Research
Work in progress
"Why do investors trade index CDS?" with T. Piquart, G. Vuillemey
"Thunderclap in a clear sky: Credit Shocks and Borrowing constraint"
Articles
"Caution: do not cross! Capital buffers and lending in Covid-19 times", 2024, with M. Lo Duca, A. Reghezza, C. Rodriguez d'Acri
Journal of Money, Credit and Banking
While regulatory capital buffers are expected to be drawn to absorb losses and meet credit demand during crises, this paper shows that banks were unwilling to do so during the pandemic. To the contrary, banks engaged in forms of pro-cyclical behaviour to preserve capital ratios. By employing granular data from the credit register of the European System of Central Banks, we isolate credit supply effects and find that banks with little headroom above regulatory buffers reduced their lending relative to other banks, also when controlling for a broad range of pandemic support measures. Firms’ inability to reallocate their credit needs to less constrained banks had real economic effects, as their headcount went down, although state guarantee schemes acted as partial mitigants. These findings point to some unintended effects of the capital framework which may create incentives for pro-cyclical behaviour by banks during downturns. They also shed light on the interactions between fiscal and prudential policies which took place during the pandemic.
Journal of Banking & Finance
We use hikes in the countercyclical capital buffer [CCyB] to measure how markets react to tighter bank capital requirements. Our identification strategy relies on two unique features of the CCyB institutional framework in Europe. First, all national authorities make quarterly announcements of CCyB rates. Second, these hikes affect all European banks proportionally to their exposure to the country of activation. We show that CCyB hikes translate in lower CDS spreads for affected banks, in particular those poorly capitalised. On the other hand, bank valuations do not react. Markets therefore consider that higher countercyclical capital requirements make banks more stable at no material cost for shareholders. We claim that these effects relate to the capital constraint itself, as opposed to the potential signal conveyed on the state of the financial cycle.
Academic Working Papers
European Central Bank Working Paper No 2841, R&R Journal of Accounting and Economics
We analyse the impact of the adoption of expected credit loss accounting (IFRS 9) on the timeliness and potential procyclicality of banks' loan loss provisioning. We use granular loan-level data from the euro area's credit register and investigate both firm-level credit events and macroeconomic shocks (2020 COVID-19 pandemic, 2022 energy price shock). We find that provisions under the new standard are higher before default and more responsive to shocks. However, the majority of provisioning still occurs at the time of default and the dynamics around default events are similar to pre-existing national standards. Additionally, banks with a larger capital headroom provision significantly more, particularly for loans using IFRS 9. This suggests a higher risk of underprovisioning for less capitalized banks.
"How to release capital requirements during a pandemic? Evidence from euro area banks", 2022, with A. Reghezza, C. Rodriguez d'Acri, A. Scopelliti
European Central Bank Working Paper No 2720; ECB Financial Stability Review Special Feature , submitted
This paper investigates the impact of the capital relief package adopted to support euro area banks at the outbreak of the COVID-19 pandemic. By leveraging confidential supervisory and credit register data, we uncover two main findings. First, capital relief measures support banks’ capacity to supply credit to firms. Second, not all measures are equally successful. Banks adjust their credit supply only if the capital relief is permanent or implemented through established processes that foresee long release periods and affect their ability to distribute dividends. By contrast, discretionary relief measures are met with limited success, possibly owing to the uncertainty surrounding their capital replenishment path or because they did not affect dividend policy. Moreover, requirement releases were more effective for banks with a low capital headroom over requirements and did not trigger additional risk-taking. These findings provide key insights on how to design effective bank capital requirement releases in crisis time.
European Central Bank Working Paper No 2618; ECB Financial Stability Review Special Feature , submitted
How do banks set their target capital ratio? How do they adjust to reach it? This paper answers these questions using an original dataset of capital ratio targets directly announced to investors by European banks, materially improving data quality compared to usual estimated implicit target. It provides the following key lessons. First, targets are affected by capital requirements and a procyclical behavior consistent with market pressure. Second, banks do not distinguish between the different types of capital requirements for setting their targets, suggesting weak usability of the regulatory buffers. Third, the distance between actual CET1 ratio and the target is a valuable predictor of future balance-sheet adjustment, suggesting that banks actively drive their capital ratios toward their announced targets, through capital accumulation and portfolio rebalancing. Fourth, this adjustment occurs both above and below targets, but banks below target adjust faster, suggesting stronger pressure. These results provide important lessons for policymakers regarding the design of the prudential framework and the effectiveness of countercyclical policies.
