In order to efficiently capture the contribution to the aggregated systemic risk of each financial institution arising from various important balance-sheet items, this publication proposes a comprehensive approach of "Mark-to-Systemic-Risk" to integrate book value data of Luxembourg financial institutions into systemic risk measures. It characterizes systemic risks and risk spillovers in equity returns for 33 Luxembourg banks, 30 European banking groups, and 232 investment funds.
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La provision forfaitaire permet-elle de réduire la procyclicité de l’activité bancaire au Luxembourg?
The objective of this paper is twofold. On the one hand, the BCL measure the impact of the lump sum provision (provision forfaitaire) on tax revenues. On the other hand, BCL perform an econometric study for assessing the potentially countercyclical character of lump sum provisions, and whether it smoothes banks’ profits and thereby, government tax revenues.
The results of the estimation of BCL indicate that the lump sum provision has a countercyclical effect helping to smooth bank profits. Banks accumulate provisions during the upswings which they use to cover losses during the downswings. Consequently, lump sum provisioning results in smoother tax revenues across the cycle.
Déficit, croissance et bien-être intergénérationnel : Comment réformer les pensions au Luxembourg ?
This working paper N° 87 from BCL proposes and evaluates a comprehensive reform, called LOLA. Five major conclusions emerged from the analysis ...
Fluctuations economiques et dynamiques de la consitutions de provisions pour créances douteuses des banques luxembourgeoises
This publication from BCL is devoted to analyzing the impact of macroeconomic shocks and / or sector on the constitution of provisions for doubtful debts of Luxembourg banks. It appears from this study that macroeconomic variables such as GDP, unemployment, interest rates and house prices affect the volume of provisions for dealing with the risks of non-recovery of loans granted to customers. Thus, GDP growth and property prices contribute to reduce the volume of reserves, while an increase in interest rates leads to rise. Moreover, it seems that long-term quality management risk leads to reduce the importance of provisions for loans granted to customers.
Predetermined interest rates in an analytical RBC model
This publication solve a version of the analytical Real Business Cycle (RBC) model with a predetermined rate of return on household saving. The solution differs from that of the benchmark RBC model along two dimensions: (i) Policy functions depend on the variance of the technology shock. (ii) There is a suboptimal pattern of excess saving. We discuss the economic intuition underlying these properties. We also demonstrate that unconditional welfare can be higher in the suboptimal model with predetermined interest rates, providing a clear illustration of the pitfall with unconditional welfare comparisons.
What Place does Luxembourg hold in Global Value Chains?
This publication describe LU-EAGLE, a DSGE model developed at the Banque centrale du Luxembourg. LU-EAGLE borrows its general structure from the Euro Area and GLobal Economy (EAGLE) model developed by the European System of Central Banks and also embeds speci c features to capture some important characteristics of Luxembourg's economy. In particular, the model reproduces the high levels of exports and imports relative to GDP, as well as the signi cant share of cross-border workers in Luxembourg's labor market. It calibrate LU-EAGLE and discuss simulation results describing the effects of a set of standard shocks, originating both in Luxembourg and abroad. The model suggests that international spillovers make Luxembourg more responsive to monetary policy shocks and less responsive to scal policy shocks. Moreover, it highlights how fluctuations in foreign demand have a significant impact on domestic developments.
What Place does Luxembourg hold in Global Value Chains?
This publication uses individual household data from Luxembourg to evaluate how severe economic conditions could affect bank exposure to the household sector. Using data from a representative survey, information on household income, expenses and liquid assets are used to calculate a household-specific probability of default (PD). The high-stress scenario generates a relatively high percentage of defaults among socioeconomically disadvantaged households. For instance, households in the lowest income quintile see their PD rise from 9.3% in the no-shock baseline to 14.8% in the most severe scenario. The main conclusion is that bank losses appear to be quite sensitive to financial stress, despite three mitigating factors in Luxembourg: indebted households tend to hold liquid assets that can help smooth shocks, household leverage tends to decline rapidly once mortgages have been serviced several years, and loan-to-value ratios at origination appear not to be excessive.
