We analyse the effects of sovereign risk premium on bank profitability amongst 154 Eurozone banks during the period 2005 – 2019. In contrast to some of the results in the previous literature, we find that the euro area banks have not suffered too much from the extremely low and negative interest rate era regarding their net internet margins. However, the overall profitability has lowered clearly during the sample period, and the sovereign risk premium has a robust negative effect on all the overall profitability measures, both with risk-adjustment and without it, but it seems to have an increasing effect on the degree of wholesale funding and loan loss provisions. Hence, the profitability puzzle can be explained by a shift towards low-cost wholesale-based funding. Banks have also exercised more loan loss provisions because of the increment in overall risk of the economy. However, if the negative interest rate era still prevails for long, the banking sector faces serious problems based on our results.
{"title":"Impacts of Sovereign Risk Premium on Bank Profitability: Evidence from Euro Area","authors":"J. Junttila, S. Nguyen","doi":"10.2139/ssrn.3903299","DOIUrl":"https://doi.org/10.2139/ssrn.3903299","url":null,"abstract":"We analyse the effects of sovereign risk premium on bank profitability amongst 154 Eurozone banks during the period 2005 – 2019. In contrast to some of the results in the previous literature, we find that the euro area banks have not suffered too much from the extremely low and negative interest rate era regarding their net internet margins. However, the overall profitability has lowered clearly during the sample period, and the sovereign risk premium has a robust negative effect on all the overall profitability measures, both with risk-adjustment and without it, but it seems to have an increasing effect on the degree of wholesale funding and loan loss provisions. Hence, the profitability puzzle can be explained by a shift towards low-cost wholesale-based funding. Banks have also exercised more loan loss provisions because of the increment in overall risk of the economy. However, if the negative interest rate era still prevails for long, the banking sector faces serious problems based on our results.","PeriodicalId":326599,"journal":{"name":"PSN: Europe & Eurasia (Comparative) (Topic)","volume":"53 51 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-08-11","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"121122740","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In this paper, we introduce a new time-domain decomposition for weakly stationary or trend stationary processes, based on trigonometric polynomial modeling of the underlying component of an economic time series. The method is explicitly devised to disentangle medium to long-term and short-term fluctuations in macroeconomic and financial series, to accurately measure the financial cycle and the concurrent long swings in economic activity. The implementation of this decomposition is straightforward and relies on standard regression analysis and general to specific model reduction. Full support to the proposed method is provided by Monte Carlo simulation. In the paper, we also provide a multivariate extension, involving sequential univariate decompositions and Principal Components Analysis. Based on this multivariate approach, we introduce a set of new composite indexes of macro-financial conditions for the euro area and assess their information content. In particular, concerning the current pandemic, the indicators suggest that most of the GDP contraction has been of short-term, cyclical nature. This is likely due to the prompt monetary and fiscal policy responses. Yet our evidence suggests that the financial cycle might have currently achieved a peak area. Hence, the risk of further, deeper disruptions is high, particularly in so far as a new sovereign/corporate debt crisis were not eventually avoided.
{"title":"A New Macro-Financial Condition Index for the Euro Area","authors":"C. Morana","doi":"10.2139/ssrn.3823720","DOIUrl":"https://doi.org/10.2139/ssrn.3823720","url":null,"abstract":"In this paper, we introduce a new time-domain decomposition for weakly stationary or trend stationary processes, based on trigonometric polynomial modeling of the underlying component of an economic time series. The method is explicitly devised to disentangle medium to long-term and short-term fluctuations in macroeconomic and financial series, to accurately measure the financial cycle and the concurrent long swings in economic activity. The implementation of this decomposition is straightforward and relies on standard regression analysis and general to specific model reduction. Full support to the proposed method is provided by Monte Carlo simulation. In the paper, we also provide a multivariate extension, involving sequential univariate decompositions and Principal Components Analysis. Based on this multivariate approach, we introduce a set of new composite indexes of macro-financial conditions for the euro area and assess their information content. In particular, concerning the current pandemic, the indicators suggest that most of the GDP contraction has been of short-term, cyclical nature. This is likely due to the prompt monetary and fiscal policy responses. Yet our evidence suggests that the financial cycle might have currently achieved a peak area. Hence, the risk of further, deeper disruptions is high, particularly in so far as a new sovereign/corporate debt crisis were not eventually avoided.","PeriodicalId":326599,"journal":{"name":"PSN: Europe & Eurasia (Comparative) (Topic)","volume":"10 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-04-10","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"133883746","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We investigate the synchronization of Eurozone’s government bond yields at different maturities. For this purpose, we combine principal component analysis with random matrix theory. We find that synchronization depends upon yields maturity. Short-term yields are not synchronized. Medium- and long-term yields, instead, were highly synchronized early after the introduction of the Euro. Synchronization then decreased significantly during the Great Recession and the European Debt Crisis, to partially recover after 2015. We show the existence of a duality between our empirical results and portfolio theory and we point to divergence trades and flight-to-quality effects as a source of the self-sustained yield asynchronous dynamics. Our results envisage synchronization as a requirement for the smooth transmission of conventional monetary policy in the Eurozone.
