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Nuno Cassola
- 21 November 2019
- OCCASIONAL PAPER SERIES - No. 237Details
- Abstract
- The prolonged crisis exposed the vulnerability of a monetary union without a banking union. The Single Supervisory Mechanism (SSM), which started operating in November 2014, is an essential step towards restoring banks to health and rebuilding trust in the banking system. The ECB is today responsible for setting a single monetary policy applicable throughout the euro area and for supervising all euro area banks in order to ensure their safety and soundness, some directly and some indirectly. Its role in the area of financial stability has also expanded through the conferral of macroprudential tasks and tools that include tightening national measures when necessary. It thus carries out these complementary functions, while its primary objective of pursuing price stability remains unchanged. What are the working arrangements of this enlarged ECB, and what are the similarities and existing synergies among these functions? In the following pages, focusing on the organisational implications of the “new” ECB, we show the relative degrees of centralisation and decentralisation that exist in discharging these functions, the cycles of policy preparation and the rules governing interaction between them.
- JEL Code
- E42 : Macroeconomics and Monetary Economics→Money and Interest Rates→Monetary Systems, Standards, Regimes, Government and the Monetary System, Payment Systems
E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies
F36 : International Economics→International Finance→Financial Aspects of Economic Integration
G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
- 17 May 2016
- WORKING PAPER SERIES - No. 1906Details
- Abstract
- We build a model of collateral choice by banks that allows to recover the opportunity cost of collateral use and the access of banks to the interbank market. We estimate the model using country-level data on assets pledged to the European Central Bank from 2009 to 2011. The model can be used to quantify how changes in haircuts affect the collateral used by banks and can provide proxies for the funding cost of banks. Our results suggest for example that a 5% higher haircut on low rated collateral would have reduced the use of this collateral by 10% but would have increased the average funding cost spread between high yield and low yield countries by 5% over our sample period.
- JEL Code
- E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy
E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies
G01 : Financial Economics→General→Financial Crises
F36 : International Economics→International Finance→Financial Aspects of Economic Integration
- 25 May 2012
- WORKING PAPER SERIES - No. 1437Details
- Abstract
- In the paper we investigate the empirical features of euro area money market turbulence during the recent financial crisis. By means of a novel Fractionally Integrated Heteroskedastic Factor Vector Autoregressive model, we find evidence of a deterministic level factor in the EURIBOR-OIS (OIS) spreads term structure, associated with the two waves of stress in the interbank market, following the BNP Paribas (9 August 2007) and the Lehman Brothers (16 September 2008) "shocks", and two additional factors, of the long memory type, bearing the interpretation of curvature and slope factors. The unfolding of the crisis yielded a significant increase in the persistence and volatility of OIS spreads. We also find evidence of a declining trend in the level and volatility of OIS spreads since December 2008, associated with ECB interest rate cuts and full allotment policy.
- JEL Code
- C32 : Mathematical and Quantitative Methods→Multiple or Simultaneous Equation Models, Multiple Variables→Time-Series Models, Dynamic Quantile Regressions, Dynamic Treatment Effect Models, Diffusion Processes
E43 : Macroeconomics and Monetary Economics→Money and Interest Rates→Interest Rates: Determination, Term Structure, and Effects
E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies
G15 : Financial Economics→General Financial Markets→International Financial Markets
- 25 August 2011
- WORKING PAPER SERIES - No. 1374Details
- Abstract
- We study European banks
- JEL Code
- D44 : Microeconomics→Market Structure and Pricing→Auctions
E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies
G01 : Financial Economics→General→Financial Crises
- 1 October 2010
- WORKING PAPER SERIES - No. 1247Details
- Abstract
- We analyze the impact of the recent financial market crisis on the Euro Overnight Index Average (EONIA) and interbank market trading and assess the effectiveness of the ECB liquidity policy between 07/2007 - 08/2008. We extend the model of [QM06] by (i) incorporating the microstructure of the EONIA market including the ECB fine-tuning operation on the last day of the maintenance period (MP) and banks’ daily excess liquidity, (ii) giving insight into banks’ trading behavior characterized by an endogenous regime-switch and suggesting an efficient procedure to simulate the entire MP, and (iii) proposing a model for market distortion due to lending constraints which lead to a bid-ask spread for the EONIA rate. The model is calibrated by simulation fitting daily EONIA rates and aggregate liquidity measures observed between March 2004 and September 2008. Besides lending constraints we consider market segmentation and aggregate liquidity shocks as possible market distortions in the crisis period. For a calibration cross-check and for estimating the timing of the endogenous regime-switch we use panel data covering liquidity data of 82 Euro Area commercial banks for the period 03/2003 - 07/2007. With the calibrated model the ECB policy of liquidity frontloading is evaluated and compared with a reserve band system policy similar to the Bank of England’s framework. We find that liquidity frontloading is a small scale central bank intervention which is capable of stabilizing interest rates in both frictionless and distorted markets. Simulations suggest that without frontloading the EONIA would have been, on average, 23 basis points above the policy rate (target); with frontloading, the overnight rate is, on average, on target.
