Published Articles

Shock amplification in an interconnected financial system of banks and investment funds, Journal of Financial Stability R&R, ECB Working paper series, No. 2581, 2021, 

(with Sydow, M., Schilte, A., Covi, G., Dejperbrock, M., Dec Vecchio, L., Fiedor, P., Fukker, G., Gehrend, M., Gourdel, R., Grassi, A., Hilberg, B., Kaijser, M., Kaoudis, G., Mingarelli, L., Montagna, M., Piquard, T., Tente, N.)

Absrtact: This paper shows how the combined endogenous reaction of banks and investment funds to an exogenous shock can amplify or dampen losses to the financial system compared to results from single-sector stress testing models. We build a new model of contagion propagation using a very large and granular data set for the euro area. Based on the economic shock caused by the Covid-19 outbreak, we model three sources of exogenous shocks: a default shock, a market shock and a redemption shock. Our contagion mechanism operates through a dual channel of liquidity and solvency risk. The joint modelling of banks and funds provides new insights for the assessment of financial stability risks. Our analysis reveals that adding the fund sector to our model for banks leads to additional losses through fire sales and a further depletion of banks’ capital ratios by around one percentage point.  

Abstract: We study how investors' withdrawals from mutual funds may affect the French corporate bond market. To do so, we use monthly data on flows to the French bond and mixed mutual funds as well as a database on their bond holdings at the bond-level from 2011 to 2017 provided by the Banque of France Statistics Department. Using a large sample of French corporate bonds held by funds, we run panel data regressions at the bond-level to explain their yields by macroeconomic variables, such as the sovereign 10-y rate, the short-term rate, the Vstoxx as well as bond-specific variables, such as the residual maturity, liquidity and the issuer’s probability of default. We also account for the corporate securities purchasing programme (CSPP) implemented by the ECB since June 2016 by adding dummy variables on the eligible bonds. Then we add variables related to inflows/outflows to test for several hypotheses. First, our results show that flows to funds affect the yields of all corporate bonds across the board. Second, this effect is asymmetric since outflows have a greater impact on yields than inflows. Third, the greater the funds’ market share in a specific bond the higher the impact on this bond is. These three results are robust to change in econometric specification. Further estimations suggest that withdrawals may raise liquidity premia and ownership by funds could amplify the response of bond yields to financial stress, although these two latter results are not significant in all econometric specifications. 

Abstract: This paper studies the scope for cross-border contagion in the European banking sector using true bilateral exposure data. Using a model of sequential solvency and liquidity cascades in networks, we analyze geographical patterns of loss propagation from 2008 to 2012. We study the distribution of contagion outcomes after a common shock and an exogenous bank default over simulated networks of actual long- and short-term claims. We exploit a novel and unique dataset of money market transactions estimated from TARGET2 payments data. Our results show the critical impact of the underlying network structure on the propagation of losses. An econometric analysis of the determinants of contagion shows that the position of a bank in the network and its exposure to the riskiest counterparties are significantly correlated with default outcomes, behind its own financial ratios.

 (with K. Anand, I. van Lelyveld, A. Banai, S. Friedrich, R. Garratt, G. Halaj, J. Fique, I. Hansen, S. Martinez Jaramillo, H. Lee,  J.L. Molina-Borboa, S. Nobili, S. Rajan, T.C. Silva,  L. Silvestri, and S. Rubens Stancato de Souza), Journal of Financial Stability, 35, 2018

Abstract: Capturing financial network linkages and contagion in stress test models are important goals for banking supervisors and central banks responsible for micro- and macropruden-tial policy. However, granular data on financial networks is often lacking, and instead; the networks must be reconstructed from partial data. In this paper, we conduct a horse race of network reconstruction methods using network data obtained from 25 different markets spanning 13 jurisdictions. Our contribution is two-fold: first, we collate and analyze data on a wide range of financial networks. And second, we rank the methods in terms of their ability to reconstruct the structures of links and exposures in networks.

Working Papers

Pricing of Green Bonds - Drivers and Dynamics of the Greenium (with Allegra Pietsch), ECB Working Paper Series, N2728, 2022

Absrtact: The green bond market has increased rapidly in recent years amid growing concerns about climate change and wider environmental issues. However, whether green bonds provide cheaper funding to issuers by trading at a premium, so-called greenium, is still an open discussion. This paper provides evidence that a key factor explaining the greenium is the credibility of a green bond itself or that of its issuer. We define credible green bonds as those which have been under external review. Credible issuers are either firms in green sectors or banks signed up to UNEP FI. Another important factor is investors’ demand as the greenium becomes more statistically and economically significant over time. This is potentially driven by increased climate concerns as the green bond market follows a similar trend to that observed in ESG/green equity and investment fund sectors. To run our analysis, we construct a database of daily pricing data on closely matched green and non-green bonds of the same issuer in the euro area from 2016 to 2021. We then use Securities Holdings Statistics by Sector (SHSS) to analyse investors’ demand for green bonds.  

