Glossy Green Banks: The Disconnect Between European Banks’ Sustainability Reporting and Lending Activities

Coauthors: M. Giannetti, M. Jasova, M. Loumioti

We study the relation between banks’ environmental disclosures and lending activities. Taking advantage of granular loan-level data from a euro-area credit registry, we show that banks with extensive environmental disclosures lend more to brown borrowers and do not provide more credit to firms in green industries. These results are not driven by banks’ financing of brown borrowers’ transition to greener technologies. Instead, banks lend to the weakest borrowers in brown industries, especially if they have low capital adequacy. Our results suggest that banks overemphasize their climate goals and credentials while continuing their relationships with polluting borrowers.

Distributional Effects of Bank Equity Losses 

Coauthors: M. Peruffo and Lukas Nord

This paper studies the distributive effects of banking sector losses on household consumption and welfare. Using data from the Consumer Expenditure Survey, we document that in response to declines in bank equity returns the consumption of low-income households decreases by roughly twice as much as that of the average household. To understand this result, we develop a heterogeneous-agent model featuring rich income and portfolio heterogeneity and a banking sector subject to financial frictions. The model matches the empirically observed inequality in consumption responses following a shock to banks’ asset returns. Households at the bottom of the income distribution suffer from losses in labor earnings and from an increase in the cost of borrowing. In contrast, high-income consumers can take advantage of temporarily low asset prices and high future returns and increase their savings to sustain higher consumption in the medium term. In fact, a fraction of households benefit from distress in the banking sector. A debt-financed asset purchase program can improve welfare, especially for low-income individuals, by dampening the increase in credit spreads and stabilizing investment.

Bank Foreign Liabilities and Capital Requirements

Coauthors: L. Falasconi, P. Herrera, D. Supera

Setting bank capital requirements to appropriate high levels is essential to increase the resilience of the banking sector to domestic financial shocks. Higher bank capital requirements are, however, associated with a larger reliance on foreign liabilities which make the economy more vulnerable to external financial shocks. Sterilized foreign exchange rate interventions are effective in weakening this policy trade-off. A combination of both policy measures is desirable, especially when the distress in the banking sector is at high levels.

Savings, Efficiency and the Nature of Bank Runs 

Coauthors:  Agnese Leonello, Ettore Panetti and Davide Porcellacchia

Does the level of deposits matter for bank fragility and efficiency? In a banking model with endogenous bank runs and a consumption-saving decision, we show that the level of deposits has opposite effects on bank fragility depending on the nature of bank runs. In an economy with panic-driven runs, higher deposits make banks less fragile, while the opposite is true when runs are only driven by fundamentals. The effect of deposits is not internalized by depositors. A saving externality arises, leading to excessive fragility and insufficient liquidity provision. The economy features under-saving when runs are panic driven, and over-saving when fundamental driven.

Monetary Policy, Labor Income Redistribution and the Credit Channel: Evidence from Matched Employer-Employee and Credit Registers 

Coauthors: M. Jasova, E. Panetti, J-L Peydro, D. Supera) CEPR WP

This paper documents the redistributive effects of monetary policy on labor market outcomes via the credit channel. For identification, we exploit matched administrative datasets in Portugal -- employee-employer and credit registers -- and monetary policy since the Eurozone creation. We find that softer monetary policy improves wages, hours worked and firm employment more in small and young firms, which are more financially constrained. Within these firms, the wage effects accrue to incumbent workers, in line with the back-loaded wage mechanism. Consistent with the capital-skill complementarity mechanism, we document an increase in skill premium and show that financially constrained firms increase both physical and human capital investment the most. Our findings uncover a central role for both the firm-balance sheet and the bank lending channels of the monetary policy transmission to labor income inequality, with state-dependent effects that are substantially stronger during crisis times. Importantly, we do not find any redistributive effects for firms without bank credit. 

