TheFutureofEurope:CapitalMarkets

14thBarcelonaGSETrobada

October2016

FernandoBronerCREI,UPF,BarcelonaGSE

Financialstructure:SizeandcomposiIonofcapitalmarkets(%GDP)

Financialstructure:Financingofnon-financialfirms(%GDP)

Equitymarkets

•  EuropeanSecuriIesandMarketsAuthority(ESMA)–  createdin2011–  butweakcoordinaIonmechanismratherthaneffecIveregulator

•  InternaIonalFinancialReporIngStandards(IFRS)–  adoptedin2002–  butimplementaIonandenforcementislimited

•  HomebiasinequityissIlllarge–  64%ofEUand61%ofeuro-areaequityhelddomesIcally

•  Especiallylowforbanks–  interbankflowsareintheformofdebt

BankconcentraIonanddiversificaIon

Shareofassetsheldbyforeignbanks

Banks

•  LowdiversificaIonofbankrisks–  smallonaverage

•  especiallyinGermany,ItalyandBelgium•  lesssoinSpain,FranceandNetherlands

–  geographicallyconcentrated•  homebias•  subsidiariesinsteadofbranches

–  cross-countryexposureviadebtinstruments

Banks:CurrentinsItuIonalarrangement

Banks:CrisisprevenIon

•  Rulemaking–  EuropeanCommission(EC)andBankingAuthority(EBA)

•  Supervision–  ECBunderSingleSupervisoryMechanism(SSM)

Banks:SingleSupervisoryMechanism

Banks:CrisisprevenIon

•  Rulemaking–  EuropeanCommission(EC)andBankingAuthority(EBA)

•  Supervision–  ECBunderSingleSupervisoryMechanism(SSM)–  atregulatedenIty(subsidiary)level

•  consolidatedlevelwouldfavorintegraIon•  butinconsistentwithnaIonaldepositinsurance

Banks:Crisismanagement

•  Lenderoflastresort–  NaIonalCentralBanks

•  accesstoECBfundsbutNCB’sholdrisk•  Depositinsurance

–  naIonallevel•  ResoluIon

–  SingleResoluIonMechanism/Fund(SRM/SRF)•  SRFfundedfrombankcontribuIons•  bail-in:8%ofliabiliIesfromshareholdersandcreditors•  bail-out:5%ofliabiliIes

•  Fiscalbackstop–  EuropeanStabilityMechanism(ESM)

•  Fundsgovernmentssothattheycanfundbanks

Sovereigndebt:Spreads

Sovereigndebt

•  ReducIonofspreadsdueto–  expectedbail-outs–  highercostofdefault

•  Notnecessarilyefficient–  excusabledefaults

Sovereigndebt:Liquidity/bail-outpackages

•  Greece–  110bnin2010:bilateralagreementswitheurocountriesandIMF–  130bnin2012:IMFandEuropeanFinancialStabilityFacility(EFSF)–  86bnin2015:ESM

•  Ireland–  67.5bnin2010:IMFandEFSF

•  Portugal–  78bnin2011:IMFandtheEFSF

•  Spain–  41bnin2012:ESM

•  Cyprus–  9bnin2013:ESM

•  EUperiphery–  purchaseofsovereignbondsinsecondarymarkets:ECBSecuriIes

MarketsProgram(SMP)–  loanstobanksthatinturnpurchasesovereignbonds:ECB

Sovereigndebt:Liquidity/bail-outpackages

•  ECB:“Monetarypolicy”–  purchaseofsovereignbondsinsecondarymarkets–  loanstobanksthatinturnpurchasesovereignbonds

•  ESM:Financialassistance–  loanstogovernments–  debtpurchases:primaryandsecondarymarkets–  bankrecapitalizaIons:throughgovernmentsordirect

•  ESM:EssenIallyabank–  capitalprovidedbyalleuroareacountries–  borrowsverycheaply

