What Happened to Profitability? Shocks, Challenges and Perspectives for Euro Area Banks
Download PDF: Working Paper 5
This paper shows how multiple shocks have hit euro area bank profitability since the crisis - their effects differ by bank type and location
Author: Gong Cheng | Economist and policy strategist at the European Stability Mechanism
with Dirk Mevis | Banking sector expert at the European Stability Mechanism
Abstract:
Transaction cost shocks in financial markets are known to affect asset prices. This paper analyses how changes in transaction costs may affect the value of assets that banks use to collateralise borrowings in monetary policy operations. Based on a simple asset pricing model and employing a dataset of hypothetical Eurosystem collateral positions, we simulate and quantify the resulting change in collateral value pledged by counterparties to the Eurosystem, resulting from a transaction cost shock. A 10 basis point increase in transaction costs entails a direct -0.30% decrease of collateral value and a -0.07% decrease when adjusted for the expected reduction in the number of trades of each asset. We conclude that banks will on average suffer small collateral losses while selected institutions could face a considerably larger collateral decrease.
Disclaimer: This Working Paper should not be reported as representing the views of the ESM. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the ESM or ESM policy. No responsibility or liability is accepted by the ESM in relation to the accuracy or completeness of the information, including any data sets, presented in this Working Paper.
JEL codes: G21, G28, G33, L25