Many countries have either eliminated or considerably reduced reserve requirements during the last decade. This paper derives the optimal reserve requirements of a simple economy with production and financial intermediation subject to costly state verification, and shows that one motivation for the widely observed reduction in the level of mandatory reserves is linked to the process of financial markets development.

This paper examines the interaction between monetary policy and financial stability and provides an assessment of the implications of banks’ risk management practices for monetary policy. By considering the desire of the central bank to stabilize different types of the “basis” risk as a contribution to financial stability, we derive a set of plausible interest-rate rules characterized by either backward or forward interest-rate smoothing. The paper investigates the determinacy conditions of the rational expectations equilibria obtained under such rules. Contrary to what previously found in the literature, we find that the practice of smoothing interest rates backward does not in general alleviate problems of equilibrium indeterminacy. Moreover, basis risk stabilization may lead to policy rules embedding “forward” interest-rate smoothing, where a new kind of indeterminacy may arise following excessive concern for financial stability.

This paper studies the systemic risk contribution of a set of large publicly traded European banks. Over a sample covering the last twenty years and three different crises, we find that all banks in our sample significantly contribute to systemic risk. Moreover, larger banks and banks with a business model more exposed to trading and financial market volatility, contribute more. In the shorter sample characterized by the Covid-19 shock, sovereign default risks significantly affected the systemic risk contribution of all banks. However, the ECB announcement of the Pandemic Emergency Purchasing Programme restored calm in the European banking sector.

This paper studies systemic-risk connectedness in the European insurance sector at three levels of granularity: across major segments of financial markets, across insurance subsectors, and across individual insurance companies. Using a common connectedness framework applied to returns, volatility, value-at-risk, and expected shortfall, we document that insurers are an important component of systemic-risk connectedness, especially during stress episodes. We also provide reduced-form evidence on economically relevant channels in the European institutional setting: aggregate insurer spillovers co-move with term spreads, sovereign spreads, and funding stress, and firm-level insurer-to-bank spillovers vary with sovereign risk and domestic sovereign-bond home bias in a way consistent with a balance-sheet channel. The analysis further reveals substantial heterogeneity across subsectors and identifies a stable core of systemically central insurers in firm-level networks.