The ECB’s QE: Time to break the doom loop between banks and their governments. CEPS Policy Brief No. 328, March 2015

The recent crises have shown that the eurozone countries’ government debt is not immune to default. Applying a large-exposure requirement also to eurozone government debt would be a logical measure towards breaking the bank-government doom loop, given the low probability and high loss-given government default. But what would be the impact of the application of the large-exposure requirement on the banking sector as well as on government funding? This CEPS Policy Brief presents the results of a simulation exercise performed for 109 systemic banks in the eurozone, showing that their eurozone government debt portfolios would have to decrease by 3.2% or €63 billion, if a 50% of own-funds cap would be applied on large exposures. The eurozone central banks’ demand for sovereign bonds under the extended asset purchase programme further creates momentum to start gradually implementing the restriction.

Banks at the Service of the Economy? European Policy Brief No. 17, November 2013

This Policy Brief discusses a few simple measures to improve both the commercial and investment banking landscapes, with or without formal separation. Covering deposits with quality collateral would make them safer and would help create an easier guarantee and resolution mechanism at the larger eurozone level. Strong central counterparties and transparency requirements would improve market mechanisms and market discipline in capital markets and investment banking. Specific governance measures would also help improve the financial sector. Finally, a better control of bank solvency, together with improved capital market transparency and accessibility, should encourage the progressive deleveraging of commercial banks, and enhance the long term funding of the economy by capital markets.

The Vulnerability of Europe's Small and Medium-Sized Banks. Bruegel Working Paper 2015/07, 16 July 2015

We study the vulnerability of 130 banks directly supervised by the European Central Bank’s Single Supervisory Mechanism. Illustrative stress tests using banks’ balance sheet data reveal that significant stress prevails in the euro area’s smaller and medium-sized banks, many of them located in southern Europe. The banks we identify as stressed also have performed substantially worse on the stock market. The vulnerable banks are typically hobbled by non-performing loans to European businesses. Strengthening the banking system, therefore, is important to achieve sustainable recovery because it will revitalise credit to the healthier segments of the economy. But instead of emphasising bank recapitalisation, as in past years, we believe the task is to shrink the banking sector to a healthier core.

Addressing the immediate needs of the Greek banks. CEPS Commentary, 31 July 2015

Based on a detailed calculation of the recapitalisation requirements of the Greek banks, we find that the sector needs an infusion of capital, but that the level largely depends on the stringency of the capital requirements applied. An expedient quick fix to comply with the minimum capital requirements could be achieved by a bail-in of existing creditors under the EU Bank Recovery and Resolution Directive of around €5 billion, leaving only €6 billion needed for re-capitalisation. If the ‘Cypriot’ standard is applied, however, the required re-capitalisation would be €15 billion. A ‘generous’ approach, which takes into account the phasing in of the new more-stringent capital requirements until 2018, would imply a re-capitalisation of €29 billion (or more bailing-in of creditors). The re-capitalisation should be undertaken preferably by the EIB, the EBRD or the new Greek investment fund, rather than via loans from the ESM to the Greek government.

Monetary policy and the over-investment cycle: China as an extreme case. CEPS Commentary, 27 August 2015

Against the background of the severe turbulence that is hitting global stock markets, Daniel Gros examines the looming slowdown in the Chinese economy in this CEPS Commentary, which he attributes to an underlying ‘real’ domestic investment/savings imbalance. Given the magnitude of this imbalance, Gros thinks it is unlikely to be solved by monetary policy and that the best that can be hoped for is that the central banks will manage to ‘paper over’ some of the unavoidable symptoms in credit markets.

Banks and the political economy of the sovereign debt crisis in Italy and Spain. CES Papers - Open Forum #18, 2013-2014

This paper sets out to explain why Spain experienced a full-fledged sovereign debt crisis and had to resort to euroarea financial assistance for its banks, whereas Italy did not. It undertakes a structured comparison, dissecting the sovereign debt crisis into a banking crisis and a balance of payments crisis. It argues that the distinctive features of bank business models and of national banking systems in Italy and Spain have considerable analytical leverage in explaining the different scenarios of the crises in each country. This ‘bank-based’ analysis contributes to the flourishing literature that examines changes in banking with a view to account for the differentiated impact of the global banking crisis first and the sovereign debt crisis in the euroarea later.

