Non-euro Area Countries Research Articles

Single Supervision and the Governance of Banking Markets: Will the SSM Deliver the Expected Benefits?

In this paper, I try to assess the likely impact of the Single Supervisory Mechanism (SSM) on eurozone banking markets. I start by analysing the predictions made by economists and policy-makers with regard to the deeper integration of financial markets which may derive from the Banking Union. I then try to identify the regulatory weaknesses that may throw uncertainty on the benefits commonly expected from the Banking Union. Firstly, I highlight the limits of EU supervisory centralisation as shaped by the reforms enacted after the 2008 financial crisis. Secondly, I analyse the limits of the SSM, which, to some extent, is still grounded on supervisory cooperation despite the fact that the ECB has powers of direction and substitution with respect to national supervisors. I argue, in particular, that the SSM represents a system of semi-strong centralisation, which may still give rise to agency problems, particularly in the relationships with supervisors of non-euro area countries that are still governed by the EU system of enhanced cooperation. Thirdly, I examine the decoupling of supervision from regulation, which derives from the fact that the ECB lacks sufficient regulatory powers when acting as a supervisor of the eurozone banking systems. The separation of regulation—which is harmonised (often with excessive detail) at EU level—and supervision—which is centralised in the euro area—may create problems to the extent that the single supervisor cannot create a prudential rulebook for the eurozone but is subject to EU prudential regulation and national law provisions, often unduly limiting its supervisory discretion.

Single Supervision and the Governance of Banking Markets

In this paper, I try to assess the likely impact of the Single Supervisory Mechanism (SSM) on Eurozone banking markets. I start by analysing the predictions made by economists and policy makers with regard to the deeper integration of financial markets which may derive from the Banking Union. I then try to identify the regulatory weaknesses that may throw uncertainty on the benefits commonly expected from the Banking Union. Firstly, I highlight the limits of EU supervisory centralisation as shaped by the reforms enacted after the 2008 financial crisis. Secondly, I analyse the limits of the SSM, which is to some extent still grounded on supervisory cooperation despite the fact that the ECB has powers of direction and substitution with respect to national supervisors. I argue, in particular, that the SSM represents a system of semi-strong centralization, which may still give rise to agency problems particularly in the relationships with supervisors of non-euro area countries that are still governed by the EU system of enhanced cooperation. Thirdly, I examine the decoupling of supervision from regulation deriving from the fact that the ECB lacks sufficient regulatory powers when acting as a supervisor of the Eurozone banking systems. The separation of regulation – which is harmonized (often with excessive detail) at EU level – and supervision – which is centralized in the euro area – may create problems to the extent that the single supervisor cannot create a prudential rulebook for the Eurozone, but is subject to EU prudential regulation and national law provisions often unduly limiting its supervisory discretion.

Towards Deeper Financial Integration in Europe: What the Banking Union Can Contribute

Abstract/Zusammenfassung The European Banking Union is a major step forward in fixing major deficiencies in the institutional framework of the Euro area. The absence of effective banking supervision and resolution powers at the European level promoted excessive private risk-taking in the up-run to the Euro crisis. Effective private risk sharing once risks materialized has been hampered. A properly designed Banking Union facilitates and improves private risk sharing, and it is thus a necessary institutional complement to a monetary union. Yet, the institutional framework of the Banking Union needs further strengthening in three regards. First, the supervisory framework needs to ensure uniform supervisory standards for all banks, including those located in non-Euro area countries. Also, conflicts of interest between monetary policy and banking supervision need to be mitigated. Second, bank resolution suffers from a highly complex governance structure. Restructuring and bail-in rules allow for a high degree ...

Does the Stability and Growth Pact Induce a Bias in the EC's Fiscal Forecasts

Enforcement of European fiscal rules, to a large extent, hinges on the fiscal forecasts prepared by the European Commission (EC). The reliability of these forecasts has received little attention in the literature, despite the fact that i) the forecasts have potentially far-reaching consequences for national governments, especially in the euro area while ii) the EC depends on information supplied by national officials in preparing its forecasts. We hypothesise that the EC’s forecasts are biased upwards when national governments expect European fiscal rules to bind. Reconstructing this expectation using real-time information, we show that for euro area countries the EC’s fiscal forecasts are indeed biased upwards when the budget deficit threatens to exceed the critical value of 3% of GDP. For non-euro area countries, which do not face the risk of fines, this bias cannot be established. Our results are robust to various ways of controlling for crisis-induced budgetary problems and the exclusion of various country groups. We offer suggestive evidence that the presence of independent fiscal councils at the national level helps to attenuate the bias induced by the 3% threshold.

Drivers of structural change in cross-border banking since the global financial crisis

The paper analyzes the effects of changes to regulatory policy and to monetary policy on cross-border bank lending since the global financial crisis. Cross-border bank lending has decreased, and the home bias in the credit portfolio of banks has risen sharply, especially among banks in the euro area. Our results suggest that expansionary monetary policy in the source countries – as measured by the change in reserves held at central banks – has encouraged cross-border lending, both in euro area and non-euro area countries. Regarding regulatory policy, increases in financial supervisory power or independencve of the supervisory authorities have encouraged credit outflows from source countries. The findings thus underline the importance of regulatory arbitrage as a driver of cross-border bank flows since the global financial crisis. However, in the euro area, arbitrage in capital stringency was linked to lower cross-border lending since the crisis.

