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№286. Monetary Policy and Banking Supervision: Coordination instead of separation

Author(s): Daniel Gros,Thorsten Beck / Language(s): English

A strict separation, or ‘Chinese walls’, between the supervisory and monetary policy arms of the European Central Bank is not needed. The economic literature is not unanimous on this issue and we argue that a strict separation of supervision and monetary policy is not desirable during a financial crisis when thes ystemic stability of the financial system represents the biggest threat to a monetary policy that aims at price stability. The key problem hampering the ECB today is that it lacks detailed information on the state of health of the banking system, which is often highly confidential. Chinese walls would not solve this problem.

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№287. The New Financial Regulatory Paradigm: A transatlantic perspective

Author(s): Karel Lannoo / Language(s): English

Five years after the start of the financial crisis, the EU is further behind in reengineering its regulatory regime than the US. Although it seemed two years ago that the two blocs were moving in tandem, it is now clear that the US is further advanced in re-regulation and implementation than the EU. The sovereign debt crisis in the eurozone is to some extent to blame, but there is more to the story than that. Bank supervisory issues do not appear to bemoving off the policy agenda in the EU.

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№288. Principles of a Two-Tier European Deposit (Re-)Insurance System

Author(s): Daniel Gros / Language(s): English

There is general agreement that banking supervision and resolution have to be organised at the same level. It is often argued, however, that there is no need to tackle deposit insurance because it is too politically sensitive.

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№289. Banking Union with a Sovereign Virus. The self-serving regulatory treatment of sovereign debt in the euro area

Author(s): Daniel Gros / Language(s): English

The purpose of the purposed banking union is to de-link banks from their sovereigns. The 'Single Supervisory Mechanism' (SSM) should correct the tendency of national supervisors to overlook problems at home.

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№290. A Copernican Turn for Banking Union

Author(s): Thomas Mayer / Language(s): English

At every meeting of central bankers, policy-makers and economists, there seems to be agreement that creation of a ‘Banking Union’ is essential for the survival of the euro. Yet, progress in building this union is painfully slow. The Single Supervisory Mechanism may not be ready before the middle of next year, the Single Resolution Mechanism may require a laborious change of the EU Treaty and common deposit insurance has been postponed into the in definite future.

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№297. A Copernican turn in Banking Union urgently needed

Author(s): Thomas Mayer / Language(s): English

At every meeting of central bankers, policy-makers and economists, there seems to be agreement that creation of a ‘Banking Union’ is essential for the survival of the euro. Yet, progress in building this union has been painfully slow. The Single Supervisory Mechanism (SSM) may not be ready until the middle of next year; the Single Resolution Mechanism (SRM) may end up as a complicated mixture between bail-in and bail-out instruments, funded at the national and euro are a levels; and common deposit insurance has been postponed into the indefinite future.

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№302. Financial Services and the Transatlantic Trade and Investment Partnership

Author(s): Karel Lannoo / Language(s): English

It is still an unresolved question whether aprocess for financial services regulatory cooperation and convergence will be included in the Transatlantic Trade and Investment Partnership (TTIP). From an enduser’s perspective, it could be argued that its inclusion could be an opportunity not only as regards product choice, but also to improve the consumer or investor protection regulatory environment on both sides of the Atlantic.

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№302. The Macroeconomic Imbalance Procedure and Germany: When is a surplus an “imbalance”?

Author(s): Matthias Busse,Daniel Gros / Language(s): English

The Macroeconomic Imbalance Procedure (MIP) was largely designed to prevent another boom/bust cycle as occurred in Spain and Ireland. But now, with the release by the European Commission on November 13th of its latest Alert Mechanism Report (AMR), which was introduced with the European Semester, this procedure is being used to address a surplus (that of Germany), which is widely perceived as constituting aproblem for the euro area’s recovery.

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№304. The New European Framework for Managing Bank Crises

Author(s): Jacopo Carmassi,Ginevra Bruzzone,Stefano Micossi / Language(s): English

The proposals under discussion for a Single Banking Resolution Regulation establishing a centralised mechanism for countries participating in the Single Supervisory Mechanism and a Resolution Directive are generally well designed and coherent. Yet there is a need to streamline the procedures for deciding the start of resolution and managing the subsequent action, which now entail much overlap in the powers attributed to the institutions involved (the Commission, the Single Resolution Board and the European Central Bank).

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№305. Strong Governments, Weak Banks

Author(s): Yuemei Ji,Paul De Grauwe / Language(s): English

Banks in the northern eurozone have capital ratios that are, on average, less than half of the capital ratios of banks in the eurozone’s periphery. We explain this by the fact that northern eurozone banks profit from the financial solidity of their governments and follow business strategies aimed at issuing too much subsidised debt. In doing so, they weaken their balance sheets and become more fragile – less ableto withstand future shocks. Paradoxically, financially strong governments breed fragile banks. The opposite occurs in countries with financially weak governments. In these countries banks are forced to strengthen themselves because they are unable to rely on their governments. As a result they have significantly more capital and reserves than banks in the northern eurozone.

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№308. Policy Lessons for Macroeconomic and Financial Crisis Management in the Southern and Eastern Mediterranean

Author(s): Rym Ayadi,Willem Pieter DE GROEN / Language(s): English

The 2007-09 global financial crisis led to a virtual collapse in economic activity and increased financial volatility worldwide. For the developing countries, the main channel of transmission has been a drop inexternal transactions, such as trade, financial and capital flows, and remittances. The southern and eastern Mediterranean countries (SEMC) have also faced declining economic activity, although there seems to be considerable variation in the relative magnitudes and timing of the decline.

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№311. The Asset Quality Review and Capital Needs: Why re-capitalise banks with public money?

