Financial Integration and Risk Sharing: The Role of the Monetary Union

Transcription

1 Financial Inegraion and Risk Sharing: The Role of he Moneary Union Sebnem Kalemli-Ozcan (Universiy of Houson and NBER) Simone Manganelli (European Cenral Bank) Elias Papaioannou (Darmouh College and CEPR ) José Luis Peydró (European Cenral Bank) Disclaimer: he views expressed in his presenaion are hose of he auhors and do no necessarily reflec hose of he European Cenral Bank or he Eurosysem

2 Inroducion Moivaion 1. Financial inegraion is of umos imporance for he euro area: Transmission of single moneary policy Smooh operaion of paymen sysems Financial sabiliy 2. Financial inegraion has real effecs on he economy: Economic growh Business cycles Volailiy of oupu and consumpion Risk sharing 3. Imporan for policy makers and for cenral bankers: Volailiy and synchronizaion of business cycles are cenral o moneary policy Risk sharing is cenral for he opimaliy of a currency area 2

3 Inroducion Ouline Firs Par: The Euro and Financial Inegraion 1. Sae of financial inegraion in he euro area 2. Impac of he Euro and harmonizaion policies in he financial secor (FSAP) on banking inegraion Second Par: The Real Effecs of Financial inegraion 3. Banking inegraion and business cycle synchronizaion 4. Banking inegraion and macroeconomic volailiy 5. Banking inegraion and cross-counry risk sharing Summary and policy implicaions 3

4 Sae of Financial Inegraion Euro and Banking Inegraion Synchronizaion Volailiy Risk Sharing Overview of Financial Inegraion Across Marke Segmens in he Euro Area Marke Money markes Sae of inegraion Policy iniiaives Unsecured/secured money marke Very high TARGET / TARGET2 Commercial paper Low STEP Bond markes Governmen bond markes High Corporae bond markes Fair TARGET2-Securiies Equiy markes Low TARGET2-Securiies Banking markes Banking direcives, FSAP Wholesale aciviies Advanced TARGET / TARGET2 Reail banking Very low SEPA Source: Special ediion of he ECB Monhly Bullein (May 2008) 4

5 Sae of Financial Inegraion Euro and Banking Inegraion Synchronizaion Volailiy Risk Sharing Our Focus: Banking Inegraion Banks are he key financial inermediaries. Mos euro area member counries financial sysems are bank-based Bank asses have reached unprecedened levels over he pas decade. Srong correlaion wih oher ypes of capial flows (Lane and Milesi-Ferrei, 2006) 5

6 Sae of Financial Inegraion Euro and Banking Inegraion Synchronizaion Volailiy Risk Sharing Daa BIS panel daase beween on exernal bank asses and liabiliies boh for each counry (aggregae) and per pair of counries (bilaeral) All inernaional on balance shee exposure of he banking secor across all secors (banking and non-banking) plus some off-balance shee iems Mosly wholesale bank aciviy 20 high-income counries: 12 iniial euro area counries 3 non-euro EU counries: GBR, DNK and SWE 5 high income counries (conrol group): AUS, CAN, CHE, JPN, USA 6

7 Sae of Financial Inegraion Euro and Banking Inegraion Synchronizaion Volailiy Risk Sharing Specificaion: Euro and Banking Inegraion Difference-in-difference specificaion BANKINTi, j, = αi, j + α + β1ez2 i, j, + β2ez1i, j, + β3eu 2i, j, + β4eu1i, j, + γfsapi, j, + ε i,j, BANKINT: Bilaeral (ime-varying) cross-border bank socks-flows. (using BIS daa) EZ2 (EU2): Indicaor (dummy) variables ha equal one in he year ha boh counerpars join he euro zone (or he EU). EZ1 (EU1): Indicaor (dummy) variables ha equal one if only one of he wo counries is a member of he euro zone (or he EU). [accoun for unilaeral effecs of euro area or EU membership] FSAP: Bilaeral measure of he harmonizaion of financial policies using EU Commission daa on he ransposiion of he direcives of he Financial Service Acion Plan, launched in

8 Sae of Financial Inegraion Euro and Banking Inegraion Synchronizaion Volailiy Risk Sharing The Euro and Bilaeral Banking Inegraion Banking Inegraion Index based on Bilaeral Socks All counries EU15 (1) (2) (3) (4) Euro area boh (EZ2) sa Euro area one (EZ1) sa EU boh (EU2) sa Increase in bilaeral socks of 44%. EU one (EU1) sa Counry-pair FE and Year FE Yes Yes Yes Yes Counry-specific ime rends No Yes No Yes Observaions Counry-pairs

9 Sae of Financial Inegraion Euro and Banking Inegraion Synchronizaion Volailiy Risk Sharing Financial Secor Harmonizaion and Bilaeral Banking Inegraion Banking Inegraion Index based on Bilaeral Socks (1) (2) (3) (4) FSAP Boh sa Euro area boh (EZ2) sa Euro area one (EZ1) sa EU boh (EU2) sa EU one (EU1) sa Counry-pair FE and Year FE Yes Yes Yes Yes Counry-specific ime rends No Yes No Yes Observaions

