The Restructuring of Banks and Financial Systems in the Euro Area and the Financing of SMEs

265 Pages·2015·2.646 MB·English

by  Filippo Luca Calciano, Franco Fiordelisi, Giovanni Scarano

Central Issues in Contemporary Economic Theory and Policy
General Editor: Gustavo Piga, Managing Editor, Rivista di Politica Economica, Rome, Italy
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Mario Baldassarri, Luigi Paganetto and Edmund S. Phelps (editors)
INTERNATIONAL ECONOMIC INTERDEPENDENCE, PATTERNS OF TRADE BALANCES
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Mario Baldassarri (editor)
KEYNES AND THE ECONOMIC POLICIES OF THE 1980s
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OLIGOPOLY AND DYNAMIC COMPETITION
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THE ITALIAN ECONOMY
Heaven or Hell?
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IS THE ECONOMIC CYCLE STILL ALIVE?
Theory, Evidence and Policies
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DEBT, DEFICIT AND ECONOMIC PERFORMANCE
Mario Baldassarri, John McCallum and Robert A. Mundell (editors)
GLOBAL DISEQUILIBRIUM IN THE WORLD ECONOMY
Mario Baldassarri and Robert A. Mundell (editors)
BUILDING THE NEW EUROPE VOLS I & II
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PRIVATIZATION PROCESSES IN EASTERN EUROPE
Theoretical Foundations and Empirical Results (Vols I & II)
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HOW TO REDUCE UNEMPLOYMENT IN EUROPE
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THE NEW WELFARE
Unemployment and Social Security in Europe
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FINANCIAL MARKETS
Imperfect Information and Risk Management
Mario Baldassarri and Bruno Chiarini (editors)
STUDIES IN LABOUR MARKETS AND INDUSTRIAL RELATIONS
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ROOTS OF THE ITALIAN SCHOOL OF ECONOMICS AND FINANCE
From Ferrara (1857) to Einaudi (1944) (three volumes)
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INTERNATIONAL PROBLEMS OF ECONOMIC INTERDEPENDENCE
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THE INTERNATIONAL SYSTEM BETWEEN NEW INTEGRATION AND
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ANTITRUST, REGULATION AND COMPETITION
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THE PRIVATIZATION OF PUBLIC UTILITIES
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EQUITY, EFFICIENCY AND GROWTH
The Future of the Welfare State
Mario Baldassarri, Luigi Paganetto and Edmund S. Phelps (editors)
THE 1990s SLUMP
Causes and Cures
Mario Baldassarri, Luigi Paganetto and Edmund S. Phelps (editors)
WORLD SAVING, PROSPERITY AND GROWTH
Mario Baldassarri, Luigi Paganetto and Edmund S. Phelps (editors)
INTERNATIONAL DIFFERENCES IN GROWTH RATES
Market Globalization and Economic Areas
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FISCAL PROBLEMS IN THE SINGLE-MARKET EUROPE
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THE ITALIAN ECONOMY
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MAFFEO PANTALEONI
At the Origin of the Italian School of Economics and Finance
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INSTITUTIONS AND ECONOMIC ORGANIZATION IN THE ADVANCED ECONOMIES
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The Restructuring of Banks
and Financial Systems in the
Euro Area and the Financing
of SMEs
Edited by
Filippo Luca Calciano, Giovanni Scarano
Roma Tre University
and
Franco Fiordelisi
Durham University, UK
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Contents
Introduction 1
Filippo Luca Calciano, Franco Fiordelisi and Giovanni Scarano
I – Restructuring Banks and Financial Systems in the
Euro Area
Regulating Core and Non-Core Banking Activities.
The Unanswered Question 11
Giampaolo Gabbi and Andrea Sironi
The Banking Regulatory Bubble and How to Get out of It 31
Giovanni Ferri and Doris Neuberger
Fifteen Years of Single Monetary Policy in the Euro Area:
A Bird’s Eye View, Effects on Italian Banks During the Crisis, and
Lessons to Draw 63
Vincenzo Chiorazzo and Pierluigi Morelli
Learning on the Road towards the Banking Union 81
Franco Bruni
The Economic Impact of EU Competitiveness Programs on
Italian SMEs 121
Stefano Marzioni, Luciano Monti, Alessandro Pandimiglio and
Marco Spallone
Regulatory Impacts from the Financial Crisis on German Banks 141
Michaela Hönig
Corporate Savings and the 2007–2009 Financial Crisis: A Warning
for the European Banking Union 175
Giovanni Scarano
II – New Tools for the Financing of SMEs
The European Central Bank and the Financing Conditions of
Small and Medium-Sized Enterprises in Europe 191
Ansgar Belke and Florian Verheyen
After the Credit Crunch: Long-Term Finance for Economic Growth 209
Angelo S. Baglioni, Andrea Monticini and Giacomo Vaciago
v
vi Contents
New Finance for Italian Firms: Issues of
Mini-Bonds and SME Entering the Stock Exchange
are the Most Promising Novelties 223
Ciro Rapacciuolo
Index 251
Introduction◊
Filippo L. Calciano, Giovanni Scarano* Franco Fiordelisi
Roma Tre University Durham University
[JEL Classification: G20; G30].
Keywords: banking; regulation; SMEs.
1. - The Regulatory Framework of Banks in the Euro Area
Banking has traditionally been one of the most heavily regulated industries in
all countries: the existence of specific market imperfections (such as negative ex-
ternalities in case of bank failures, asymmetric information) have always called
for government interventions. Until the late 1980s, banking was strongly regu-
lated in most countries to restrict competition (viewed as the major source of
banking instability) through entrance barriers, opening of new branches, restrict-
ing bank activities, separating commercial and investing banking activities, etc.
As a result, most banks were run both inefficiently and ineffectively. At the end
of 1980, there was a general consensus to shift toward a new prudential-style of
regulation, based on the establishment of objective rules (based on risk-weighted
