Jorge Abad

We analyze the impact of introducing a central bank-issued digital currency (CBDC) on the operational framework of monetary policy and the macroeconomy as a whole. To this end, we develop a New Keynesian model with heterogeneous banks, a frictional interbank market, a central bank with deposit and lending facilities, and household preferences for different liquid assets. The model is calibrated to replicate the main monetary and financial aggregates in the euro area. Our analysis predicts that CBDC adoption implies a roughly equivalent reduction in banks’ deposit funding. However, this ‘deposit crunch’ has a rather small effect on bank lending to the real economy, and hence on aggregate investment and GDP. This result reflects the parallel impact of CBDC on the central bank’s operational framework. For relatively moderate CBDC adoption levels, the reduction in deposits is absorbed by an almost one-to-one fall in reserves at the central bank, implying a transition from a ’floor’ system –with ample reserves– to a ‘corridor’ one. For larger CBCD adoption, the loss of bank deposits is compensated by increased recourse to central bank credit, as the corridor system gives way to a ‘ceiling’ one with scarce reserves.

This paper develops a quantitative dynamic general equilibrium model that features endogenous bank failure and sovereign default risk. It studies the feedback loop between sovereign and banking crises, and evaluates the effectiveness of bank capital regulation in addressing it. In the model, bank failure contributes to an increase of sovereign default risk through the government bailout of bank creditors. Meanwhile, holding high-yield risky sovereign bonds may be attractive to banks protected by limited liability. By increasing banks' failure risk and their funding costs, sovereign exposures hurt bank lending and contribute to further contractions in aggregate economic activity. Capital requirements shape banks' incentives to invest in sovereign debt. More stringent capital regulation makes banks safer, weakening the sovereign-bank nexus. This comes at the cost of constraining the overall supply of credit.

The Great Recession has pushed accounting standards for banks' loan loss provisioning to shift from an incurred loss approach to an expected credit loss approach. IFRS 9 and the incoming update of US GAAP imply a more timely recognition of credit losses but also greater responsiveness to changes in aggregate conditions, which raises procyclicality concerns. This paper develops and calibrates a recursive ratings-migration model to assess the impact of different provisioning approaches on the cyclicality of banks' profits and regulatory capital. The model is used to analyze the effectiveness of potential policy responses to the procyclicality problem.

Post-crisis regulatory reforms, especially enhanced capital requirements and expected credit loss provisioning, intend to make banks resilient to negative shocks, so that they can continue to supply credit to the real economy during episodes of stress, and to mitigate the potential procyclicality effects of the previous regulatory framework. To examine the impact of such reforms on bank behavior, especially lending, we develop a structural model of banking that features endogenous bank lending and precautionary capital buffers. The model illustrates the effect of various regulatory and provisioning frameworks on the procyclicality of credit supply and bank equity capital.

This paper develops a macroeconomic model in which banks intermediate funds between households and firms, and are subject to failure risk. Using the model, it is possible to decompose credit spreads faced by bank borrowers in two components. First, a scarcity premium arises when banks’ constraints tighten and bank equity becomes relatively scarce at the aggregate level. Second, a failure risk premium arises when bank risk is high and the deposit spreads faced by banks increase. This decomposition is important for the optimal policy response to a banking crisis. When the scarcity premium is the dominant force driving credit spreads, a reduction in capital requirements (akin to a release of countercyclical capital buffers) can effectively reduce funding costs of bank borrowers. If, instead, the failure risk component dominates, a reduction in capital requirements can have the opposite effect, leading to an increase in bank leverage and higher funding costs for banks, which translate into higher borrowing costs for non-financial borrowers with adverse consequences for aggregate activity.

This paper provides a unique snapshot of the asset exposures of EU banks to shadow banking entities within the global financial system. Drawing on a rich and novel dataset, we show that 60 per cent of the EU banks’ exposures are towards non-EU entities, particularly US-domiciled shadow banking entities. We assess the degree of concentration across different types of shadow banking counterparties. We show that while banks’ exposures are diversified at the individual level, this diversification leads to high overlap across different types of shadow banking entities, with consequent systemic risk. We also examine how bank- and country-level characteristics relate to the exposures of EU banks to shadow banking entities. Our results emphasise the importance of monitoring these cross-border and cross-sector exposures and closing remaining data gaps.

EU banks entered the coronavirus crisis with high capital and liquidity buffers resulting from the reforms undertaken after the global financial crisis of 2007-2009. This allowed a bold and swift response by supervisors oriented towards supporting banks’ ability to provide credit to the real economy. This paper provides an overview and an assessment of the regulatory response to the crisis, and suggestssome recommendations for the future design of countercyclical regulation.

The Countercyclical Capital Buffer (CCyB) is the most significant macroprudential element of Basel III. Following the guidance of the Basel Committee, its practical design was based on the deviation of the credit-to-GDP ratio with respect to its trend, the credit-to-GDP gap. This ties the determination of the CCyB to a variable that, as noted by many critics, is late in both signalling the build up and the release of the buffer. This note proposes a way out of this dead end by computing the credit-to-GDP gap using a shorter window, say 8 years. The results of applying this alternative gap measure to Spain show that it significantly improves upon the standard measure so that buffers are more likely to be built up in good times and released in bad times.

We present a first analysis of the EU-wide transactions-level derivatives dataset collected under the European Markets Infrastructure Regulation (EMIR). We describe the structure of the dataset, drawing comparisons with existing survey-based evidence on derivatives markets, and zoom in on three markets: interest rate, credit and foreign exchange derivatives. New insights from each of these three markets provide the basis for further research.