What Place does Luxembourg hold in Global Value Chains?
This publication analyses the place held by Luxembourg in global value chains (GVC) by relying on trade in value added data retrieved from OECD inter-country input-output tables, available over the period 1995-2011. The analysis is multifaceted as the role of Luxembourg in GVC is analyzed across 50 advanced and emerging market economies, at the country level, at the sector level and over time. Results show that Luxembourg acts as an important chain-link in GVC as evidenced by its strong upstream and downstream interconnections with other partner countries. Luxembourg is primarily a buyer of foreign value added and less a seller of domestic value added.
The analysis unveils that Luxembourg possesses a comparative advantage in GVC in the finance and insurance industry. It is from the latter sector that the country retrieves the most important share of value added from GVC participation.
The Cross-border Household Finance and Consumption Survey
This publication presents the methodology and main descriptive results of the second wave of the Cross-border Household Finance and Consumption Survey (XB-HFCS) conducted in 2014. The survey provides novel information on the economic and financial situation of households employed in Luxembourg but living in neighbouring countries (cross-border commuters), who contribute substantially to Luxembourg’s economy.
Household net wealth of crossborder commuters is more equally distributed compared to that of employed households resident in Luxembourg. In addition, cross-border commuters have a higher median net wealth and gross income compared to those of the employed population in their country of residence. About 26% of their financial assets and 19% of their liabilities are located in Luxembourg. While the majority of the non-durable expenditures are done in the country of residence, cross-border commuters consume about 20% of their household income in Luxembourg.
Housing prices and mortgage credit in Luxembourg
This paper investigates the interaction between residential housing prices and mortgage credit in Luxembourg over the period 1980Q1-2017Q1. We use a vector error correction framework to model this interaction and allow for feedback effects between the two variables. In the long-run, higher housing prices lead to a mortgage credit expansion, which in turn puts upward pressure on prices. The growing demand for mortgage credit is also sustained by positive net migration to Luxembourg. Construction activity is another important determinant of housing prices, in line with existing supply-side limitations on dwelling availability. These dynamics lead to a structural imbalance between housing supply and demand, with the latter being fueled by demographic factors, tax incentives and fiscal subsidies, as well as the low interest rate environment. While price dynamics are partially explained by these structural factors, our results suggest that over the last few years residential housing prices have been characterized by a moderate, but persistent, overvaluation with respect to market fundamentals. Between 2012Q1 and 2017Q1, the average overvaluation is estimated at 6.85% but its trend is decreasing in the last quarters. Results also show that housing prices have a slow rate of adjustment to deviations from fundamentals (only 2.2% of the misalignment is corrected each quarter) and they do not directly adjust to disequilibria in the mortgage market. These findings are supported by impulse response analysis, which suggests that shocks to the endogenous variables lead to permanent increases in housing prices.
Household debt burden and financial vulnerability in Luxembourg
Shadow intermediaries activities have registered a spectacular increase during the last decades. Recently, their market shares have rapidly been gaining momentum partially due to “regulatory arbitrage”. Although their centrality to the credit boom in the early 2000s and to the collapse during the financial crisis of 2007-2009 is widely documented, the number of contributions studying the implications on the real economy and the underlying transmission mechanisms is surprisingly limited. We contribute to filling this gap and devise a new DSGE model whose productive sector captures key characteristics of the European economy by accounting for small and large firms vertically linked in a production chain. The adopted framework includes commercial banks and shadow financial intermediaries directly interconnected in the interbank market with specific and differentiated channels of financing to the real economy. The framework also incorporates moral hazard for commercial banks which, together with regulatory arbitrage, might bring further incentives for banks to securitize part of their assets. An attempt to incorporate macroprudential policy is considered through the implementation of capital requirements and caps to securitization in the traditional banking sector. The results show that the complementarity of such tools devised by a macroprudential authority can be effective in dampening aggregate volatility and safeguarding financial stability.
