Upload
others
View
5
Download
0
Embed Size (px)
Citation preview
1 1
The European Debt Crisis and the Banking Union Proposal
Claudia M. Buch (IWH Halle & University Magdeburg) Tobias Körner (German Council of Economic Experts)
Benjamin Weigert (German Council of Economic Experts)
Boston College/DIW Summer School June 11, 2013
1 1
2 2
A vicious circle of bank distress, sovereign risk, and macroeconomic crisis
Claudia M. Buch
Vicious circle of banking, debt and macroeconomic crises
© Sachverständigenrat
Bankingcrisis
Macro-economic
crisis
Debtcrisis
Economic downturn leading to debt default
Credit crunch decreases investment
Declining tax revenues andincreasing transfers adversely
affect public households
Default on government bondsimpairs banks' balance sheets
and capital levels
Banks bailed out bygovernment impairsgovernment budget
Unavoidablegovernment
consolidationweakens
domestic demand
3 3
The EU’s Banking Union Proposal
June 2012 summit: Policy measures that aim at breaking the “vicious circle between banks and sovereigns”. – Establishment of a Single Supervisory Mechanism involving the ECB by
January 1, 2013. – Afterwards, the ESM shall be allowed to recapitalize banks directly.
Establishment of a Single Supervisory Mechanism would be an important step towards a Banking Union consisting of pan-European supervision, restructuring and resolution, and deposit insurance. – Internal Market rests on the principles of home country control, mutual
recognition, and minimum harmonization.
So far, only the Single Supervisory Mechanism has been decided upon (March 2013).
Buch / Körner / Weigert
4 4
Why the Banking Union is Necessary
Weak supervision and weaknesses in the real economy have created a debt overhang.
Bank risks do not stop at national borders.
Formal risk-sharing mechanisms have been absent prior to the crisis.
Risks have been shifted to the European level through common monetary policy – without corresponding control rights at the European level.
The goal should be to align liability and control – without mutualizing legacy assets.
Buch / Körner / Weigert
5 5
Designing the Banking Union
Buch / Körner / Weigert
European supervisory authority European restructuring authority
National supervisory authorities
– Issuance of banking licences– Ongoing supervision– Early intervention
– Identification of systemic risks
Ongoing microprudentialat the request ofsupervision
the European supervisoryauthorityEarly intervention coordinationin
uropwith the E ean supervisoryauthority
Restructuring and resolutionif the stability of the Europeanfinancial system is at risk
Restructuring and resolutionat the request of the Europeanrestructuring authorityRestructuring and resolutionif the stability of the nationalfinancial system is at risk; incoordination with the Europeanrestructuring authority
Compensation of depositors in thecontext of– Resolution by European and/or
national restructuring authorities– Insolvency proceedings
European restructuring fund
National restructuringauthorities
National deposit guarantee schemes
Microprudential supervision
Macroprudential supervision
– Specification of additionalcapital buffers
Euro
pean
leve
lN
atio
nall
evel
Supervision FinancingRestructuring
Funded by harmonized, risk-basedinsurance premiums
Funded by European bank levyFiscal backstop, for examplethrough the ESM
Financing of bank restructuringand resolution measures
6 6
How can risk-sharing mechanisms be improved?
Contingent claims allow for ex ante risk sharing: Cross-border equity ownership improves risk-sharing.
Bank assets and liabilities are non-contingent claims and allow for ex post risk-sharing only: – Deposit insurance provides risk-sharing – but it requires risk-
adjusted premia and effective supervision to prevent moral hazard.
- Bail in of creditors as a risk-sharing device
The type of shocks matters: – Bank-specific or regional shocks can be insured at the national
level. Risks of banks and sovereigns need to be disentangled.
6 Buch / Körner / Weigert
7 7
Structure of the Talk
1. The present:
How are risks allocated in Europe’s banking markets?
2. The long-run:
How can the Banking Union contribute to improved risk-sharing?
3. The transition:
How to deal with existing risks on banks’ balance sheets?