Our currency, your problem? The global effects of the euro debt crisis

In this paper, I look at the global effects of the euro debt crisis, using an event study approach. After identifying a number of euro crisis events in the period that goes from 2010 to 2012, I analyse their impact on equity returns, exchange rates and government bond yields in 40 non-euro area countries. The main finding of this study is that euro debt crisis events have contributed to a rise in global risk aversion accompanied by a fall in equity returns, mainly in the financial sector. Moreover, I find that the effect on bond yields is not statistically significant for the whole set of countries, but it has a significant - though small - impact on countries with a high risk rating. Finally, the paper also focuses on transmission channels by looking at how pre-determined country characteristics influence the strength and direction of the contagion effect. I find that the most consistent conduits of contagion are: (i) trade exposure to the euro area, (ii) EU membership, and (iii) whether a currency is pegged to the euro.

The Possible Breakup of the Euro Zone: Examining the Differences between Credit Default Swap Fees Nominated in Euro and US-Dollar During the Euro-Area Crisis.

Before the beginning of the euro-area crisis, fees (premiums) for Credit Default Swaps (CDS) for the same entity (country) but nominated in different currencies were nearly equal. This is still true for non-euro area countries during the crisis; but these differences increased dramatically for euro-area countries since the beginning of the crisis. For some euro-area countries investors have to pay more for Euro compared to US-Dollar nominated CDSs, while for other euro-area countries the opposite is true. This paper analyzes by using a simple theoretical model and thereafter testing empirically the differences between CDS fees nominated in Euro and US-Dollar and concludes that the volatility of the differences is largely explained, next to the US-Dollar-Euro forward rate, by the probability of collapse of the Euro(-currency). Market uncertainty is shown to play a significant role; nevertheless, it only explains a small fraction of the volatility of these differences. Further, our empirical results imply that for the countries analyzed in this paper – Germany, France, Finland and Italy – market participants expect in the case of a euro-collapse and the subsequent failure of the respective sovereign a depreciation of the newly introduced local currency.

Drivers of Structural Change in Cross-Border Banking Since the Global Financial Crisis

The paper analyzes the effects of changes to regulatory policy and to monetary policy on cross-border bank lending since the global financial crisis. Cross-border bank lending has decreased, and the home bias in the credit portfolio of banks has risen sharply, especially among banks in the euro area. Our results suggest that expansionary monetary policy in the source countries - as measured by the change in reserves held at central banks - has encouraged cross-border lending, both in euro area and non-euro area countries. Regarding regulatory policy, increases in financial supervisory power or independence of the supervisory authorities have encouraged credit outflows from source countries. The findings thus underline the importance of regulatory arbitrage as a driver of cross-border bank flows since the global financial crisis. However, in the euro area, arbitrage in capital stringency was linked to lower cross-border lending since the crisis.

The European periphery during the crisis: fix or float?

This article empirically investigates the growth performance of European noneuro area countries during the recent global crisis depending on their respective exchange rate regime. Usually, floating exchange rate regimes are considered to better help countries cope with negative real shocks. However, for countries with close ties to the euro area, the advantages of pegging their exchange rate to the euro might dominate even during such a crisis. By applying standard panel growth regressions, the empirical analysis shows that during the crisis, countries with a floating exchange rate (i.e. those that should be better able to react to a crisis) did indeed grow more successfully.

Country adjustment to a ‘sudden stop’: does the euro make a difference?

This paper starts from the observation that two groups of European countries, neither of which could use the exchange rate as an adjustment instrument, experienced a sudden stop after the outbreak of the global financial crisis. The first group comprises Greece, Ireland, Italy, Portugal and Spain, while four newer EU Member States with the exchange rate pegged to the euro, Bulgaria, Estonia, Latvia and Lithuania, belong to the second group. The main finding is that the adjustment was quicker outside EMU than inside. The shock absorber provided by the Eurosystem reduced the pressure for a quick adjustment, while foreign ownership of banks in non-euro area countries favoured quick fiscal and external corrections but also averted the legacy of a banking crisis. A rudimentary welfare comparison of the two patterns over the whole period of adjustment suggests that the ‘short and sharp’ correction approach is preferable in terms of macroeconomic outcome.

