoing analyses suggest that the transmission is working well under negative rates, although pass-through to bank lending rates appears to be slower compared with periods of positive policy rates.

David Martinez-Miera, Rafael Repullo, 06 August 2020

The question of whether low interest rates foster or hamper financial stability has recently received ample attention both from policy as well as the academic circles,  leading to the development of a large, mostly empirical, literature on the topic. This column presents a framework to analyse the relevance of the financial sector’s market structure in answering this question. It shows that in markets with low competition lower safe rates result in less risk-taking by financial intermediaries, while in highly competitive markets lower safe rates result in higher risk-taking.

Henk Jan Reinders, Dirk Schoenmaker, Mathijs van Dijk, 13 July 2020

The severe economic impact of the COVID-19 pandemic could threaten financial stability. Since accounting-based methods report loan losses with a delay, this column adopts a real-time, market-based assessment of the impact on corporate loan portfolios. Using European stock market data, it estimates that the market-implied losses for euro area banks could reach over €1 trillion, or, depending on the scenario, 7-43% of available bank capital.

Arnoud Boot, Elena Carletti, Hans‐Helmut Kotz, Jan Pieter Krahnen, Loriana Pelizzon, Marti Subrahmanyam, 25 April 2020

The involvement of the EU in fighting the detrimental consequences of the Covid crisis has to be increased. This column expands on an earlier proposal for a European Pandemic Equity Fund – a programme of government assistance for firms hurt by the crisis in the EU – and discusses the principles and conditions relevant for the operationalisation of such a fund.

Enrico Perotti, 27 March 2020

Enrico Perotti tells Tim Phillips that while regulatory reform means that banks are unlikely to be at risk, the coronavirus shock poses a serious liquidity risk for the shadow banking sector, where significant funding has been extended on the basis of cash flow rather than real collateral. Avoiding financial panic is key, and will require liquidity support as well as targeted fiscal measures.

Enrico Perotti, 27 March 2020

Years of quantitative easing by the ECB have suppressed sovereign yields to historic lows. This has contributed to a shadow banking boom, as market participants invested heavily in various private asset constructions. This column argues that the coronavirus shock poses a serious liquidity risk for the shadow banking sector, where significant funding has been extended on the basis of cash flow rather than real collateral. Avoiding financial panic is key, and will require liquidity support as well as targeted fiscal measures. 

Arnoud Boot, Elena Carletti, Hans‐Helmut Kotz, Jan Pieter Krahnen, Loriana Pelizzon, Marti Subrahmanyam, 25 March 2020

The COVID-19 pandemic has massive detrimental economic effects and demands immediate policy actions to prevent a financial or debt crisis. This column argues that while the fiscal policy responses in Europe have some merit in the short term, they put financial stability in the longer run at risk. It calls for a coordinated long-term fiscal plan at the pan-European level to complement national measures. 



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