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The	Future	of	Europe:	Capital	Markets	
	
14th	Barcelona	GSE	Trobada	
October	2016	
	
Fernando	Broner	
CREI,	UPF,	Barcelona...
Financial	structure:	
Size	and	composiIon	of	capital	markets	(%	GDP)
Financial	structure:	
Financing	of	non-financial	firms	(%	GDP)
Equity	markets	
•  European	SecuriIes	and	Markets	Authority	(ESMA)	
–  created	in	2011	
–  but	weak	coordinaIon	mechanism	...
Bank	concentraIon	and	diversificaIon
Share	of	assets	held	by	foreign	banks
Banks	
•  Low	diversificaIon	of	bank	risks	
–  small	on	average	
•  especially	in	Germany,	Italy	and	Belgium	
•  less	so	in...
Banks:	Current	insItuIonal	arrangement
Banks:	Crisis	prevenIon	
•  Rule	making	
–  European	Commission	(EC)	and	Banking	Authority	(EBA)	
•  Supervision	
–  ECB	u...
Banks:	Single	Supervisory	Mechanism
Banks:	Crisis	prevenIon	
•  Rule	making	
–  European	Commission	(EC)	and	Banking	Authority	(EBA)	
•  Supervision	
–  ECB	u...
Banks:	Crisis	management	
•  Lender	of	last	resort	
–  NaIonal	Central	Banks	
•  access	to	ECB	funds	but	NCB’s	hold	risk	
...
Sovereign	debt:	Spreads
Sovereign	debt	
•  ReducIon	of	spreads	due	to	
–  expected	bail-outs	
–  higher	cost	of	default	
•  Not	necessarily	efficien...
Sovereign	debt:	Liquidity/bail-out	packages	
•  Greece	
–  110	bn	in	2010:	bilateral	agreements	with	euro	countries	and	IM...
Sovereign	debt:	Liquidity/bail-out	packages	
•  ECB:	“Monetary	policy”	
–  purchase	of	sovereign	bonds	in	secondary	market...
Sovereign	debt:	ESM-IMF	maturity	and	rates
Sovereign	debt:	ESM-IFM	loan	sizes	
0
20
40
60
80
100
120
03/2008
08/2008
01/2009
06/2009
11/2009
04/2010
09/2010
02/2011
...
Sovereign-bank	embrace:	
Euro	area	bank	holdings	of	government	bonds	
Total Domestic Foreign GIIPS
Sep-07 4.2 2.6 1.6 2.4 ...
Sovereign-bank	embrace:	
Fiscal	cost	of	banking	crises	
0
10
20
30
40
50
60
70
80
Italy		
Luxembourg		
Austria		
Germany		...
Sovereign-bank	embrace	
•  Holdings	of	government	debt	affects	banks	by	
–  crowding	out	lending	to	private	sector	
–  expo...
The	future	(?)	
•  Reduce	remaining	barriers	to	internaIonal	diversificaIon	in	equity	
•  Improve	bank	risk	sharing	
–  equ...
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Barcelona GSE Roundtable on the Future of Europe: Capital Markets

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Fernando Broner (CREI, UPF and Barcelona GSE)

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Barcelona GSE Roundtable on the Future of Europe: Capital Markets

