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Agnese Leonello

Research

Division

Financial Research

Current Position

Principal Economist

Fields of interest

Financial Economics

Email

agnese.leonello@ecb.europa.eu

Education
2007-2011

PhD Economics, European University Institute, Florence, Italy

2005-2007

MA Economics, University of Naples "Federico II", Italy

2002-2005

BA Economics, University of Naples "Federico II", Italy

Professional experience
2020-

Senior Economist- Financial Research Division, Directorate General Research, European C

2014-2020

Economist - Financial Research Division, Directorate General Research, European Central Bank

2011-2014

Post-Doctoral Fellow - Financial Institutions Center, The Wharton School of the University of Pennsylvania, Philadelphia, USA

Awards
2012

Best PhD Thesis on Financial Stability, Fondation Banque Centrale du Luxembourg

2010

Fourth Year completion grant, European University Institute, Florence, Italy

10 January 2024
WORKING PAPER SERIES - No. 2886
Details
Abstract
Bank market power, both in the loan and deposit market, has important implications for credit provision and for financial stability. This article discusses these issues through the lens of a simple theoretical framework. On the asset side, banks choose the quality and quantity of loans. On the liability side, they may be subject to depositor runs whenever they offer demandable contracts. Thisstructure allows us to review the literature on the role of market power for credit provision and stability and also highlight the interactions between the two sides of banks’ balance sheets. Our approach identifies relevant channels that deserve further analysis, especially given the rising importance of bank market power for monetary policy transmission and the rise of the digital economy.
JEL Code
G01 : Financial Economics→General→Financial Crises
G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation
15 February 2023
WORKING PAPER SERIES - No. 2783
Details
Abstract
We develop a model of financial intermediation with remunerated Central Bank Digital Currency (CBDC) as consumers’ alternative to bank deposits and an endogenous risk of bank runs. Echoing widespread concerns, higher CBDC remuneration raises bank fragility by increasing consumers’ withdrawal incentives. On the other hand, it also induces banks to offer more attractive deposit contracts in order to retain funding, thereby reducing fragility. This results in a U-shaped relationship between bank fragility and CBDC remuneration. We evaluate policy proposals aimed at mitigating the financial-stability risks of CBDC, such as holding limits and contingent CBDC remuneration.
JEL Code
D82 : Microeconomics→Information, Knowledge, and Uncertainty→Asymmetric and Private Information, Mechanism Design
G01 : Financial Economics→General→Financial Crises
G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
14 February 2023
WORKING PAPER SERIES - No. 2782
Details
Abstract
Loan guarantees represent a form of government intervention to support bank lending. However, their use raises concerns as to their effect on bank risk-taking incentives. In a model of •nancial fragility that incorporates bank capital and a bank incentive problem, we show that loan guarantees reduce depositor runs and improve bank underwriting standards, except for the most poorly capitalized banks. We highlight a novel feedback effect between banks•' underwriting choices and depositors' •run decisions, and show that the effect of loan guarantees on banks' incentives is different from that of other types of guarantees, such as deposit insurance.
JEL Code
G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation
31 October 2022
RESEARCH BULLETIN - No. 100
Details
Abstract
Central banks around the world are exploring the case for central bank digital currency (CBDC) – essentially a digital version of cash. In this article, we provide an overview of the economics of CBDC (Ahnert et al., 2022a). First, we outline the economic forces that shape the rise of digital money and motivate the current debate. We then look at the implications for monetary policy and financial stability before discussing policy issues and challenges. Finally, we highlight several areas where our understanding of digital money could be improved by further research.
JEL Code
E41 : Macroeconomics and Monetary Economics→Money and Interest Rates→Demand for Money
E42 : Macroeconomics and Monetary Economics→Money and Interest Rates→Monetary Systems, Standards, Regimes, Government and the Monetary System, Payment Systems
E51 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Money Supply, Credit, Money Multipliers
E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy
E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies
G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
16 August 2022
WORKING PAPER SERIES - No. 2713
Details
Abstract
This paper provides a structured overview of the burgeoning literature on the economics of CBDC. We document the economic forces that shape the rise of digital money and review motives for the issuance of CBDC. We then study the implications for the financial system and discuss of a number of policy issues and challenges. While the academic literature broadly echoes policy makers’ concerns about bank disintermediation and financial stability risks, it also provides conditions under which such adverse effects may not materialize. We also point to several knowledge gaps that merit further work, including data privacy and the study of end‐user preferences for attributes of digital payment methods.
