We use an endogenous growth model calibrated to the Spanish economy to evaluate the effects of a rapid doubling of international prices of brown energy inputs. In the baseline calibration of the model, which resembles the current state of the Spanish economy, this results in a 0.30% drop in GDP on impact. After increasing the share of renewables in the energy mix from 26% to 85%, in line with the 2050 targets for the Spanish economy, the same shock results in a 0.24% fall in GDP on impact, and the recovery is faster: the present discounted value of the full GDP response is reduced by 65%. The three main conclusions that we draw from this exercise are: i) an increase in the share of renewables makes the economy less vulnerable to shocks in international prices of brown energy inputs; ii) this vulnerability reduction is less than proportional: dividing the share of brown energy by approximately five only reduceds the size of the effects on GDP by between 21% and 65%; and iii) the main statistic that determines how much the vulnerability is reduced is not the share of brown energy inputs, but the degree to which final energy prices respond to the shock to brown energy prices.
我们使用一个根据西班牙经济校准的内生增长模型来评估棕色能源投入的国际价格迅速翻番的影响。在与西班牙经济现状相似的模型基准校准中，这将导致 GDP 下降 0.30%。根据西班牙经济 2050 年的目标，将可再生能源在能源结构中的比例从 26% 提高到 85%，同样的冲击导致 GDP 下降 0.24%，而且恢复速度更快：全部 GDP 反应的现贴现值减少了 65%。我们从这项研究中得出的三个主要结论是：i) 可再生能源份额的增加会降低经济对国际棕色能源价格冲击的脆弱性；ii) 这种脆弱性的降低并不成正比：将棕色能源的份额除以约 5，对国内生产总值的影响仅降低了 21% 至 65%；iii) 决定脆弱性降低程度的主要统计量不是棕色能源投入的份额，而是最终能源价格对棕色能源价格冲击的响应程度。
{"title":"Green energy transition and vulnerability to external shocks","authors":"Rubén Domínguez-Díaz, Samuel Hurtado","doi":"10.53479/37354","DOIUrl":"https://doi.org/10.53479/37354","url":null,"abstract":"We use an endogenous growth model calibrated to the Spanish economy to evaluate the effects of a rapid doubling of international prices of brown energy inputs. In the baseline calibration of the model, which resembles the current state of the Spanish economy, this results in a 0.30% drop in GDP on impact. After increasing the share of renewables in the energy mix from 26% to 85%, in line with the 2050 targets for the Spanish economy, the same shock results in a 0.24% fall in GDP on impact, and the recovery is faster: the present discounted value of the full GDP response is reduced by 65%. The three main conclusions that we draw from this exercise are: i) an increase in the share of renewables makes the economy less vulnerable to shocks in international prices of brown energy inputs; ii) this vulnerability reduction is less than proportional: dividing the share of brown energy by approximately five only reduceds the size of the effects on GDP by between 21% and 65%; and iii) the main statistic that determines how much the vulnerability is reduced is not the share of brown energy inputs, but the degree to which final energy prices respond to the shock to brown energy prices.","PeriodicalId":296461,"journal":{"name":"Documentos de Trabajo","volume":"13 23","pages":""},"PeriodicalIF":0.0,"publicationDate":"2024-08-09","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"141925013","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Roberto Blanco, Miguel García-Posada, Sergio Mayordomo, María Rodríguez-Moreno
We study the access to credit and the propensity to exit the market of firms with no bank debt (the main funding source of Spanish non-listed firms) around the COVID-19 crisis. Our methodology allows us to disentangle credit supply from credit demand, as having no bank debt may be the result of financial constraints or a deliberate strategy. Before the COVID-19 crisis, zero-bank-debt firms, especially risky ones, faced more difficult access to bank loans than firms that had previously held bank debt owing to their lack of credit history. These credit constraints were tightened by the COVID shock, regardless of firms’ risk, arguably because of increased information asymmetries during a period of high macroeconomic uncertainty. Zero-bank-debt firms, even those with a low probability of default, were much more likely to leave the market during the COVID-19 crisis than firms with a history of bank debt. Moreover, granting new credit to zero-bank-debt firms reduced their probability of exit, which suggests a causal relationship between the two aforementioned findings. Beyond the specific setting of the pandemic, this paper adds to the broader literature on a better understanding of supply and demand-side constraints for corporate external funding, as crystalised in zero-debt firms.
