European Central Bank

When margins call: liquidity preparedness of non-bank financial institutions

07/14/2025 European Central Bank Central banks

We propose a novel framework to assess systemic risk stemming from the inadequate liquidity preparedness of non-bank financial institutions (NBFIs) to derivative margin calls. Unlike banks, NBFIs may struggle to source liquidity and meet margin calls during periods of significant asset price fluctuations, potentially triggering asset fire sales and amplifying market volatility. We develop a set of indicators and statistical methods to assess liquidity preparedness and examine risk transmission through common asset holdings and counterparty exposures.

From risk to buffer: calibrating the positive neutral CCyB rate in the euro area

07/14/2025 European Central Bank Central banks

This paper proposes a novel yet intuitive method for the calibration of the CCyB through the cycle in the euro area, including the positive neutral CCyB rate. The paper implements the Risk-to-Buffer framework by Couaillier and Scalone (2024) in both a DSGE and macro time series setting and proposes a calibration of the PN CCyB aimed to reduce the macroeconomic amplification of shocks occurring in an environment where risks are neither subdued nor elevated.

On the collection of MiFIR transparency data: an application to the ECB eligible marketable assets

07/10/2025 European Central Bank Central banks

One of the main goals of launching the EU’s second Markets in Financial Instruments Directive (MiFID II) and the respective Markets in Financial Instruments Regulation (MiFIR) was to increase the transparency of transactions in financial markets. Prior to MiFID II, transparency requirements in financial markets were limited mostly to equities traded in regulated markets. Following MiFID II, transactions now need to be publicly reported for a broader range of financial assets.

Violent conflict and cross-border lending

07/09/2025 European Central Bank Central banks

How do violent conflicts shape cross-border lending? Using data on syndicated loans by 14,021 creditors to firms in 179 countries (1989–2020), we document a dual effect: foreign banks reduce overall lending relative to domestic banks but significantly increase financing to military and dual-use sectors during conflicts. This reallocation is stronger among lenders less specialized in the conflict country, more specialized in military lending, and domiciled in politically non-aligned nations. Effects are geographically contained and temporally limited, dissipating post-conflict.

Monetary policy transmission through cross-selling banks

07/09/2025 European Central Bank Central banks

We show theoretically how the anticipated cross-selling of loans incentivizes banks to offer lower deposit spreads to attract and retain depositors, more when policy rates are lower and future cross-selling is more valuable. Utilizing comprehensive data on every Norwegian bank household relationship, we then establish empirically how banks facing identical loan demand respond to policy rate cuts with greater deposit spread reductions for clients with higher cross-selling potential, thereby raising both deposit and loan growth.

Violent conflict and cross-border lending

07/09/2025 European Central Bank Central banks

How do violent conflicts shape cross-border lending? Using data on syndicated loans by 14,021 creditors to firms in 179 countries (1989–2020), we document a dual effect: foreign banks reduce overall lending relative to domestic banks but significantly increase financing to military and dual-use sectors during conflicts. This reallocation is stronger among lenders less specialized in the conflict country, more specialized in military lending, and domiciled in politically non-aligned nations. Effects are geographically contained and temporally limited, dissipating post-conflict.

Monetary policy transmission through cross-selling banks

07/09/2025 European Central Bank Central banks

We show theoretically how the anticipated cross-selling of loans incentivizes banks to offer lower deposit spreads to attract and retain depositors, more when policy rates are lower and future cross-selling is more valuable. Utilizing comprehensive data on every Norwegian bank household relationship, we then establish empirically how banks facing identical loan demand respond to policy rate cuts with greater deposit spread reductions for clients with higher cross-selling potential, thereby raising both deposit and loan growth.

Global evidence on profit shifting within firms and across time

07/04/2025 European Central Bank Central banks

We provide estimates of profit shifting for over 2 million firm-year observations in 100 countries over the period 2009–2020. Employing nonparametric estimation techniques within a mainstay model of profit shifting, we examine how the profits of both parent and subsidiary firms within a multinational group respond to marginal changes in the composite tax indicator. The key advantage of this approach is that it yields firm-year estimates of profit shifting. Multinational firms engage in extensive profit shifting by maintaining affiliates in low-tax countries and zero-tax havens.

Global evidence on profit shifting within firms and across time

07/04/2025 European Central Bank Central banks

We provide estimates of profit shifting for over 2 million firm-year observations in 100 countries over the period 2009–2020. Employing nonparametric estimation techniques within a mainstay model of profit shifting, we examine how the profits of both parent and subsidiary firms within a multinational group respond to marginal changes in the composite tax indicator. The key advantage of this approach is that it yields firm-year estimates of profit shifting. Multinational firms engage in extensive profit shifting by maintaining affiliates in low-tax countries and zero-tax havens.

Falling interest rates and credit reallocation: lessons from general equilibrium

07/04/2025 European Central Bank Central banks

We show that in a canonical model with heterogeneous entrepreneurs, financial frictions, and an imperfectly elastic supply of capital, a fall in the interest rate has an ambiguous effect on aggregate economic activity. In partial equilibrium, a lower interest rate raises aggregate investment both by relaxing financial constraints and by prompting relatively less productive entrepreneurs to invest. In general equilibrium, however, this higher demand for capital raises its price and crowds out investment by more productive entrepreneurs.

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