Central Bank of Ireland : Central Bank publishes research on Trends in Business Investment and Some Implications of New Regulatory Measures for Euro Area Money Markets

29 January 2014

The Central Bank of Ireland today (29 January 2014) publishes the signed articles from the Bank's first Quarterly Bulletin for 2014 on trends in business investment  and on some implications of new regulatory measures for euro area money markets.

Trends in Business Investment analyses trends in business investment in Ireland over the last three decades and estimates an econometric model to explain long- and short-run trends.  The key findings of the research are as follows:

• Business investment in Ireland exhibits large cyclical movements around a long-run trend relative to GDP.
• Changes in business investment broadly coincide with the overall business cycle, although swings in investment tend to be far greater, with extended periods of both over- and under-investment relative to GDP.
• Since its peak in 2007, annual business investment expenditure has fallen by €6 billion - a 40 per cent decline. As a share of GDP, business investment has fallen from 8 per cent between 2000 and 2008 to 5 per cent between 2009 and 2012. This fall is explained by both the rapid slowdown and subsequent fall in GDP growth and the previous cycle of over-investment which resulted in an elevated business investment to GDP ratio relative to the long-run trend.
• The results from the econometric model indicate that, in addition to GDP, other factors such as the cost of capital, the availability of credit and changes in capital gains (asset prices) may also play a role.
• Almost 60 per cent of the fall in business investment since 2007 is due to a reduction in firms' spending on machinery and equipment; the remainder is attributable to reduced spending on buildings and other infrastructure.
• A restocking of business capital could represent a source of growth for the Irish economy in the years ahead.

Some Implications of New Regulatory Measures for Euro Area Money Markets discusses the implications of enhanced regulatory standards, including Basel III Liquidity Coverage Ratio (LCR), Net Stable Funding Ratio (NSFR) and Leverage Ratio (LR). These new measures are intended to ensure that banks and banking systems are significantly more resilient in the future than was the case in the run-up to the financial crisis.  

Concerns that the extent and range of the new regulatory measures may lead to unintended shifts in market behaviour explain, in part, why the recent amendments to the Basel III ratios were considered necessary.  Amongst the potential implications discussed in the paper are:

• The LCR and the NSFR may reduce activity in the short-term unsecured money markets and are likely to increase demand for high quality liquid assets and for longer-term funding and funding through repos. 
• The measures are likely to reduce demand for lower quality assets and may increase demand, in certain circumstances, for central bank funding. 
• On the other hand, the LR appeared to offer a disincentive to the use of repos.  However, this may be mitigated somewhat by the recent amendments. 
• Other regulatory measures, such as the European Market Infrastructure Regulation, require increased central clearing and may further increase demand for high quality assets, for collateral and margining purposes. 

The paper concludes that, while the latest Basel III amendments will mitigate some of the previous concerns, the proposed measures may still have unintended consequences for money markets.

ENDS

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