Buildings’ Energy Efficiency and the Probability of Mortgage Default: The Dutch Case

We investigate the relationship between building energy efficiency and the probability of mortgage default. To this end, we construct a novel panel data set by combining Dutch loan-level mortgage information with provisional building energy ratings provided by the Netherlands Enterprise Agency. Using the logit regression and the extended Cox model, we find that building energy efficiency is associated with a lower probability of mortgage default. There are three possible channels that might drive the results: (i) personal borrower characteristics captured by the choice of an energy-efficient building, (ii) improvements in building performance that could help to free-up the borrower’s disposable income, and (iii) improvements in dwelling value that lower the loan-to-value ratio. We address all three channels. In particular, we find that the default rate is lower for borrowers with less disposable income. The results hold for a battery of robustness checks. This suggests that the energy efficiency ratings complement borrowers’ credit information and that a lender using information from both sources can make superior lending decisions than a lender using only traditional credit information. These aspects are not only crucial for shaping future energy policy, but also have implications for the risk management of European financial institutions

Collateral eligibility of corporate debt in the Eurosystem

We study the many implications of the Eurosystem collateral framework for corporate bonds. Using data on the evolving collateral eligibility list, we identify the first inclusion dates of bonds and issuers and use these events to find that the increased supply and demand for pledgeable collateral following eligibility (a) increases activity in the corporate securities lending market, (b) lowers eligible bond yields, and (c) affects bond liquidity. Thus, corporate bond lending relaxes the constraint of limited collateral supply and thereby improves market functioning

Coronavirus and financial stability 3.0: Try equity – risk sharing for companies, large and small

This policy letter adds to the current discussion on how to design a program of government assistance for firms hurt by the Coronavirus crisis. While not pretending to provide a cure-all proposal, the advocated scheme could help to bring funding to firms, even small firms, quickly, without increasing their leverage and default risk. The plan combines outright cash transfers to firms with a temporary, elevated corporate profit tax at the firm level as a form of conditional payback. The implied equity-like payment structure has positive risk-sharing features for firms, without impinging on ownership structures. The proposal has to be implemented at the pan-European level to strengthen Euro area resilience

Price Effects of Sovereign Debt Auctions in the Euro-Zone: The Role of the Crisis

Exploring the period since the inception of the euro, we show that secondary-market yields on Italian public debt increase in anticipation of auctions of new issues and decrease after the auction, while no or a smaller such effect is present for German public debt. However, these yield movements on the Italian debt are largely confined to the period of the crisis since mid-2007. We also find that there is some tendency of the yield movements to be larger when the demand for the new issue is smaller relative to its supply. Our results are consistent with a framework in which a small group of primary dealers require compensation for inventory risk and this compensation needs to be higher when market uncertainty is larger. We also find that the secondary-market behaviour of series with a maturity close to the auctioned series, but for which there is no auction, is very similar to the secondary-market behaviour of the auctioned series. These findings support an explanation of yield movements based on the behaviour of primary dealers with limited risk-bearing capacity