7 Buch / Körner / Weigert
8 8
The Present: How are risks allocated in Europe’s Banking Markets?
8 Buch / Körner / Weigert
9
The increase in external liabilities in the Euro Area has been above-average …
E to GDPxternal liabilities
Euro Area average1)
1,0
2,0
3,0
4,0
5,0
6,0
7,0
8,0
0
1,0
2,0
3,0
4,0
5,0
6,0
7,0
8,0
01993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Non-Euro Area average2)
1) Euro Area: Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Netherlands, Portugal, Spain.– 2) Non-Euro Area: Australia, Canada,Cyprus, Czech Republic, Denmark, Estonia, Hungary, Iceland, Israel, Japan, Korea, Latvia, Lithuania, Malta, Mexico, New Zealand, Norway, Poland,Singapore, Slovak Republic, Slovenia, Sweden, Switzerland, United Kingdom, United States. Dotted lines denote the average ±1 standard deviation.
10
… but the share of equity in total cross-border assets has been below-average.
0,1
0,2
0,3
0,4
0,5
0,6
0,7
093 94 95 96 97 98 99 00 01 02 03 04 05 06 07
Euro Area average1)
0,1
0,2
0,3
0,4
0,5
0,6
093 94 95 96 97 98 99 00 01 02 03 04 05 06 07
Equity to total liabilitiesEquity to total external assets
Non-Euro Area average2)
1) Euro Area: Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Netherlands, Portugal, Spain.– 2) Non-Euro Area: Australia, Canada,Cyprus, Czech Republic, Denmark, Estonia, Hungary, Iceland, Israel, Japan, Korea, Latvia, Lithuania, Malta, Mexico, New Zealand, Norway, Poland,Singapore, Slovak Republic, Slovenia, Sweden, Switzerland, United Kingdom, United States. Dotted lines denote the average ±1 standard deviation.
11
European financial markets have become increasingly fragmented.
1) Excluding the Eurosystem.– 2) Share of cross-border intra-Euro-Area positions in sum of cross-border intra-Euro-Area and domestic positions.
Source: ECB
10
20
30
40
50
60
0
%
10
20
30
40
50
60
0
%
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Share of cross-border holdings of assets of Euro Area MFIs1)2)
Corporate bonds
Loans to non-MFIsGovernment bonds
Loans to MFIs
12
Cross-border ownership of bank assets in Europe is very heterogeneous.
Foreign ownership of banking system assets1)
20
40
60
80
100
0
%
20
40
60
80
100
0
%
AT BE BG CH CY CZ DE DK EE ES FI FR GR HU IE IT LT LU LV MT NL PL PT RO SI SK UK
2001 2010
1) Percent of the banking system's assets in banks that were foreign-controlled (where foreigners owned 50 % or more equity) at the end of the year.AT-Austria, BE-Belgium, BG-Bulgaria, CH-Switzerland, CY-Cyprus, CZ-Czech Republic, DE-Germany, DK-Denmark, EE-Estonia, ES-Spain, FI-Finland, FR-France, GR-Greece, HU-Hungary, IE-Ireland, IT-Italy, LT-Lithuania, LU-Luxembourg, LV-Latvia, MT-Malta, NL-Netherlands, PL-Poland,PT-Portugal, RO-Romania, SI-Slovenia, SK-Slovakia, UK-United Kingdom.– 2) For 2001: As of 31 December 2002
Source: World Bank
2)
13
Banks in the crisis countries are in distress …
2
4
6
8
10
12
14
16
18
20
22
0
%
2
4
6
8
10
12
14
16
18
20
22
0
%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Banks' non-performing loans in selected countries1)
as a ratio of gross loans
1) The definition of non-performing loans differs from one country to the next. For this reason it is harder to compare figures between countries thanwithin a single country over time.– 2) .For the year 2011, status: as at Q2
Source: IMF
France2)Germany
Greece Italy
Ireland
Portugal
Spain
14 14
… and rely on central bank borrowing.
