Financial markets

By Jade Al Yahya (Banque de France)

Since 2018, the ACPR and the AMF have studied how financial institutions adjust their business practices to demographic ageing. Senior consumers are particularly likely to experience vulnerability. Yet, according to preliminary results, a commercial offer based solely on an age criterion, the most commonly used today, is far from satisfactory.

Chart 1. Population projection for the European Union by age category.
Chart 1. Population projection for the European Union by age category. Source: Eurostat.

Monetary policy decisions require a prior assessment of different economic scenarios, including the most extreme ones. Assessed on the basis of the Banque de France's Financial Conditions Index, financial risks that are likely to weigh on the distribution of future euro-area GDP growth appear limited.

Expected distribution of euro area quarterly GDP growth between 2001 and 2018
Chart 1: Expected distribution of euro area quarterly GDP growth between 2001 and 2018 Sources: Eurostat, Banque de France, authors' calculations.

The banking sector assesses the credit risks associated with borrowers. What are the consequences to be expected from the production of information by a third party? Exploiting a change in the rating methodology of the Banque de France, this post shows how the disclosure of more detailed information on companies can increase the supply of credit for their benefit.

Chart: Companies with a fine-tuned rating obtain more credit
Chart: Companies with a fine-tuned rating obtain more credit

By John Hutchinson and Arthur Saint-Guilhem

For several decades, the wedge between the return on capital and risk-free rates has been growing in the euro area and the United States. We examine the drivers of this wedge and find that while the risk premium is the main driver, mark-ups also play a role. More recently, the contribution from mark-ups has decreased in the euro area and increased in the United States.

Chart 1: Growing wedge between the return on capital and risk-free rates in the euro area and the United States
Chart 1: Growing wedge between the return on capital and risk-free rates in the euro area and the United States Source: AMECO, FRED, AWM, and authors’ calculations.

By Thomas Ferrière and Laure Frey

Household mortgage debt can jeopardise financial stability, as the 2008 crisis showed. This risk is often assessed using the ratio of the loan amount to the value of the financed property, or loan-to-value ratio (LTV). Yet, very high LTVs cover in large part the property purchases, excluding primary residences, of households with the highest incomes, which are not necessarily the most risky. Therefore, this ratio by itself is insufficient to provide the full picture.

Chart 1: Lower LTVs for primary residences
Chart 1: Lower LTVs for primary residences (% of the 2014 value of the property) Sources: INSEE Household Wealth Survey 2014-2015 and authors’ calculations.

Financial conditions are not fully captured by the short-term interest rate, especially when it is stuck at its lower bound. As a result, financial institutions and central banks turn to other indicators richer in information such as financial condition indices (FCI). We provide a new FCI with time-varying component weights which pinpoints the sources of changes in financial conditions.

Dynamics of the Banque de France FCI for the euro area
Chart 1: Dynamics of the Banque de France FCI for the euro area Sources: Bloomberg and the authors’ calculations

By Silvia Gabrieli and Claire Labonne

Between 2011 and the announcement of Outright Monetary Transactions (OMTs), high rates of non-performing exposures to peripheral countries hindered banks’ access to the interbank market. Sizeable holdings of peripheral countries’ sovereign bonds also increased the price paid for interbank funding. The introduction of OMTs in 2012 and Targeted Longer-Term Refinancing Operations (TLTROs) in 2014 successfully curbed these channels of fragmentation risk.

Figure 1: Average interest rates in the euro area interbank market for GIIPS
Figure 1: Average interest rates in the euro area interbank market for GIIPS Source: Gabrieli and Labonne (2018)

By Stéphane Lhuissier
The 2008 financial crisis and the sovereign debt crisis in the euro area led to major recessions. By contrast, the macroeconomic impact of the bursting of the technology bubble in 2000 was mild. The reason behind these all-or-nothing effects is amplification: a fragile financial system makes economic agents more sensitive to changes in financial conditions.

Differences in the impact of an adverse financial shock on euro area industrial production between financial states
Chart 1 – Differences in the impact of an adverse financial shock on euro area industrial production between financial states Note: Impulse responses of industrial production to the financial shock in healthy and fragile financial states. The size of the financial shock is the same in both cases. The dotted line shows the median and solid lines are 68% probability intervals.

By Cyril Couaillier and Julien Idier

Financial cycles can be broken down into four phases in which the intensity of financial risks changes. The crisis that follows the downturn is all the more pronounced as risks have accumulated during the upturn. Macroprudential policy aims to limit the impact of financial crises on the real economy: the decision to activate the countercyclical capital buffer in France meets this imperative.

The four seasons of the financial cycle
Chart 1: The four seasons of the financial cycle

By Hervé Le Bihan and Imène Rahmouni Rousseau

Financial markets confirm that, since autumn 2016, deflationary risks in the euro area have dissipated. Market indicators – which are admittedly susceptible to a number of biases – nevertheless continue to reflect medium-term inflation expectations which are below the Eurosystem’s target (inflation rates of below, but close to, 2% over the medium run).

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