nep-eec New Economics Papers
on European Economics
Issue of 2020‒05‒11
eight papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Central Bank Digital Currency - Objectives, preconditions and design choices By Peter Wierts; Harro Boven
  2. European community bonds since the oil crisis: Lessons for today? By Horn, Sebastian; Meyer, Josefin; Trebesch, Christoph
  3. Long-term outlook for the German statutory pension system By Schön, Matthias
  4. Foreign exchange interventions under a one-sided target zone regime and the Swiss franc By Hertrich, Markus
  5. Regulatory stress testing and bank performance By Ahnert, Lukas; Vogt, Pascal; Vonhoff, Volker; Weigert, Florian
  6. Collateral eligibility of corporate debt in the Eurosystem By Pelizzon, Loriana; Riedel, Max; Simon, Zorka; Subrahmanyam, Marti G.
  7. Negative interest rates, deposit funding and bank lending By Tan Schelling; Pascal Towbin
  8. Effects of macroprudential policies on bank lending and credit risks By Stefanie Behncke

  1. By: Peter Wierts; Harro Boven
    Abstract: In principle, DNB has a favourable attitude to central bank digital currency (CBDC) which is money issued by a central bank and generally accessible to households and businesses. We believe the continued use of a public form of money is important. After all, the fungibility between private money and public money bolsters confidence in money when it is needed most - in periods of uncertainty including war, financial crisis or disruption of private payments. It is at those times that the demand for public money increases. Cash has fulfilled this role, but given the decrease in the use of cash this may be set to change in the future. The trend of declining use of cash has long been ongoing and appears to be of a structural nature. CBDC could provide the desired policy options to protect the balance between public and private forms of money and safeguard the fungibility between private and public money.The aim of this report is to contribute to the public debate on CBDC. The introduction of CBDC would involve a structural reform affecting users and the financial system as well as DNB's tasks and objectives. The social impact of such a reform requires broad public debate both in the Netherlands and the euro area as a whole. This study therefore serves as DNB's input for the debate on CBDC within the euro area. The euro was introduced in the Netherlands in 1999, involving a transfer of monetary policy autonomy to the European System of Central Banks (ESCB). That holds for CBDC as well. As a consequence, this study also looks at the European institutional and legal framework for CBDC.
  2. By: Horn, Sebastian; Meyer, Josefin; Trebesch, Christoph
    Abstract: The history of joint European bond issuance has been largely forgotten. The authors show that bonds issued and guaranteed jointly by European states are not a novel instrument, but have repeatedly been issued since the 1970s. The issuance of one-off "Coronabonds", as currently proposed, would not be unprecedented, but quite the contrary. The first European community bond was issued in 1976 to mitigate the adverse impact of the oil crisis, which threatened the viability of the European Economic Union. The funds were raised on private capital markets and then passed on to crisis countries, including Italy and Ireland. In the 1980s and 1990s community bonds were issued in favor of France, Greece and Portugal and, in 2008/2009, to support the non-Eurozone countries Hungary, Latvia and Romania. Moreover, the EFSF and ESM facilities were created after 2010 to support Eurozone members. The most important lesson from history is that, during deep crises, the European governments have repeatedly shown willingness to extend rescue funds along with substantial guarantees to other members in need. The necessary institutional arrangements were often set up flexibly and quickly. A second lesson is that the EU budget played a central role in past European bond guarantee schemes. Direct guarantees via country quotas were only the second guarantee tier, in case EU funds did not suffice, and only until 1981. Not coincidentally, the repayment of "Coronabonds" through an enlarged future EU budget is currently being discussed.
    Keywords: EU-Anleihen,Europäische Union,Globale Krise,COVID-19,Euro bonds,European Union,global crisis,COVID-19
    Date: 2020
  3. By: Schön, Matthias
    Abstract: This paper presents long term projections of the German pension system that are based on a general equilibrium model with overlapping generations (OLG). This framework takes into account the two way feedback of both micro and macroeconomic relationships, meaning that households, for example, react to changes in the statutory pension system, such as the retirement age or the replacement rate. Changes in households' behaviour, in turn, impact on macroeconomic developments and public finances. One approach to parametrically reform the pension system would be linking (indexing) the retirement age systematically to increasing life expectancy. The model shows that the resulting increase in employment would also bolster social security contributions and taxes. Moreover, with a rising retirement age and the associated longer periods of work, pension entitlements would increase.
