Regulatory requirements for banks are often criticised as having an adverse impact on lending and hence, indirectly, on the real economy. A new research paper uses a theoretical partial equilibrium model to study the direct effects a liquidity coverage ratio could have on banks’ loan supply.

Whenever financial markets react to ECB Governing Council meetings, the explanation seems obvious: the Governing Council surprised markets, for instance, by changing its policy rate or by hinting at a future rate change. Any market reaction would thus stem from unexpected announcements about monetary policy. The response of different asset prices such as bond yields and stock prices, however, often contradicts this simple explanation. A new study indicates that these seemingly puzzling reactions are driven by information about the economic outlook that the ECB reveals via its announcements.