Financial institutions

Fiscal drag in theory and in practice: a European perspective

10/09/2025 European Central Bank Central banks

This paper presents a comprehensive characterization of “fiscal drag”—the increase in tax revenue that occurs when nominal tax bases grow but nominal parameters of progressive tax legislation are not updated accordingly—across 21 European countries using a microsimulationapproach. First, we estimate tax-to-base elasticities, showing that the progressivity built in each country’s personal income tax system induces elasticities around 1.7–2 for many countries, indicating a potential for large fiscal drag effects.

Fiscal drag in theory and in practice: a European perspective

10/09/2025 European Central Bank Central banks

This paper presents a comprehensive characterization of “fiscal drag”—the increase in tax revenue that occurs when nominal tax bases grow but nominal parameters of progressive tax legislation are not updated accordingly—across 21 European countries using a microsimulationapproach. First, we estimate tax-to-base elasticities, showing that the progressivity built in each country’s personal income tax system induces elasticities around 1.7–2 for many countries, indicating a potential for large fiscal drag effects.

Capital requirements: a pillar or a burden for bank competitiveness?

10/09/2025 European Central Bank Central banks

This paper examines the relationship between capital requirements, capital ratios and bank competitiveness – measured as profit efficiency. Using data envelopment analysis techniques, profit efficiency scores were estimated for a sample of listed significant institutions directly supervised by the European Central Bank. In calculating the scores, use was made of rich supervisory data on bank-specific characteristics and capital requirements, in addition to macroeconomic variables.

Details matter – how loan pricing affects monetary policy transmission in the euro area

10/09/2025 European Central Bank Central banks

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 2022-23. We document substantial variation in (a) the prevalence of fixed versus 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, influences their sensitivity to monetary policy changes.

Decoding climate-related risks in sovereign bond pricing: a global perspective

10/08/2025 European Central Bank Central banks

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.

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