Tighter Credit and Consumer Bankruptcy Insurance CEPR WP

Coauthors: A. Antunes, T.Cavalcanti, M. Peruffo and A.Villamill

·         Presented at EEA 2020 Invited session on The Micro and Macro of Consumer Credit

How does bankruptcy protection affect household balance sheet adjustments and aggregate consumption when credit tightens? Using a tractable model of unsecured consumer credit we quantify the trade-off between the insurance and the creditworthiness effects of bankruptcy in response to tighter credit. We show that bankruptcy dampens the effect of tighter credit on aggregate consumption on impact. This is because it allows borrowers to sustain consumption against severe financial distress. However, by leading to consumers' exclusion from the credit market for a certain period, bankruptcy also reduces their ability to smooth consumption over time, implying a slower recovery. The bankruptcy code establishes how costly it is to default, and, thus, plays a crucial role in determining consumers' bankruptcy decisions and in shaping consumption dynamics. We quantify that the 2005 BAPCPA reform, by making filing for bankruptcy more costly, worsened the negative welfare effects of the subsequent credit tightening.

Equity versus Bail-in Debt in Banking: An Agency Perspective (with K. Nikolov, J. Suarez) 

·         R&R Journal of the European Economic Association

Housing Market Dynamics: Any News? (with S. Gomes) Working Paper 1775, European Central Bank. ON LINE APPENDIX.

·         R&R International Journal of Central Banking

Collateral Requirements: Macroeconomic Fluctuations and Macro-Prudential Policy Working Paper 201211 Banco de Portugal. 

·         R&R Macroeconomic Dynamics

PUBLICATIONS IN PEER-REWIED JOURNALS 

2024

[24] Twin Defaults and Capital Requirements (with K. Nikolov, J. Rubio-Ramirez, J. Suarez, and D. Supera). SSRN WP. CEPR WP, Forthcoming Journal of Finance

Columns on the paper: @ECB @VoxEU

2023

[22] Systemic Risk and Monetary Policy: The Haircut Gap Channel of the Lender of Last Resort (with Martina Jasova, Luc Laeven, Jose-Luis Peydro and D. Supera) CEPR WP Accepted Review of Financial Studies. 

·         Winner of the 2021 Best Paper Award, MARC Conference

[21] ”Wall Street QE vs. Main Street Lending”: A Comment European Economic Review, Volume 161, January 2024, 104569.

2021

[20] Expectation-Driven Cycles and the Changing Dynamics of Unemployment (with A. D'Agostino and F. Puglisi) Journal of Money Credit and Banking. ON LINE APPENDIX.

[19] Policy Uncertainty, Lender of Last Resort and the Real Economy (with M. Jasova and D. Supera)  Journal of Monetary Economics, Volume 118, March 2021, Pages 381-398. 

2020

[18] Bank Capital in the Short and in the Long Run (with K. Nikolov, J. Suarez,  and D. Supera), Journal of Monetary Economics, Volume 115, November 2020, Pages 64-79 

2019

[17] Inflation Dynamics and Adaptive Expectations in an Estimated DSGE Model. (with Paolo, G, Iskraev, N. and Lansing K.) Journal of Macroeconomics, Volume 59, January 2019. Pages 258-277. 

2018

[16] Optimal Inflation with Corporate Taxation and Financial Constraints (with D. Finocchiaro, G. Lombardo and P.Weil), Journal of Monetary Economics, Volume 95, May 2018, Pages 18-31.

[15] Risk Shocks in a Small Open Economy: Business Cycle Dynamics in Canada ( with Y. Zhang) Economic Modelling, Volume 72, June 2018, Pages 391-409 

[14] Optimal Dynamic Capital Requirements (with K. Nikolov, J. Suarez,  and D. Supera), Journal of Money Credit and Banking. Volume 50, May 2018, Pages 1271-1297.  ON LINE APPENDIX.

2017

[13] Monetary Policy Shocks: We Got News! (with S. Gomes and N. Iskrev) Journal of Economic Dynamics and Control, Volume 74, January 2017, Pages 108–128. APPENDIX

[12] Expectations-Driven Cycles in the Housing Market (with Luisa Lambertini and Maria Teresa Punzi), Economic Modelling, Volume 60, January 2017, Pages 297-312.

