Embedded Files
Research Interests:
Macroprudential policy, Growth-at-risk applications, Early warning models, Quantitative macroeconomics, Uncertainty shocks
The state-dependent impact of changes in bank capital requirements (2023)
(with D. Menno)
Presentation at CEMFI-BdE conference
Based on a non-linear equilibrium model of the banking sector with an occasionally-binding equity issuance constraint, we show that the economic impact of changes in bank capital requirements depends on the state of the macro-financial environment. In ”normal” states where banks do not face problems to retain enough profits to satisfy higher capital requirements, the impact on bank loan supply works through a ”pricing channel” which is small: around 0.1% less loans for a 1pp increase in capital requirements. In ”bad” states where banks are not able to come up with sufficient equity to satisfy capital requirements, the impact on loan supply works through a ”quantity channel”, which acts like a financial accelerator and can be very large: up to 10% more loans for a capital requirement release of 1pp. Compared to existing DSGE models with a banking sector, which usually feature a constant lending response of around 1%, our state-dependent impact is an order of magnitude lower in ”normal” states and an order of magnitude higher in ”bad” states. Our results provide a theoretical justification for building up a positive countercyclical capital buffer in ”normal” macro-financial environments.
Medium-term growth-at-risk in the euro area (2023)
(with M. Rusnák and M. Greiwe)
Financial stability indicators can be grouped into financial stress indicators that reflect heightened spreads and market volatility, and financial vulnerability indicators that reflect credit and asset price imbalances. Based on a panel of euro area countries, we show that both types of indicators contain information about downside risks to real GDP growth (growth-at-risk) in the short-term (1-year ahead). However, only vulnerability indicators contain information about growth-at-risk in the medium-term (3-years ahead and beyond). Among various vulnerability indicators suggested in the literature, the Systemic Risk Indicator (SRI) proposed by Lang et al. (2019) outperforms in terms of in-sample explanatory power and out-of-sample predictive ability for medium-term growth-at-risk in euro area countries. Shocks to the SRI induce a rich ”term structure” for growth-at-risk: downside risks to real GDP growth are reduced in the short-term, but over the medium-term the effect reverses and downside risks to real GDP growth go up considerably. We also show that using cross-country information from the panel of euro area countries can improve the out-of-sample forecasting performance of growth-at-risk for the euro area aggregate.
House prices and ultra-low interest rates: exploring the non-linear nexus (2023)
(with D. Dieckelmann, H. Hempell, B. Jarmulska, M. Rusnák)
The acceleration of house price growth amidst falling interest rates to record-low levels across euro area countries between 2015 and 2021 has sparked renewed interest in the link between the two variables. Asset-pricing theory suggests that real house prices respond to changes in real interest rates in a non-linear fashion. This non-linearity should be especially pronounced at very low real interest rates. Most existing empirical studies estimate models with a con-stant semi-elasticity, thereby ruling out by design the potential non-linearities between house prices and interest rates. To address this issue, we estimate a panel model for the euro area countries with a constant interest rate elasticity (as opposed to a constant semi-elasticity), which is consistent with asset pricing theory. Our empirical results suggest that, in a low interest rate environment such as the period between 2015 and 2021, non-linearities in the house price response to interest rate changes are important: an increase of real interest rates from ultra-low levels could lead to downward pressure on real house prices three to eight times higher than the literature suggests.
Bank capital-at-risk (2020)
(with M. Forletta)
ECB Macroprudential Bulletin Article
Methodology mentioned by Vitor Constâncio
This paper studies the impact of cyclical systemic risk on future bank profitability for a large representative panel of EU banks between 2005 and 2017. Using linear local projections we show that high current levels of cyclical systemic risk predict large drops in the average bank-level return on assets (ROA) with a lead time of 3-5 years. Based on quantile local projections we further show that the negative impact of cyclical systemic risk on the left tail of the future bank-level ROA distribution is an order of magnitude larger than on the median. Given the tight link between negative profits and reductions in bank capital, our method can be used to quantify the level of “Bank capital-at-risk” for a given banking system, akin to the concept of “Growth-at-risk”. We illustrate how the method can inform the calibration of countercyclical macroprudential policy instruments.