cahiers BCL 112
The paper from BCL construct debt burden indicators at the level of individual households and calculate the share of households that are financially vulnerable using Luxembourg survey data collected in 2010 and 2014. The share of households that were indebted declined from 58.3% in 2010 to 54.6% in 2014, but the median level of debt (among indebted households) increased by 22% to reach € 89,800. This suggests that indebted households in 2014 carried a heavier burden than indebted households in 2010.
cahiers BCL 112
The paper from BCL analyses gross investment flows in equity and investment fund shares (EIFS) in Luxembourg - a small open economy with a financial center - over the period 2002Q1-2016Q3. The paper carries out three analyses. The statistical analysis shows that gross EIFS flows exhibit similar patterns over time amongst resident investors and non-resident investors. However, the volatility of EIFS flows instigated by non-resident investors is larger than the volatility of EIFS flows initiated by resident investors. The graphical analysis shows that gross EIFS flows switch between positive and negative growth cycle periods whose durations vary over time depending on shocks affecting the return/risk ratio associated to EIFS. The econometric analysis supports these results as it provides evidence of a significant relationship between EIFS flows, global stock prices, global risk aversion, global economic policy uncertainty measures and fundamentals that may have played an important role in shaping the evolution of EIFS flows over the period of analysis (in particular, global liquidity, global government spending, global interest rates and oil prices).
cahiers BCL 111
In this paper, we revisit the role of regulation in a small-scale dynamic stochastic general equilibrium (DSGE) model with interacting traditional and shadow banks. We estimate the model on US data and we show that shadow banking interferes with macro-prudential policies. More precisely, asymmetric regulation causes a leak towards shadow banking which weakens the expected stabilizing effect. A counterfactual experiment shows that a regulation of the whole banking sector would have reduced investment fluctuations by 10% between 2005 and 2015. Our results therefore suggest to base regulation on the economic functions of financial institutions rather than on their legal forms.
BCL WORKING PAPER 110
We analyse the use of active labour market policy (ALMP) measures and short-time work arrangements (STWAs) by Luxembourg firms during the years of economic and inancial crisis (2008-09) and the subsequent European sovereign debt crisis (2010-13). About 34% of Luxembourg firms used ALMPs between 2008 and 2013. Economy-wide, use of ALMPs increased along both the extensive margin (more firms) and the intensive margin (more measures per firm). The likelihood that a firm hired with recourse to ALMPs is greater for large, domestically oriented, multiple establishment firms, firms facing strong demand, with concerns about labour cost pressures and unavailability of skilled labour. The crisis saw a surge in firms using STWAs. The likelihood of applying for STWAs increases with demand volatility, the share of workers with permanent contracts, export orientation and the inability to shift workers between establishments. Firms reported that 20-25% of jobs in STWAs were saved by this measure.
BCL WORKING PAPER 109
This study of BCL takes a comprehensive approach to systemic risk stemming from Luxembourg’s Other Systemically Important Institutions (OSIIs), from the Global Systemically Important Banks (G-SIBs) to which they belong, from the investment funds sponsored by the OSIIs, from the housing market, from the non-financial corporate sector and from the sovereign. All sectoral balance sheets are integrated and the resulting systemic contingent claims are linked into a stochastic version of the general government balance sheet to gauge their impact on sovereign risk. Explicitly modeling default dependence and capturing the time-varying non-linearities and feedback effects typical of financial markets, the approach evaluates systemic losses and potential public sector costs from contingent liabilities stemming directly or indirectly from the financial sector. Various vulnerability and risk indicators suggest the sovereign is robust to a variety of shocks. The analysis highlights the key role of a sustainable fiscal position for financial stability.
workingpaper106
This report presents the main results and the underlying methodology of the 2nd wave of the Luxembourg Household Finance and Consumption Survey (LU-HFCS) and compares them to those obtained in the 1st wave in 2010. This survey is conducted among private households resident in Luxembourg and is part of the Eurosystem Household Finance and Consumption Survey, which provides detailed individual and household data on assets, liabilities, income and consumption.