Are ethical and green investment funds more resilient? (with Laura-Dona Capota, Margherita Giuzio, Sujit Kapadia), ECB Working Paper Series, N2747, 2022

Absrtact: In this paper we look at how investors in investment funds with an environmental, social and corporate governance mandate (ESG) react to past negative performance. Such analysis is motivated by an increasing investors’ interest in this market as well as seemingly more limited outflows from ESG funds during the market turmoil in March 2020. In the absence of an ESG-label, we define an investment fund to be ESG- or Environmentally-focused if its name contains relevant words. The econometric analysis shows that ESG/E equity and corporate bond funds exhibit a weaker flow-performance relationship compared to traditional funds in 2016-2020. This finding may reflect the longer-term investment horizon of ESG investors and their expectation of better risk-adjusted performance from ESG funds in the future. Furthermore, we explore how the results vary across institutional and retail investors and how they depend on the liquidity of funds’ assets and wider market conditions. A weaker flow-performance relationship allows funds to provide a stable source of financing to the green transition and may reduce risks for financial stability, particularly during turmoil episodes. 

Financing the low carbon transition in Europe (with Carradori, O., Giuzio, M., Kapadia, S., and Vozian, K.), ECB Working Paper Series, N 2813, 2023

Absrtact: Using evidence from the EU emissions trading system, we collect verified emissions of close to 4000 highly polluting and mostly non-listed firms responsible for 26% of EU’s emissions. Over the period 2013 - 2019, we find a non-linear relationship between leverage and emissions. A firm with higher leverage has lower emissions in subsequent years. However, when leverage exceeds 50%, a further increase is associated with higher emissions. Our difference-in-differences approach sheds light on the existence of a group of firms that are too indebted to successfully accomplish the low-carbon transition, even when they are exposed to the steeply increasing cost of their emissions. Furthermore, we provide evidence that firm-specific and country-specific environmental factors, such as fossil fuel subsidies, affect firms’ ability to reduce emissions; while we document that only a very limited number of carbon-intensive firms have used green debt instruments in the time frame analysed.  

Derivative margin calls: A new driver of MMF flows? (with Linda Fache Rousová, Maddalena Ghio, Germán Villegas Bauer), ECB Working paper series, N 2800, 2023

Absrtact: This paper investigates whether the significant volatility in MMF flows in the March 2020 market turmoil was driven by investors' liquidity needs related to derivative margin payments. We combine three highly granular unique data sets (EMIR data for derivatives, SHSS data for investor holdings of MMFs and Refinitiv Lipper data for daily MMF flows) to construct a daily fund-level panel data spanning from February to April 2020. We estimate the effects of variation margin paid and received by the largest holders of EUR-denominated MMFs on flows of these MMFs. The main findings suggest that variation margin payments faced by some investors holding MMFs were an important driver of the flows of EUR-denominated MMFs domiciled in euro area. Margins posted have a stronger effect on MMF outflows that margins received on MMFs inflows. 

Do market-based network reflect true exposures between banks? (with Ben Craig and Madina Karamysheva), forthcoming ECB Working Paper Series

We compare interbank networks constructed using  several well-known methods from publicly available daily market data against reported exposures along several dimensions of the balance sheet. We use granular confidential bank-level data to construct benchmark networks of direct and common exposures in loans, bonds and equity. Our findings suggest that while global network structure remains stable, individual exposures are more dynamic. Regression analysis shows that different market-based estimates capture different types of exposures. Networks constructed based on credit risk variables seem to reflect  all types of interconnections, both direct and indirect. Networks based on returns capture mostly common factors.

Absrtact: This paper studies the transmission of an exogenous shock on assets valuation through a financial network. We use entity-specific data on French financial institutions to build a network of banking groups, insurance companies and individual investment funds where each institution hold external assets as well as bonds, equities and investment fund shares issued by other institutions in the network. Our model considers two main contagion channels: securities’ market prices and potential default cascades. The securities market channel accounts for common exposures to the same set of securities and for the impact of an institution’s losses on the price of its own securities, i.e. the equities, bonds and fund shares issued by the entity and held by other financial institutions in the network. The second channel reflects institutions’ losses due to defaults by their financial counterparties, and is augmented with bilateral large exposure loans. 

Absrtact: We study the substitution between secured and unsecured interbank markets. Banks are competitive and subject to reserve requirements in a corridor rate system with deposit and lending facilities. Banks face counterparty risk in the unsecured market and incur an opportunity cost to pledge collateral. The model provides insights on interest rates, trading volumes and substitution between the two markets. Using transaction data on the Euro money market, we provide new empirical findings that the model accounts for: (i) borrowing banks are active on both markets even when their collateral constraint is not binding, (ii) secured interest rates may fall below the deposit facility rate. We derive and empirically test predictions on how "conventional" and "unconventional" monetary policies impact interbank markets, depending on whether marketable collateral is purchased or not. 