Banque de France Working Paper no. 763, submitted
In this paper we study how households’ financial vulnerability affects the propagation of housing and credit shocks. First, we estimate a non-linear model generating impulse responses that depend on the evolution of households' Debt to Service Ratio, i.e. the fraction of income that households use to pay back their debt. Second, we use sign restrictions to jointly identify a wide set of financial and economic shocks. We find that financial vulnerability: i) amplifies the response of the economy to housing shock, ii) makes the response to expansionary credit shocks less persistent and even negative after the first year since the arrival of the shock. Finally, overall recessionary shocks have larger effects with respect to expansionary ones of the same size.
Policy Working Papers
"Informing macroprudential policy choices using credit supply and demand decompositions", 2022 with C. Barbieri, C. Perales, C. Rodriguez d'Acri
ECB Working Paper no 2702
Macroprudential policies should strengthen the banking sector throughout the financial cycle. However, while bank credit growth is used to capture cyclical exuberance and calibrate buffer requirements, it depends on potentially heterogeneous dynamics on the borrower and lender sides. By decomposing credit growth into a common component and components capturing heterogeneity in supply and demand `a la Amiti and Weinstein, 2018 applied on the euro area credit register (“AnaCredit”), we can inform the policy debates in two ways. Ex ante, we introduce a framework mapping the decomposition to different types of macroprudential instruments, specifically broad vs targeted measures. Ex post, we also show that the resulting decomposition can be used to assess the effectiveness of adopted measures on credit supply or demand. We find evidence that buffer releases and credit guarantees increased bank credit supply during the COVID-19 pandemic and interacted positively with banks’ profitability.
"Risk-to-Buffer: Setting Cyclical and Structural Capital Buffers through Banks Stress Tests", 2021, with V. Scalone
Banque de France Working Paper no. 830
In this work we present the Risk-to-Buffer: a new framework to jointly calibrate cyclical and structural capital buffers, based on the integration of a non-linear macroeconomic model with a Stress test model. The macroeconomic model generates scenarios whose severity depends on the level of cyclical risk. Risk-related scenarios feed into a banks' Stress test model. Banks' capital losses deriving from the reference-risk scenario are used to calibrate the structural buffer. Additional losses associated to the current-risk scenario are used to calibrate the cyclical buffer.
Banque de France Working Paper no. 724
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.
"An analytical framework to calibrate macroprudential policy", 2017, with T. Bennani, A. Devulder, S. Gabrieli, J. Idier, P. Lopez, T.Piquard, V. Scalone
Banque de France Working Paper no. 648
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.
Other publications
"Financial market pressure as an impediment to the usability of regulatory capital buffers", 2020, with D. Andreeva and P. Bochmann, ECB Macroprudential Bulletin no 11
"Do highly indebted large corporations pose a systemic risk?", 2020, with J. Idier, D. Henricot, Banque de France Eco Notepad no 147 (FR)
"Activation of countercyclical capital buffers in Europe: initial experiences", 2019, with J. Idier, V. Scalone, Banque de France Bulletin no. 222 (FR)
"Systemic liquidity concept, measurement and macroprudential instruments", with K. Budnik, C. Couaillier, P. Duijm, P. Faykiss, K. Gajewski, C. Holtorf, L. IzquierdoRios, A. Koban, C. Kok, D. Laliotis, M. Lamas, G. Lialiouti, S. Loehe, A. Marques, J. Matos, B. Meller, A. SofiaMelo, I. Moldovan, A. Morão, A. Pereira, P. Pessarossi, C. Roling, V. Rutkauskas, S. Schmitz, L. Silbermann, J. Szakacs, P. Tissari, E. Ubl, D. DiVirgilio, N. Vlachogiannakis, ECB Occasional Paper Series no 214
"Minimum down payment requirement: a macroprudential tool that is increasingly being used to mitigate real estate risk", 2018, with J. Idier, R. Jimborean, Banque de France Quarterly Selection of Articles no. 49
"Measuring excess credit using the “Basel gap”: relevance for setting the countercyclical capital buffer and limitations", 2017 with J. Idier, Banque de France Quarterly Selection of Articles no. 46 (FR)