Euro billion
50100150200250300350400450
02006 2007 2008 2009 2010 2011 2012 2013
© Sachverständigenrat
Germany Greece Italy Ireland Portugal Spain
Refinancing operations TARGET2 balances
-600
-400
-200
200
400
600
800
0
2006 2007 2008 2009 2010 2011 2012 2013
15
European banks are weakly capitalized.
Bank equity in selected countries1)
as a ratio of total assets
1
2
3
4
5
6
7
8
0
%
1
2
3
4
5
6
7
8
0
%
AT BE DE ES FR GR IE IT NL PT SE UK
12/2008 6/2012
1) The data are consolidated on a cross-border basis (data on branches and subsidiaries located outside the domestic market are consolidated in thedata reported by the parent institution) and a cross-sector-basis (branches and subsidiaries of banks that can be classified as „other financialinstitutions” are included). AT-Austria, BE-Belgium, DE-Germany, ES-Spain, FR-France, GR-Greece, IE-Ireland, IT-Italy, NL-Netherlands, PT-Portugal, SE-Sweden, UK-United Kingdom.– 2) banks with total assets of moreExcluding foreign (i.e. non-EU) banks.– 3) Large / medium / smallthan 0.5% / between 0.005% and 0.5% / less than 0.005% of the total consolidated assets of EU banks of the previous year.
Source: ECB
EU2)3)
Allbanks
Large Me-dium
Small
16 16
The Long-Run: How can the Banking Union contribute to improved risk-sharing?
16 Buch / Körner / Weigert
17 17
How can the Banking Union contribute to improved risk-sharing?
Prevention of risk-taking and reduced regulatory forbearance through the Single Supervisory Mechanism.
Improved management of bank distress through rules for the restructuring and resolution of banks: – Equity owners need to bear risk. – Explicit rules for the bail in of creditors. – Fiscal backstops.
Strengthening of the lender-of-last-resort function of the ECB by closing insolvent banks.
Improved cross-border risk sharing to higher equity capital and more cross-border equity ownership.
17 Buch / Körner / Weigert
18 18
Implications for the Single Supervisory Mechanism
Incentives to shift risks require comprehensive competence at the European level. – Liability and control need to be at the same level. – European supervisor needs clear regulatory competence for all
banks and – ideally – all countries in the Single Market.
Stricter banking regulations need to be enforced. - Leverage Ratio should become mandatory. - Privileges for government bonds should be abolished.
Supervision and monetary policy need to be clearly separated to prevent conflicts of interest. – Basing the Single Supervisory Mechanism on Article 127 (6) of
the European Treaty has severe shortcomings.
Buch / Körner / Weigert
19
Governance Structure in the Single Supervisory Mechanism (SSM)
ECB Governing Council
MembersChair not member of the ECB Governing Council- ( )2)
- Vice-Chair (member of the ECB Executive Board)2)
- One representative from the supervisory authority ofeach participating member state3)
- 4 representatives of the ECB4)
- One representative of the European Commission mayparticipate in meetings as observer upon invitation
Decision making- Simple majority, with each member having one vote- In case of draw, the Chair has the casting vote
Supervisory Board
Mediation Panel
Draftdecision1)
Objects todraft decision
- One member per partici-pating state , chosen3)
among the members ofthe Supervisory Boardor the Governing Council
- Decisions by simple ma-jority, with each memberhaving one vote
Steering Committee
- Established by the Supervisory Board from among itsmembers
- Maximum 10 members, rotation- Chaired by the Chair of the Supervisory Board- No decision-making powers
Preparatory tasks
20 20
Implications for the Single Resolution Mechanism
European banking supervision is not sufficient but needs to be complemented by authority to restructure and resolve banks. – Covered by the Treaty?
Financing mechanisms are required – European bank resolution fund financed by a European bank
levy – Fiscal backstop through the ESM – Ex ante mechanism for fiscal burden sharing – But: National deposit insurance systems
Buch / Körner / Weigert
21 21
Implications for Deposit Insurance
European deposit insurance is not necessary and would set the wrong incentives. – Deposit insurance and funding mechanism differ. – There are significant implicit guarantees for banks. – Banks are burdened with legacy assets, which should not be
mutualized.
