In a recent column in VoxEU together with Michael Stiefel (UZH) and Iryna Stewen (JGU Mainz)) we discuss our new CEPR discussion paper Growing Like Germany: Local public debt, local banks, low private investment. The paper shows that local government debt in Germany crowds out private investment to the tune of 1 percent of GDP per year. The reason: Forced to lend to local governments by their statutory mandate, local public banks try to “make up” for the low-yields on municipal debt by charging SME higher rates in what are locally segmented credit markets. This effect is exacerbated by the dire straits of municipal finances in Germany which, as we argue, is a direct consequence of the debt brake at the federal and state levels which shifted a lot of expensive government task to municipalities.
My paper “Non-US global banks and dollar (co-)dependence: how housing markets became internationally synchronized” with Torsten Ehlers (BIS) and Alexander Raabe (UZH / ESM) is now out as BIS discusssion paper no 897. Here is the BIS tweet:
My new paper with Lilia Ruslanova: Softening the Blow: U.S. State-Level Banking Deregulation and Sectoral Reallocation after the China Trade Shock is now online as UZH discussion paper.
The upshot: U.S. state-level banking deregulation during the 1980s considerably dampened the fallout on local economies of the China trade shock a decade later. The reason: households in financially integrated areas could more easily borrow against their housing wealth to smooth consumption. This kept house prices and wages in the non-tradable sector up, facilitating labor reallocation away from manufacturing.
The paper has a a clear take-away for European policy makers in the time of COVID19: the pandemic is likely to be a major reallocation shock, similar to the China Trade Shock, with very heterogeneous effects across regional economies in Europe. But,as our results show, for efficient reallocation to take place, household-level access to finance is paramount. However, cross-border retail financial integration in the EMU basically does not exist because banking integration is still superficial and fragile. Therefore, even in the current situation, EMU policymakers’ homework remains the same: complete the banking union, get an EDIS done, encourage cross-border banking consolidation …
Our paper Channels of Risk Sharing in the Eurozone: What Can Banking and Capital Market Union Achieve? (with Egor Maslov, Iryna Stewen and Bent E. Sorensen) is now forthcoming in the IMF Economic Review.
In the paper, we argue that the interplay of equity market and banking integration is of first-order importance for risk sharing in the EMU. While EMU created an integrated interbank market, “direct” banking integration (in terms of direct cross-border bank-to-real sector flows or cross-border banking-consolidation) and equity market integration remained limited. We find that direct banking integration is associated with more risk sharing, while interbank integration is not. Further, interbank integration proved to be highly procyclical, which contributed to the freeze in risk sharing after 2008. Based on this evidence, and a stylized DSGE model, we discuss implications for banking union. Our results show that real banking integration and capital market union are complements and robust risk sharing in the EMU requires both.
Our paper “ Holes in the Dike: The Global Savings Glut, U.S. House Prices and the Long Shadow of Banking Deregulation” (with Iryna Stewen) is now forthcoming in the Journal of the European Economic Association.
In the paper, we argue that capital inflows into the U.S. greatly contributed to the housing boom in the years prior to the financial crisis. States that liberalized their banking markets earlier saw bigger run-ups in house prices (and larger busts). The reason for this was the treacherous assumption, that geographically diversified banks should be allowed higher leverage (as would be implied by value-at-risk (VaR) models of bank risk management). States that liberalized their banking markets earlier had a stronger presence of geographically diversified banks by the time the savings glut started to hit the U.S. from the mid-1990s onwards. As we show, using bank-level data, the lending of geographically diversified banks was more sensitive to aggregate capital inflows and counties and states in which these banks had higher market shares saw a bigger expansion of mortgage credit and bigger house price increases.
A short policy piece by Mathias Hoffmann and his co-authors Bent Sorensen, Egor Maslov and Iryna Stewen on how to ensure that risk sharing in EMU becomes resilient to systemic banking shocks has just appeared in a new CEPR e-book edited by my colleagues Jan-Egbert Sturm and Nauro Campos entitled
Bretton Woods, Brussels, and Beyond: Redesigning the Institutions of Europe
In this piece we build on some of our earlier and on ongoing current research to compare the state of banking integration in the EMU today to that in the U.S. prior to state-level banking deregulation in the 1980s. As in the U.S. then, EMU today is essentially an integrated interbank market. But— as was the case among states in the U.S. prior to 1980— there is little direct cross-border lending of banks to firms or cross-border branching in the EMU. This makes macroeconomic risk sharing susceptible to systemic crisis as well as to country-specific banking sector shocks. We conclude that a proper banking union will have to encourage the cross-border consolidation and branching of banks and that this has to be complemented by a proper capital market union that encourages the cross-border ownership of equity. Just focusing on one of the two unions —as is currently advocated by some policymakers—will not be enough. A pre-publication version of the piece can also be downloaded here.
The book was launched ahead of the June 25th EU summit with some presentations by the authors across Europe, including two by Mathias Hoffmann at the Bank of Finland on June 19th and at ETH Zürich on June 22nd.
Mathias Hoffmann will present his new paper
“Are capital market and banking union complements? Evidence from Risk Sharing Channels in the EMU”
co-authored with Egor Maslov, Bent E. Sorensen and Iryna Stewen at the Conference “The Euro at 20” on June 25-26 2018 co-organized by the IMF, the Central Bank of Ireland and the IMF Economic Review. The full program of the conference and the conference draft of the paper are available here. For the current version of the paper follow the link at the paper title above.
My paper “A provincial view of Global Imbalances: Regional Capital Flows in China” with Samuel Cudré (Mc Kinsey & Co) is now forthcoming in the Review of World Economics
My paper with Rahel Suter “Systematic Consumption Risk in Currency Returns” is forthcoming in the Journal of International Money and Finance