JEL Code
E41 : Macroeconomics and Monetary Economics→Money and Interest Rates→Demand for Money
E42 : Macroeconomics and Monetary Economics→Money and Interest Rates→Monetary Systems, Standards, Regimes, Government and the Monetary System, Payment Systems
E51 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Money Supply, Credit, Money Multipliers
E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy
E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies
G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
Network
Discussion papers
16 August 2022
DISCUSSION PAPER SERIES - No. 20
Details
Abstract
This paper provides a structured overview of the burgeoning literature on the economics of CBDC. We document the economic forces that shape the rise of digital money and review motives for the issuance of CBDC. We then study the implications for the financial system and discuss of a number of policy issues and challenges. While the academic literature broadly echoes policy makers’ concerns about bank disintermediation and financial stability risks, it also provides conditions under which such adverse effects may not materialize. We also point to several knowledge gaps that merit further work, including data privacy and the study of end‐user preferences for attributes of digital payment methods.
JEL Code
E41 : Macroeconomics and Monetary Economics→Money and Interest Rates→Demand for Money
E42 : Macroeconomics and Monetary Economics→Money and Interest Rates→Monetary Systems, Standards, Regimes, Government and the Monetary System, Payment Systems
E51 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Money Supply, Credit, Money Multipliers
E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy
E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies
G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
11 January 2022
WORKING PAPER SERIES - No. 2636
Details
Abstract
Does the level of deposits matter for bank fragility and efficiency? By augmenting a standard model of endogenous bank runs with a consumption-saving decision, we obtain two novel results. First, depositors’ incentives to run are a function of the level of savings held as bank deposits. Second, a saving externality emerges in that individual depositors do not internalize the effect of their saving decisions on the bank-run probability. As a result, the economy features an inefficient level of savings and bank liquidity provision as well as excessive bank fragility. These results are robust to different sources of bank fragility, as they emerge both when runs are panic- and fundamental-driven.
JEL Code
G01 : Financial Economics→General→Financial Crises
G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation
1 October 2021
WORKING PAPER SERIES - No. 2593
Details
Abstract
This paper develops a simple analytical framework to study the impact of central bank policy-rate changes on banks’ credit supply and risk-taking incentives. Unobservable expost bank monitoring of loans creates an external-financing constraint, which determines bank leverage. Unobservable, costly ex-ante screening of borrowers determines the level of bank risk-taking. More risk-taking tightens the external-financing constraint. The policy rate affects the external-financing constraint because it affects both the return on outside investors’ alternative investments and loan rates. In a low rate environment, a policy-rate cut reduces bank funding costs less because of a zero lower bound (ZLB) on retail deposit rates. Bank risk-taking is a necessary but not sufficient for a policy-rate cut to become contractionary ("reversal"). Reversal can occur even though banks’ net-interest margins increase. Credit market competition plays an important role for the interplay of monetary policy and financing stability. When banks have market power, a policy-rate cut can increase lending and still lead to risk-taking. We use our analytical framework to discuss the literature on how monetary policy affects the credit supply of banks, with special emphasis on low and negative rates.
JEL Code
E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy
E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy
E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies
G20 : Financial Economics→Financial Institutions and Services→General
G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
Network
Research Task Force (RTF)
1 October 2021
DISCUSSION PAPER SERIES - No. 16
Details
Abstract
