A framework to assess the severity of adverse scenarios in EU-wide stress tests
(with Juan Manuel Figueres, Barbara Montero Prieto, James ’t Hooft, Lucas ter Steege and Clarissa Vallotto)
The severity and the plausibility of stress test scenarios are crucial elements for interpreting the results and ensuring the credibility of stress-testing exercises. This article introduces a comprehensive framework for assessing scenario severity and plausibility in the context of the adverse scenarios used in the EU-wide stress tests. Two families of indicators are developed, characterised by a backward-looking and a forward-looking perspective. Backward-looking indicators compare the scenario with historical regularities, using as key metrics deviations from baseline projections and comparisons with the extreme values of key variables. Forward-looking indicators are drawn from macroeconomic modelling and compare the scenario with projected distributions about future economic developments incorporating the co-movement of variables within a unified analytical framework. These forward-looking metrics enable the severity assessment to account for the prevailing financial conditions and the level of systemic risk in the economy. The analysis presented suggests that the adverse scenarios used in the EU-wide stress tests have become more severe over time, peaking in the 2023 exercise and stabilising in 2025. Taking into account systemic risk, the 2025 scenario appears to be slightly more severe than the 2023 scenario. Overall, the article supports the idea of fostering a more effective definition, monitoring and communication of scenario severity, thereby strengthening the policy relevance and transparency of stress-testing exercises.
Residential real estate (RRE) lending standards: determinants and financial stability implications
(with Giorgia De Nora, Elena Durante, Adele Fontana, Marco Forletta, Gregorio Ghetti, Barbara Jarmulska, Cristian Perales)
This article looks into residential real estate (RRE) lending standards, focusing on their key determinants and assessing the implications of loose lending standards for financial stability and the real economy. Two key insights emerge. First, lending standards tend to be procyclical – i.e., they become looser during economic upturns and tighter during downturns. Second, loose lending standards amplify the effects of negative housing market shocks on the real economy and heighten financial stability risks via an increase in the probability of default of households.
Implications of higher inflation and interest rates for macroprudential policy stance
(with Hannah Hempell, Fatima Silva et al. )
In recent years, monetary policy and inflation considerations have been playing an increasingly important role for macroprudential authorities in their policy setting. This paper aims to assess the implications of high inflation and rising interest rates for macroprudential policy stance. The conceptual discussions and model-based analyses included in this paper reflect on the appropriate direction and impact of macroprudential policies at the different stages of financial and business cycles, given cross-country and banking system heterogeneities. In this context, a key objective of the paper is to assess to what extent the interaction between macroprudential and monetary policies differs, given the heterogeneity across euro area countries exposed to a homogenous monetary policy. While both policies are to a large extent complementary, monetary policy may generate relevant spillovers due to its impact on the financial cycle and, potentially, on financial stability. The paper argues that the recent focus of macroprudential policy on resilience, when banking sector conditions ensure no unwarranted procyclical effects of macroprudential tightening, suggests an expansion of the notion of “complementarity” with monetary policy. Specifically, with the build-up of resilience, macroprudential policy acts de facto countercyclically, supporting monetary policy in its pursuit of price stability. In this regard, the paper stresses that the source of the inflationary shock (supply versus demand side) and the monetary environment primarily affect the intensity, speed and extent of buffer build-up or release within each stage of the financial cycle while affecting borrower-based measures in their bindingness.
The importance of being positive: costs and benefits of a positive neutral rate for the countercyclical capital buffer
(with L. Herrera and M. Pirovano )
This article explores the benefits of a positive neutral rate for the countercyclical capital buffer (CCyB) and the conditions shaping the economic costs of its activation in a general equilibrium framework. The analysis shows that a gradual build-up of the buffer and favourable banking sector conditions (e.g. high profitability) limit these economic costs. Furthermore, a positive neutral CCyB rate ensures banking sector resilience in all phases of the financial cycle and improves macroprudential authorities’ ability to provide relief to the banking sector in the event of (potentially large) shocks, including those unrelated to the materialisation of domestic credit imbalances.
Assessing the Impact of Basel III: Evidence from Structural Macroeconomic Models
(with Bora Durdu, Olivier de Bandt, Hibiki Ichiue, Kalin Nikolov, Yasin Mimir, Jolan Mohimont, Sigrid Rohers, Jean-Guillaume Sahuc, Micheal Straughan)
This paper (i) reviews the different channels of transmission of prudential policy highlighted in the literature and (ii) provides a quantitative assessment of the impact of Basel III reforms using "off- the-shelf" DSGE models. It shows that the effects of regulation are positive on GDP whenever the costs and benefits of regulation are both introduced. However, this result may be associated with a temporary economic slowdown in the transition to Basel III, which can be accommodated by monetary policy. The assessment of liquidity requirements is still an area for research, as most models focus on costs, rather than on benefits, in particular in terms of lower contagion risk.
An analytical framework to calibrate macroprudential policy (with T. Bennani, C. Couaillier, A. Devulder, S. Gabrieli, J. Idier, P. Lopez, T. Piquard)
This project presents the analytical framework for macroprudential policy (AFMaP) developed at the Financial Stability Directorate of the Banque de France that could be used to calibrate macroprudential instruments and to provide analytical support to macroprudential policy decision making. In this paper, we present and compare several possible methodologies to calibrate macroprudential capital buffers that rely both on structural models and macroprudential stress-testing tools.
ALIENOR, a Macrofinancial Model for Macroprudential Policy (with C. Couaillier, T. Ferrière)
ALIENOR is an econometric model built to provide macroeconomic scenarios and conduct macroprudential analysis, in particular for larger stress-test exercises. In the model design, we pay particular attention to the link between financial variables and the real economy, to estimate the potential impact of the materialization of financial systemic risk, and to perform policy exercises. In addition, we quantify the impact of the macroeconomy on financial variables, with a focus on households’ credit, Non-Financial Corporates’ credit, and real estate prices, given the key role played by those variables during the crisis. Finally, we analyse the consequences on the economy of an exogenous increase in the long-term interest rates and a decrease in real estate prices.