- JEL Code
- E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy
E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy
G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
- 23 December 2008
- WORKING PAPER SERIES - No. 982Details
- Abstract
- In the framework of a new money market econometric model, we assess the degree of precision achieved by the European Central Bank ECB) in meeting its operational target for the short-term interest rate and the impact of the U.S. sub-prime credit crisis on the euro money market during the second half of 2007. This is done in two steps. Firstly, the long-term behaviour of interest rates with one-week maturity is investigated by testing for co-breaking and for homogeneity of spreads against the minimum bid rate (MBR, the key policy rate). These tests capture the idea that successful steering of very short-term interest rates is inconsistent with the existence of more than one common trend driving the one-week interest rates and/or with non-stationarity of the spreads among interest rates of the same maturity (or measured against the MBR). Secondly, the impact of several shocks to the spreads (e.g. interest rate expectations, volumes of open market operations, interest rate volatility, policy interventions, and credit risk) is assessed by jointly modelling their behaviour. We show that, after August 2007, euro area commercial banks started paying a premium to participate in the ECB liquidity auctions. This puzzling phenomenon can be understood by the interplay between, on the one hand, adverse selection in the interbank market and, on the other hand, the broad range of collateral accepted by the ECB. We also show that after August 2007, the ECB steered the "risk-free" rate close to the policy rate, but has not fully off-set the impact of the credit events on other money market rates.
- JEL Code
- C32 : Mathematical and Quantitative Methods→Multiple or Simultaneous Equation Models, Multiple Variables→Time-Series Models, Dynamic Quantile Regressions, Dynamic Treatment Effect Models, Diffusion Processes
E43 : Macroeconomics and Monetary Economics→Money and Interest Rates→Interest Rates: Determination, Term Structure, and Effects
E50 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→General
E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies
G15 : Financial Economics→General Financial Markets→International Financial Markets - Network
- ECB workshop on the analysis of the money market
- 23 February 2008
- WORKING PAPER SERIES - No. 869Details
- Abstract
- The theory of liquidity management under uncertainty predicts that, under certain conditions, commercial banks will accumulate minimum reserve requirements linearly over the reserve maintenance period. This prediction is empirically tested using daily data (from March 2004 until February 2007) on the current accounts and minimum reserve requirements of a panel of 79 commercial banks from the euro area. The linear accumulation hypothesis is not rejected by the data with the exception of small banks which build-up excess reserves. The empirical analysis suggest that idiosyncratic liquidity uncertainty is much higher than aggregate liquidity uncertainty. Nevertheless, on the penultimate day in the reserve maintenance period, the inverse demand schedule of the representative bank is relatively flat around the middle of the interest rate corridor set by the standing facilities. This suggests that liquidity e¤ects on the overnight inter-bank rate should be very muted on this day. Our calibration exercise suggests that the probability of an individual bank's daily overdraft in the euro area is very low (less than 1:0%). This is con
- JEL Code
- C23 : Mathematical and Quantitative Methods→Single Equation Models, Single Variables→Panel Data Models, Spatio-temporal Models
E4 : Macroeconomics and Monetary Economics→Money and Interest Rates
E5 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit
G2 : Financial Economics→Financial Institutions and Services
- 16 August 2007
- WORKING PAPER SERIES - No. 793Details
- Abstract
- This paper contributes to the existing literature on central bank repoauctions. It is based on a structural econometric approach, whereby the primitives of bidding behaviour (individual bid schedules and bid-shading components) are directly estimated. With the estimated parameters we calibrate a theoretical model in order to illustrate some comparative static results. Overall the results suggest that strategic and optimal behaviour is prevalent in ECB tenders. We find evidence of a statistically significant bid-shading component, even though the number of bidders is very large. Bid-shading increases with liquidity uncertainty and decreases with the number of participants.