Is FDIC a good role model? – Yes: FDIC has closed more banks after the crisis than European
authorities. – But: The Institutional structure differs: FDIC has resolution
powers, and it can borrow from the Ministy of Finance.
Deposit insurance first needs to be reformed at the national level.
Buch / Körner / Weigert
22 22
The Design of the Banking Union
Buch / Körner / Weigert
European supervisory authority European restructuring authority
National supervisory authorities
– Issuance of banking licences– Ongoing supervision– Early intervention
– Identification of systemic risks
Ongoing microprudentialat the request ofsupervision
the European supervisoryauthorityEarly intervention coordinationin
uropwith the E ean supervisoryauthority
Restructuring and resolutionif the stability of the Europeanfinancial system is at risk
Restructuring and resolutionat the request of the Europeanrestructuring authorityRestructuring and resolutionif the stability of the nationalfinancial system is at risk; incoordination with the Europeanrestructuring authority
Compensation of depositors in thecontext of– Resolution by European and/or
national restructuring authorities– Insolvency proceedings
European restructuring fund
National restructuringauthorities
National deposit guarantee schemes
Microprudential supervision
Macroprudential supervision
– Specification of additionalcapital buffers
Euro
pean
leve
lN
atio
nall
evel
Supervision FinancingRestructuring
Funded by harmonized, risk-basedinsurance premiums
Funded by European bank levyFiscal backstop, for examplethrough the ESM
Financing of bank restructuringand resolution measures
23 23
The Transition: How to deal with existing risks on banks’ balance sheets?
23 Buch / Körner / Weigert
24 24
Two main obstacles block the road to full Banking Union
1. Incomplete institutional and legal framework. – Basing the Single Supervisory Mechanism on Article 127 (6) of
the European Treaty has severe shortcomings. – Both, competences for supervision and restructuring must be
transferred to the European level. – Sufficient separation between monetary policy and banking
supervision must be ensured. 2. Legacy assets.
– Exiting bad debts on banks‘ balance sheets should not be mutualized.
– Governments should be liable for bank recapitalization funds through the ESM.
Transition into the Banking Union should proceed in three steps.
Buch / Körner / Weigert
25 25
Concept of the GCEE for the transition to a banking union
Time
Creation of thelegal and institutional
framework
Phase 2Qualifying phase
Phase 1
Supervision and liabilityat the national level
Phase 3Fully-fledged
Banking Union
Supervision and liabilityat the European
levelGroup 2
Group 3
Group 1
January 1, 20141) January 1, 2019
General framework
1) If the legal and institutional preconditions - including the modification of the EU treaties - are not fulfilled as of 1 January 2014, phases 2 and 3 will startlater, accordingly.
26 26
Summing up
ECB interventions have stabilized the situation but the debt crisis in Europe is not yet over.
Further steps towards a new institutional framework are required: – Pillar for fiscal stability („Maastricht 2.0“) – Crisis management – Enhanced financial stability and banking regulation
Crisis management is crucial – but without jeopardizing the
transition to a stable long-run framework. – The Banking Union is not a crisis management tool. – It can contribute to improved monitoring and management of risks. – Risk-sharing needs to be enhanced through higher equity capital and the
bail in option.