This paper develops a simple analytical framework to study the impact of central bank policy-rate changes on banks’ credit supply and risk-taking incentives. Unobservable expost bank monitoring of loans creates an external-financing constraint, which determines bank leverage. Unobservable, costly ex-ante screening of borrowers determines the level of bank risk-taking. More risk-taking tightens the external-financing constraint. The policy rate affects the external-financing constraint because it affects both the return on outside investors’ alternative investments and loan rates. In a low rate environment, a policy-rate cut reduces bank funding costs less because of a zero lower bound (ZLB) on retail deposit rates. Bank risk-taking is a necessary but not sufficient for a policy-rate cut to become contractionary ("reversal"). Reversal can occur even though banks’ net-interest margins increase. Credit market competition plays an important role for the interplay of monetary policy and financing stability. When banks have market power, a policy-rate cut can increase lending and still lead to risk-taking. We use our analytical framework to discuss the literature on how monetary policy affects the credit supply of banks, with special emphasis on low and negative rates.
JEL Code
E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy
E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy
E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies
G20 : Financial Economics→Financial Institutions and Services→General
G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
22 September 2021
RESEARCH BULLETIN - No. 87.2
Details
Abstract
The effect of policy rate cuts on bank lending and risk-taking depends on how the low interest rate environment affects banks’ ability to raise external financing. When interest rates are low, easing monetary policy relaxes banks’ external financing constraint less than when interest rates are high. This reduces the stimulus to bank lending and induces banks to take more risk. There are indeed side effects of monetary stimulus at the zero-lower bound (ZLB).
JEL Code
E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy
E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy
E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies
G20 : Financial Economics→Financial Institutions and Services→General
G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
Network
Research Task Force (RTF)
27 May 2019
WORKING PAPER SERIES - No. 2287
Details
Abstract
The architecture of supervision – how we define the allocation of supervisory powers to different policy institutions – can have implications for policy conduct and for the economic and financial environment in which these policies are implemented. Theoretically, an integrated structure for monetary policy and supervision brings important benefits arising from better information flow and policy coordination. Aggregate supervisory information may significantly improve the conduct of monetary policy and the effectiveness of the lender of last resort function. As long as the process towards an integrated structure does not shrink the set of available tools, monetary policy and supervision are no less effective in pursuing their objectives than a separated structure. Additionally, an integrated structure does not seem to be correlated with more price and/or financial instability, as suggested by analysing a large global set of countries with different supervisory set-ups. A centralised structure for supervision entails significant benefits in terms of fewer opportunities for supervisory arbitrage by banks and less informational asymmetry. A large central supervisor can take advantage of economies of scale and scope in supervision and gain a broader perspective on the stability of the entire banking sector, which should result in improved financial stability. Potential drawbacks of a centralised supervisory structure are the possible lack of specialisation relative to local supervisors and the increased distance between the supervisor and the supervised institutions. We discuss the implications of our findings in the euro area context and in relation to the design of the Single Supervisory Mechanism (SSM).
JEL Code
E5 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit
G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
G38 : Financial Economics→Corporate Finance and Governance→Government Policy and Regulation
Network
Discussion papers
27 May 2019
DISCUSSION PAPER SERIES - No. 9
Details
Abstract
The architecture of supervision – how we define the allocation of supervisory powers to different policy institutions – can have implications for policy conduct and for the economic and financial environment in which these policies are implemented. Theoretically, an integrated structure for monetary policy and supervision brings important benefits arising from better information flow and policy coordination. Aggregate supervisory information may significantly improve the conduct of monetary policy and the effectiveness of the lender of last resort function. As long as the process towards an integrated structure does not shrink the set of available tools, monetary policy and supervision are no less effective in pursuing their objectives than a separated structure. Additionally, an integrated structure does not seem to be correlated with more price and/or financial instability, as suggested by analysing a large global set of countries with different supervisory set-ups. A centralised structure for supervision entails significant benefits in terms of fewer opportunities for supervisory arbitrage by banks and less informational asymmetry. A large central supervisor can take advantage of economies of scale and scope in supervision and gain a broader perspective on the stability of the entire banking sector, which should result in improved financial stability. Potential drawbacks of a centralised supervisory structure are the possible lack of specialisation relative to local supervisors and the increased distance between the supervisor and the supervised institutions. We discuss the implications of our findings in the euro area context and in relation to the design of the Single Supervisory Mechanism (SSM).