2016

[11]Housing Collateral, Residential Investment and the Canadian Business Cycle (with I. Christensen, P. Corrigan and S. Nishiyama) February 2016, vol. 49 nr. 1, Canadian Journal  of Economics.  Also Bank of Canada wp 2009/26

[10] Financial Shocks, Comovement and Credit Frictions (with D.Finocchiaro), Economics Letters, Volume 143, June 2016, Pages 20–23.

2015

[9] Assessing Capital Regulation in a Macroeconomic Model with Three Layers of Defaults (with L. Clerc, S. Moyen, A. Derviz, K. Nikolov, L. Stracca,  J. Suarez,  and A.Vardoulakis) International Journal of Central Banking, June 2015, Pages 9-63. Discussion by Nobuhiro Kiyotaki

2014

[8] House Prices, Capital Inflows and Macroprudential Policy (with Maria Teresa Punzi), Journal of Banking and Finance, Volume 49, December 2014, Pages 337–355.

[7] Financial and Economic Downturns in OECD Countries (with Markus Haavio and Maria Teresa Punzi) Applied Economics Letters, Vol. 21(6), 2014, Pages 407-412.

[6] Heterogeneous Firms and the Impact of Government Policy on Welfare and Informality  (with M. Prado) Economics Letters, Volume 124, Issue 1, July 2014, Pages 151-156

2013

[5] Leaning Against Boom-Bust Cycles in Credit and Housing Prices: Monetary and Macroprudential Policy  (with Luisa Lambertini and Maria Teresa Punzi), Journal of Economic Dynamics and Control, Volume 37, Issue 8, August 2013, Pages 1500–1522. 

[4] Expectations-Driven Cycles in the Housing Market: Evidence from Survey Data (with Luisa Lambertini and Maria Teresa Punzi) Journal of Financial Stability, Vol. 9(4), December 2013, Pages 518-529.

[3] House Prices, Credit Growth, and Excess Volatility: Implications for Monetary and Macroprudential Policy (with Paolo Gelain and Kevin Lansing), International Journal of Central Banking, Volume 9, Number 2, June 2013, Pages 219-276.

[2] Price-level Targeting Rules and Financial Shocks: the Case of Canada (with A. Dib and Y. Zhang), Economic Modelling, Volume 30, January 2013, Pages 941–953.

2012

[1] On the Amplification Role of Collateral Constraints  Economics Letters,  Volume 117, Issue 2, November 2012, Pages 429–435.

Monetary Policy, Macroprudential Policy and Financial Stability (with L. Laeven and A. Maddaloni), Discussion Paper 2647, European Central Bank, 2022.

Monetary and Macroprudential policies: trade-offs and interactions (with L. Laeven and A. Maddaloni), Research Bulletin Article, nr.92 European Central Bank, 2022.

On the Interaction between Monetary and Macroprudential Policies (with A. Martin and A. Van der Ghote), Discussion Paper 2527, European Central Bank, 2021.

How Much Capital Should Bank Hold? (with K. Nikolov, J. Rubio-Ramirez, J. Suarez,  and D. Supera)  Research Bulletin Article, nr. 80, European Central Bank, 2021.

Benefits and costs of liquidity regulation (with Marie Hoerova, Glenn Schepens, Kalin Nikolov and Skander Van den Heuvel), Discussion Paper 2169, European Central Bank, 2018.

Capital Regulation: Lessons from a Macroeconomic Model (with C. Mendicino and D. Supera) In: Achieving Financial Stability Challenges to Prudential Regulation, 2017 chapter 10, pages 121-131 World Schientific Publishing Co.

