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On 26 September 2019, Andrea Enria, Chair of the European Central Bank’s Supervisory Board, gave a speech on the future of stress testing (“The future of stress testing – realism, relevance and resources”) in which he outlined a proposal on how to achieve meaningful progress with a view to make the tests both more realistic and more relevant, with fewer resources required. Andrea Enria’s proposals involve a decisive re-design of the stress test exercise. Stress tests are currently carried out using ...

During the crisis, the ECB modified its collateral framework to face increased liquidity needs of commercial banks. This has taken two forms: the minimum required rating for different classes of assets has been reduced and the haircut associated to these assets has evolved conditional on the default risks of these assets. The benefits in terms of cushioning a liquidity crisis and enhancing monetary policy transmission have most probably exceeded the costs in terms of riskier central bank balance ...

Collateral constitutes an indispensable lubricant for the financial system. Government bonds constitute the most important source of collateral, for use in inter-bank and repo transactions. But, the vast bond buying program of the ECB in the context of the Public Sector Purchase Programme has not led to any collateral scarcity. Banks still hold very large amounts of sovereign bonds and they have ample other collateral should they want to borrow more from the ECB for ‘standard’ monetary policy operations ...

The importance of collateral as an instrument for monetary policy has increased in recent years not only in the light of the changes in the ECB’s collateral framework during the crisis but also due to the progressive replacement of the unsecured money market segment with the secured one in the euro area. Both aspects are set to have consequences for collateral availability and the scarcity of high-quality assets, particularly as these interact with non-standard monetary policy. In this note, we look ...

This paper takes a wide view of nonstandard measures in difficult situations. We explore how, and to what extent, prudential metrics written into the new prudential and surveillance regulations can be used as policy instruments. The paper does not try to reach a judgment on which measures will work best. Instead we explore how these policies work; why they depend on high quality collateral/assets; what happens if policymakers are driven to expand the bounds of “sufficient quality or liquidity”; how ...

What should the ECB “new normal” look like?

Analisi approfondita 15-11-2017

We review the set of arguments in favour of adding permanently balance sheet policies to the central bank toolkit. Balance sheet policies could support financial stability and complement the role of the standard – pre-crisis – policy to enhance macroeconomic stability. There are two major challenges though. The first one refers to the trade-off between effectiveness and distortions. Conventional interest rate policy aims at market neutrality whereas balance sheet policies target specific securities ...

Discussions on how the ECB should reduce monetary policy accommodation as growth picks up in the euro area are gaining momentum. Given that the ECB’s main interest rate instrument was constrained by the zero-lower bound, monetary accommodation has also been implemented through a number of unconventional monetary tools, which would have to be phased out. As this is unknown territory, it is important to consider how to do that as well as what the ‘new normal’ in monetary policy should look like.

The paper explains the accounting mechanics regarding loan loss provisions (LLP) and introduces the three most important models for loan loss provisioning: the incurred loss model (ILM), the expected credit loss model (ECL) and the counter-cyclical buffer model (CBM). The paper investigates the preferred method to calculate loan loss provisions that from the viewpoint of financial accounting needs (information needs of financial statement readers) and prudential regulation (micro and macro prudential ...

New provisioning rules introduced by IFRS 9 are expected to reduce the procyclicality of provisioning. Heterogeneity among banks in the procyclicality of provisioning may not only reflect the formal accounting rules, but also variation in discretionary provisioning policies. This paper presents empirical evidence on the heterogeneity of provisioning procyclicality among significant banks that are directly supervised by the ECB. In particular, this paper finds that provisioning is relatively procyclical ...

This note provides an updated picture on NPLs in the European Union, showing that – although the NPL ratio has been steadily decreasing, significant differences remain across Member States. It then discusses the two main factors driving NPLs in the long term: the macroeconomic cycle and the banks’ lending practices, arguing that policy makers should continue to encourage the development of sound internal credit ratings. Finally, four main levers are discussed, that can be used to curb high NPL ...