Abstract
Beyond financial stability as the European Banking Union’s primary objective, the European capital market integration provides an impetus for deepening bank integration and greater financial market efficiency. This article proposes an empirical framework to assess the dynamics of euro area banks’ business networking. We use banks’ foreign claims across Europe, particularly the euro area, to see how banks react to various macroeconomic signals. Banks’ foreign claims are particularly interesting due to their sensitivity. One of the main conclusions is that the euro area has seen a reallocation of capital in the aftermath of the 2008 crisis. The financial picture of Europe is different after the recent financial crisis. Although we observe a re-concentration of capital from the periphery to the core countries, we also observe some signs of recovered confidence within the European banking framework for macro-prudential reasons.
Highlights
Introduction and Research ContextThis article proposes to look into the European financial industry and its efficiency
The three European macroeconomic convergence variables are: IRDIFij,t is the difference in the real interest rates between country i and j (4), BGTDIFij,t represents the difference in the government budget surplus or deficit as a percentage of GDP between the source and host country (5), and DBTDIFij,t is the difference of the debt-to-GDP ratios within each country pair (6)
The results in columns [3,4] are based on estimations that include an intercept dummy variable for participation in Economic and Monetary Union (EMU) and multiplicative terms of each explanatory variable interacted with the EMU membership dummy variable
Summary
This article proposes to look into the European financial industry and its efficiency. Our article adds a descriptive dimension to Obstfeld’s (2013) new policy trilemma He argues that once financial deepening reaches a certain threshold, the euro area cannot simultaneously have: (1) full cross-border financial integration, (2) financial stability, and (3) national fiscal independence. This is a relevant issue, given the growth in banking and financial globalization and the increased incidence of sudden stops of international capital flows (e.g., Micossi 2013a, 2013b, 2015; Crafts 2014). We provide a critical review of the existing body of empirical literature exploring the structural fundamentals and weaknesses of the Economic and Monetary Union (EMU), the rapid transformation of the financial crisis into the euro area sovereign debt crisis, and the institutional reaction to the crisis. The sixth section contains concluding remarks and policy-relevant recommendations
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