Low Inflation in the Euro Area: Causes and Consequences, Occazional Paper 181, January 2017.  Final report of the ESCB expert group studying the causes of Low Inflation. https://www.ecb.europa.eu/pub/economic-research/research-networks/html/researcher_lift.en.html

The Crisis, Ten Years After: Lessons Learnt for Monetary and Financial Research (with Beyer, A. Coeuré, B.),  ECONOMIE ET STATISTIQUE / ECONOMICS AND STATISTICS N° 494-495-496, 2017.

Literature Review on Integration of Regulatory Capital and Liquidity Instruments, Working Papers of the Basel Committee on Banking Supervision 30, March 2016.

Capital requirements in a model for the SSM area with three layers of default (with Colciago, A., Fahr, S. , Hurtado, S., Mendicino, C., Nikolov, K., Supera, D.) Macroprudential Bulletin, European Central Bank, vol. 1 ,2016.

The Domestic and the International Effects of Deleveraging in the Financial and non-financial sectors (with F. Canova, L. Coutinho, E. Pappa, M.T. Punzi and D. Supera), EC report, 2015.

House Prices Expectations, ECB-Research Bulletin 21, 2014.

The 3D Model: a Framework to Assess Capital Regulation (with L. Clerc, S. Moyen, A. Derviz, K. Nikolov, L. Stracca,  J. Suarez,  and A.Vardoulakis), Economic Bulletin, Banco de Portugal, June 2014.

Macroprudential capital tools: assessing their rationale and effectiveness (with L. Clerc, S. Moyen, A. Derviz, K. Nikolov, L. Stracca, J. Suarez,  and A.Vardoulakis),  Financial Stability Review, Banque de France, April 2014.

Confidence and economic activity: the case of Portugal (with M.T.Punzi),  Economic Bulletin, BdP, Winter 2013.

Financial shocks and the macroeconomy: heterogeneity and non-linearities (with A. D’Agostino, M. Cervena, M. Ciccarelli, P. Guarda, M. Haavio, K.Hubrich, P. Jeanfils, E. Ortega, M. Valderrama, M. Valentinyiné),  Working Group in Econometric Modelling, ECB Occassional Paper Series, 143, January 2013.

Boom-Boom-bust Cycles and Stabilization Policy (with M.T.Punzi), December 2011, Conference volume BoK-BIS Conference on Macroprudential Regulation and Policy.

Stabilization Policy and Boom-Bust Cycles - Monetary and Macro-Prudential Rules, (with M.T.Punzi),  Economic Bulletin, BdP, Summer 2011.

Housing Market and Macroeconomic Boom-Bust Cycles (with M.T.Punzi), Moneda y Crédito, vol. 230, 2010. ISSN:0026-959X. 

Financial Frictions in NCBs Macroeconomic Models (with M. Jonsson, A. Locarno P. McAdam and C.Thomas),  Working Group in Econometric Modelling, ECB Report, 2010.

Monetary Policy Expectations and Boom-Bust Cycles in the Housing Market, Economic Bulletin, BdP, Spring 2009.

The Role of Collateral Contraints in the Transmission of Shocks,  Monetary Policy Briefing Box, BdP, Spring 2009.

Financial Market Imperfections, Business Cycle Fluctuations and Economic Growth, The Economics Institute for Research EFI, ISBN: 91-7258-705-9. 2006.

Expectation-Driven Cycles: Time-Varying Effects (with A. D'Agostino) Working Paper Series 1776, European Central Bank, 2015.

CAN CONSUMER CONFIDENCE PROVIDE INDEPENDENT INFORMATION ON CONSUMPTION SPENDING?  EVIDENCE FROM EURO AREA COUNTRIES (with A. D'Agostino), 2015 ESM, wp 2.

CREDIT FRICTIONS, HOUSING PRICES, AND MONETARY POLICY RULES (with Andrea Pescatori). 2008. 

CREDIT MARKET AND MACROECONOMIC VOLATILITY, European Central Bank, wp 743, 2007.

FINANCIAL LIBERALIZATION, BANK CRISES AND GROWTH: ASSESSING THE LINKS (with Alessandra Bonfiglioli). Working paper 567, Stockholm School of Economics, 2004.