The significance of the eurozone banking union on the road to stability

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The benefits of a banking union …

The benefits of a banking union
Single supervision reduces banking fragmentation and restores interbank market
A single resolution scheme with participation of the private sector increases incentives for core countries (Germany) to mutualize (part of) the resolution funds
Banking union helps breaking the loop between banking and sovereign risk
Convergence of financing costs and evolution towards trans-european banks and recovery of the financial integration that is key to the survival of the euro area

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  • 1. The significance of theeurozone banking unionon the road to stabilityJorge Sicilia, Chief Economist BBVAwww.bbvaresearch.comApril 2013
  • 2. Palm Beach Strategic ForumUS and Eurozone: Two “areas” with a singlecurrency Share in world Share in world Public deficit Public debt (% GDP p.c. GDP population (% GDP) GDP) (bn $) US 23.5% 6.1% 7.3% 105% 48 328 EZ 22.4% 4.6% 3% 89.6% 34764 Página 2
  • 3. Palm Beach Strategic ForumBefore 2008, the euro area was living under thespell of a “feel good” factor No asymmetries in State´s (countrys) growth rates There was a single monetary policy working throughout the euro area National fiscal policy was (apparently) kept in check Current account imbalances (apparently) didnt matter Página 3
  • 4. Palm Beach Strategic ForumThe euro area had a fast and united reaction to the2008 crisis POLICY Time to zero real interest rates*, months Great Depression (Oct29) 30 Japan (Jun91) 73 Europe (Aug07) 19 Monetary policy 15 UK (Aug07) USA (Aug07) 6 *Using ex-post inflation for the Great Depression. Inflation expectations for Japan, Europe, UK, USA. Time to first fiscal package, months Great Depression (Oct29) 42 Japan (Jun91) 59 Fiscal policy Europe (Aug07) 15 UK (Aug07) 13 USA (Aug07) 6 Time to first injection of public capital, months Great Depression (Oct29) 36 Japan (Jun91) 59 Financial stabilization UK (Aug07) 13 Europe (Aug07) 6 USA (Aug07) 13 Página 4
  • 5. Palm Beach Strategic Forum … but in 2010 everything changedOn the radarproblems that Structural differences (flexibility in product and labor markets)came back tohaunt the euroarea One-fits-all fiscal policy (and market´s missreading of the “no bail out” clause)Off the radar The financial integration reversal among euro area countriesproblems thatcompoundedthe picture The negative feedback loop between bank and sovereign risk (and the related current account crisis) Página 5
  • 6. Palm Beach Strategic ForumInterest rates closely related to the zip code Change in interest rates on new bank loans and Change in 10yr spreads vs. Germany, (Basis points, dec-10 a jul-12) Source: IMF, Bloomberg and BBVA Research 700 Portugal 600 500 1 0  yr  spreads   vs.  German   400 Spain Italy 300 200 Belgium 100 Netherlands Franc e 0 Germany Finland A ustria Ireland -­‐1 0 0 -­‐2 0 0 -­‐8 0 -­‐6 0 -­‐4 0 -­‐2 0 0 20 40 60 80 100 Corporate  L oans Página 6
  • 7. Palm Beach Strategic ForumNational central banks taking the place of theinterbank market TARGET2 position vs the Eurosystem (+) creditor position / (-) debtor position), bn € Source: National central Banks and BBVA Research 1200 1000 800 600 400 200 0 -­‐2 0 0 -­‐4 0 0 -­‐6 0 0 -­‐8 0 0 -­‐1 0 0 0 -­‐1 2 0 0 May-­‐0 8 May-­‐0 9 May-­‐1 0 May-­‐1 1 May-­‐1 2 May-­‐0 7 J an-­‐0 7 J an-­‐0 8 J an-­‐0 9 J an-­‐1 0 J an-­‐1 1 J an-­‐1 2 J an-­‐1 3 Sep-­‐0 7 Sep-­‐0 8 Sep-­‐0 9 Sep-­‐1 0 Sep-­‐1 1 Sep-­‐1 2 c ore  c ou ntries Per ip heral  c ou ntries Página 7
  • 8. Palm Beach Strategic ForumThe euro area crisis has the potential to destabilizethe rest of the world economy Financial stress index Source: Bloomberg and BBVA Research 3,00 US driven 2,50 Euro driven 2,00 US   1,50 Eurozone   1,00 0,50 0,00 -0,50 -1,00 -1,50 abr-06 set-06 feb-07 jul-07 des-07 mai-08 set-08 feb-09 jul-09 des-09 mai-10 oct-10 feb-11 jul-11 des-11 mai-12 oct-12 mar-13 des-05 Página 8
  • 9. Palm Beach Strategic ForumThe tale of two small economies: Nevada vsIreland GDP Unemploy- No. banks Loss Financial Population (bn $) ment bust absorber crisisNevada 2.7 120 13.5% 11 FDIC No IrishIreland 4.5 200 14.5% 2? sovg. YesSource: Daniel Gross, CEPS, 2013 Página 9
  • 10. Palm Beach Strategic ForumThe road to a solution: The strategy is focusednow on the ECB backstop + Banking union Surveillance of imbalances Instruments to reduce private and public imbalances Fiscal treaty EFSF-ESM Liquidity provision ECB backstop Banking union Completing monetary union Fiscal union Página 10
  • 11. Palm Beach Strategic ForumBanking Union: An ambitious project Single Resolution Mechanism and European Resolution Fund Single DGS Single (EZ) Supervisory (EZ) MechanismSingle (EZ)Rulebook (EU27) 2013 2013-14 2015-2018? ? Fiscal union Página 11 Página 11
  • 12. Palm Beach Strategic ForumThe benefits of a banking union Single supervision reduces banking fragmentation and restores interbank market A single resolution scheme with participation of the private sector increases incentives for core countries (Germany) to mutualize (part of) the resolution funds Banking union helps breaking the loop between banking and sovereign risk Convergence of financing costs and evolution towards trans-european banks and recovery of the financial integration that is key to the survival of the euro area Página 12
  • 13. The significance of theeurozone banking unionon the road to stabilityJorge Sicilia, Chief Economist BBVAwww.bbvaresearch.comApril 2013