{"title":"Access to credit and firm survival during a crisis: the case of zero-bank-debt firms","authors":"Roberto Blanco, Miguel García-Posada, Sergio Mayordomo, María Rodríguez-Moreno","doi":"10.53479/36752","DOIUrl":"https://doi.org/10.53479/36752","url":null,"abstract":"We study the access to credit and the propensity to exit the market of firms with no bank debt (the main funding source of Spanish non-listed firms) around the COVID-19 crisis. Our methodology allows us to disentangle credit supply from credit demand, as having no bank debt may be the result of financial constraints or a deliberate strategy. Before the COVID-19 crisis, zero-bank-debt firms, especially risky ones, faced more difficult access to bank loans than firms that had previously held bank debt owing to their lack of credit history. These credit constraints were tightened by the COVID shock, regardless of firms’ risk, arguably because of increased information asymmetries during a period of high macroeconomic uncertainty. Zero-bank-debt firms, even those with a low probability of default, were much more likely to leave the market during the COVID-19 crisis than firms with a history of bank debt. Moreover, granting new credit to zero-bank-debt firms reduced their probability of exit, which suggests a causal relationship between the two aforementioned findings. Beyond the specific setting of the pandemic, this paper adds to the broader literature on a better understanding of supply and demand-side constraints for corporate external funding, as crystalised in zero-debt firms.","PeriodicalId":296461,"journal":{"name":"Documentos de Trabajo","volume":"7 6","pages":""},"PeriodicalIF":0.0,"publicationDate":"2024-06-17","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"141335802","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Francisco González, José E. Gutiérrez, José María Serena
This paper analyzes how lending relationships affect firms’ incentives to default, drawing on loan-level data in Spain. We provide new evidence showing that firms first default on loans from less important (“non-main”) banks to preserve their most valuable lending relationships. Our findings also indicate that banks integrate this borrower behavior into their credit risk management because the most important banks within a borrower’s set of lending relationships recognize lower discretionary loan impairments. The results are robust to alternative difference-in-difference (DID) analyses and control for potential bank forbearance, loan characteristics, and a variety of time-varying bank and firm fixed effects.
{"title":"Shadow seniority? Lending relationships and borrowers’ selective default","authors":"Francisco González, José E. Gutiérrez, José María Serena","doi":"10.53479/36695","DOIUrl":"https://doi.org/10.53479/36695","url":null,"abstract":"This paper analyzes how lending relationships affect firms’ incentives to default, drawing on loan-level data in Spain. We provide new evidence showing that firms first default on loans from less important (“non-main”) banks to preserve their most valuable lending relationships. Our findings also indicate that banks integrate this borrower behavior into their credit risk management because the most important banks within a borrower’s set of lending relationships recognize lower discretionary loan impairments. The results are robust to alternative difference-in-difference (DID) analyses and control for potential bank forbearance, loan characteristics, and a variety of time-varying bank and firm fixed effects.","PeriodicalId":296461,"journal":{"name":"Documentos de Trabajo","volume":"10 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2024-06-13","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"141347556","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
To moderate the falls in production and income that affect certain states or regions, countries and monetary unions have risk-sharing mechanisms. These mechanisms work by stabilising household incomes such that fluctuations in production do not filter through to consumption. Almost all existing monetary unions are true insurance unions, except for the euro area. This entails lower resilience to economic shocks and, as demonstrated during the COVID-19 crisis, implies that the ability to respond to different shocks may differ between countries and, therefore, hinder economic convergence and homogeneous operation of the euro area. In this regard, the creation of a European Unemployment Insurance (EUI) scheme is often cited as an important step towards macroeconomic smoothing within the euro area that could help mitigate the economic and social impact of large economic shocks. In this paper, I propose an EUI scheme, with partial coverage, calibrated to the characteristics of the Temporary Support to Mitigate Unemployment Risks in an Emergency (SURE scheme) introduced during the COVID-19 crisis, and test its cyclical properties through simulation exercises, based on the payment and contribution flows in each country. This paper shows that such a transfer system with a relatively limited size could make a significant contribution to stabilising economic developments, cushioning part of the disruptions in times of crisis.
