The Asset Quality Review and Capital Needs: Why re-capitalise banks with public money? CEPS Policy Brief No. 311, 19 December 2013

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. The case for a public backstop was strong when the entire euro area banking system was under stress, but this is no longer the case. Banks with a viable business model can find capital; those without should be closed because any public-sector re-capitalisation would likely mean throwing good money after bad.

Regulation of European Banks and Business Models: Towards a new paradigm? CEPS Paperbacks. June 2012

Amidst talks of establishing an EU-wide banking union, the recent changes in the regulatory framework and the rethinking of the future of European banking structure, the future of EU bank regulation is inextricably linked to banks’ business models. Using a sample of over 70 banks, which overlaps with those subjected to the EBA’s 2011 stress tests, this report emphasizes the key regulatory gaps that emerge from a comprehensive analysis of the soundness and performance of bank business models and provides policy-makers with guidance to reinforce the evolving regulatory framework in European banking.

The Crowding-out Effect of Mandatory Labour Market Pension Schemes on Private Savings. Evidence from renters in Denmark. CEPS Working Document No. 389, February 2014

This paper aims to estimate the crowding-out effect of the Danish mandatory labour market pension reforms begun in 1993 on the level of total household savings for renters. The effect is identified via a large panel of individual administrative records utilising the differences in speed, timing and sectoral coverage of the implementation of the reform in the period 1997 to 2005. Little substitutability was found between current mandatory labour market pension savings and private voluntary savings. Each euro paid into mandatory labour market pension accounts results in a reduction in private savings of approximately 0 to 30 cents, depending on age. This low rate of substitution is only, to a minor extent, explained by liquidity constraints. The results point to mandatory pension savings having a large effect on total household savings. Thus, pension reforms that introduce mandatory savings have macroeconomic implications.

Cross-country insurance mechanisms in currency unions. Bruegel Working Paper 2014/04, 27 March 2014

Countries in a monetary union can adjust to shocks either through internal or external mechanisms. We quantitatively assess for the European Union a number of relevant mechanisms suggested by Mundell’s optimal currency area theory, and compare them to the United States. For this purpose, we update a number of empirical analyses in the economic literature that identify (1) the size of asymmetries across countries and (2) the magnitude of insurance mechanisms relative to similar mechanisms and compare results for the European Monetary Union (EMU) with those obtained for the US. To study the level of synchronization between EMU countries we follow Alesina et al. (2002) and Barro and Tenreyro (2007). To measure the effect of an employment shock on employment levels, unemployment rates and participation rates we perform an analysis based on Blanchard and Katz (1992) and Decressin and Fatas (1995). We measure consumption smoothing through capital markets, fiscal transfers and savings, using the approach by Asdrubali et al. (1996) and Afonso and Furceri (2007). To analyze risk sharing through a common safety net for banks we perform a rudimentary simulation analysis. |

Historic turning point or just another chapter? The results of a foreign-policy summit. EPC Post-Summit Analysis, 24 March 2014

The March 2014 European Council could enter the history books as a turning point, not only in the EU’s relations with Russia but also in its role as a foreign policy actor. Events in Ukraine inevitably dominated the Summit, with EU leaders adopting a balanced approach aimed at achieving three key objectives – de-escalation, containment/deterrence and cooperation – based on political and economic support for Ukraine, increased but limited pressure on Russia, and moves to strengthen ties with other EU neighbours. The Summit also discussed a range of economic and environmental policy issues, with the situation in Ukraine casting a long shadow over the discussion on energy policy, but failed to reach agreement on the EU’s climate goals to 2030, or to put more flesh on the bones of calls for a European “industrial renaissance”. However, two other developments were particularly significant: the creation of the second pillar of the future banking union, establishing a single regime for winding down failing banks; and changes to the savings tax directive, bringing years of negotiation to an end.

Executives as Agents: Expatriate managers in subsidiaries of multinational banks. ACES Working Papers, June 2012

Performance and behavior between domestic and foreign-owned banks are grounded in assumptions about the ability of parent banks to provide subsidiaries with capital and knowledge and to manage asymmetric information and agency problems in the parent-subsidiary relationship. We complement research on internal capital markets and investigate how foreign owners of banks in emerging markets use their power to appoint executives at their subsidiaries to manage agency problems in the parent-subsidiary relationship. We find that perceived corruption and poor ICRG risk scores are associated with the appointment of parent-country executives as supervisors on behalf of the foreign owner. By contrast, a focus on retail clients, the absence of organizational routines and poor creditor rights are associated with the appointment of host-country executives. These bank and country characteristics create agency problems within the subsidiary, but not necessarily between the subsidiary and its parent. As such, they create a need for host-country executives’ superior knowledge of local markets and staff rather than for the supervisory role of parent-country executives.