Central banks

Should we mind the gap? An assessment of the benefits of equity markets and policy implications for Europe’s capital markets union

08/05/2025 European Central Bank Central banks

The European Union (EU) economy depends heavily on bank funding. For this reason, strengthening EU equity markets as an alternative funding source has been a policy priority under the Capital Markets Union (CMU) agenda, and more recently a key feature of the Savings and Investment Union (SIU). EU listed equity markets are smaller and structurally different from those in the United States (US), with differing market capitalisations of listed firms and differences in the number of companies listed, stemming from lower initial public offering (IPO) activity in Europe.

FEDS Paper: Indirect Credit Supply: How Bank Lending to Private Credit Shapes Monetary Policy Transmission

08/05/2025 Federal Reserve Central banks

Sharjil Haque, Young Soo Jang, and Jessie Jiaxu WangThis paper examines how banks’ financing of nonbank lenders affects monetary policy transmission. Using supervisory bank loan-level data and deal-level private credit data, we document an intermediation chain: Banks lend to Business Development Companies (BDCs)—large private credit providers—which then lend to firms.

FEDS Paper: Discussion of “Dynamic Causal Effects in a Nonlinear World: the Good, the Bad, and the Ugly”

08/05/2025 Federal Reserve Central banks

Edward P. Herbst and Benjamin K. JohannsenThis comment discusses Kolesár and Plagborg-Møller's (2025) finding that the standard linear local projection (LP) estimator recovers the average marginal effect (AME) even in nonlinear settings. We apply and discuss a subset their results using a simple nonlinear time series model, emphasizing the role of the weighting function and the impact of nonlinearities on small-sample properties.

The impact of climate litigation risk on firms’ cost of bank loans

08/05/2025 European Central Bank Central banks

Using a novel worldwide dataset of 5,264 syndicated loans issued to 329 firms from 2006 to 2021, we study how climate-related litigation risk affects firm’s cost of borrowing. We find robust empirical evidence that firms targeted by climate lawsuits pay significantly higher spreads on their bank loans. These effects are more pronounced for firms with weaker environmental performance and higher ESG controversies. The results suggest that lender’s view climate litigation as a material risk factor, which is increasingly priced into debt contracts.

The impact of climate litigation risk on firms’ cost of bank loans

08/05/2025 European Central Bank Central banks

Using a novel worldwide dataset of 5,264 syndicated loans issued to 329 firms from 2006 to 2021, we study how climate-related litigation risk affects firm’s cost of borrowing. We find robust empirical evidence that firms targeted by climate lawsuits pay significantly higher spreads on their bank loans. These effects are more pronounced for firms with weaker environmental performance and higher ESG controversies. The results suggest that lender’s view climate litigation as a material risk factor, which is increasingly priced into debt contracts.

Heterogeneity in buffers set for systemically important banks in the European banking union

08/05/2025 European Central Bank Central banks

Unwarranted heterogeneity in O-SII buffer levels across the European banking union may have adverse consequences for financial stability and the level playing field in the banking market. Analysis of national buffer-setting yields evidence of heterogeneity which does not result from differences in the size, concentration and funding structure of the domestic banking systems. From a banking union perspective, buffer-setting by national authorities results in heterogeneity at both the upper and the lower end of the distribution of a bank’s systemic relevance.

Enhancing the ECB’s O-SII framework

08/05/2025 European Central Bank Central banks

Capital buffers for other systemically important institutions (O-SIIs) are set by national authorities. They vary greatly across the EU Member States participating in the banking union. On 1 January 2025 the ECB started using an enhanced floor methodology to assess national O-SII buffer decisions. This methodology adopts a banking union (BU) perspective to address “too-big-to-fail”-related risks at the BU level. The aim is to reduce the heterogeneity in O-SII buffers and achieve a more consistent treatment of the most systemically important institutions.

FEDS Paper: Systemic Credit Risk Premium: Insights from Credit Derivatives Markets(Revised)

08/04/2025 Federal Reserve Central banks

Kiwoong Byun, Baeho Kim, and Dong Hwan OhThis study examines the market-implied premiums for bearing systemic credit risk by analyzing credit derivatives on the CDX North American Investment Grade portfolio from September 2005 to March 2021. We construct systemic credit risk premium (SCRP) as the difference between the observed prices of multi-name super-senior tranches and their synthetic counterparts valued from historical asset correlations implied by single-name CDS spreads.

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