•  ESM:unclearrole–  providesliquidityassistance–  improvescredibility–  isatransferscheme

Sovereigndebt:ESM-IMFmaturityandrates

Sovereigndebt:ESM-IFMloansizes

0

20

40

60

80

100

120

03/2008

08/2008

01/2009

06/2009

11/2009

04/2010

09/2010

02/2011

07/2011

12/2011

05/2012

10/2012

03/2013

08/2013

01/2014

06/2014

11/2014

Cyprus

ESMdebt(%GDP) IMFdebt(%GDP) Marketdebt(%GDP)

0

50

100

150

200

12/2008

04/2009

08/2009

12/2009

04/2010

08/2010

12/2010

04/2011

08/2011

12/2011

04/2012

08/2012

12/2012

04/2013

08/2013

12/2013

04/2014

08/2014

12/2014

Greece

ESMdebt(%GDP) IMFdebt(%GDP) Marketdebt(%GDP)

020406080100120140

12/2008

04/2009

08/2009

12/2009

04/2010

08/2010

12/2010

04/2011

08/2011

12/2011

04/2012

08/2012

12/2012

04/2013

08/2013

12/2013

04/2014

08/2014

12/2014

Ireland

ESMdebt(%GDP) IMFdebt(%GDP) Marketdebt(%GDP)

020406080100120140

12/2008

04/2009

08/2009

12/2009

04/2010

08/2010

12/2010

04/2011

08/2011

12/2011

04/2012

08/2012

12/2012

04/2013

08/2013

12/2013

04/2014

08/2014

12/2014

Portugal

ESMdebt(%GDP) IMFdebt(%GDP) Marketdebt(%GDP)

Sovereign-bankembrace:Euroareabankholdingsofgovernmentbonds

Bankscope

Total Domestic Foreign GIIPS Total

Sep-07 4.2 2.6 1.6 2.4 Dec-07 4.5Dec-08 3.9 2.3 1.6 2.4 Dec-08 4.0Dec-09 4.6 2.8 1.7 3.2 Dec-09 4.8Dec-10 5.1 3.4 1.6 4.1 Dec-10 5.1Dec-11 5.3 3.9 1.4 4.6 Dec-11 5.2Dec-12 6.2 4.7 1.4 5.8 Dec-12 5.7Jun-13 6.5 5.0 1.5 6.8 Dec-13 6.0

2007-2013 5.0 3.4 1.6 4.0 2007-2013 5.1

ECB Individual MFI Balance Sheet Statistics

Sovereign-bankembrace:Fiscalcostofbankingcrises

0

10

20

30

40

50

60

70

80Italy

Luxembo

urg

Austria

Germ

any

Belgium

Unite

dStates

Unite

dKingdo

m

Denm

ark

Netherland

s

Latvia

Ukraine

Spain

Gree

ce

Iceland

Ireland

FiscalCosts(%ofGDP) Increaseinpublicdebt(%ofGDP)

Sovereign-bankembrace

•  Holdingsofgovernmentdebtaffectsbanksby–  crowdingoutlendingtoprivatesector–  exposuretosovereignrisk

•  Bankexposureaffectsgovernments–  fiscalcosts

•  InsItuIonalsetupencouragessovereign-bankembrace–  ECBsupportsgovernmentsthroughbanks(lowriskweights)

–  ECBlenderoflastresortthroughNCBs–  ESMbankresoluIonthroughgovernments

Thefuture(?)•  ReduceremainingbarrierstointernaIonaldiversificaIoninequity•  Improvebankrisksharing

–  equityexposure–  consolidaIonacrosscountries–  internaIonalbranches–  regulatebanksubsidiariesasconsolidates

•  Movelenderoflastresortanddepositinsurancetoeuro-arealevel•  Reducesovereign-bankembrace

–  directlenderoflastresort–  directESMfundingtorecapitalizebanks–  limitexposuretoindividualsovereigns–  appropriateriskweightsforsovereignexposure