Trends in residential real estate lending standards and implications for financial stability (2020)
(with M. Pirovano, M. Rusnák, C. Schwarz)
Special Feature of the ECB Financial Stability Review
It is often maintained that the recent real estate booms in many euro area countries have been accompanied by a loosening in lending standards. However, data for a thorough cross-country assessment of lending standards have been missing. This special feature uses a novel euro area dataset from a dedicated data collection covering significant institutions supervised by ECB Banking Supervision to analyse trends in real estate lending standards and derive implications for financial stability. First, lending standards for residential real estate loans in the euro area, in particular loan-to-income ratios, eased between 2016 and 2018. Given the significant deterioration in the euro area economic outlook since the coronavirus outbreak, this vulnerability seems of particular relevance. Second, lending standards appear to be looser in countries that saw stronger real estate expansions, suggesting that real estate vulnerabilities may have been growing in some euro area countries. Third, lending standards deteriorated less in countries with borrower-based macroprudential policies in place, highlighting the importance of early macroprudential policy action to help prevent the build-up of real estate vulnerabilities.
Anticipating the bust: A new cyclical systemic risk indicator to assess the likelihood and severity of financial crises (2019)
(with C. Izzo, S. Fahr, J. Ruzicka)
Special Feature of the ECB Financial Stability Review
This paper presents a tractable, transparent and broad-based domestic cyclical systemic risk indicator (d-SRI) that captures risks stemming from domestic credit, real estate markets, asset prices, and external imbalances. The d-SRI increases on average several years before the onset of systemic financial crises, and its early warning properties for euro area countries are superior to those of the total credit-to-GDP gap. In addition, the level of the d-SRI around the start of financial crises is highly correlated with measures of subsequent crisis severity, such as GDP declines. Model estimates suggest that the d-SRI has significant predictive power for large declines in real GDP growth three to four years down the line, as it precedes shifts in the entire distribution of future real GDP growth and especially of its left tail. The d-SRI therefore provides useful information about both the probability and the likely cost of systemic financial crises many years in advance. Given its timely signals, the d-SRI is a useful analytical tool for macroprudential policymakers.
Semi-Structural Credit Gap Estimation (2018)
(with P. Welz)
Special Feature of the ECB Financial Stability Review
Covered by John Cochrane's Blog
This paper proposes a semi-structural approach to identifying excessive household credit developments. Using a structural overlapping generations model, a normative trend level for the real household credit stock is derived that depends on fundamental economic factors. Semi-structural household credit gaps are obtained as deviations of the real household credit stock from this fundamental trend level. We estimate the semi-structural household credit gaps for 12 EU countries over the period 1980q1 - 2015q4 in an unobserved components framework. Without imposing ex-ante restrictions on the frequency of the cyclical component, the semi-structural modeling framework yields long household credit cycles that last between 15 to 25 years and that display large deviations from the real household credit trend of around +/- 20%. The estimated semi-structural household credit gaps tend to increase well before systemic financial crises and decrease slowly thereafter. The early warning properties for systemic financial crises are superior compared to credit gaps that are obtained from purely statistical filters. The proposed semi-structural household credit gaps could therefore provide useful information for the formulation of countercyclical macroprudential policy.
A new database for financial crises in European countries (2017)
(with M. Lo Duca, A. Koban, M. Basten, E. Bengtsson, B. Klaus, P. Kusmierczyk, C. Detken, T. Peltonen)
This paper presents a new database for financial crises in European countries, which serves as an important step towards establishing a common ground for macroprudential oversight and policymaking in the EU. The database focuses on providing precise chronological definitions of crisis periods to support the calibration of models in macroprudential analysis. An important contribution of this work is the identification of financial crises by combining a quantitative approach based on a financial stress index with expert judgement from national and European authorities. Key innovations of this database are (i) the inclusion of qualitative information about events and policy responses, (ii) the introduction of a broad set of non-exclusive categories to classify events, and (iii) a distinction between event and post-event adjustment periods. The paper explains the two-step approach for identifying crises and other key choices in the construction of the dataset. Moreover, stylised facts about the systemic crises in the dataset are presented together with estimations of output losses and fiscal costs associated with these crises. A preliminary assessment of the performance of standard early warning indicators based on the new crises dataset confirms findings in the literature that multivariate models can improve compared to univariate signalling models.