BCL WORKING PAPER 105
This publication incorporates sticky investment prices in a two-sector monetary model of business cycles. Fit to quarterly U.S. time series, the model suggests that price rigidity in the investment sector is the single most empirically relevant friction to match the data. Sticky investment prices are also important to understand the dynamic effects of technology shocks and their pass-through to the relative price of investment goods.
Characterising the financial cycle in Luxembourg
This paper characterises the financial cycle in Luxembourg using both the growth and classical cycle definitions. We implement both a frequency-based approach –using band-pass filters– to measure the growth cycle and a turning-point approach to capture the classical cycle. The financial cycle is characterized using varibales related to domestic credit and asset prices.
Tracking Changes in the Intensity of Financial Sector’s Systemic Risk
This study provides the first available estimates of systemic risk in the financial sector comprising the banking and investment fund industries during 2009Q4 -2015Q4. Systemic risk is measured in three forms: as risk common to the financial sector; ascontagion within the financial sector and; as the build-up of financial sector’s vulnerabilities over time, which may unravel in a disorderly manner.
The mainresults suggest that interdependence in the financial sector decreased in the first three years of the sample, but rose again later coinciding with ECB’s references to increased search for yield in the financial sector. Investment funds are a more important source of contagion to banks than the other way round, and this is more the case for European banking groups than for Luxembourg banks.
cahier bcl 98/2015
The primary aim of this work is to study the sensitivity of Luxembourg bond funds to interest rate movements. For this purpose, the dataset compiled at the Banque centrale du Luxembourg (BCL) since December 2008 is used to analyse the balance sheet composition of Luxembourg bond funds and to measure the interest rate exposure of their bond portfolio.
Immigration, occupational choice and public employment
This paper investigates the theoretical effects of immigration in an occupational choice model with three sectors: a low-skilled, a high-skilled and a public sector. The originality of our approach is to consider intersectoral mobility of labor and public employment. We highlight the fact that including a public sector is crucial, since omitting it implies that low-skilled immigration unambiguously reduces wages and welfare of all workers.
Les vulnérabilités des organismes de placement collectif : une approche dynamique d’évaluation des risques systémiques
This study measures investment funds’ systemic credit risk in three forms: (1) credit risk common to all funds within each of the seven categories National Central Banks report to the ECB; (2) credit risk in each category of investment fund conditional on distress on another category of investment fund and; (3) the build-up of investment funds’ vulnerabilities which may lead to a disorderly unraveling.
The Eurosystem, the banking sector and the money market
This working paper N° 92 of the Central Bank of Luxembourg recalls the foundations of the interbank money market and then analyses the evolution of the “net liquidity needs” of the banking sector. It provided a clarification of the relation between the Eurosystem, the euro zone banking sector and the money market. In particular, it develops arguments against the myth of “idle money parked with the Eurosystem”. Since October 2008, the credit granted by the Eurosystem to the Euro zone banking sector increased in a substantial way, as a result of the implementation of nonconventional measures, in particular the fact that the Eurosystem left to the banks the faculty to determine themselves the quantity of credit that they wished to obtain.
Cross-border commuting and consuming: An empirical investigation
This working paper N° 89 analyses empirically how cross-border consumption varies across product and services categories and across household characteristics. It focuses on the part of cross-border sales that arise due to work-related cross-border crossings; it analyses the cross-border consumption behaviour of cross-border commuter households residing in Belgium, France and Germany and working in Luxembourg.
The impact of the exchange rate on Luxembourg equity funds
The aim of this work is to investigate the impact of the exchange rate on Luxembourg equity funds. For this purpose, the dataset compiled by the Banque centrale du Luxembourg is used to exploit the detailed information on the currency composition of assets and liabilities and to deliver a statistical decomposition of the exchange rate valuation effect on both sides of the balance sheet.