- JEL Code
- G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
G12 : Financial Economics→General Financial Markets→Asset Pricing, Trading Volume, Bond Interest Rates
D44 : Microeconomics→Market Structure and Pricing→Auctions
E43 : Macroeconomics and Monetary Economics→Money and Interest Rates→Interest Rates: Determination, Term Structure, and Effects
E50 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→General
- 28 December 2006
- WORKING PAPER SERIES - No. 703Details
- Abstract
- This paper assesses the sources of volatility persistence in Euro Area money market interest rates and the existence of linkages relating volatility dynamics. The main findings of the study are as follows. Firstly, there is evidence of stationary long memory, of similar degree, in all series. Secondly, there is evidence of fractional cointegration relationships relating all series, except the overnight rate. Two common long memory factors are found to drive the temporal evolution of the volatility processes. The first factor shows how persistent volatility shocks are trasmitted along the term structure, while the second factor points to excess persistent volatility at the longer end of the yield curve, relative to the shortest end. Finally, impulse response analysis and forecast error variance decomposition point to forward transmission of shocks only, involving the closest maturities.
- JEL Code
- C32 : Mathematical and Quantitative Methods→Multiple or Simultaneous Equation Models, Multiple Variables→Time-Series Models, Dynamic Quantile Regressions, Dynamic Treatment Effect Models, Diffusion Processes
F30 : International Economics→International Finance→General
G10 : Financial Economics→General Financial Markets→General
- 17 August 2006
- WORKING PAPER SERIES - No. 668Details
- Abstract
- It is argued that bidders in liquidity-providing central bank operations should typically possess declining marginal valuations. Based on this hypothesis, we construct an equilibrium in central bank refinancing operations organised as variable rate tenders. In the case of the discriminatory pricing rule, bid shading does not disappear in large populations. The predictions of the model are shown to be consistent with the data for the euro area.
- JEL Code
- D44 : Microeconomics→Market Structure and Pricing→Auctions
E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy
- 30 November 2005
- WORKING PAPER SERIES - No. 554Details
- Abstract
- The fixed rate tender is one of the main procedural formats relied upon by central banks in their implementation of monetary policy. This fact stands in a somewhat puzzling contrast to the prevalent view in the theoretical literature that the procedure, by fixing interest rate and quantity at the same time, does not allow a strategic equilibrium. We show that an equilibrium exists under general conditions even if bidders expect true demand to exceed supply on average. The outcome is typically inefficient. It is argued that the fixed rate tender, in comparison to other tender formats, may be an appropriate instrument for central bank liquidity management when market conditions are sufficiently calm.
- JEL Code
- D44 : Microeconomics→Market Structure and Pricing→Auctions
E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy
- 29 October 2004
- WORKING PAPER SERIES - No. 399Details
- Abstract
- In certain market environments, a large investor may benefit from building up a futures position first and trading subsequently in the spot market (Kumar and Seppi, 1992). The present paper identifies a variation of this type of manipulation that might occur in money markets with an interest rate corridor. We show that manipulation involving the use of central bank facilities would be observable only sporadically. The probability of manipulation decreases when the central bank uses an active liquidity management. Manipulation can also be reduced by widening the interest rate corridor.
- JEL Code
- D84 : Microeconomics→Information, Knowledge, and Uncertainty→Expectations, Speculations
E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy
- 27 July 2004
- WORKING PAPER SERIES - No. 378Details
- Abstract
- We model the interbank market for overnight credit with heterogeneous banks and asymmetric information. An unsophisticated bank just trades to compensate its liquidity imbalance, while a sophisticated bank will exploit its private information about the liquidity situation in the market. It is shown that with positive probability, the liquidity effect (Hamilton, 1997) is reversed, i.e., a liquidity drainage from the banking system may generate an overall decrease in the market rate. The phenomenon does not disappear when the number of banks increases. We also show that private information mitigates the effect of an unexpected liquidity shock on the market rate, suggesting a conservative information policy from a central bank perspective.
- JEL Code
- G14 : Financial Economics→General Financial Markets→Information and Market Efficiency, Event Studies, Insider Trading
G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy
- 23 December 2003
- WORKING PAPER SERIES - No. 295Details
- Abstract
- On several occasions during the period 2001-2003, the European Central Bank (ECB) decided to deviate from its "neutral" benchmark allotment rule, with the effect of not alleviating a temporary liquidity shortage in the banking system. This is remarkable because it implied the possibility of short-term interest rates raising significantly above the main policy rate. In the present paper, we show that when the monetary authority cares for both liquidity and interest rate conditions, the optimal allotment policy may entail a discontinuous reaction to initial conditions. More precisely, we prove that there is a threshold level for the accumulated aggregate liquidity position in the banking system prior to the last operation in a given maintenance period, so that the benchmark allotment is optimal whenever liquidity conditions are above the threshold, and a tight allotment is optimal whenever liquidity conditions are below the threshold.