The Leverage Ratio, Risk-Taking and Bank Stability (2017)
(with M. Grill and J. Smith)
Special Feature of the ECB Financial Stability Review
Covered by Bloomberg and Wall Street Journal
Under the new Basel III banking regulations, a non-risk based leverage ratio requirement will be introduced alongside the risk-based capital framework. However, this move away from a solely risk-based capital requirement has raised some concern of increased bank risk-taking; potentially offsetting any benefits from requiring highly leveraged banks to hold more capital. We address exactly this trade-off between additional loss-absorbing capacity and higher bank risk-taking associated with a leverage ratio requirement in both a theoretical and empirical setting. Using a theoretical micro model, we show that a leverage ratio requirement indeed incentivises constrained banks to slightly increase their risk-taking, but this increase in risk-taking is more than outweighed by the increase in loss-absorbing capacity from higher capital, thus leading to more stable banks. These theoretical predictions are then tested and confirmed in an empirical analysis on a large sample of EU banks. For our baseline empirical model, we find that a leverage ratio requirement would have lead to a significant decline in the failure probability of highly leveraged banks.
A Framework for Early-Warning Modeling with an Application to Banks (2018)
(with T. Peltonen and P. Sarlin)
Special feature article in the ECB Macroprudential Bulletin
Covered in VoxEU article by Vitor Constâncio
This paper proposes a general framework for deriving early-warning models with optimal out-of-sample forecasting properties and applies it to predicting distress in European banks. The main contributions of the paper are threefold. First, the paper introduces a conceptual framework to guide the process of building early-warning models, which highlights and structures the numerous complex choices that the modeler needs to make. Second, the paper proposes a flexible modeling solution to the conceptual framework that supports model selection in real-time. Specifically, our proposed solution is to combine the loss function approach to evaluate early-warning models with regularized logistic regression and cross-validation to find a model specification with optimal real-time out-of-sample forecasting properties. Third, the paper illustrates how the modeling framework can be used in analysis supporting both micro- and macro-prudential policy by applying it to a large dataset of EU banks and showing some examples of early-warning model visualizations.
Cross-Country Linkages and Spill-Overs in Early Warning Models for Financial Crises (2018)
This paper uses data on bilateral foreign exposures of domestic banking systems in order to construct early warning models for financial crises that take into account cross-country spill-overs of vulnerabilities from foreign countries to the domestic financial system. The empirical results of the paper show that incorporating cross-country financial linkages can indeed improve the signalling performance of early warning models. The relative usefulness, which is a loss function based performance measure of early warning models, increases from 0.65 to 0.87 and the AUROC from 0.89 to 0.97 when weighted foreign variables are added to domestic variables in a multivariate early warning model. The findings of the paper also suggest that global variables still play a role in predicting financial crises, even when foreign variables are controlled for, which could suggest that both cross-country spill-overs and contagion are important factors for driving financial crises. A parsimonious model with nine variables that combines domestic, foreign and global variables yields an out-of-sample relative usefulness of 0.82, corresponding to out-of-sample Type I and Type II errors of 0.11 and 0.07.
Operationalising the countercyclical capital buffer: indicator selection, threshold identification and calibration options (2014)
(with other contributors to a dedicated ESRB Expert Group on the CCyB)
ESRB Occasional Paper Series No. 5
This paper presents the analysis underpinning the ESRB Recommendation on guidance on setting countercyclical buffer rates (ESRB 2014/1). The Recommendation is designed to help authorities tasked with setting the countercyclical capital buffer (CCB) to operationalise this new macroprudential instrument. The analysis in the paper focuses on early warning models in order to identify indicators that signal the types of crises that the CCB is designed to mitigate. Consistent with the literature, this paper finds that, in univariate signalling, credit-to-GDP gaps (using bank, household and total credit) are the best single leading indicators for systemic banking crises associated with excessive credit growth. A number of other variables also performed well in univariate signalling, and thus offer a good indication that the CCB may need to be built up. These variables include the residential property price-to-income ratio, residential and commercial property price gaps, the debt service-to-income ratio for households, real bank and household credit growth and the deviation of the (deflated) broad monetary aggregate M3 from its trend. Multivariate analysis shows that when the credit-to-GDP gap is combined with other variables either in a multivariate signalling approach, a discrete choice model or a decision tree approach, the overall signalling performance improves. In addition to the above-mentioned variables, the overall debt-service-to-income ratio, the current account-to-GDP ratio and real equity price growth are useful variables in a multivariate setting. Market-based indicators have been found to be the best coincident or near-crisis indicators which can be used to signal that the CCB should be reduced or released.
Uncertainty, Expectations, and the Business Cycle (2012)
PhD Thesis written at the European University Institute.
Page updated
Google Sites
Report abuse