Decoding climate-related risks in sovereign bond pricing: A global perspective, with Marianna Blix Grimaldi, Carlos Madeira, Simona Malovana and Georgios Papadopoulos
Part of the International Banking Research Network (IBRN) research initiatives.
ECB Working Paper- BIS Working Paper - Sveriges Riksbank Working Paper- Bank of Greece WP
Abstract
Climate change poses a significant risk to financial stability by impacting sovereign credit risk. Quantifying the exact impact is difficult as climate risk encompasses different components – transition risk and physical risk – with some of these, as well as the policies to address them, playing out over a long time horizon. In this paper, we use a large panel of 52 developed and developing economies over two decades to empirically investigate the extent to which climate risks influence sovereign yields. The results of a panel regression analysis show that transition risk is associated with higher sovereign yields, with the effect more pronounced for developing economies and for high-emitting countries after the Paris agreement. In contrast, high-temperature anomalies do not appear to be priced-in sovereign borrowing costs. At the same time, countries with high levels of debt tend to record higher sovereign yields as acute physical risk increases. In the medium term, using local projections, we find that sovereign yields respond significantly but also differently to different types of disaster caused by climate change. We also explore the nonlinear effects of weather-related natural disasters on sovereign yields and find a striking contrast in the impact of climate shocks on sovereign borrowing costs according to income level and fiscal space when the shock hits.
Unveiling the enablers: Exploring country characteristics that encourage emissions reduction, with Panayiotis C. Andreou, Christos Cabolis and Konstantinos Dellis
Abstract
The transition to sustainability relies on adopting green technology and fostering innovation. While emissions abatement is achieved at the firm level, our study argues that national characteristics significantly shape the decarbonization process. Utilizing the EU Emissions Trading System (ETS) we delve into the relation between national structural and institutional characteristics and the effectiveness of the EU environmental policies. Leveraging firm-level emissions data and structural indicators from IMD and WEF, our analysis spans 540 firms from 2005 to 2018. Our empirical findings underscore several critical imperatives. Firstly, we highlight the pressing need to bridge the skills gap through targeted investments in educational and training initiatives tailored for both traditional workers and managerial personnel. Secondly, we advocate for prioritizing investments in technologies and infrastructure aimed at reducing emissions. Thirdly, we stress the importance of fostering collaboration among stakeholders across various sectors-public, private, educational, and research-to leverage collective expertise towards sustainable outcomes. Lastly, we emphasize the establishment of robust monitoring and evaluation mechanisms to assess the effectiveness of emission reduction measures and identify areas for improvement. Overall, our findings accentuate the catalytic role of strong institutions in empowering firms to drive environmental progress.
Details Matter: Loan Pricing and Transmission of Monetary Policy in the Euro Area, with Karlis Vilerts, Konstantıns Benkovskis, Sebastian Bredl, Massimo Giovannini, Florian Matthias Horky, Vanessa Kunzmann, Tibor Lalinsky, Athanasios Lampousis, Elizaveta Lukmanova, Filippos Petroulakis and Klavs Zutis
ECB Working Paper - Bundesbank Discussion Paper- Central Bank of Ireland Research Technical Paper- Latvijas Banka Working Paper- Bank of Greece Working Paper
Abstract
Does the maturity of the relevant risk-free rate influence the strength of monetary policy pass-through to interest rates on new loans? To address this question, we present novel empirical evidence on lending practices across all euro area countries, using AnaCredit data covering nearly seven million new loans issued to non-financial corporations in 2022--2023. We document substantial variation in (a) the prevalence of fixed- vs floating-rate loans, (b) rate fixation periods, and (c) reference rates. This variation results in lending rates being exposed to different segments of the risk-free rate yield curve which, in turn, influence their sensitivity to monetary policy changes. We show that loans linked to shorter-maturity risk-free rates experience more pronounced monetary pass-through. Importantly, this effect is not purely mechanical, as part of the effect is offset by adjustments in the premium, revealing previously less-explored heterogeneity in the pass-through to lending rates.
Bond funds' risk-taking and monetary policy (draft available), with Haris Giannakidis, Dimitris Malliaropulos, Petros Migiakis and Filippos Petroulakis
Abstract
By using a large and representative of the broader market dataset of portfolio holdings of US and EU bond funds, at security level, we examine the effects of monetary policies exercised by the Fed and the ECB, before and after the Covid episode, on fund’s risk taking. We find that the Fed’s policies have had a significant effect, increasing risks in investment funds bond portfolios during accommodative periods. Economically, these effects are sizeable: the observed rate cuts and asset purchases resulted to a risk taking by funds that is equivalent to a fall of the average rating in their bond portfolios from A+ to BBB, after the Covid QE and rate cuts. During tightening periods, the effects of monetary policy on funds’ risk taking are not significant. Similarly we do not find evidence that ECB’s monetary policies have had a similarly significant effect on funds’ risk taking.
Do banks respond to their friends' markets? Social spillovers in deposit pricing (draft available), with Panagiotis Avramidis and Natalya Martinova
Abstract
We examine how online social networks among bank customers impact banks' deposit-pricing behavior. We begin by documenting that small banks compete primarily on price and adjust their rates in response changes in market conditions after a closure of a large bank branch. Using county-level online social connection data and a two-stage regression framework, we find that they do so even following deposit rate shocks in socially connected but geographically distant areas. The effect is strong and persistent and is not driven by geographic proximity or economic linkages. Our results also indicate that social spillovers are amplified in banking markets characterized by high competition and by customers with greater financial sophistication. A corollary of our findings, also tested here, is that increased social connectedness accelerates rate convergence of small banks across connected counties.
Work in progress
Financial literacy and advice: Substitutes or complements? with P.C. Andreou, D. Koursaros, A. Previtero and W. Wang
Financial behaviour and environmental concern, with P. C. Andreou, K. Dellis and C. Makridis