Saving the Banks: The Political Economy of Bailouts. CES Papers - Open Forum #8, 2012

How much leeway did governments have in designing bank bailouts and deciding on the height of intervention during the 2007-2009 financial crisis? This paper analyzes comparatively what explains government responses to banking crises. Why does the type of intervention during financial crises vary to such a great extent across countries? By analyzing the variety of bailouts in Europe and North America, we will show that the strategies governments use to cope with the instability of financial markets does not depend on economic conditions alone. Rather, they take root in the institutional and political setting of each country and vary in particular according to the different types of business-government relations banks were able to entertain with public decision-makers. Still, “crony capitalism” accounts overstate the role of bank lobbying. With four case studies of the Irish, Danish, British and French bank bailout, we show that countries with close one-on-one relationships between policy-makers and bank management tended to develop unbalanced bailout packages, while countries where banks have strong interbank ties and collective negotiation capacity were able to develop solutions with a greater burden sharing from private institutions.

The German Constitutional Court’s decision about the European Central Bank’s OMT [Outright Monetary Transactions] mechanism: A masterpiece of judicial arrogance. European Policy Briefs No. 30, April 2014

The German Constitutional Court (BVG) recently referred different questions to the European Court of Justice for a preliminary ruling. They concern the legality of the European Central Bank’s Outright Monetary Transaction mechanism created in 2012. Simultaneously, the German Court has threatened to disrupt the implementation of OTM in Germany if its very restrictive analysis is not validated by the European Court of Justice. This raises fundamental questions about the future efficiency of the ECB’s monetary policy, the damage to the independence of the ECB, the balance of power between judges and political organs in charge of economic policy, in Germany and in Europe, and finally the relationship between the BVG and other national or European courts.

The European Central Bank’s quantitative easing programme: limits and risks. Bruegel Policy Contribution Issue 2016/04, February 2016

The European Central Bank (ECB) has made a number of significant changes to the original guidelines of its quantitative easing (QE) programme since the programme started in January 2015. These changes are welcome because the original guidelines would have rapidly constrained the programme’s implementation. The changes announced expand the universe of purchasable assets and give some flexibility to the ECB in the execution of its programme. However, this might not be enough to sustain QE throughout 2017, or if the ECB wishes to increase the monthly amount of purchases in order to provide the necessary monetary stimulus to the euro area to bring inflation back to 2 percent. To increase the programme’s flexibility, the ECB could further alter the composition of its purchases. The extension of the QE programme also raises some legitimate questions about its potential adverse consequences. However, the benefits of this policy still outweigh its possible negative implications for financial stability or for inequality. The fear that the ECB’s credibility will be undermined because of its QE programme also seems to be largely unfounded. On the contrary, the primary risk to the ECB’s credibility is the risk of not reaching its 2 percent inflation target, which could lead to expectations becoming disanchored.

Are Germans wasting their savings abroad? CEPS Commentary, 7 April 2016

Germany is running a current account surplus of about 8% of GDP, which means that about one-third of all German savings (equal to 24% of GDP) has to be invested abroad every year. It has become by now almost a cliché that these huge excess savings are being wasted abroad. But this is a popular misconception based on the divergence between the available data on the (cumulated) current account balance (cCAB) of Germany and its net international investment position (NIIP). A closer look at the data actually suggests that the NIIP is probably not measured correctly and that the observed returns on German investment abroad have remained above most domestic returns.

The effectiveness of the European Central Bank’s Asset Purchase Programme. Bruegel Policy Contribution issue 2016 10 June 2016

Since the end of 2014, inflation has been at or very close to zero. With very little ability to move the actual interest rate further into negative territory, the ECB has resorted to unconventional measures. The latest of these includes a programme to purchase corporate bonds, which started on 8 June 2016.