EUROZONE BANKS AND CAPITAL FLOW REVERSAL

Transcription

1 EUROZONE BANKS AND CAPITAL FLOW REVERSAL Ashoka Mody Research Department International Monetary Fund European Crisis: Historical Parallels and Economic Lessons Julis-Rabinowitz Center for Public Policy and Finance Inaugural Conference April 18-2, 212 The views expressed in this presentation are mine and not necessarily those of the IMF.

2 The Crisis Averted Interbank and dollar liquidity tensions in the eurozone (Basis points) November 3, 211, US FED dollar liquidity swaps coordinated with the ECB and other central banks December 2, 211, First long-term refinancing operation by the ECB Sources: Bloomberg; and staff calculations. Note: Dotted series start on March 3, 28, and show post-bear Stearns developments as a comparison. Euribor: 3 months Euro interbank offer rate, OIS (EUR SWAP/EONIA): Overnight indexed swap between the fixed and flow interest rate swap. Basis Swap Spread (EUR-USD): Two parties swap variable interest rates between the EUR and USD money markets.

3 Long-term Refinancing Operations percent February percent 1 2 December Bank Term debt maturing 212 LTRO operations (net) Sovereign Debt Purchases LTRO used to bank cover term debt Source: IMF, 212, Global Financial Stability Report, Spring.

4 Banks at the Center of the Crisis Sovereign Bank Links Deep Inter- Connection Between Banks Banks: High Leverage High Dependences on Wholesale Funding Mediating Capital Flows

5 Leverage and Wholesale Funding 7 Euro area banks have made least progress in raising capital ratios and reducing reliance on wholesale funding 6 Tangible Equity to Assets Ratio United States United Kingdom Euro Area 1 Wholesale Funding Ratio Note: 1/ Wholesale funding ratio is short and long-term borrowing and repos to assets. 2/ TCE ratio is tangible common equity to tangible assets

6 Leverage and Wholesale Funding: Update 7 Adjusted tangible assets to Tier1 common capital Wholesale funding of euro area banks (percent of assets) 4. 6 United States 35. Bank deposits Wholesale Funding 3. 5 United Kingdom Euro Area Dec-8 Dec-9 Jun-1 Dec-1 Jun-11

7 Eurozone Banks Interconnectedness Jul-2 Jan-3 Jul-3 Jan-4 Jul-4 Jan-5 Jul-5 Jan-6 Jul-6 Jan-7 Jul-7 Jan-8 Jul-8 Jan-9 Jul-9 Jan-1 Jul-1 Jan-11 Jul-11 Jan-12 Source: Kamil Yilmaz personal communication Note: Interconnectedness is the fraction of the forecast error variances due to innovations in the stock prices of other banks.

8 Banking Sector Claims on the Government (percent of total banking sector claims) Non-Euro Mean Euro Mean Sources: IMF IFS, WEO, author s calculations

9 TARGET Imbalances Mar-7 Jun-7 Sep-7 Dec-7 Mar-8 Jun-8 Sep-8 Dec-8 Mar-9 Jun-9 Sep-9 Dec-9 Mar-1 Jun-1 Sep-1 Dec-1 Mar-11 Jun-11 Sep-11 Dec-11 Germany Netherlands Belgium France Italy GRC, IRL, PRT Spain EUR billion

10 Withdrawal of German Private Capital 2 15 German Balance of Payments (EUR billion, 12 month rolling sum) Ireland: Bilateral Flows vis-à-vis Germany (EUR billions) Capital account (4 qtr average) Capital account (4 qtr average, ex one offs) Current account (4 qtr avearage) Change in Bundesbank's claims on the Eurosystem (Target) (+) Net capital flows, ex Target (outflows +) Q1 21-Q3 22-Q1 22-Q3 23-Q1 23-Q3 24-Q1 24-Q3 25-Q1 25-Q3 26-Q1 26-Q3 27-Q1 27-Q3 28-Q1 28-Q3 29-Q1 29-Q3 21-Q1 21-Q3 211-Q1 211-Q Q1 21-Q3 22-Q1 22-Q3 23-Q1 23-Q3 24-Q1 24-Q3 25-Q1 25-Q3 26-Q1 26-Q3 27-Q1 27-Q3 28-Q1 28-Q3 29-Q1 29-Q3 21-Q1 21-Q3 211-Q1 211-Q3

11 Capital Flow and Target Balances: An Aggregate Perspective Germany, Finland, Netherlands Capital flows ex Target ( + outflow) Change in Target claims (+ increase) Current account Greece, Ireland, Italy, Spain, Portugal Capital flows ex Target ( + outflow) Change in Target claims (+ increase) Current account rolling 4 quarter sum, EUR billion -3 rolling 4 quarter sum, EUR billion

12 Final Thoughts The treatment of imbalances within TARGET may be the most important piece of unfinished business for the ECB to tackle. (Kenen, 2) But resolving imbalances is not a technical matter it is tied to the broader health of eurozone s banking system Concurrent action is needed: stemming capital flow reversal, weakening the sovereign-bank links, and inducing greater transparency in banks operations. Ultimately, more proactive use of resolution powers is likely to be required.