Buch / Körner / Weigert
27 27
The European Debt Crisis and the Banking Union Proposal
Claudia M. Buch (IWH Halle & University Magdeburg) Tobias Körner (German Council of Economic Experts)
Benjamin Weigert (German Council of Economic Experts)
Boston College/DIW Summer School June 11, 2013
27 27
28 28
Backup
29 29 Claudia M. Buch
Long-run institutional framework for the euro area
© Sachverständigenrat
Finanzierung
National responsibility
Strengthening ofmarket discipline
European responsibility
Reformed SGPPreventive anddissuasive arm
Fiscal policy
EuropeanStability Mechanism
(ESM)
Linkages:– Financial support in
case of state insolvencies
Crisis mechanism
– Ex-ante conditionalliquidity support (com-pliance with SGP)
– Financial back-upfor bank restructuring
EuropeanBanking Union
Financial market regulation
– Supervision– Restructuring
and resolution– Restructuring
fund
Accompanyingmeasure:
Abolition of regulatoryprivileges for sovereignbonds
Fiscal Compact
– But national:deposit guaranteeschemes
No-bailout clause
State insolvencyproceedings
Nationaldebt brakes
30 30
From the internal market to a banking union
© Sachverständigenrat
Banking Supervision in the Internal Market and the Banking Union
Decentralized
DecentralizedLiabilityControl
Centralized
Centralized
IV.Banking Union
– centralized supervision– centralized restructuring competence and
financing mechanism (e.g. through the ESM)– national deposit insurance
I.Current concept of the Internal Market
– Minimum Harmonization– Home Country Control– Mutual Recognition
ESM with liability of single member states
III.
II.Financing illiquid and insolventbanks through the central bank
ESM with direct recapitalization of bankswithout sufficient transfer of control rights
31 31
Interest rate differentials reveal structural problems in the European banking sector.
Claudia M. Buch
Source: ECB
1
2
3
4
5
6
7
8
0
% p.a.
1
2
3
4
5
6
7
8
0
% p.a.
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Loans interest rates spreads in the Euro-Area:new loans to nonfinacial corporations
© Sachverständigenrat
GermanyItaly
Euro areaNetherlands
FranceAustria
GreecePortugal
IrelandSpain
32 32
Interest rate spreads have narrowed but remain at a high level.
Claudia M. Buch
Source: Thomson Financial Datastream
150
300
450
600
750
0
Basispunkte
150
300
450
600
750
0
Basispunkte
2010 2011 2012
10 years bond yields spreads in Italy and Spain
© Sachverständigenrat
SpainItaly
J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D
Announcement SMP
Draghi speechLondon Announcement
OMT
Purchases of government bonds SMP
Reducing key ECB interest rate
3 year refinancing operations
33
20406080
100
0
%
02 03 04 05 06 07 08 09 10 11 12
© Sachverständigenrat
Cumulated financial account balances for selected countries
as a percentage of GDP (2007)
Source of basic data: Thomson Financial Datastream
Total net finacial imports Private net financial imports
-80-60-40-20
2040
0
%
02 03 04 05 06 07 08 09 10 11 12
Greece Ireland
-5
51015202530
0
%
02 03 04 05 06 07 08 09 10 11 12
Italy
20
40
60
80
0
%
02 03 04 05 06 07 08 09 10 11 12
Portugal Spain
-70
-50
-30
-10
100
%
02 03 04 05 06 07 08 09 10 11 12
Germany
102030405060
0
%
02 03 04 05 06 07 08 09 10 11 12
34
500
1,000
1,500
2,000
2,500
3,000
0
500
1,000
1,500
2,000
2,500
3,000
02013 14 2015 16 17 18 19 2020 21 22 23 24 2025 26 27 28 29 2030 31 32 33 34 2035 36 37 2038
Debts in European Redemption Fund by countryEuro, billions
© Sachverständigenrat
ItalyGermany FranceSpain Netherlands Austria
BelgiumMalta
35 35
The debt crisis affects both, public and private creditors.
20
40
60
80
100
120
0
%
US EU-17
DE UK Asia Latin-america
Sources: IMF, Thomson Financial Datastream
Public and private debt in selected countries
© Sachverständigenrat
General government gross debt(in percent of GDP)
2009 2010 2011
Outstanding household debt(in percent of disposable income)
2008
30
40
50
60
80
120140
100
Log. Scale3. Quarter 2007 = 100
2000 2002 2004 2006 2008 2010 2012
Spain
Belgium
France
Ireland
Italy
Portugal
United States