Research

Journal Articles

Optimal capital ratios for banks in the euro area

Journal of Financial Stability (2023), with Harro van Heuvelen, Bert Kramer and Rob Luginbuhl

In this paper we estimate the optimal level of capital for banks in the euro area. This optimum is the result of a trade-off between the costs and benefits of more bank capital: although higher capital requirements likely lead to higher lending rates, they also reduce the likelihood of banking crises. Our baseline estimates show an optimal risk-weighted capital ratio of around 23%. By varying the assumptions underlying our analysis we obtain a range of optimal ratios from 16% to 31%. These estimates are higher than the current Basel III minimum requirements. We also estimate optimal rates for individual member states and find substantial differences between them. This is primarily due to variation across countries in the resilience of their economies. For this reason we find lower optimal bank capital ratios in countries with more stable economies. Our results show only a modest dependence on the ease with which banks in different member states are able to raise capital. 

JEL classifications: C33, C54, E44, G15, G21

Estimating the Impact of the Financial Cycle on Fiscal Policy

Empirical Economics (2023), with Rutger Teulings and Rob Luginbuhl

We investigate the impact of the financial cycle on fiscal policy. Our contribution to the existing literature is three fold. First, we estimate fiscal multipliers that depend on different states of the financial cycle. Second, to obtain our estimates we extend the TVAR method from a single country to a panel. Third, we investigate the fiscal multipliers of different types of government spending. We .nd that the multipliers for government investment are influenced substantially by the state of the financial cycle. In an upturn they are negative, while in a downturn they are positive. When we also condition on the state of the business cycle our results for government investment remain essentially unchanged. We obtain smaller multipliers for government consumption. Although these multipliers do not depend on the financial cycle, jointly conditioning on the financial and business cycles does produce multipliers which vary over the states of both cycles.

JEL classifications: C33, E62, G15.

The effects of fiscal policy at the effective lower bound

Macroeconomic Dynamics (2022), with Jakob de Haan and Dennis Bonam

We estimate the effects of government consumption and investment shocks during prolonged episodes of low interest rates, which we consider as proxy for the effective lower bound. Using a panel VAR model for 17 advanced countries, in which we include real government spending, output, inflation, and the real interest rate, we find that both the cumulative government consumption and investment multipliers are significantly higher (and exceed unity) when interest rates are persistently low. These results are robust for using different threshold values for the nominal interest rate or the length of the period with low interest rates to proxy the ELB.

JEL classifications: E6, E62, E65

Sovereign bond holdings and monetary policy operations in the euro area

Journal of Policy Modeling (2018), with Ivo J.M. Arnold

This paper investigates the relationship between sovereign bond holdings of banks and refinancing operations by the ECB for countries in the euro area. We use data collected by Bruegel as well as a new dataset compiled from the annual statements of national central banks to estimate panel regression models. Our findings support the hypothesis that the ECB’s refinancing operations have increased resident banks’ exposure to domestic sovereign bonds. This is in line with the moral suasion theory advanced in the literature. These results strengthen the case for regulatory changes aimed at reducing the sensitivity of banks to sovereign risk.

JEL classifications: F34, F36, G21

Bank stability and refinancing operations during the crisis: Which way causality?

Research in International Business and Finance (2018), with Ivo J.M. Arnold

This paper explores the causality between refinancing operations of the ECB and the stability of the European banking sector during the recent crisis. We hypothesize that causality may run both ways. The ECB’s role in safeguarding the stability of the financial system suggests that refinancing operations may contribute to greater stability. Alternatively, instability in the banking sector may stimulate banks to tap liquidity at the ECB. Using country-level data on refinancing operations and bank CDS rates, we find a positive relationship between bank instability and liquidity uptake. High bank CDS rates are significantly related to the decision to tap liquidity, yet the liquidity uptake itself does little to bring these rates down quickly.

