Financial institutions

Systemic risks in linkages between banks and the non-bank financial sector

11/25/2025 European Central Bank Central banks

Linkages between euro area banks and entities in the non-bank financial intermediation (NBFI) sector may lead to the emergence of systemic risk in at least two fields. First, the banking sector receives short-term deposit, repo and debt securities liabilities from NBFI entities. Such liabilities may be prone to flight risk and difficult to substitute. Second, euro area banks provide credit to NBFI entities which follow leveraged investment strategies.

FEDS Paper: Settlement Speed and Financial Stability

11/20/2025 Federal Reserve Central banks

Agostino Capponi and Jin-Wook ChangThis paper investigates how settlement speed affects financial stability in payment networks, taking into account netting benefits, liquidity costs, and counterparty risks. Our analysis reveals that faster settlements have ambiguous effects on systemic risk and social welfare. The optimal settlement speed is determined by the network structure and the trade-off between netting efficiency and liquidity costs on one hand, and the probability of counterparty defaults on the other.

Walking the talk? Green politicians and pollution patterns

11/20/2025 European Central Bank Central banks

Exploiting three decades of detailed regional data for Germany, we find that when the Green Party is successful at the polls, local hazardous emissions decline. The level of political representation matters, too. Green politicians’ gaining influence at county level is followed largely by a decline in air pollutants that have an immediate adverse health effect. In contrast, when the Green party joins the state government, only greenhouse gas emissions that affect the welfare of future generations via climate change decline.

Walking the talk? Green politicians and pollution patterns

11/20/2025 European Central Bank Central banks

Exploiting three decades of detailed regional data for Germany, we find that when the Green Party is successful at the polls, local hazardous emissions decline. The level of political representation matters, too. Green politicians’ gaining influence at county level is followed largely by a decline in air pollutants that have an immediate adverse health effect. In contrast, when the Green party joins the state government, only greenhouse gas emissions that affect the welfare of future generations via climate change decline.

The complex linkages between euro area insurers and sovereign bond markets

11/20/2025 European Central Bank Central banks

Euro area insurers manage several trillion euro in assets and take a long‑term investment perspective. To counteract the long period of low interest rates, they have shifted towards holding more alternative and less liquid assets. As a result, their balance sheets have become less liquid and more sensitive to market conditions overall. Meanwhile, their holdings of sovereign bonds show a significant home bias, which may have even increased with quantitative easing.

FEDS Paper: The Collateral Channel and Bank Credit(Revised)

11/19/2025 Federal Reserve Central banks

Arun Gupta, Horacio Sapriza, and Vladimir YankovWe examine the firm-level and aggregate effects of the collateral channel using administrative bank-firm-loan level data. We introduce novel instrumental variables related to the efficiency of federal district bankruptcy courts and show their importance as predictors of collateral use and banks' expected losses given default across collateral types.

Integrating contagion risk into the 2025 EU-wide stress test: a system-wide analysis with amplification effects between banks and non-banks

11/19/2025 European Central Bank Central banks

This article expands the 2025 EU-wide stress test by incorporating a system-wide perspective to capture contagion risks across investment funds and insurance corporations alongside the banking sector. It examines potential short-term contagion effects under the EBA’s adverse scenario as financial institutions adjust their balance sheets in response to stress. These adjustments would result in additional average CET1 ratio depletion of 29 basis points, increasing first-round effects by 12%.

A framework to assess the severity of adverse scenarios in EU-wide stress tests

11/19/2025 European Central Bank Central banks

The severity and the plausibility of stress test scenarios are crucial elements for interpreting the results and ensuring the credibility of stress-testing exercises. This article introduces a comprehensive framework for assessing scenario severity and plausibility in the context of the adverse scenarios used in the EU-wide stress tests. Two families of indicators are developed, characterised by a backward-looking and a forward-looking perspective.

Simulating dynamic balance sheet reactions and macroprudential policy using the 2025 EU-wide stress test

11/19/2025 European Central Bank Central banks

Stress test simulations can enhance our understanding of the interplay between bank actions, the real economy and macroprudential buffers. Leveraging BEAST, the ECB’s workhorse top-down stress test model, this article explores impacts stemming from bank behavioural reactions by simulating them under the adverse scenario of the 2025 EU-wide stress test. The article shows that allowing banks to adjust their balance sheets only improves their capital ratios to a minor extent compared with simulations where they are assumed to keep their balance sheets constant.

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