{"title":"The Anatomy of Government Bond Yields Synchronization in the Eurozone","authors":"C. Barbieri, M. Guerini, M. Napoletano","doi":"10.2139/ssrn.3797157","DOIUrl":"https://doi.org/10.2139/ssrn.3797157","url":null,"abstract":"We investigate the synchronization of Eurozone’s government bond yields at different maturities. For this purpose, we combine principal component analysis with random matrix theory. We find that synchronization depends upon yields maturity. Short-term yields are not synchronized. Medium- and long-term yields, instead, were highly synchronized early after the introduction of the Euro. Synchronization then decreased significantly during the Great Recession and the European Debt Crisis, to partially recover after 2015. We show the existence of a duality between our empirical results and portfolio theory and we point to divergence trades and flight-to-quality effects as a source of the self-sustained yield asynchronous dynamics. Our results envisage synchronization as a requirement for the smooth transmission of conventional monetary policy in the Eurozone.","PeriodicalId":326599,"journal":{"name":"PSN: Europe & Eurasia (Comparative) (Topic)","volume":"223 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-03-03","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"122885304","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In this study we explore market power in 13 EU banking sectors for the years 2007 to 2019 by estimating a structural model with demand and supply equations, where the mark-up of price over marginal cost is parameterized as a measure of banks’ conduct that depends on selected factors. Our evidence indicates that EU banks enjoy a significant degree of market power, which shows a decreasing trend over time and some difference across countries. More competition is associated with higher bank density, lower bank capitalization, more efficient and stable banking systems, and better macroeconomic conditions. Finally, a clear convergence pattern emerges in the behaviour of EU banks.
{"title":"What Affects Bank Market Power in the Euro Area? A Structural Model Approach","authors":"Paolo Coccorese, C. Girardone, Sherrill Shaffer","doi":"10.2139/ssrn.3773920","DOIUrl":"https://doi.org/10.2139/ssrn.3773920","url":null,"abstract":"In this study we explore market power in 13 EU banking sectors for the years 2007 to 2019 by estimating a structural model with demand and supply equations, where the mark-up of price over marginal cost is parameterized as a measure of banks’ conduct that depends on selected factors. Our evidence indicates that EU banks enjoy a significant degree of market power, which shows a decreasing trend over time and some difference across countries. More competition is associated with higher bank density, lower bank capitalization, more efficient and stable banking systems, and better macroeconomic conditions. Finally, a clear convergence pattern emerges in the behaviour of EU banks.","PeriodicalId":326599,"journal":{"name":"PSN: Europe & Eurasia (Comparative) (Topic)","volume":"12 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-01-27","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"128402637","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We estimate a modified version of the “Financial Business Cycles” model originally developed by Iacoviello (2015) in order to investigate the role played by financial factors in driving the business cycle in the euro area. In the model, financial shocks such as borrower defaults, collateral shocks and credit supply effects amplify economic downturns by reducing the flow of credit from banks to the real sector. In this novel application to the euro area, we introduce capital reallocation inefficiency, an innovation to the original set-up which allows for more realistic effects of entrepreneur defaults on economic activity. Our results suggest that financial factors, as captured by this model, played a smaller role in the euro area throughout the double-dip recession than in the United States during the 2008-09 global financial crisis. In a scenario on second-round effects implied by potential NFC loan losses due to the COVID-19 pandemic, we find large financial amplification risks to real economic activity. JEL Classification: E32, E44, E47
{"title":"Financial Drivers of the Euro Area Business Cycle: A Dsge-Based Approach","authors":"Dominik Hirschbühl, G. Krustev, Grigor Stoevsky","doi":"10.2139/ssrn.3705338","DOIUrl":"https://doi.org/10.2139/ssrn.3705338","url":null,"abstract":"We estimate a modified version of the “Financial Business Cycles” model originally developed by Iacoviello (2015) in order to investigate the role played by financial factors in driving the business cycle in the euro area. In the model, financial shocks such as borrower defaults, collateral shocks and credit supply effects amplify economic downturns by reducing the flow of credit from banks to the real sector. In this novel application to the euro area, we introduce capital reallocation inefficiency, an innovation to the original set-up which allows for more realistic effects of entrepreneur defaults on economic activity. Our results suggest that financial factors, as captured by this model, played a smaller role in the euro area throughout the double-dip recession than in the United States during the 2008-09 global financial crisis. In a scenario on second-round effects implied by potential NFC loan losses due to the COVID-19 pandemic, we find large financial amplification risks to real economic activity. JEL Classification: E32, E44, E47","PeriodicalId":326599,"journal":{"name":"PSN: Europe & Eurasia (Comparative) (Topic)","volume":"136 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-10-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"121194456","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2019-09-01DOI: 10.5089/9781513512549.001