capital requirements) aiming to achieve both banking stability and efficiency. As
such, structural regulation tools were removed by mid 1990s in most countries
and the re-regulation started. However, in some countries (e.g. the US), the re-
regulation was not timely implemented (or implemented at all). This is what the
US Financial Crisis Inquiry Commission (2011, page xviii) reports:
◊ The introduction is the result of a close co-operation between the authors.
However, Franco Fiordelisi has mainly contributed to section 1, Filippo Calciano
to section 2 and Giovanni Scarano to section 3. The essay by Gabbi and Sironi has
undergone updates and is not the original paper published in the Rivista di Politica
Economica.
* <[email protected]>, Department of Economics;
< [email protected]>, Business School;
<[email protected]>, Department of Economics.
1
2 Filippo L. Calciano, Franco Fiordelisi and Giovanni Scarano
«The sentries were not at their posts, in no small part due to the widely accepted
faith in the self-correcting nature of the markets and the ability of financial insti-
tutions to effectively police themselves. More than 30 years of deregulation and
reliance on self-regulation by financial institutions, championed by former Federal
Reserve chairman Alan Greenspan and others, supported by successive adminis-
trations and Congresses, and actively pushed by the powerful financial industry at
every turn, had stripped away key safeguards, which could have helped avoid ca-
tastrophe. This approach had opened up gaps in oversight of critical areas with
trillions of dollars at risk, such as the shadow banking system and over-the-counter
derivatives markets. In addition, the government permitted financial firms to pick
their preferred regulators in what became a race to the weakest supervisor».
As an example of the slow re-regulation process, the Basel 2 capital adequacy
framework became effective only after 10 years of discussions in January 2008 in
the majority of developed countries (but not in the US). As such, it is not sur-
prising that the financial system became riskier in the 2000s than in the past (see
Rajan, 2006) and only the international banking system has been hit by such a
deep financial crisis from 2007 onwards. This imposed on central banks to sig-
nificantly increase the amount of liquidity in the financial system and on national
governments to support banks using different tools (capital injections, subsidized
loans, etc.). In the following years, this financial crisis gave rise to a corresponding
public finance crisis, with many national governments of developed countries
facing a significant increase in their budget deficit and national debt.
The Basel Committee (2009) describes the causes of the financial crisis asfollows:
«One of the main reasons the economic and financial crisis became so severe
was that the banking sectors of many countries had built up excessive on- and
off-balance sheet leverage. This was accompanied by a gradual erosion of the level
and quality of the capital base. At the same time, many banks were holding in-
sufficient liquidity buffers. The banking system therefore was not able to absorb
the resulting systemic trading and credit losses nor could it cope with the rein-
termediation of large off-balance sheet exposures that had built up in the shadow
banking system. The crisis was further amplified by a procyclical deleveraging
process and by the interconnectedness of systemic institutions through an array
of complex transactions». To solve these problems, the Basel 3 framework pro-
posed a heterogenous set of new rules to enhance the stability of the banking sys-
tem, which consist essentially in the introduction of:
Introduction 3
1) two capital buffers to reduce procyclicality:
a) the “capital conservation buffer”, set at 2.5% of a bank’s risk-weighted assets to
absorb losses emerging during periods of economic and financial stress; and
b) the “countercyclical capital requirement” (ranging between 0% and 2.5% of
a bank’s risk-weighted assets, as decided by national regulatory authorities)
to protect a banking system from risks related to an excessive loan growth;
2) a maximum leverage threshold, i.e.a minimum 3% ratioof high quality capital
(Tier 1 capital) over the sum of total assets and off-balance sheet exposures;
3) two liquidity constrains:
a)the “liquidity coverage ratio”aims to ensure that banks maintain an adequate
level of high quality liquid assets (which can be readily converted into cash)
to withstand an acute short-term (30 days) stress scenario;
b)the “net stable funding ratio”designed to encourage banks to balance stable
(medium to long term) funding sources with their corresponding medium
to long term needs;
4) a new capital requirement for Globally Systemically Important Banks (G-SIB);
5) new counterparty risk capital requirements;
6) two new requirements (the Incremental Risk Charge and the Stressed VAR)
for the market risk.
The Basel 3 framework has been implemented in most of developed banking
markets as Europe, India, China and, partly, the US. Focusing on Europe, Gov-
ernment agreed to create a banking union (completing the economic and mon-
etary union) and allowing for centralized application of EU-wide rules for banks
in the euro area (and any non-euro Member States that would want to join).
Specifically, a common set of rules for banks was set for all banks in all 28 Mem-
ber States (i.e. a single rulebook), in particular Capital Requirements Directive
IV and the Capital Requirements Regulation. The banking union ensures the
common implementation of those rules in the Eurozone: as of November 2014,
the European Central Bank (ECB) will directly supervise more than 6,000 banks
(covering 85% of total assets) in the euro area in the framework of the Single Su-
pervisory Mechanism. In addition, in case banks do end up in difficulty, the Di-
rective on Bank Recovery and Resolution was also approved, i.e. a common
framework to manage the process, including a means to wind them down in an