Systemic Importance of Central Bank Communication: ECB Policy Announcements and Systemic Risk in the Eurozone

Abstract

This paper studies central bank communication of the ECB as a potential factor that explains the contribution to systemic risk for a panel of large banks in the Eurozone between 2002 and 2018. The empirical evidence suggests that the ECB is able to use central bank communication to effectively steer private sector expectations in such a way that it has a robust and significant impact on banks' contribution to systemic risk. However, the results indicate that this influence varies over time, implying that the ECB uses monetary policy surprises and the associated language to steer market expectations in line with its own policy objectives at time. Additional analyses show that banks that contribute more to systemic risk tend to be more sensitive towards the effects of central bank communication. More specifically, larger banks and highly leveraged banks react more strongly to central bank communication. Furthermore, requirements of prudential regulation tend to mitigate the effects of central bank communication which is additional evidence on the topic of policy coordination between macroprudential policy and monetary policy.

Keywords: Systemic Risk, Monetary Policy Effectiveness; Central Bank Communication; Forward Guidance; Textual Analysis

JEL Classification: E44, E52, E58, G14