A. Kangur, K. Kirabaeva, Jean-Marc Natal, Simon Voigts
We study the properties of the IMF-WEO estimates of real-time output gaps for countries in the euro area as well as the determinants of their revisions over 1994-2017. The analysis shows that staff typically saw economies as operating below their potential. In real time, output gaps tend to have large and negative averages that are largely revised away in later vintages. Most of the mis-measurement in real time can be explained by the difficulty in predicting recessions and by overestimation of the economy’s potential capacity. We also find, in line with earlier literature, that real-time output gaps are not useful for predicting inflation. In addition, countries where slack (and potential growth) is overestimated to a larger extent primary fiscal balances tend to be lower and public debt ratios are higher and increase faster than projected. Previous research suggests that national authorities’ real-time output gaps suffer from a similar bias. To the extent these estimates play a role in calibrating fiscal policy, over-optimism about long-term growth could contribute to excessive deficits and debt buildup.
{"title":"How Informative are Real Time Output Gap Estimates in Europe?","authors":"A. Kangur, K. Kirabaeva, Jean-Marc Natal, Simon Voigts","doi":"10.5089/9781513512549.001","DOIUrl":"https://doi.org/10.5089/9781513512549.001","url":null,"abstract":"We study the properties of the IMF-WEO estimates of real-time output gaps for countries in the euro area as well as the determinants of their revisions over 1994-2017. The analysis shows that staff typically saw economies as operating below their potential. In real time, output gaps tend to have large and negative averages that are largely revised away in later vintages. Most of the mis-measurement in real time can be explained by the difficulty in predicting recessions and by overestimation of the economy’s potential capacity. We also find, in line with earlier literature, that real-time output gaps are not useful for predicting inflation. In addition, countries where slack (and potential growth) is overestimated to a larger extent primary fiscal balances tend to be lower and public debt ratios are higher and increase faster than projected. Previous research suggests that national authorities’ real-time output gaps suffer from a similar bias. To the extent these estimates play a role in calibrating fiscal policy, over-optimism about long-term growth could contribute to excessive deficits and debt buildup.","PeriodicalId":326599,"journal":{"name":"PSN: Europe & Eurasia (Comparative) (Topic)","volume":"19 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-09-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115176068","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The Russian equity market in 2018 came to be more profitable and stable than many other emerging markets, but it continued to lag behind competitors in terms of returns to investors and investment risk indicators. There were more problems that came from non-residents outflow.
{"title":"Russia’s Financial Market 2018: Investment Risks","authors":"A. Abramov, A. Lavrisheva","doi":"10.2139/ssrn.3348336","DOIUrl":"https://doi.org/10.2139/ssrn.3348336","url":null,"abstract":"The Russian equity market in 2018 came to be more profitable and stable than many other emerging markets, but it continued to lag behind competitors in terms of returns to investors and investment risk indicators. There were more problems that came from non-residents outflow.","PeriodicalId":326599,"journal":{"name":"PSN: Europe & Eurasia (Comparative) (Topic)","volume":"31 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-04-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"132639451","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In this paper we re-evaluate the capital immobility hypothesis of Feldstein and Horioka (1980) for the case of the European Union and the Eurozone, based on long-run regressions. We employ the Long Run Derivative proposed by Fischer and Seater (1993) in order to examine capital mobility as a long-run phenomenon. In order to enhance the robustness of our results we also perform panel causality tests on our data as it is a common approach in this setting. Our empirical findings provide no evidence in favor of the capital immobility hypothesis. In fact, we reject capital immobility even before the creation of the European Union, the introduction of the Eurozone or the 2008 global financial crisis.