10 Sae of Financial Inegraion Euro and Banking Inegraion Synchronizaion Volailiy Risk Sharing The Real Effecs of Financial Inegraion 1. Business cycle synchronizaion and banking inegraion 2. Business cycle volailiy and banking inegraion 3. Risk sharing and banking inegraion 10

11 Sae of Financial Inegraion Euro and Banking Inegraion Synchronizaion Volailiy Risk Sharing Brief Summary: Theoreical Lieraure Consumers insure agains idiosyncraic counry risk via global capial markes (Obsfeld, 1994; Lewis, 1996; Sorensen and Yosha, 1998) Diversificaion across borders shifs invesmen owards high reurn secors, inducing specializaion (Helpman and Razin, 1978; Obsfeld, 1994) Financial inegraion amplifies GDP differences as capial flows o counries wih high produciviy and workers subsiue leisure wih labour (Backus, Kehoe, and Kydland, 1992; Baxer and Crucini, 1995) Corporae finance models: focus on banking, yield similar predicions, alhough he effec could differ depending on he naure of shocks (Holmsrom and Tirole, 1997; Morgan, Rime, Srahan, 2004; Allen and Gale, 2000) Inernaional diversificaion is more appealing in regions-counries wih less correlaed reurns and hus less synchronized GDP growh raes (Heahcoe and Perri, 2008) 11

12 Sae of Financial Inegraion Euro and Banking Inegraion Synchronizaion Volailiy Risk Sharing Sandard Theoreical Predicions A higher degree of financial inegraion: 1. Less synchronized, more divergen business (GDP) cycles 2. Higher oupu volailiy 3. Bu, lower consumpion volailiy (due o risk sharing and consumpion smoohing). 12

13 Sae of Financial Inegraion Euro and Banking Inegraion Synchronizaion Volailiy Risk Sharing Brief Summary: Empirical Lieraure 1. Financial inegraion and business cycle synchronizaion: Cross-counry: posiive relaionship beween inegraion and synchronizaion (Imbs, 2004, 2006) Panel (US saes): banking inegraion lead o more synchronized sae cycles (Morgan, Rime, and Srahan, 2004) Sudies (focus on wihin federaions): a negaive relaionship beween financial inegraion and synchronizaion via he specializaion channel (Kalemli-Ozcan, Sorensen, Yosha, 2001, 2003) 2. Financial inegraion and macroeconomic volailiy: Cross-counry: Weak and inconclusive (Kose, Prasad, Terrones, 2006) Panel (US saes): banking inegraion lead o lower sae oupu volailiy (Morgan, Rime, Srahan, 2004) 3. Financial inegraion and risk sharing: A higher level of foreign asses and liabiliies increases income and consumpion risk sharing (Sorensen, e al., 2007; Frazscher and Imbs, 2007) Increase in consumpion risk sharing in he Euro area since he 1990s (Giannone and Reichlin, 2006) Some increase in income risk sharing via bank M&A since he 1990s 13 (Demyanyk, Osergaard, Sorensen, 2008)

14 Sae of Financial Inegraion Euro and Banking Inegraion Synchronizaion Volailiy Risk Sharing Banking Inegraion and Business Cycle Synchronizaion: Specificaion SYNCH i, j, = α i, j + α + β BANKINT i, j, 1 + CONTROLS i, j, 1 + ε i, j, where SYNCH1 i, j, = - ln( GDP i, / GDP i, 1 ) - ln( GDP j, / GDP j, 1 ) and SYNCH 2 i, j, = corr (cyclical componen of GDP) Meris of panel esimaion: 1. Counry-pair fixed-effecs conrol for sources of ime-invarian bilaeral characerisics Disance, poliical ies, legal sysem similariies, culural ies Previous research shows hese affec boh business cycles and inegraion 2. Year (period) fixed-effecs accouns for global rends Business cycle paerns (may) have changed and inegraion has increased 14

15 Sae of Financial Inegraion Euro and Banking Inegraion Synchronizaion Volailiy Risk Sharing Banking Inegraion and Synchronizaion: Panel resuls (annual and five-year frequency) Higher inegraion leads o less synchronized cycles Banking Inegraion Index based on Socks Annual Daa 5-year Averaged Daa Beween Wihin Beween Wihin (1) (2) (3) (4) Banking Inegraion sa Period FE No Yes No Yes Counry-pair FE No Yes No Yes Observaions Counry-pairs

16 Sae of Financial Inegraion Euro and Banking Inegraion Synchronizaion Volailiy Risk Sharing Banking Inegraion and Macroeconomic Volailiy: Specificaion FLUCT GDP, C i, = α i + α + β BANKINTi, 1 + CONTROLSi, 1 + ε i, Are increases in he degree of financial inegraion associaed wih higher or lower consumpion and oupu flucuaions? Panel: conrol for global rends, counry-specific unobservable characerisics. Use boh annual daa and non-overlapping 5-year periods. Two measures: FLUCT1: Deviaion of oupu and consumpion growh from global and counry mean (Morgan, Rime, Srahan, 2004) FLUCT2: Sandard deviaion of oupu and consumpion growh over each 5-year period. 16

