Download publication

Policy Contribution

Excess liquidity and bank lending risks in the euro area

In this Policy Contribution prepared for the European Parliament’s Committee on Economic and Monetary Affairs (ECON) as an input to the Monetary Dialogue, the authors clarify what excess liquidity is and argue that it is not a good indicator of whether banks’ have more incentives in risk-taking and look at indicators that might signal that bank lending in the euro area creates undue risks.

By: and Date: September 26, 2018 Topic: European Parliament

This Policy Contribution was prepared for the European Parliament’s Committee on Economic and Monetary Affairs (ECON) as an input to the Monetary Dialogue of 24 September 2018 between ECON and the President of the European Central Bank. Copyright remains with the European Parliament at all times.

Excess liquidity (defined as all kinds of commercial bank deposits held by the Eurosystem minus the minimum reserve requirements) in the euro area exceeded €1,900 billion, or 17 percent of euro-area GDP, in September 2018. Holding such excess liquidity is costly for commercial banks, given that the currently negative (-0.4 percent) deposit facility interest rate applies on excess liquidity holdings. The current stock of excess liquidity implies an annual €7.6 billion cost in total for those banks that hold this liquidity. More generally, the European Central Bank’s negative deposit interest rate and asset purchases further reduced market interest rates, with a negative impact on banks’ net interest income and thus profitability. This could incentivise a reach-for-yield race among banks. Additionally, the access to liquidity eased significantly and removed the liquidity constraint for most banks’ lending activities. These factors might incentivise banks to engage in risky lending in order to improve their profits. This in turn might create financial stability risks.

The authors clarify the definition of excess liquidity, to highlight the reasons why such a large amount of it is being held, and to assess its financial stability implications.

Read about event More on this topic
 

Past Event

Past Event

What is in store for Euro area economies?

ECB Executive Board Member Philip Lane discusses the outlook for Euro area economies.

Speakers: Maria Demertzis and Philip Lane Topic: European governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: May 5, 2022
Read about event More on this topic
 

Past Event

Past Event

Tackling future risks to banks

How to address vulnerabilities in banks in the coming years?

Speakers: Maria Demertzis and Elizabeth McCaul Topic: Banking and capital markets Date: March 29, 2022
Read article
 

Opinion

European governance

How to reconcile increased green public investment needs with fiscal consolidation

The EU’s ambitious emissions reduction targets will require a major increase in green investments. This column considers options for increasing public green investment when major consolidations are needed after the fiscal support provided during the pandemic. The authors make the case for a green golden rule allowing green investment to be funded by deficits that would not count in the fiscal rules. Concerns about ‘greenwashing’ could be addressed through a narrow definition of green investments and strong institutional scrutiny, while countries with debt sustainability concerns could initially rely only on NGEU for their green investment.

By: Zsolt Darvas and Guntram B. Wolff Topic: European governance, Green economy, Macroeconomic policy Date: March 8, 2022
Read article More on this topic More by this author
 

Opinion

The week inflation became entrenched

The events that have unfolded since 24 February have solved one dispute: inflation is no longer temporary.

By: Maria Demertzis Topic: Macroeconomic policy Date: March 8, 2022
Read article Download PDF More on this topic More by this author
 

External Publication

Book notes: Monetary policy in times of crisis

Review of 'Monetary policy in times of crisis: a tale of two decades of the European Central Bank' published in the Central Banking.

By: Francesco Papadia Topic: Macroeconomic policy Date: February 17, 2022
Read article More on this topic
 

External Publication

The Euro in 2022

An annual review of the euro published jointly by Fundación ICO and Fundación de Estudios Financieros to expand knowledge, raise awareness of the single currency, and suggest ideas and proposals for strengthening its acceptance and sustainability.

By: Grégory Claeys, Maria Demertzis and Fernando Fernández Topic: Macroeconomic policy Date: February 17, 2022
Read about event More on this topic
 

Past Event

Past Event

A debate on fiscal rules and the new monetary strategy

Presentation of the Yearbook of the Euro 2022.

Speakers: Maria Demertzis, Fernando Fernández, Gonzalo García Andrés, José Carlos García de Quevedo, Pablo Hernández de Cos and Jorge Yzaguirre Topic: European governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: February 17, 2022
Read article More on this topic
 

Blog Post

Who is suffering most from rising inflation?

The lowest income households are suffering disproportionally from the current inflation increase, with rising energy prices the main culprit.

By: Grégory Claeys and Lionel Guetta-Jeanrenaud Topic: Macroeconomic policy Date: February 1, 2022
Read article More by this author
 

Opinion

European governance

The euro comes of age

A well-functioning euro reflects a degree of unity that allows the EU to credibly claim a position at the global table and therefore help shape the policies that will deal with global problems. That is a decisive success.

By: Maria Demertzis Topic: European governance, Macroeconomic policy Date: January 13, 2022
Read article More by this author
 

Opinion

European governance

The Euro at 20

The euro’s advocates hoped that the single currency would deliver economic and financial integration, policy convergence, political amalgamation, and global influence. While these predictions were often wide of the mark, the euro has arguably proven to be a wise investment.

By: Jean Pisani-Ferry Topic: European governance, Macroeconomic policy Date: January 3, 2022
Read article
 

Blog Post

European governanceInclusive growth

12 Charts for 21

A selection of charts from Bruegel’s weekly newsletter, analysis of the year and what it meant for the economy in Europe and the world.

By: Hèctor Badenes, Henry Naylor, Giuseppe Porcaro and Yuyun Zhan Topic: Banking and capital markets, Digital economy and innovation, European governance, Global economy and trade, Green economy, Inclusive growth, Macroeconomic policy Date: December 21, 2021
Read article
 

Blog Post

European governance

Policy coordination failures in the euro area: not just an outcome, but by design

Discussions on the fiscal framework should aim to correct its procyclical nature with a view to promoting more cooperative outcomes.

By: Maria Demertzis and Nicola Viegi Topic: European governance, Macroeconomic policy Date: December 20, 2021
Load more posts