JEL classifications: C33, E52, E58, G01, G13, G15, G21

The missing spillover of base expansion into monetary aggregates: Is there a puzzle?

Journal of Macroeconomics (2017), with Ivo J.M. Arnold

The seeming impotence of monetary base expansion to influence money growth during the Global Financial Crisis and the European sovereign debt crisis, can be regarded as a puzzle. A possible explanation is that central banks have used unconventional monetary policies to pursue dual objectives: to stabilize the financial system and to stimulate the economy. While achieving the latter objective may result in a positive spillover of base money into money growth, this does not necessarily hold for the former objective. This paper aims to disentangle these effects by estimating a state space model in which the monetary base is adjusted for distortions arising from the instability in financial markets. We find that stress in money and bond markets, measured by various indicators, has significantly affected the relationship between base growth and money growth in the EA, but not in the US.

JEL classifications: E44; E51; E52; E58

Internal or external devaluation? What does the EC Consumer Survey tell us about macroeconomic adjustment in the Euro area?

Journal of International Money and Finance (2016), with Ivo J.M. Arnold

This paper explores the dynamics of national inflation expectations within the euro area during the recent crisis. Using the European Commission’s Consumer Survey, we find that the strong anchoring of area-wide inflation expectations, which is typically found in the literature, does not extend to individual member states. We also measure the effect of the crisis on national inflation expectations using sovereign bond spreads and find that increases in sovereign risk have a significant negative effect on inflation expectations. This suggests that consumers expect their country to adjust through a process of internal devaluation. In contrast, we find no evidence that tensions in the sovereign bond markets increase national inflation expectations, as one would be expect under an exit

or breakup scenario.

JEL classifications: C16, C46, D84, E31, E58

Working Papers

European insolvency law and firm leverage

CPB publication, with Fien van Solinge

In this paper we investigate the effect of insolvency law on firm capital structure in EU member states. Using an extensive and unique firm-level information for almost 2 million European, we find that strengthening insolvency law has a positive effect on firms’ long-term leverage. A further analysis shows that this is (partly) offset by a decrease in short-term leverage. Furthermore, the increase in long-term leverage appears to be mainly driven by the improvement of debtor rights. This novel insight supports the finding that the demand-side channel, rather than merely the supply side channel, is an important factor driving the effect of insolvency law of firm capital structure.

JEL classifications: G15, G32, G33, K22

A disaggregated analysis of central bank balance sheets: A tale of two currency unions

Work in progress, with Ivo J.M. Arnold

Since the start of the Global Financial Crisis, central bank balance sheets have experienced substantial changes due to the implementation of non-standard monetary policy measures. This paper analyzes how these measures have percolated to the regional central banks that make up the Eurosystem and the Federal Reserve System. To this end, we construct a new harmonized database comprising disaggregated balance sheet data for the Eurosystem and collect existing disaggregated data from the Federal Reserve System. We employ a variety of indicators to measure potential asymmetries in the development of regional central bank balance sheets within the Euro Area and the United States. We observe strong uniformity within the Federal Reserve System. In contrast, within the Eurosystem central bank balance sheets show substantial heterogeneity, especially during the sovereign debt crisis.

JEL classifications: E40, E42, E50, E52, E58, F45


Other publications

CPB publications

CPB (2023). Simulatie energieprijzen en bedrijfswinsten.

CPB (2023). Position paper: De toekomst van de euro.

CPB (2022). Inflatiescenario's.

CPB (2022). Heeft de contracyclische kapitaalbuffer effect op de kredietverlening?

CPB blog (2021). Zo zeker als de bank?

CPB Corona Publicatie (2020). De gevolgen van de coronacrisis voor Nederlandse bedrijven en banken

CPB Corona Publicatie (2020). Een nieuwe plaag voor de EMU. 

CPB Notitie (2020). De effecten van macroprudentieel beleid op de woningmarkt. 

Financial Risk Reports:

CPB World trade monitor

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