{"title":"A Re-Evaluation of the Feldstein-Horioka Puzzle in the Eurozone","authors":"Vasilios Plakandaras, Periklis Gogas, Theophilos Papadimitriou","doi":"10.2139/ssrn.3275922","DOIUrl":"https://doi.org/10.2139/ssrn.3275922","url":null,"abstract":"In this paper we re-evaluate the capital immobility hypothesis of Feldstein and Horioka (1980) for the case of the European Union and the Eurozone, based on long-run regressions. We employ the Long Run Derivative proposed by Fischer and Seater (1993) in order to examine capital mobility as a long-run phenomenon. In order to enhance the robustness of our results we also perform panel causality tests on our data as it is a common approach in this setting. Our empirical findings provide no evidence in favor of the capital immobility hypothesis. In fact, we reject capital immobility even before the creation of the European Union, the introduction of the Eurozone or the 2008 global financial crisis.","PeriodicalId":326599,"journal":{"name":"PSN: Europe & Eurasia (Comparative) (Topic)","volume":"79 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2018-09-11","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"130334618","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2018-06-30DOI: 10.53116/pgaflr.2018.1.9
L. Vértesy
This contribution deals with the macroeconomic legal trends in the Eastern member states of the European Union, so called EU11: Bulgaria, Croatia, the Czech Republic, Estonia, Latvia, Lithuania, Hungary, Poland, Romania, Slovakia and Slovenia. The paper discusses the development from the 1990s to nowadays, emphasizing the initial changes and the consolidation after the financial crisis. Therefore, the fiscal policy bears a major attention: fiscal and budgetary stability, government debts, fiscal controls (auditing and independent fiscal councils), for a more comprehensive overview, some ports of the monetary policy will be examined: national banks and price stability. The main aim of the contribution is to confirm or disprove the hypothesis that there is any identifiable or verifiable correlation between the legislation and the macroeconomic trends: sustainable balanced budget and government debt, economic growth, inflation. The research is based on law and economics, especially law and finance methodology with quantitative analysis, because of the cross-discipline nature of the topic. The paper contains some comparative statistics to evaluate the certain results upon figures, because it is even important to match the legal provisions with the economic performance.
{"title":"Macroeconomic Legal Trends in the EU11 Countries","authors":"L. Vértesy","doi":"10.53116/pgaflr.2018.1.9","DOIUrl":"https://doi.org/10.53116/pgaflr.2018.1.9","url":null,"abstract":"This contribution deals with the macroeconomic legal trends in the Eastern member states of the European Union, so called EU11: Bulgaria, Croatia, the Czech Republic, Estonia, Latvia, Lithuania, Hungary, Poland, Romania, Slovakia and Slovenia. The paper discusses the development from the 1990s to nowadays, emphasizing the initial changes and the consolidation after the financial crisis. Therefore, the fiscal policy bears a major attention: fiscal and budgetary stability, government debts, fiscal controls (auditing and independent fiscal councils), for a more comprehensive overview, some ports of the monetary policy will be examined: national banks and price stability. The main aim of the contribution is to confirm or disprove the hypothesis that there is any identifiable or verifiable correlation between the legislation and the macroeconomic trends: sustainable balanced budget and government debt, economic growth, inflation. The research is based on law and economics, especially law and finance methodology with quantitative analysis, because of the cross-discipline nature of the topic. The paper contains some comparative statistics to evaluate the certain results upon figures, because it is even important to match the legal provisions with the economic performance.","PeriodicalId":326599,"journal":{"name":"PSN: Europe & Eurasia (Comparative) (Topic)","volume":"15 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2018-06-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"117053926","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The single market is one of the greatest achievements of the European Union. The restrictions on trade and free competition between Member States have been progressively eliminated, which has led to an increase in the standard of living. The Treaty establishing the European Economic Community was the one that made it possible to eliminate customs barriers within the Community and establish a common customs tariff that would apply to goods from non-EU countries. The single market has not yet become a unique economic space. Some sectors of the economy (public services) are still subject to national laws. The Member States of the EU still assume most of the powers in taxation and social welfare. The single market is supported by a series of related policies, established by the EU over the years. These policies help to ensure that the liberalization of markets is beneficial for as many companies and consumers as possible.
{"title":"The European Market: Success or Obstacle to Integration?","authors":"Peter Burk","doi":"10.2139/ssrn.3198511","DOIUrl":"https://doi.org/10.2139/ssrn.3198511","url":null,"abstract":"The single market is one of the greatest achievements of the European Union. The restrictions on trade and free competition between Member States have been progressively eliminated, which has led to an increase in the standard of living. The Treaty establishing the European Economic Community was the one that made it possible to eliminate customs barriers within the Community and establish a common customs tariff that would apply to goods from non-EU countries. The single market has not yet become a unique economic space. Some sectors of the economy (public services) are still subject to national laws. The Member States of the EU still assume most of the powers in taxation and social welfare. The single market is supported by a series of related policies, established by the EU over the years. These policies help to ensure that the liberalization of markets is beneficial for as many companies and consumers as possible.","PeriodicalId":326599,"journal":{"name":"PSN: Europe & Eurasia (Comparative) (Topic)","volume":"135 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2018-06-19","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"131656078","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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