    Keywords: Demographic Change,Pension System,OLG Models
    JEL: E27 E62 H55 J11 J26
    Date: 2020
  4. By: Hertrich, Markus
    Abstract: From September 2011 to January 2015, the Swiss National Bank (SNB) implemented a minimum exchange rate regime (i.e. a one-sided target zone) vis-a-vis the euro to fight deflationary pressures in the aftermath of the Great Financial Crisis. During this period of unconventional monetary policy, the SNB faced mounting criticism from the media and the public on the sizable balance sheet risks that it was incurring. Motivated by this episode, I present a structural model embedded within the target zone framework developed by Krugman (1991) that allows monetary authorities to determine ex-ante the maximum size of foreign exchange market interventions that are expected to be necessary to implement and maintain a one-sided target zone. An empirical application of the proposed model to the aforementioned episode reveals that it is well suited to explain the actual size of these interventions and that, in January 2015, the SNB's euro purchases might indeed have been large without the abandonment of the minimum exchange rate regime, which is consistent with the official statements of the SNB in the aftermath of that episode.
    Keywords: Foreign exchange interventions,minimum exchange rate,reaction function,reflected Brownian motion,Swiss franc,Swiss National Bank,target zone,unconventional monetary policy
    JEL: C43 C51 E32 E37 E43 G12 R21 R28 R31
    Date: 2020
  5. By: Ahnert, Lukas; Vogt, Pascal; Vonhoff, Volker; Weigert, Florian
    Abstract: This paper investigates the impact of stress testing results on bank's equity and CDS performance using a large sample of twelve tests from the US CCAR and the European EBA regimes in the time period from 2010 to 2018. We find that passing banks experience positive abnormal equity returns and tighter CDS spreads, while failing banks show strong drops in equity prices and widening CDS spreads. We also document strong market reactions at the announcement date of the stress tests. Although the institutional designs between US and European stress tests differ, we generally observe similar capital market consequences for both regimes. We complement existing studies by investigating the predictability of stress test outcomes and evaluating strategic options for affected banks and investors.
    Keywords: Banks,Stress Testing,Equity Performance,CDS Performance
    JEL: G00 G21 G28
    Date: 2020
  6. By: Pelizzon, Loriana; Riedel, Max; Simon, Zorka; Subrahmanyam, Marti G.
    Abstract: We study how the Eurosystem Collateral Framework for corporate bonds helps the European Central Bank (ECB) fulfill its policy mandate. Using the ECBs eligibility list, we identify the first inclusion date of both bonds and issuers. We find that due to the increased supply and demand for pledgeable collateral following eligibility, (i) securities lending market trading activity increases, (ii) eligible bonds have lower yields, and (iii) the liquidity of newly-issued bonds declines, whereas the liquidity of older bonds is una↵ected/improves. Corporate bond lending relaxes the constraint of limited collateral supply, thereby making the market more cohesive and complete. Following eligibility, bond-issuing firms reduce bank debt and expand corporate bond issuance, thus increasing overall debt size and extending maturity.
    Keywords: Collateral Policy,ECB,Corporate Bonds,Corporate Debt Structure,Eligibility premium
    JEL: G12 G14 G32 E58
    Date: 2020
  7. By: Tan Schelling; Pascal Towbin
    Abstract: In a negative interest rate environment, banks have generally proved reluctant to pass on negative interest rates to their retail depositors. Thus, banks that are more dependent on deposit funding face higher funding costs relative to other banks. This raises questions about the effect of negative interest rates on bank lending and monetary policy transmission. To study the transmission of negative interest rates, we use an unexpected policy decision by the Swiss National Bank in combination with a comprehensive and granular micro data set on individual Swiss corporate loans. We find that banks relying more heavily on deposit funding take more risks and offer looser lending terms than other banks. This result is consistent with the risk-taking channel, where a lower policy rate spurs bank risk-taking to maintain profits.
    Keywords: Negative interest rates, bank lending, deposit funding, monetary transmission
    JEL: G21 G28 E58
    Date: 2020
  8. By: Stefanie Behncke
    Abstract: I analyse the effects of two macroprudential policy measures implemented in Switzerland: the activation of the countercyclical capital buffer (CCyB) and a cap on the loan-to-value (LTV) ratios. I use a difference-in-differences method to estimate the effects of these measures on risk indicators, such as their LTV and loan-to-income (LTI) ratios and mortgage growth rates. I find that both the CCyB and the LTV cap led to a reduction in high LTV mortgages. The banks affected by the CCyB also reduced their mortgage growth rates. I do not find any evidence that these measures had unintended consequences on LTI risks or on non-mortgage credit growth.
    Keywords: Banks, countercyclical capital buffer, financial stability, loan-to-value ratio, macroprudential policy, mortgages
    JEL: E5 G21 G28
    Date: 2020

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