The credit risk of the sovereign affects the financial health of its banking sector and vice versa, creating an adverse feedback loop known as “sovereign- bank nexus”. We show that Quantitative Easing can effectively mitigate the sovereign-bank nexus. Our results indicate that the ECB’s Public Sector Purchase Programme reduced the co-movement of sovereign and bank credit risk by almost 80%. The mitigation is driven by the euro area periphery and works through three channels: (i) a reduction in government bond holdings of banks, (ii) an increase of government bond prices, and (iii) an increase in excess liquidity holdings of banks.
Link to the paper on SSRN: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3761085
Distributed ledger technology (DLT) enables a wide range of innovative industrial use cases and business models, such as through programmable payments and the seamless exchange of assets, goods, and services. To exploit the full potential of a DLT-based European economy, it is crucial to integrate the euro into DLT networks. In this paper, we propose a framework for developing payment solutions for a DLT-based European economy. To this end, we decompose the digital payments value chain into three pillars: (1) contract execution system, (2) digital payment infrastructure, and (3) monetary unit. Based on this framework, we systematically compare account- and token-based payment solutions, including a bridge solution, e-money tokens, synthetic central bank digital currencies (CBDCs), and a central bank digital currency (CBDC). Taking into account current circumstances, we conclude that no individual payment solution will be sufficient to address all emerging use cases. Instead, a broad array of payment solutions will emerge and co-exist. These solutions will apply to a variety of different use cases and will be launched at different points in time.
Link to the paper on SSRN: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3751204
Link to the Blockchain4Europe working paper: https://www.blockchain4europe.eu/wp-content/uploads/2020/12/BC4EU-The-Future-of-Payments-in-a-DLT-based-European-Economy-A-Roadmap_v5.1-1.pdf
We propose and test a new channel that links funding liquidity risk and interest rates in short-term funding markets. Borrowers with high liquidity risk are willing to pay a markup to lock in their funding, independent of risk premiums demanded by lenders. We test the channel using unique trade-by-trade data and reveal systematic and persistent differences in borrowers’ funding liquidity risk that lead to systematic and persistent heterogeneity in funding costs. Our results have important implications for financial stability, the transmission of monetary policy, and banks’ asset and liability management.
Link to the paper on SSRN: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3391129
Link to the paper on Alexandria: https://www.alexandria.unisg.ch/257072/
Link to my blog post about the paper: http://alexanderbechtel.com/2019/05/24/new-working-paper-liquidity-risk-and-funding-cost/