- JEL Code
- E43 : Macroeconomics and Monetary Economics→Money and Interest Rates→Interest Rates: Determination, Term Structure, and Effects
E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy
- 1 June 2003
- WORKING PAPER SERIES - No. 235Details
- Abstract
- This paper estimate the factors underlying the volatility of the euro overnight interest rate and its transmission along the euro area money market yield curve. A new multivariate unobserved components model is proposed allowing for both long-memory and stationary cyclical dynamics. Using hourly data the estimates show repetitive intradaily and monthly patterns that can be explained by the microstructure of the money market and the institutional features of the Eurosystem's operational framework for monetary policy implementation. Strong persistence is dedected in all log-volatility processes and two common long-memory factors are extracted. The first factor explains the long-memory dynamics of the shortest maturity. The second factor explains the transmission of volatility along the money market yield curve. We find evidence that most liquidity effects are cyclical, confined to the ned of reserve maintenance periods, and are not transmitted along the money market yield curve.
- JEL Code
- C32 : Mathematical and Quantitative Methods→Multiple or Simultaneous Equation Models, Multiple Variables→Time-Series Models, Dynamic Quantile Regressions, Dynamic Treatment Effect Models, Diffusion Processes
E43 : Macroeconomics and Monetary Economics→Money and Interest Rates→Interest Rates: Determination, Term Structure, and Effects
F30 : International Economics→International Finance→General
G10 : Financial Economics→General Financial Markets→General
- 1 January 2002
- WORKING PAPER SERIES - No. 119Details
- Abstract
- In this paper we study the role of the stock market in the transmission mechanism in the euro area and evaluate whether price stability and financial stability are mutually consistent and complementary objectives. Four major conclusions can be drawn from our work. First, stock prices and more generally, relative asset prices seem to play an important role in the transmission mechanism in the euro area. Second, we do not find any significant, direct impact of stock prices on inflation. These two findings taken together support the view that stock market prices may be important for monetary policy, independently of their direct impact on inflation. Third, permanent productivity shocks are the driving force of the stock market in the long-run and contribute significantly to its cyclical behaviour. Nevertheless, the bulk of cyclical dynamics in the stock market is explained by transitory shocks. Fourth, a monetary policy focused on maintaining price stability in the long-run can contribute also to stock market stability.
- JEL Code
- C32 : Mathematical and Quantitative Methods→Multiple or Simultaneous Equation Models, Multiple Variables→Time-Series Models, Dynamic Quantile Regressions, Dynamic Treatment Effect Models, Diffusion Processes
O11 : Economic Development, Technological Change, and Growth→Economic Development→Macroeconomic Analyses of Economic Development
- 1 March 2001
- WORKING PAPER SERIES - No. 46Details
- Abstract
- In this paper we show that a two-factor constant volatility model provides an adequate description of the dynamics and shape of the German term structure of interest rates from 1972 up to 1998. The model also provides reasonable estimates of the volatility and term premium curves. Following the conjecture that the two factors driving the German term structure of interest rates represent the H[-DQWH real interest rate and the expected inflation rate, the identification of one factor with expected inflation is discussed. Our estimates are obtained using a Kalman filter and a maximum likelihood procedure including in the measurement equation both the yields and their volatilities
- JEL Code
- E43 : Macroeconomics and Monetary Economics→Money and Interest Rates→Interest Rates: Determination, Term Structure, and Effects
G12 : Financial Economics→General Financial Markets→Asset Pricing, Trading Volume, Bond Interest Rates
- 1 November 2000
- WORKING PAPER SERIES - No. 39Details
- Abstract
- In order to assess the importance of monetary and financial developments for key macroeconomic variables in the euro area a money demand system for M3 is estimated adopting a structural cointegrating VAR approach. While maintaining a good statistical representation of the data, long-run relationships are based on economic theory. By using generalised response profiles the dynamics of the money demand system is investigated without any further identifying assumptions. Error bounds of the profiles are derived using bootstrap simulations.
- JEL Code
- C32 : Mathematical and Quantitative Methods→Multiple or Simultaneous Equation Models, Multiple Variables→Time-Series Models, Dynamic Quantile Regressions, Dynamic Treatment Effect Models, Diffusion Processes
E41 : Macroeconomics and Monetary Economics→Money and Interest Rates→Demand for Money