The effects of prudential policies on bank leverage and insolvency risk in Central and Eastern Europe

This paper analyses the effects of prudential policies on leverage and insolvency risk in eleven Central and Eastern Europe banking systems in the 2005–2014 period. It explores the relationship between leverage, insolvency risk and regulation variables, and the temporal patterns of this relationship. It also examines whether the effects of prudential policies on leverage and insolvency risk are influenced by bank ownership structure and financial cycle. The paper finds a consistent link between prudential regulation and leverage, which varies over the sample period. Conversely, the insolvency risk shows a stronger relationship with macroprudential policies. The estimates reveal that prudential policies work better on leverage and z-score for foreign banks. Both leverage and insolvency risk are better mitigated over booms. Finally, prudential policies have similar effects on both domestic and foreign banks' stability in normal times, while the effects are opposite during turbulences. These dissimilarities are raising challenges to the conduct of prudential policies.     

Monetary policy and systemic risk-taking in the euro area banking sector

Available empirical evidence on the significance of the (micro) risk-taking channel of monetary policy is not enough to indicate a threat to financial stability. Evidence of risk-taking with systemic risk implications is necessary. Statistical measures that capture systemic risk in all its forms within a structural factor-augmented vector autoregressive model suggest that conventional and unconventional monetary policies have resulted in systemic risk-taking in the euro area banking sector. Systemic risk has taken the form of an increase in the banking sector’s vulnerability via contagion and interconnectedness. Banks’ balance sheets, however, do not account for the full transmission from (micro) risk taking to systemic risk-taking. The main policy implication is that a persistently accommodative monetary policy may drive a monetary authority with a price stability mandate to consider a possible trade-off with financial stability. At a minimum, coordination between monetary and macro-prudential policies requires serious consideration.     

Charter value,risk-taking and systemic risk in banking before and after the global financial crisis of 2007-2008

ABSTRACT

We investigate how bank charter value affects risk for a sample of OECD banks by using standalone and systemic risk measures before, during, and after the global financial crisis of 2007–2008. Prior to the crisis, bank charter value is positively associated with risk-taking and systemic risk for very large ‘too-big-too-fail’ banks and large U.S. and European banks but such a relationship is inverted during and after the crisis. A deeper investigation shows that such a behaviour before the crisis is mostly relevant for very large banks and large banks with high growth strategies. Banks’ business models also influence this relationship. We find that for banks following a focus strategy, higher charter value amplifies both standalone and systemic risk for large U.S. and European banks. Our findings have important policy implications and cast doubts on the relevance of the uniform more stringent capital requirements introduced by Basel III.     

How Much Will It Cost to Join the Club? The Extra Costs of Approximating Lithuanian Environmental Laws with Those of the European Union

This paper presents estimates of costsassociated with approximating Lithuanianenvironmental protection legislation with thatof the European Union (EU). Lithuania is oneof twelve EU associate members in Central andEastern Europe that is currently preparing foraccession by approximating their legislationwith that of the EU. The costs of fifteen EUdirectives are considered and details are givenon four directives. Necessary investments maytotal Euro 1500 million by 2015 and the presentvalue of all annualized costs is expected to beabout Euro 2200 million. In 2015, annualized costsare estimated to be approximately Euro 500 million,but these costs are only part of the totalcosts of approximation. Non-environmentalcosts are not considered. Assuming a modestlyambitious average annual growth of GDP of 2.0%per year implies that approximation with thefifteen directives analyzed will cost roughly3.5% of GDP in 2015. This level of additional commitment to environmentalprotection is itself much higher than the 2.0%of GDP being spent on average by OECD countriesand suggests the possibility of a substantialeconomic burden on the Lithuanian economy. Public budgets and households are expected tocarry a substantial portion of this cost,because many directives are the responsibilityof national and local governments. Making theright choices that are expected to be part ofapproximation with the environmental acquis is likely to benefit from carefulcomparisons of costs and willingness to pay forthe environmental benefits of approximation.     

The transmission of financial shocks in an estimated DSGE model with housing and banking

We develop a dynamic stochastic general equilibrium (DSGE) model with housing and banking to study the transmission of financial shocks between the financial and real sectors. A deterioration in the bank's balance sheet induced by financial shocks could have amplified and persistent impacts on real activities. The amplification of the shocks are originated from financial frictions tied to households and banks. We find that a disruption in bank net worth initiated by capital quality shocks generates a decline in household loans, house prices and output. Bank liquidity shocks also have negative effects on these variables. Housing preference shocks could generate a positive comovement between house prices and output. All these findings are qualitatively consistent with empirical evidence, suggesting that these financial shocks are critical to the dynamics of house prices and other macroeconomic variables.     

The Determinants of Foreign Direct Investment in the CEECs: New evidence from sectoral patterns

This paper investigates the determinants of European Union FDI in the CEECs at sectoral level. The aim is to understand whether and to what extent FDI undertaken in different sectors reacts to the characteristics of the host countries. The analysis is based on a dataset created specifically for this purpose. It concentrates on the manufacturing sectors, classified according to the Pavitt taxonomy. Firstly, data summarizing the recent trend of FDI in the CEECs is presented and then empirical evidence given to account for differences between sectors. The estimated model is a generalization of a three-way fixed effect model incorporating 'classic' variables, such as labour costs as well as country-specific variables, i.e., the stage reached in the transition process. The results confirm the presence of heterogeneity at sector level.     

Fiscal policy in Central and Eastern Europe with real time data: cyclicality,inertia and the role of EU accession

This article evaluates the cyclicality, inertia and effect of EU accession on fiscal policy in Central and Eastern Europe (CEE) using a real time dataset. Budget balances are found to react in a stabilizing way to economic activity – every extra percentage point of economic growth is associated with an improvement in the budget balance of 0.3 percentage points of Gross Domestic Product (GDP) – and there is no evidence of an asymmetric reaction to the cycle. Balances are much less inert than is typically found in Western Europe. However, there is clear evidence of a fiscal loosening in the run-up to EU accession. This began in 1999 in larger central European countries, often identified as ‘front-runners’. The other seven began loosening in 2001, after the Nice Treaty was agreed. For both sets of countries, this loosening cumulatively amounts to some 3% of GDP.     

The economic performance of state-owned enterprises in Central and Eastern Europe

This article explores the economic performance of state ownership in the largest non-financial enterprises operating in 13 post-socialist Central and Eastern European (CEE) countries over the period 2007–2013. The largest state-owned enterprises (SOEs) are selected based on the ‘Coface – 500 Top Companies in CEE’ list in 2013. Of these 500 enterprises, 69 were identified as state-owned. All originated in the socialist period. The majority of them are from Poland and Ukraine. SOEs hold a dominant position in energy supply, the oil and gas sector, and transport. We find that the persistence of state ownership in post-socialist countries is caused by incomplete privatisation and the presence of SOEs within strategic sectors. The economic performance of the largest state-owned companies is, on average, comparable to their private counterparts.