JEL Code
E5 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit
G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
G38 : Financial Economics→Corporate Finance and Governance→Government Policy and Regulation
12 June 2017
RESEARCH BULLETIN - No. 35
Details
Abstract
The recent financial and sovereign debt crises showed that providing public guarantees to banks may pose serious threats to sovereign solvency, despite their short-term beneficial effects on financial stability. This article analyses the role that public guarantees to banks play in the bank-sovereign nexus and offers a more nuanced assessment of their implications for sovereign debt crises. Depending on the nature of the banking crisis and the specific characteristics of the economy, guarantees may improve financial stability without undermining sovereign solvency, thus generating a positive feedback loop between bank and sovereign stability.
JEL Code
G01 : Financial Economics→General→Financial Crises
G18 : Financial Economics→General Financial Markets→Government Policy and Regulation
H63 : Public Economics→National Budget, Deficit, and Debt→Debt, Debt Management, Sovereign Debt
22 May 2017
WORKING PAPER SERIES - No. 2067
Details
Abstract
This paper studies the effects of government guarantees on the interconnection between banking and sovereign debt crises in a framework where both the banks and the government are fragile and the credibility and feasibility of the guarantees are determined endogenously. The analysis delivers some new results on the role of guarantees in the bank-sovereign nexus. First, guarantees emerge as a key channel linking banks’and sovereign stability, even in the absence of banks’holdings of sovereign bonds. Second, depending on the specific characteristics of the economy and the nature of banking crises, an increase in the size of guarantees may be beneficial for the bank-sovereign nexus, in that it enhances …financial stability without undermining sovereign solvency.
JEL Code
G01 : Financial Economics→General→Financial Crises
G18 : Financial Economics→General Financial Markets→Government Policy and Regulation
H63 : Public Economics→National Budget, Deficit, and Debt→Debt, Debt Management, Sovereign Debt
28 February 2017
WORKING PAPER SERIES - No. 2032
Details
Abstract
Banks are intrinsically fragile because of their role as liquidity providers. This results in underprovision of liquidity. We analyze the effect of government guarantees on the interconnection between banks' liquidity creation and likelihood of runs in a model of global games, where banks' and depositors' behavior are endogenous and affected by the amount and form of guarantee. The main insight of our analysis is that guarantees are welfare improving because they induce banks to improve liquidity provision although in a way that sometimes increases the likelihood of runs or creates distortions in banks' behavior.
JEL Code
G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation
7 July 2016
WORKING PAPER SERIES - No. 1932
Details
Abstract
We develop a model where banks invest in reserves and loans, and trade loans on the interbank market to deal with liquidity shocks. Two types of equilibria emerge, depending on the degree of credit market competition and the level of aggregate liquidity risk. In one equilibrium, all banks keep enough reserves and remain solvent. In the other, some banks default with positive probability. The latter equilibrium exists when competition is not too intense and high liquidity shocks are not too likely. The model delivers several implications concerning the severity of crises and credit availability along the business cycle.
JEL Code
G01 : Financial Economics→General→Financial Crises
G20 : Financial Economics→Financial Institutions and Services→General
G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
2018
Journal of Economic Theory
Government Guarantees and Financial Stability
  • Allen, F., Carletti, E., Goldstein, I. and Leonello, A.
2018
Journal of Financial Economics
Government Guarantees and the Two-way Feedback between Banking and Sovereign Debt Crises
  • Leonello, A.
2017
Review of Finance
Credit Market Competition and Liquidity Crises
  • Carletti, E. and Leonello, A.
2017
Achieving Financial Stability: Challenges to Prudential Regulation, eds. Evanoff, D.D., Kaufman, G., Leonello, A., and Manganelli, S., Chicago Fed International Banking Conference proceedings
Government Guarantees to Financial Institutions: Banks’ Incentives and Fiscal Sustainability
  • Leonello, A.
2016
Handbook of European Banking, eds. Casu, B., and Beck, T., Palgrave Macmillan UK
Regulatory reforms in the European banking sector
  • Carletti, E. and Leonello, A.
2015
Journal of Financial Regulation
Moral Hazard and Government Guarantees in the Banking Industry
  • Allen, F., Carletti, E., Goldstein, I. and Leonello, A.
2011
Oxford Review of Economic Policy
Deposit Insurance and Risk-Taking
  • Allen, F., Carletti, E. and Leonello, A.