{"title":"Stabilisation properties of a sure-like European unemployment insurance","authors":"Daniel Alonso","doi":"10.53479/36654","DOIUrl":"https://doi.org/10.53479/36654","url":null,"abstract":"To moderate the falls in production and income that affect certain states or regions, countries and monetary unions have risk-sharing mechanisms. These mechanisms work by stabilising household incomes such that fluctuations in production do not filter through to consumption. Almost all existing monetary unions are true insurance unions, except for the euro area. This entails lower resilience to economic shocks and, as demonstrated during the COVID-19 crisis, implies that the ability to respond to different shocks may differ between countries and, therefore, hinder economic convergence and homogeneous operation of the euro area. In this regard, the creation of a European Unemployment Insurance (EUI) scheme is often cited as an important step towards macroeconomic smoothing within the euro area that could help mitigate the economic and social impact of large economic shocks. In this paper, I propose an EUI scheme, with partial coverage, calibrated to the characteristics of the Temporary Support to Mitigate Unemployment Risks in an Emergency (SURE scheme) introduced during the COVID-19 crisis, and test its cyclical properties through simulation exercises, based on the payment and contribution flows in each country. This paper shows that such a transfer system with a relatively limited size could make a significant contribution to stabilising economic developments, cushioning part of the disruptions in times of crisis.","PeriodicalId":296461,"journal":{"name":"Documentos de Trabajo","volume":"45 2","pages":""},"PeriodicalIF":0.0,"publicationDate":"2024-06-04","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"141228512","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Gerald P. Dwyer, Biljana Gilevska, María J. Nieto, Margarita Samartín
We examine the effects of all three major European Central Bank (ECB) unconventional monetary policies since 2011 for euro area banks’ holdings of loans, government securities and cash deposited in central banks. The three ECB policies are longer-term refinancing operations (LTROs), the asset purchase programmes and the ECB’s interest rate on its deposit facility. We also compare the responses of non-crisis and crisis countries to these policies. Our evidence indicates that the ECB’s unconventional monetary policy measures increased bank lending across the euro area countries. The second round of LTROs, also known as targeted LTROs (TLTROs), were conditional on banks increasing their lending. This change had a substantially larger effect on total lending by banks. The computed effects of the LTROs and TLTROs, based on average size, indicate that in non-crisis countries LTROs increased bank loans by 7.6% of assets and TLTROs increased bank loans by 16.4% of assets, whereas in crisis countries the increases were 8.4% and 14.6% for LTROs and TLTROs, respectively. We find that both LTROs and TLTROs were associated with decreases in government securities held by banks in non-crisis countries, while the LTROs were associated with increases in government securities held by banks in crisis countries.