Macroeconomic and financial adjustment in globalised economies - The state-of-play

From June 20 to 23, 2013, the European Economics and Finance Society (EEFS) hosted its Twelfth Annual Conference in collaboration with the journal “International Economics and Economic Policy”. The conference addressed the current the state-of-play regarding macroeconomic and financial adjustment in today’s globalised economies, in the aftermath of the financial crisis. The focus was strongly on deriving policy conclusions to lessen the probability of further crises and to identify questions for further research. A peer-reviewed selection of the papers presented at the conference is presented in this issue. These contributions can be grouped around two main topics. Seven papers fall into the category of “adjustment in the aftermath of the financial crisis”. Our compilation starts with the paper by Daniel Gros and Cinzia Alcidi on country adjustment to a “sudden stop” and their assessment of whether the euro makes a difference in this context. The paper identifies two groups of European countries which experienced a sudden stop after the outbreak of the global financial crisis. The first group comprises Greece, Ireland, Italy, Portugal and Spain, while four newer EU Member States with the exchange rate pegged to the euro, Bulgaria, Estonia, Latvia and Lithuania, belong to the second group. The main finding of the paper is that the adjustment process was quicker outside the Eurozone than inside. The shock absorber provided by the Eurosystem reduced the pressure for a quick adjustment. By contrast, foreign ownership of banks in the non-euro area countries led to far quicker fiscal and Int Econ Econ Policy (2015) 12:1–4 DOI 10.1007/s10368-014-0282-y

Why Firms Avoid Cutting Wages: Survey Evidence from European Firms

The rarity with which firms reduce nominal wages has been frequently observed, even in the face of considerable negative economic shocks. This paper uses a unique survey of fourteen European countries to ask firms directly about the incidence of wage cuts and to assess the relevance of a range of potential reasons for why they avoid cutting wages. Concerns about the retention of productive staff and a lowering of morale and effort were reported as key reasons for downward wage rigidity across all countries and firm types. Restrictions created by collective bargaining were found to be an important consideration for firms in euro area countries but were one of the lowest ranked obstacles in non-euro area countries. The paper examines how firm characteristics and collective bargaining institutions affect the relevance of each of the common explanations put forward for the infrequency of wage cuts.

Should Non-Euro Area Countries Join the Single Supervisory Mechanism?

Abstract Irrespective of the euro crisis, a European banking union makes sense, including for non-euro area countries, because of the extent of European Union financial integration. The Single Supervisory Mechanism (SSM) is the first element of the banking union. From the point of view of non-euro countries, the draft SSM regulation as amended by the EU Council includes strong safeguards relating to decision-making, accountability, attention to financial stability in small countries and the applicability of national macroprudential measures. Non-euro countries will also have the right to leave the SSM and thereby exempt themselves from a supervisory decision. The SSM by itself cannot bring the full benefits of the banking union, but would foster financial integration, improve the supervision of cross-border banks, ensure greater consistency of supervisory practices, increase the quality of supervision, avoid competitive distortions and provide ample supervisory information. While the decision to join the SSM is made difficult by uncertainty surrounding other elements of the banking union, including possible burden sharing, we conclude that non-euro EU members should stand ready to join the SSM and be prepared for negotiations on the other elements of the banking union.

Why Firms Avoid Cutting Wages: Survey Evidence from European Firms

The rarity with which firms reduce nominal wages has been frequently observed, even in the face of considerable negative economic shocks. This paper uses a unique survey of fourteen European countries to ask firms directly about the incidence of wage cuts and to assess the relevance of a range of potential reasons for why they avoid cutting wages. Concerns about the retention of productive staff and a lowering of morale and effort were reported as key reasons for downward wage rigidity across all countries and firm types. Restrictions created by collective bargaining were found to be an important consideration for firms in euro area countries but were one of the lowest ranked obstacles in non-euro area countries. The paper examines how firm characteristics and collective bargaining institutions affect the relevance of each of the common explanations put forward for the infrequency of wage cuts.

Business Cycle Synchronisation with(in) the Euro Area: in Search of a ‘Euro Effect’

This paper studies business cycle synchronisation and convergence in the euro area. A set of stylised facts concerning the characteristics of the business cycle and synchronisation in the euro area is derived. It is analysed whether convergence or divergence patterns between the euro area countries changed after the introduction of the euro. In addition, a closer look is taken at the degree of business cycle synchronisation between other, i.e. non-euro area countries and the euro area average. Furthermore, a dynamic correlation analysis is carried out to broaden the scope of business cycle synchronisation further. We enrich the study with a frequency domain analysis and use the concepts of coherence, dynamic correlation and phase. Our main results are (i) that the synchronisation of business cycles in the euro area is fairly high, and (ii) that the introduction of the euro in 1999 does not seem to have generated a very strong—neither positive nor negative—impact on synchronisation. Coherence and dynamic correlation among the euro area countries, the UK, Japan and the US are also fairly high, reminding of the importance of synchronisation with the global business cycle.

Integration of European Stock Markets: A Review and Extension of Quantity-Based Measures

We examine to what extent Europe´s stock markets are integrated, and how this can be measured. We review 54 empirical studies and find an overemphasis on price-based measures and a need for more quantity-based studies. We update the Baele et al (2004) study on investment funds' equity holdings to March 2006 for ten euro area and four non-euro area countries, provide additional quantity based evidence, and discuss integration theories. Our results indicate a decline in home bias particularly after the advent of the euro. We conclude that although European stock markets have undergone significant developments, the level of European integration is below expectations and there is a high joint integration with the U.S. (author's abstract)