Household Risk Taking after th e Financial Crisis
This study from BCL investigates whether and how the crisis in 2008/2009 affects households' risk attitudes, subjective risk and return expectations, and planned financial risk taking using the German SAVE study. Households' wealth change from end-2007 to end-2009 is not found to have an effect. However, households that attribute losses to the crisis decreased their risk tolerance and planned risk taking; the probability of expecting an increase in risks and returns is raised. According to economic theory, wealth changes attributed to a dramatic event should not have a different effect than other wealth changes. The results suggest an emotional reaction.
Household risk management and actual mortgage choice in the EURO area
This paper from BCL conducts a simulation exercise to identify how the easing of monetary policy during the financial crisis affected mortgage holders. It shows that the resulting reduction in mortgage rates produced a substantial decline in debt burdens among mortgage-holding households, especially in countries where households have higher debt burdens and a larger share of ARMs, as well as for some disadvantaged groups of households, such as those with low income.
Banking Systemic Vulnerabilities : A Tail-risk Dynamic CIM DO Approach
This paper from BCL is concerned with developing measures for tracking banking systemic vulnerabilities over time with the objective of helping to make macroprudential policy operational. In addition, this paper’s approach covers the cross-section dimension as well as the time-dimension of banking sector systemic risk.
The determinants of short term funding in luxembourgish banks
This paper attempts to empirically identify the determinants of Luxembourgish banks’ reliance on short term funding. The emphasis lies on making the link to developments in the macroeconomic environment and the build up of systemic risk while institution-specific factors are being controlled for. The paper provides evidence for a close link between exuberant credit developments at the aggregate level and shortterm funding of banks.
This finding supports the view that one possible channel for increasing vulnerabilities during a lending boom may run through increased reliance of banks on short term funding. When it comes to bank specific variables, bank size has an important effect on the tendency to contract short term funding. This result is in line with recent work on leverage procyclicality in the banking sector.
An empirical study on the impact of Basel III standards on banks’ default risk
This publication from BCL studies how the Basel III regulations, namely the Capital-to-assets ratio (CAR), the Net Stable Funding Ratio (NSFR) and the Liquidity Coverage Ratio (LCR), are likely to impact the banks’ profitabilities (i.e. ROA), capital levels and default. The simulation exercise suggests that basically all banks would have seen a decrease in their default risk if they had previously adhered to Basel III.
Income, wealth and consumption of cross-border commuters to Luxembourg
Exceeding 40% of domestic employment cross-border commuters are extremely important to Luxembourg’s economy and labour market in general. This paper presents unique information on their income, wealth and consumption using representative survey data from cross-border commuter households to Luxembourg. The estimated average total net wealth of cross-border commuter households is about €240,000, which falls substantially short of comparable estimates for Luxembourg resident households exceeding €700,000. Cross-border commuters do not only receive money from but also leave money in Luxembourg. In terms of consumption expenditures, they spend on average more than €9,300 per year inside Luxembourg’s borders, representing about 15% of their total gross income and 17% of their gross income from Luxembourg.
PDF Macroeconomic Conditions and Leverage in Monetary Financial Institutions: Comparing European countries and Luxembourg
In this article we study the interaction between leading macroeconomic indicators (industrial production, stock prices, consumer sentiment and real interest rates) and financial sector leverage in major European countries. We base our analysis on monthly, country-aggregated panel VAR models for the pre-crisis period January 2003 to August 2008, and the crisis period September 2008 to June 2011. We find little evidence for a relationship between macroeconomic variables and leverage in the pre-crisis period, with only real interest rates having a negative short-term impact on leverage growth. We find positive feedback loops between sentiment and stock prices as well as MFI assets in the pre-crisis period, and a positive impact of real interest rate changes on equity and asset growth. Thus, balance sheet expansions weredriven by sentiment and stock prices, while real interest changes allowed MFIs to profit fromhigher spreads. During the crisis period (starting in September 2008), we observe a countercyclical impact from leverage on sentiment and stock prices, while sentiment and stock prices bear a pro-cyclical impact on leverage. In contrast to this, MFI leverage in Luxembourg is negatively impacted by stock prices, suggesting significant impacts from marking-to-market.