Interconnections between the French asset management sector and the rest of the French financial system, (with K. Benhami, C. Le Moign, and A. Vinel), HCSF publication, 2018

Abstract: The risks related to the structure of the financial sector and particularly the interconnections between its various components (banks, insurance and asset management companies) raise many questions, notably about their contribution to the propagation and amplification of risks. These questions pertain in particular to the role of asset management. The interconnections between asset management sector and the rest of the French financial system result, on the assets side, from the holding of securities issued by financial entities (banks, insurers, or other financial intermediaries) and, on their liabilities side, from the holding of fund shares by these same types of entities. Based on regulatory reporting data, this study provides an analysis of the main characteristics of the interconnections between asset management sector and the French financial system over 2008-2016. The results show that the observed network of interconnections between asset management sector and the rest of the financial system can be characterised as follows. First, it is sparse. Second, it exhibits a “small world” structure with a relatively short shortest average distance separating the network players from one another. Third, the network is organised around hubs (insurance, banks and certain money market funds) with funds being essentially connected to the banking sector on the assets side and to the insurance sector on the liabilities side. Money market funds stand out as being the most exposed to the banking sector where the latter represents 89% of their assets. Fund liabilities show higher concentration than assets with a particularly significant exposure to entities of the same group. These results can be later used to model shock propagation and to assess how a shock can be transmitted by investment funds.

Payment delays: Propagation and Punishment (with B. Craig and M. Saldias), Banque de France Working Paper Series, №671, 2018

Abstract: Using a unique data set of intraday transactions from the real-time gross settlement system TARGET2 for 2008-2014 period, we analyze the behavior of banks with respect to the settlement of interbank claims. We argue that banks delay payments as part of their intraday liquidity management behavior because they prefer to economize on the liquidity provided to the system at the beginning of the day and wait for the incoming payments to settle their outgoing transactions. Particularly, we identify two groups of banks, those who provide enough liquidity for their intraday activity and those who do not. Banks' transacting behavior is extremely persistent over time, and banks tend to stay in the same category. Furthermore, we show that banks of the second group are particularly associated with delayed payments.

Domino Effects When Banks Hoard Liquidity: The French Network (with V. Fourel, J.-C. Heam, S. Tavolaro), Banque de France Working Paper Series, №432, 2013

Abstract: We investigate the consequences of banks' liquidity hoarding behaviour for the stability of the financial system by proposing a new model of banking contagion through two channels, bilateral exposures and funding shortage. Inspired by the key role of liquidity hoarding in the 2007-2009 financial crisis, we incorporate banks' hoarding behaviour in a standard Iterative Default Cascade algorithm to compute the propagation of a common market shock through a banking system. In addition to potential solvency contagion, a market shock leads to banks liquidity hoarding that may generate problems of short-term funding for other banks. As an empirical exercise, we apply this model to the French banking system. Relying on data on banks bilateral exposures collected by France' Prudential Supervisory Authority, the French banking sector appears resilient to the combination of an initial market shock (losses on marked-to-market assets) and the resulting solvency and liquidity contagion. Moreover, the model gauges the relative weight of the various factors in the total loss.

Delays as a Source of Liquidity: a Closer look at banks' intraday liquidity management practices (2017) (with B. Craig), forthcoming

Abstract: We use a unique dataset of transactions from the real-time gross settlement system TARGET2 to analyze the behavior of banks with respect to the settlement of interbank claims. We focus on the time that passes between a payment’s introduction to the system and its settlement, the so-called payment delay. Delays represent the means by which some participants could free ride on the liquidity of others; and they are important in that they can propagate, thus prompting concerns that delays could cause system gridlock and that gross settlement systems could be as prone to instability as net settlement systems. This paper characterizes the delays in TARGET2 and analyzes whether delays in incoming transactions could cause delays in outgoing transactions. We distinguish between the potentially mechanical pass-through of delays and the reaction of one bank to its delaying counterparty, and we propose a set of instruments to tackle endogeneity issues. In contrast to the theoretical literature, the data show weak evidence that banks engage in strategies on a payment-by-payment basis, but rather they follow persistent liquidity management routines.

Policy publications

Climate-related risks to financial stability, Special Feature in ECB Financial Stability Review, May 2021, (with Emambakhsh, T., Giuzio, M., Mingarelli, L., and Spaggiari, M.)