{"title":"The effects of the ECB’s unconventional monetary policies from 2011 to 2018 on banking assets","authors":"Gerald P. Dwyer, Biljana Gilevska, María J. Nieto, Margarita Samartín","doi":"10.53479/36595","DOIUrl":"https://doi.org/10.53479/36595","url":null,"abstract":"We examine the effects of all three major European Central Bank (ECB) unconventional monetary policies since 2011 for euro area banks’ holdings of loans, government securities and cash deposited in central banks. The three ECB policies are longer-term refinancing operations (LTROs), the asset purchase programmes and the ECB’s interest rate on its deposit facility. We also compare the responses of non-crisis and crisis countries to these policies. Our evidence indicates that the ECB’s unconventional monetary policy measures increased bank lending across the euro area countries. The second round of LTROs, also known as targeted LTROs (TLTROs), were conditional on banks increasing their lending. This change had a substantially larger effect on total lending by banks. The computed effects of the LTROs and TLTROs, based on average size, indicate that in non-crisis countries LTROs increased bank loans by 7.6% of assets and TLTROs increased bank loans by 16.4% of assets, whereas in crisis countries the increases were 8.4% and 14.6% for LTROs and TLTROs, respectively. We find that both LTROs and TLTROs were associated with decreases in government securities held by banks in non-crisis countries, while the LTROs were associated with increases in government securities held by banks in crisis countries.","PeriodicalId":296461,"journal":{"name":"Documentos de Trabajo","volume":"4 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2024-05-24","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"141100168","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Using data for 17 countries in Europe and North America, we compare the career trajectories of mothers and fathers and of women and men without children across cohorts and at different points in their life cycle. There is wide cross-country variation in employment and earnings gaps at age 30. At age 50, however, employment gaps between mothers and non-mothers have closed in most countries. We also observe convergence in employment gaps between mothers and fathers by age 50, but these gaps do not close altogether. Motherhood gaps in earnings also close by age 50 between mothers and non-mothers, particularly among the highly educated. But there is strong persistence in earnings gaps between mothers and fathers even among highly educated parents. The main reasons for the remaining gaps at later stages in the life-cycle are part-time work among women and fatherhood premia as fathers’ earnings outperform non-fathers’ over their life-cycle.
{"title":"Family and career: An analysis across Europe and North America","authors":"Luis Guirola, Laura Hospido, Andrea Weber","doi":"10.53479/36575","DOIUrl":"https://doi.org/10.53479/36575","url":null,"abstract":"Using data for 17 countries in Europe and North America, we compare the career trajectories of mothers and fathers and of women and men without children across cohorts and at different points in their life cycle. There is wide cross-country variation in employment and earnings gaps at age 30. At age 50, however, employment gaps between mothers and non-mothers have closed in most countries. We also observe convergence in employment gaps between mothers and fathers by age 50, but these gaps do not close altogether. Motherhood gaps in earnings also close by age 50 between mothers and non-mothers, particularly among the highly educated. But there is strong persistence in earnings gaps between mothers and fathers even among highly educated parents. The main reasons for the remaining gaps at later stages in the life-cycle are part-time work among women and fatherhood premia as fathers’ earnings outperform non-fathers’ over their life-cycle.","PeriodicalId":296461,"journal":{"name":"Documentos de Trabajo","volume":"47 9","pages":""},"PeriodicalIF":0.0,"publicationDate":"2024-05-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"140961875","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We provide compelling evidence of the association between credit standards at loan origination in the corporate sector and default risk, a topic that has received little attention in the literature in comparison to the study of this relationship in the mortgage market. Using data from the Spanish credit register merged with corporate balance sheet information spanning the last financial cycle, we demonstrate that leverage and debt burden ratios at loan origination are key predictors of future corporate loan defaults. We also show that the deterioration in lending standards is strongly correlated to the build-up of cyclical systemic risk during periods of financial expansions. Specifically, limits on the debt-to-assets ratio and the interest coverage ratio could serve as effective tools to mitigate credit risk during economic expansions. We identify that the strength of these associations varies significantly across different sectors and is dependent on firms’ size, age and the existence of prior relationships with the bank. Real estate firms and small and medium-sized enterprises exhibit the strongest relationship between credit standards and future default. Overall, our findings provide strong support for the effectiveness of macroprudential measures targeting the corporate sector and contribute to providing guidance for the implementation of borrower-based measures in key segments of corporate credit.