Author(s): Daniel Gros / Language(s): English

It is generally assumed that any capital needs discovered by the Asset Quality Review the ECB is scheduled to finish by the end of 2014 should be filled by public funding (= fiscal backstop). This assumption is wrong, however. Banks that do not have enough capital should be asked to obtain it from the market; or be restructured using the procedures and rules recently agreed. The Directorate-General for Competition at the European Commission should be particularly vigilant to ensure that no further state aid flows to an already oversized European banking system.

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The case for a euro-TARP

Author(s): Karel Lannoo / Language(s): English

The European Union should move quickly to enact an American-style ‘TARP’1 in the euro-zone to strengthen the financial sector and maintain lending. Through the European Financial Stability Facility, the EU now has the structure in place for a truly European support fund for the banking sector, which it did not have in 2008. This should be put into motion without delay, taking into account the lessons of the 2008 crisis and applying EU state aid rules. A euro-zone recapitalization fund would better limit distortions to the functioning of the single market than the current arrangement of ad hoc guarantees and support mechanisms.

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A closer look at Dexia: The case of the misleading capital ratios

Author(s): Willem Pieter DE GROEN / Language(s): English

When first published, the results of the stress tests performed by the European Banking Authority (EBA) gave little evidence of Dexia’s vulnerability. The test was based on the current criteria for Basel II capital (core Tier-1 ratio). Dexia was ranked 12th of the 90 tested banks, with a stressed core Tier-1 ratio of more than twice the benchmark of 5%. In turn, the equity ratio was only about 1.9%, representing one-sixth of the core Tier-1 ratio at year-end 2010. In other words, for every €53 in assets, the bank had only €1 in capital (see Table 1). Such a level of leverage is high, twice in fact the average of large EU banks.3 The leverage and difference with other large banks are largely explained by the calculation of the risk-weighted assets (RWA) and the definition of core Tier-1 capital, both of which painted an overly optimistic picture.

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Eurozone Bank Recapitalisations: Pouring water into a leaky bucket

Author(s): Paul De Grauwe / Language(s): English

The sovereign debt crisis has degenerated into a banking crisis. This was perfectly predictable. A sovereign debt crisis always leads to a banking crisis. Yet policy-makers did not see it coming, or if they did see it, they failed to act in time.

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The pitfalls of official first-loss bond insurance

Author(s): Daniel Gros / Language(s): English

Euro-zone leaders agreed this morning on the rough outline of a package of measures designed to end the crisis in the euro-zone. This commentary argues that a central pillar of the package will not work. The so-called ‘first-loss insurance’ of euro-zone sovereign debt relies on an incomplete analysis of the underlying problem and the proposed solution.

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The euro’s global dreams and nightmares

Author(s): Barry Eichengreen / Language(s): English

One motive for founding the euro was to create a European unit that might provide an alternative to the dollar as an international and reserve currency. The Werner Report, the first full-throated argument for a single European currency, was issued in a period of angst about the Bretton Woods System and the dollar (Zimmermann, 2002). The Delors Report, which provided a detailed road-map in 1989, was not unrelated to the preceding decade of wild dollar fluctuations.

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The consequences of Moldovan oilmen's "flirtation" with political decision makers

Author(s): Ion Muntean / Language(s): English

The interference of political decision-makers in the process of setting fuel prices is a very visible practice, being acknowledged by the representatives of some oil companies operating in the Republic of Moldova. As a result, the stable and predictable market development framework is compromised and the prospect of rooting competitive principles becomes even more distant. In the first 2 months of 2021, the price of petroleum products experienced an increase that was reflected differently on the Moldovan market compared to the same evolution on the Romanian market, where most quantities of petroleum products come from. Over 65% of the market is held by 6 companies, and over 80% of the import of A95 petrol is controlled by only 3 companies.

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Recalibrating Conventional Wisdom: Romania-IMF relations under scrutin

Author(s): Cornel Ban,Daniela Gabor / Language(s): English

This study proposes a critical evaluation of Romania-IMF relations by focusing on financial, monetary and fiscal policy choices. As such, the study has two pillars. First, Daniela Gabor scrutinizes the IMF’s take on the Romanian central bank’s monetary and financial stability policies. Gabor finds that the central bank and the IMF have constructed and reproduced the fiction that the central bank controls monetary (and to some extent financial) conditions in the economy through its inflation-targeting regime. This fiction is useful for the central bank to deny responsibility for domestic economic developments, and for the IMF to construct balance of payment crises as crises of state intervention in the economy. Moreover, the central bank uses liquidity management instruments (standing facilities, open market operations) for the purpose of managing capital flows, and not for inflation targeting, as the IMF demands. Finally, both the central bank and the Fund share the belief that a gradual, orderly transition to a local banking model is to be achieved by market means rather than via regulatory interventions. This market-driven approach enables transnational banks to forge alliances with the central bank in order to oppose government-initiated measures by narrating them as measures that pose serious risks to financial stability.

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Creşterea Competitivităţii întreprinderilor de pe ambele maluri ale Nistrului

Author(s): Viorel Chiviriga / Language(s): Romanian

Factors at the country level that have repercussions on the competitiveness of the national economy are those that have an impact on the overall cost structure and productivity of the entire economy. These include both the business environment and macroeconomic factors: inflation and the exchange rate. Regarding the factors at the country level, the focus of several policy documents and the Roadmap for improving the competitiveness of the Republic of Moldova are focused on creating a favorable business environment, which includes the following elements: international trade and customs administration; fiscal and administrative policy; the competitive framework; business regulation environment; access to financial resources; infrastructure and logistics; the contract, the implementation of property rights and the quality of the judicial system; environmental protection and sustainable use of natural resources; investor protection; labor market regulation.

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