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New paper in the IMF Economic Review

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.

New paper in JEEA

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.

Shocks and risk sharing in the EMU: Lessons for Banking and Capital Market Union

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.