{"title":"Should macroprudential policy target corporate lending? Evidence from credit standards and defaults","authors":"Luis Gonzalo Fernandez Lafuerza, Jorge E. Galán","doi":"10.53479/36477","DOIUrl":"https://doi.org/10.53479/36477","url":null,"abstract":"We provide compelling evidence of the association between credit standards at loan origination in the corporate sector and default risk, a topic that has received little attention in the literature in comparison to the study of this relationship in the mortgage market. Using data from the Spanish credit register merged with corporate balance sheet information spanning the last financial cycle, we demonstrate that leverage and debt burden ratios at loan origination are key predictors of future corporate loan defaults. We also show that the deterioration in lending standards is strongly correlated to the build-up of cyclical systemic risk during periods of financial expansions. Specifically, limits on the debt-to-assets ratio and the interest coverage ratio could serve as effective tools to mitigate credit risk during economic expansions. We identify that the strength of these associations varies significantly across different sectors and is dependent on firms’ size, age and the existence of prior relationships with the bank. Real estate firms and small and medium-sized enterprises exhibit the strongest relationship between credit standards and future default. Overall, our findings provide strong support for the effectiveness of macroprudential measures targeting the corporate sector and contribute to providing guidance for the implementation of borrower-based measures in key segments of corporate credit.","PeriodicalId":296461,"journal":{"name":"Documentos de Trabajo","volume":"144 3","pages":""},"PeriodicalIF":0.0,"publicationDate":"2024-05-03","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"141015221","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Effrosyni Adamopoulou, Luis Díez-Catalán, Ernesto Villanueva
This paper studies the impact of downward wage rigidity on wage and employment dynamics after the outbreak of major recessions in Spain. Downward wage rigidity stems from collective agreements, which set province-sector-skill-specific minimum wage floors for all workers. By exploiting variation in the renewal of collective agreements, we find that those signed before the onset of recessions settle on higher nominal negotiated wage growth than agreements signed afterwards. Leveraging social security data and the distribution of the worker-level bite of minimum wage floors, we document that the negotiated wage rigidity translated into higher wage growth mainly among workers with near-floor wages. Consequently, these workers experienced a substantial and highly persistent increase in the probability of non-employment, but only if they were covered by long-duration collective agreements. Our findings highlight the interplay between rigidity at different parts of the wage distribution and labor market institutions and identify conditions under which collective contract staggering and the inability to renegotiate may amplify aggregate shocks.
{"title":"Staggered contracts and unemployment during recessions","authors":"Effrosyni Adamopoulou, Luis Díez-Catalán, Ernesto Villanueva","doi":"10.53479/36474","DOIUrl":"https://doi.org/10.53479/36474","url":null,"abstract":"This paper studies the impact of downward wage rigidity on wage and employment dynamics after the outbreak of major recessions in Spain. Downward wage rigidity stems from collective agreements, which set province-sector-skill-specific minimum wage floors for all workers. By exploiting variation in the renewal of collective agreements, we find that those signed before the onset of recessions settle on higher nominal negotiated wage growth than agreements signed afterwards. Leveraging social security data and the distribution of the worker-level bite of minimum wage floors, we document that the negotiated wage rigidity translated into higher wage growth mainly among workers with near-floor wages. Consequently, these workers experienced a substantial and highly persistent increase in the probability of non-employment, but only if they were covered by long-duration collective agreements. Our findings highlight the interplay between rigidity at different parts of the wage distribution and labor market institutions and identify conditions under which collective contract staggering and the inability to renegotiate may amplify aggregate shocks.","PeriodicalId":296461,"journal":{"name":"Documentos de Trabajo","volume":"7 4","pages":""},"PeriodicalIF":0.0,"publicationDate":"2024-04-25","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"140653845","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The countercyclical capital buffer (CCyB) has become a very important macroprudential tool to strengthen banks’ resilience. However, there is still limited evidence of its impact on lending over the cycle. Using data of 170 banks in 25 European Union countries, we provide a comprehensive assessment of how the CCyB release during the pandemic and its earlier accumulation impacted lending activity. We find that the CCyB has significant effects on lending, but that these effects are highly dependent on banks’ capitalization levels and, more importantly, on their headroom over regulatory requirements. We show that the release of the CCyB in response to the pandemic had a positive impact on lending, especially for banks with the lowest headroom over requirements, and that this effect was larger than the negative impact of its previous accumulation. While the CCyB accumulation had a short-term negative impact on lending for the most capital-constrained banks, this effect quickly diluted due to their enhanced solvency position, potentially allowing them to lower their cost of equity. Our results provide evidence of the benefits of the CCyB, especially in supporting lending during adverse events, while emphasising the need for policymakers to consider the heterogeneous effects across banks when deploying this tool.
