ECB-BIG Index Signals Tightening Credit Conditions in Euro Area

The European Central Bank (ECB) has introduced a new indicator called the ECB-Broad Intermediation Gauge (BIG) index to track credit conditions in the euro area. This index provides a timely assessment of developments in intermediation conditions across banks and non-banks, combining the advantages of reduced-form and structural methodologies.

The ECB-BIG index measures the impact of financial and credit shocks on investment, an indicator of economic activity closely linked to credit conditions. It is constructed using conditional forecasting techniques applied within a Bayesian vector autoregressive (BVAR) model that can handle large mixed-frequency datasets of financial, credit, and macroeconomic variables.

The index captures the interlinkages between financial and credit variables on one hand and macroeconomic variables on the other. This is particularly important because macroeconomic variables respond to financing conditions, typically with a delay, while financial and credit variables react to macroeconomic news. The ECB-BIG index currently points to intermediation conditions being tighter than those observed before the start of the war in the Middle East.

The index has peaked during three main periods: the global financial crisis of 2007-09, the aftermath of the European sovereign debt crisis around 2014, and the 2022-23 hiking cycle. The recent tightening reflects pressure stemming from price components, most notably lending rates.