The ECB is continuing its work on incorporating climate-related risks into assessments of financial stability. This includes a new analysis of disclosure, pricing and greenwashing risks in financial markets, as well as continued monitoring of financial institutions’ exposure to transition and physical risks. There is some encouraging evidence of better disclosure by non-financial corporations and increasing awareness of climate-related risks in financial markets. Progress made by banks, however, has been more limited. Established and newer metrics show no clear evidence of a reduction in climate-related risks, revealing instead a potential for amplification mechanisms stemming from exposure concentration, cross-hazard correlation and financial institutions’ overlapping portfolios. These findings can inform evidence-based international and European policy debates around climate-related corporate disclosure, standards for sustainable financial instruments and climate-related prudential policies. More generally, amid high uncertainty around governments’ transition policies in an environment of volatile energy prices, further investments in the transition to a net-zero economy would also have a positive impact on medium-term growth and energy security.   

The role of speculation during the recent increase in EU emissions allowance prices, Box in the ECB Economic Bulletin Issue 3, 2022 (with Ampudia, M., Kapp, D., Bua, G.)

The price of emissions allowances traded on the EU Emissions Trading System (ETS) has risen from below €10 per metric tonne of carbon to above €90 since the beginning of 2018. This box outlines the main reasons behind this increase and examines whether speculative activity may have played a significant role. It concludes that, at present, tangible evidence for a marked increase in speculative activity related to potential changes in market structure appears scarce. Furthermore, a speculation index suggests that, while speculation appears to have increased slightly since early 2019, it remains relatively moderate and well below readings during earlier phases of the ETS.   

Towards a green capital markets union: developing sustainable, integrated and resilient European capital markets, Box in the ECB Macroprudential Bulletin, October 2021, (with Born, A., Giuzio, M., Lambert, C., Schölermann, H., Tamburrini, F.)

Green capital markets are growing rapidly and are more resilient and integrated than traditional markets. Enhancing market structures and standards will help decrease greenwashing and drive the growth of green finance, helping bring about carbon neutrality.  

Climate-related risks to financial stability, Special Feature in ECB Financial Stability Review, May 2021, (with Alogoskoufis, S., Carbone, S., Coussens, W., Fahr, S., Giuzio, M., Kuik, F., Parisi, L., Spaggiari, M.)

The ECB has been intensifying its quantitative work aimed at capturing climate-related risks to financial stability. This includes estimating financial system exposures to climate-related risks, upgrading banking sector scenario analysis and monitoring developments in the financing of the green transition. Considerable progress has been made on capturing banking sector exposures to firms that are subject to physical risks from climate change. While data and methodological challenges are still a focus of ongoing debates, our analyses suggest (i) somewhat concentrated bank exposures to physical and transition risk drivers, (ii) a prevalence of exposures amongst more vulnerable banks and in specific regions, (iii) risk-mitigating potential for interactions across financial institutions, and (iv) strong inter-temporal dependency conditioning the interaction of transition and physical risks. At the same time, investor interest in “green finance” continues to grow – but so-called greenwashing concerns need to be addressed to foster efficient market mechanisms. Both the assessment of risks and the allocation of finance to support the orderly transition to a more sustainable economy can benefit from enhanced disclosures, including of firms’ forward-looking emission targets, better data and strengthened risk assessment methodologies, among other things. 

The performance and resilience of green finance instruments: ESG funds and green bonds, Box in the ECB Financial Stability Review, November 2020, (with Belloni, M., Giuzio, M., Kordel, S., Radulova, P., and Wicknig, F.)

Green financial markets are growing rapidly globally. Assets of funds with an environmental, social and governance (ESG) mandate have grown by 170% since 2015. The outstanding amount of euro area green bonds has increased sevenfold over the same period. Given the financial stability risks stemming from climate change, this box aims to understand the performance of such products and their potential for greening the economy. It focuses on the resilience of ESG funds and the absence of a consistent “greenium” a lower yield for green bonds compared with conventional bonds with a similar risk profile reflecting the fact that green projects do not benefit from cheaper financing. 

Interconnectedness of derivatives markets and money market funds through insurance corporations and pension funds, Box in the ECB Financial Stability Review, November 2020, (with Fache Rousova, L., Kordel, S., and Ghio, M.)

In the most turbulent week during the coronavirus-related market turmoil in March 2020, euro-denominated money market funds experienced very high outflows. But which investors withdrew from these funds and why did they do so? This box suggests that the increase in variation margin on derivatives contracts held by euro area insurance corporations and pension funds was one of the key drivers behind these outflows. 

Les instruments de politique macroprudentielle : un rempart contre les risques de contagion interbancaire  (with T. Piquard), Bulletin de la Banque de France n°218 : Article 3 

Other publications

Pricing of green bonds – drivers and dynamics of the greenium (with Allegra Pietsch), SUERF Policy Brief, N 487, 2022

Beyond the greenim: Assessing the additionality of green bonds, European Corporate Governance Institute Blog, 30 March 2023