  1. 1. The Future of Europe: Capital Markets 14th Barcelona GSE Trobada October 2016 Fernando Broner CREI, UPF, Barcelona GSE
  2. 2. Financial structure: Size and composiIon of capital markets (% GDP)
  3. 3. Financial structure: Financing of non-financial firms (% GDP)
  4. 4. Equity markets •  European SecuriIes and Markets Authority (ESMA) –  created in 2011 –  but weak coordinaIon mechanism rather than effecIve regulator •  InternaIonal Financial ReporIng Standards (IFRS) –  adopted in 2002 –  but implementaIon and enforcement is limited •  Home bias in equity is sIll large –  64% of EU and 61% of euro-area equity held domesIcally •  Especially low for banks –  interbank flows are in the form of debt
  5. 5. Bank concentraIon and diversificaIon
  6. 6. Share of assets held by foreign banks
  7. 7. Banks •  Low diversificaIon of bank risks –  small on average •  especially in Germany, Italy and Belgium •  less so in Spain, France and Netherlands –  geographically concentrated •  home bias •  subsidiaries instead of branches –  cross-country exposure via debt instruments
  8. 8. Banks: Current insItuIonal arrangement
  9. 9. Banks: Crisis prevenIon •  Rule making –  European Commission (EC) and Banking Authority (EBA) •  Supervision –  ECB under Single Supervisory Mechanism (SSM)
  10. 10. Banks: Single Supervisory Mechanism
  11. 11. Banks: Crisis prevenIon •  Rule making –  European Commission (EC) and Banking Authority (EBA) •  Supervision –  ECB under Single Supervisory Mechanism (SSM) –  at regulated enIty (subsidiary) level •  consolidated level would favor integraIon •  but inconsistent with naIonal deposit insurance
  12. 12. Banks: Crisis management •  Lender of last resort –  NaIonal Central Banks •  access to ECB funds but NCB’s hold risk •  Deposit insurance –  naIonal level •  ResoluIon –  Single ResoluIon Mechanism/Fund (SRM/SRF) •  SRF funded from bank contribuIons •  bail-in: 8% of liabiliIes from shareholders and creditors •  bail-out: 5% of liabiliIes •  Fiscal backstop –  European Stability Mechanism (ESM) •  Funds governments so that they can fund banks
  13. 13. Sovereign debt: Spreads
  14. 14. Sovereign debt •  ReducIon of spreads due to –  expected bail-outs –  higher cost of default •  Not necessarily efficient –  excusable defaults
  15. 15. Sovereign debt: Liquidity/bail-out packages •  Greece –  110 bn in 2010: bilateral agreements with euro countries and IMF –  130 bn in 2012: IMF and European Financial Stability Facility (EFSF) –  86 bn in 2015: ESM •  Ireland –  67.5 bn in 2010: IMF and EFSF •  Portugal –  78 bn in 2011: IMF and the EFSF •  Spain –  41 bn in 2012: ESM •  Cyprus –  9bn in 2013: ESM •  EU periphery –  purchase of sovereign bonds in secondary markets: ECB SecuriIes Markets Program (SMP) –  loans to banks that in turn purchase sovereign bonds: ECB
  16. 16. Sovereign debt: Liquidity/bail-out packages •  ECB: “Monetary policy” –  purchase of sovereign bonds in secondary markets –  loans to banks that in turn purchase sovereign bonds •  ESM: Financial assistance –  loans to governments –  debt purchases: primary and secondary markets –  bank recapitalizaIons: through governments or direct •  ESM: EssenIally a bank –  capital provided by all euro area countries –  borrows very cheaply •  ESM: unclear role –  provides liquidity assistance –  improves credibility –  is a transfer scheme
  17. 17. Sovereign debt: ESM-IMF maturity and rates
  18. 18. Sovereign debt: ESM-IFM loan sizes 0 20 40 60 80 100 120 03/2008 08/2008 01/2009 06/2009 11/2009 04/2010 09/2010 02/2011 07/2011 12/2011 05/2012 10/2012 03/2013 08/2013 01/2014 06/2014 11/2014 Cyprus ESM debt (% GDP) IMF debt (% GDP) Market debt (% GDP) 0 50 100 150 200 12/2008 04/2009 08/2009 12/2009 04/2010 08/2010 12/2010 04/2011 08/2011 12/2011 04/2012 08/2012 12/2012 04/2013 08/2013 12/2013 04/2014 08/2014 12/2014 Greece ESM debt (% GDP) IMF debt (% GDP) Market debt (% GDP) 0 20 40 60 80 100 120 140 12/2008 04/2009 08/2009 12/2009 04/2010 08/2010 12/2010 04/2011 08/2011 12/2011 04/2012 08/2012 12/2012 04/2013 08/2013 12/2013 04/2014 08/2014 12/2014 Ireland ESM debt (% GDP) IMF debt (% GDP) Market debt (% GDP) 0 20 40 60 80 100 120 140 12/2008 04/2009 08/2009 12/2009 04/2010 08/2010 12/2010 04/2011 08/2011 12/2011 04/2012 08/2012 12/2012 04/2013 08/2013 12/2013 04/2014 08/2014 12/2014 Portugal ESM debt (% GDP) IMF debt (% GDP) Market debt (% GDP)
  19. 19. Sovereign-bank embrace: Euro area bank holdings of government bonds Total Domestic Foreign GIIPS Sep-07 4.2 2.6 1.6 2.4 De Dec-08 3.9 2.3 1.6 2.4 De Dec-09 4.6 2.8 1.7 3.2 De Dec-10 5.1 3.4 1.6 4.1 De Dec-11 5.3 3.9 1.4 4.6 De Dec-12 6.2 4.7 1.4 5.8 De Jun-13 6.5 5.0 1.5 6.8 De 2007-2013 5.0 3.4 1.6 4.0 2007 ECB Individual MFI Balance Sheet Statistics
  20. 20. Sovereign-bank embrace: Fiscal cost of banking crises 0 10 20 30 40 50 60 70 80 Italy Luxembourg Austria Germany Belgium United States United Kingdom Denmark Netherlands Latvia Ukraine Spain Greece Iceland Ireland Fiscal Costs (% of GDP) Increase in public debt (% of GDP)
  21. 21. Sovereign-bank embrace •  Holdings of government debt affects banks by –  crowding out lending to private sector –  exposure to sovereign risk •  Bank exposure affects governments –  fiscal costs •  InsItuIonal setup encourages sovereign-bank embrace –  ECB supports governments through banks (low risk weights) –  ECB lender of last resort through NCBs –  ESM bank resoluIon through governments
  22. 22. The future (?) •  Reduce remaining barriers to internaIonal diversificaIon in equity •  Improve bank risk sharing –  equity exposure –  consolidaIon across countries –  internaIonal branches –  regulate bank subsidiaries as consolidates •  Move lender of last resort and deposit insurance to euro-area level •  Reduce sovereign-bank embrace –  direct lender of last resort –  direct ESM funding to recapitalize banks –  limit exposure to individual sovereigns –  appropriate risk weights for sovereign exposure

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