{"title":"The impact of the Countercyclical Capital Buffer on credit: Evidence from its accumulation and release before and during COVID-19","authors":"Mikel Bedayo, Jorge E. Galán","doi":"10.53479/36312","DOIUrl":"https://doi.org/10.53479/36312","url":null,"abstract":"The countercyclical capital buffer (CCyB) has become a very important macroprudential tool to strengthen banks’ resilience. However, there is still limited evidence of its impact on lending over the cycle. Using data of 170 banks in 25 European Union countries, we provide a comprehensive assessment of how the CCyB release during the pandemic and its earlier accumulation impacted lending activity. We find that the CCyB has significant effects on lending, but that these effects are highly dependent on banks’ capitalization levels and, more importantly, on their headroom over regulatory requirements. We show that the release of the CCyB in response to the pandemic had a positive impact on lending, especially for banks with the lowest headroom over requirements, and that this effect was larger than the negative impact of its previous accumulation. While the CCyB accumulation had a short-term negative impact on lending for the most capital-constrained banks, this effect quickly diluted due to their enhanced solvency position, potentially allowing them to lower their cost of equity. Our results provide evidence of the benefits of the CCyB, especially in supporting lending during adverse events, while emphasising the need for policymakers to consider the heterogeneous effects across banks when deploying this tool.","PeriodicalId":296461,"journal":{"name":"Documentos de Trabajo","volume":"47 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2024-04-03","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"140747300","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The feedback loop between sovereign and financial sector insolvency has been identified as a key driver of the European debt crisis and has motivated an array of policy proposals. We revisit this “doom loop” focusing on governments’ incentives to default. To this end, we present a simple 3-period model with strategic sovereign default, where debt is held by domestic banks and foreign investors. The government maximizes domestic welfare, and thus the temptation to default increases with externally-held debt. Importantly, the costs of default arise endogenously from the damage that default causes to domestic banks’ balance sheets. Domestically-held debt thus serves as a commitment device for the government. We show that two prominent policy prescriptions – lower exposure of banks to domestic sovereign debt or a commitment not to bailout banks – can backfire, since default incentives depend not only on the quantity of debt, but also on who holds it. Conversely, allowing banks to buy additional sovereign debt in times of sovereign distress can avert the doom loop. In an extension we show that in the context of a monetary union (such as the euro area) similar unintended negative consequences may arise from the pooling of debt (such as European safe bonds (ESBies)). A central bank backstop (such as the ECB’s Transmission Protection Instrument) can successfully disable the loop if precisely calibrated.
{"title":"The bright side of the doom loop: banks’ sovereign exposure and default incentives","authors":"Luis E. Rojas, Dominik Thaler","doi":"10.53479/36258","DOIUrl":"https://doi.org/10.53479/36258","url":null,"abstract":"The feedback loop between sovereign and financial sector insolvency has been identified as a key driver of the European debt crisis and has motivated an array of policy proposals. We revisit this “doom loop” focusing on governments’ incentives to default. To this end, we present a simple 3-period model with strategic sovereign default, where debt is held by domestic banks and foreign investors. The government maximizes domestic welfare, and thus the temptation to default increases with externally-held debt. Importantly, the costs of default arise endogenously from the damage that default causes to domestic banks’ balance sheets. Domestically-held debt thus serves as a commitment device for the government. We show that two prominent policy prescriptions – lower exposure of banks to domestic sovereign debt or a commitment not to bailout banks – can backfire, since default incentives depend not only on the quantity of debt, but also on who holds it. Conversely, allowing banks to buy additional sovereign debt in times of sovereign distress can avert the doom loop. In an extension we show that in the context of a monetary union (such as the euro area) similar unintended negative consequences may arise from the pooling of debt (such as European safe bonds (ESBies)). A central bank backstop (such as the ECB’s Transmission Protection Instrument) can successfully disable the loop if precisely calibrated.","PeriodicalId":296461,"journal":{"name":"Documentos de Trabajo","volume":" 19","pages":""},"PeriodicalIF":0.0,"publicationDate":"2024-03-25","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"140210252","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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