Recently the Dutch government nationalized the Dutch financial conglomerate SNS Reaal. The intervention was the first use of the Intervention Act introduced in the beginning of 2012. Read more
Bruegel blog
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Six lessons for Europe from the nationalization of SNS Reaal
13th March 2013
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No ringfencing makes sense, but don't take off the gloves - implementing the recommendations in the Liikanen report
4th February 2013
Michel Barnier, European commissioner in charge of regulatory reform, has indicated implementation of the recommendations in the Liikanen report will stop short of ringfencing certain bank activities. The argument is that this could undermine fragile European growth outlook. This viewpoint makes sense. Read more
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The Liikanen report - is size the elephant in the room?
4th October 2012
Yesterday, the High-level Expert Group on reforming the structure of the EU banking sector chaired by the governor of Finland's central bank Erkki Liikanen, in short the Liikanen report issued its report. Apart from endorsing other currently discussed points such as common bank supervision and the resolution schemes, one of its main findings is that ‘it is necessary to require legal separation of certain particularly risky financial activities from deposit-taking banks within a banking group’, which fits nicely with the Volcker rule in the US and the Vickers proposal in the UK. The main goals of legal separation are to limit a banking group’s incentives and ability to take excessive risks with insured deposits, to prevent the coverage of losses… Read more
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Dutch elections – anti-Europe lost, but did pro-Europe win?
13th September 2012
The Dutch elections have ended in a race between the liberal party (VVD) and the social-democratic party (PvdA). The preliminary results indicate that VVD has 41 seats (up from 31) whereas PvdA has 39 seats (up from 30) out of a total of 150 seats. Especially the latter party has won while endorsing a pro-European agenda. The division of seats is such that PvdA and VVD are practically forced to enter into a coalition. Many observers have concluded that the anti-European strategy of the right-wing populists (PVV) and the left-wing socialists (SP) has backfired and that pro-Europe has won. This observation, however, is too optimistic for two reasons. First, the main issue in the elections has turned out to be… Read more
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Should we worry about Target2 imbalances? Why Central Bank negative equity does and doesn’t matter
3rd September 2012
Over the past few months Germany has become the safe haven of Europe. Depositors fearing a euro break-up have moved their deposits away from the periphery, realizing effective insurance. As a consequence, peripheral banks’ funding has shifted from private to public sources (see e.g. Pisany-Ferry and Merler). The Target2 imbalances that capture this have risen to unprecedented levels. Read more
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Eurocrisis lessons from banking regulation: create collateral in return for support
14th August 2012
The similarities between banks and countries in a monetary union are striking. First, like banks, countries in a monetary union can face a self-fulfilling run resulting in sudden stops. Second, just as one banks’ risk taking increases other banks’ probability of default because of contagion, as the current crisis in the eurozone shows, contagion is especially strong within a monetary union due to cross-border trade, impact on domestic banks, or investor beliefs on correlated risk (see e.g. the review in Pericoli and Sbracia, 2003). Third, just like banks considered to be sound turned to be insolvent in the 2007-2008 financial crisis, we are rediscovering that also in advanced economies debt levels can become unsustainable. And while a country with debt denominated in its own currency can not be forced into default by markets, this is not the case in a monetary union. Read more
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The creation of euro area safety nets
5th July 2012
The financial crisis has exposed the need to devise stronger and broader international and regional safety nets in order to deal with economic and financial shocks and allow for countries to adjust. The euro area has developed several such mechanisms over the last couple of years through a process of trial and error and gradual enhancement and expansion. Their overall architecture remains imperfect and leaves areas of vulnerabilities. Europe suffers from three simultaneous and mutually reinforcing crises: banking crises, fiscal crises, and balance-of-payment (BOP) crises. Each can occur because of transitory liquidity shock or a more permanent solvency problem but the lines are very often blurred and the associated policy response therefore often uneasy. Table 1 shows the various categories… Read more
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Five questions eurozone politicians will have to answer (and a research agenda for economists)
26th June 2012
I propose five questions that eurozone politicians will have to answer. Identifying these questions is useful because in the debate on the future of the eurozone an answer to one of these questions is often dismissed by arguing that it does not address the other ones, an unsatisfying state of affairs. In addition, I argue that economists have been unable to provide clear answer to these questions. Read more
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A banking union is no panacea
9th June 2012
The claim that the eurozone needs a banking union is by now almost universal (see here by Martin Wolf, here by Wolfgang Munchau, here by the European commission, and here by the ECB, see here for an overview of the recent debate). In addition, there seems to be more and more political support. Such a banking union first and foremost refers to a eurozone safety net and restructuring mechanism for banks. In addition it will inevitably imply regulation and supervision at a European level. A banking union is necessary for two reasons. First, bad regulation or inadequate recapitalisation in one country is potentially harmful to other countries, especially inside a monetary union. Second, as the example of Spain and Ireland… Read more
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The debate on austerity: are economists barking up the wrong tree?
7th May 2012
The discussion on the costs of eurozone austerity (see our recent review on the topic) may be beside the point. While economists are trying to convince politicians of the high costs of too much austerity, the reality may be different. Europe’s politicians don’t need convincing that austerity is costly. They know this. But they think this is a price worth paying. Instead of trying to argue why austerity is or isn’t costly, economists should try to understand why politicians adhere to this point of view. This would provide a more constructive way towards alternatives for austerity than assuming that irrational and ignorant policymakers need educating. I can think of two possible ways to rationalize observed preferences. First, austerity may be… Read more