17 Sae of Financial Inegraion Euro and Banking Inegraion Synchronizaion Volailiy Risk Sharing Banking Inegraion and GDP Flucuaions Higher oupu volailiy due o high exernal liabiliies Banking Inegraion Index based on Flows Annual Daa 5-year Averaged (1) (2) (3) (4) Banking Inegraion - Aggregae sa Weak effec of aggregae index Banking Inegraion - Asses sa Banking Inegraion - Liabiliies sa Period FE Yes Yes Yes Yes Counry FE Yes Yes Yes Yes Observaions Counries

18 Sae of Financial Inegraion Euro and Banking Inegraion Synchronizaion Volailiy Risk Sharing Banking Inegraion and Consumpion Flucuaions Lower consumpion volailiy due o high exernal asses Banking Inegraion Index based on Flows Annual Daa 5-Year Averaged Daa (1) (2) (3) (4) Banking Inegraion - Aggregae sa Weak effec of aggregae index Banking Inegraion - Asses sa Banking Inegraion - Liabiliies sa Period FE Yes Yes Yes Yes Counry FE Yes Yes Yes Yes Observaions Counries

19 Sae of Financial Inegraion Euro and Banking Inegraion Synchronizaion Volailiy Risk Sharing Robusness (in boh synchronizaion and volailiy specificaions) Conrol for rade (Frankel and Rose, 1998) Conrol for indusrial specializaion (Krugman, 1991) Conrol for financial developmen Alernaive measures for business cycle synchronizaion and volailiy Alernaive measures of banking inegraion 19

20 Sae of Financial Inegraion Euro and Banking Inegraion Synchronizaion Volailiy Risk Sharing Banking Inegraion and Risk Sharing Specificaion The resul ha banking inegraion (exernal asses) is negaively correlaed wih consumpion volailiy suggess ha banking inegraion improves risk sharing We ask: How much? 1 s model: ( logc logc ) = µ + κ ( loggdp loggdp ) i, i i, + ε i, 2 nd model : ( loggni loggni ) = µ + κ ( loggdp loggdp ) i, i i, + ε i, where κ = κ 0 _ + κ1 + κ Asses 2 (BANKINT i, 1 BANKINT 1 ) + κ Liab 2 (BANKINT Following Kalemli-Ozcan, e al. (2003); Meliz & Zumer (1999); Sorensen e al. (2007) i, 1 BANKINT 1 20 )

21 Sae of Financial Inegraion Euro and Banking Inegraion Synchronizaion Volailiy Risk Sharing Banking Inegraion and Consumpion Risk Sharing 14% addiional RS by doubling exernal asses Dep. Variable: Idiosyncraic Consumpion Growh Toal Household (1) (2) Idiosyncraic GDP growh sa Idiosyncraic GDP growh x Banking Inegraion-Asses sa Idiosyncraic GDP growh x Banking Inegraion-Liabiliies sa Idiosyncraic GDP growh x Trend sa Counry FE Yes Yes Observaions Counries

22 Sae of Financial Inegraion Euro and Banking Inegraion Synchronizaion Volailiy Risk Sharing Banking Inegraion and Income Risk Sharing 18% addiional RS by doubling exernal liabiliies Dep. Variable: Idiosyncraic Income (GNI) growh Idiosyncraic GDP growh sa 2.76 Idiosyncraic GDP growh x Banking Inegraion-Asses sa 1.10 Idiosyncraic GDP growh x Banking Inegraion-Liabiliies sa Idiosyncraic GDP growh x Trend sa Counry FE Yes Observaions 574 Counries 20 22

23 Summary and Conclusion Summary 1. The euro has spurred cross-border bilaeral banking inegraion Moneary union Legal-regulaory financial secor harmonizaion 2. In line wih sandard heory, counry-pair banking inegraion is associaed wih less synchronized, more divergen cycles 3. Counry level banking inegraion (exernal liabiliies) has increased he volailiy of GDP growh 4. Counry level banking inegraion (in form of exernal asses) has reduced he volailiy of consumpion growh 5. Counry level banking inegraion has increased consumpion and income risk sharing 23

24 Summary and Conclusion Policy Implicaions: RS increases ex-pos opimaliy of he currency area Financial Inegraion Channel Oher Channels (rade, common policy, ) More No he righ crieria Oupu Asymmery Risk Sharing Less Dominaes Righ crieria Consumpion Asymmery 24

25 Summary and Conclusion Policy implicaions: RS increases ex-pos opimaliy of he currency area Counries migh decide o specialize in high-reurn secors or inves in relaively high poenial regions because hey spread he risk of producion in EU-wide capial markes due o financial inegraion This migh increase he asymmery and variabiliy of oupu. Bu i should reduce he consumpion flucuaions To he exen ha risk-sharing allows consumpion smoohing, i represens a key couneracing mechanism agains oupu asymmeries This mechanism reduces he need for policy inervenion in dealing wih such asymmeries Synhesizing our (five) empirical resuls The increased cross-border banking inegraion due o he euro has improved ex-pos he opimaliy of he currency union by improving consumpion and income risk sharing 25