Inflation is back

An overview of how economic bloggers see it and the issues they are discussing, by Pia Hütt

Three Essays on Financial Economics

Diese Dissertation besteht aus drei Kapiteln, die durch die europäische Schuldenkrise als gemeinsames Thema verbunden sind. Kapitel eins untersucht die Auswirkungen der Finanzintegration auf das Kreditangebot der Banken und die Realwirtschaft. Im Jahr 2007 ersetzt die Europäische Zentralbank die nationalen Sicherheitenlisten durch eine einzige Euroraumliste. Für Banken mit solch neu zugelassene Sicherheiten sinken die Finanzierungskosten. Diese Banken vergeben mehr Kredite, insbesondere an risikoreichere und unproduktivere Firmen in anderen Euroraumländern. Bei diesen Firmen wiederum nehmen Beschäftigung und Investitionen zu. Die Ergebnisse verdeutlichen die unbeabsichtigte Rolle der Finanzintegration beim Anheizen grenzüberschreitender Kreditblasen. Kapitel zwei untersucht die politischen Verbindungen von Bankvorständen in Krisenzeiten. Regierungen beeinflussen nach einer staatlichen Bankenrettung die Zusammensetzung von Bankvorständen, um sich Kontrollrechte zu sichern. Wir stellen fest, dass die Anzahl der politischen Vorstandsmitglieder nach einer staatlichen Unterstützung um 21,4% steigt. Gerettete Banken mit solch neuen politischen Vorständen schneiden in Bezug auf Marktkapitalisierung und Bewertung deutlich besser ab als gerettete Banken ohne solche Verbindungen. Kapitel drei liefert kausale Belege für die Auswirkungen von Kreditklemmen auf politische Radikalisierung. Mit Daten zu Bank-Firmen-Verbindungen und kommunalen Wahlergebnissen zeigen wir, dass Unternehmen mit einer Beziehung zu schwachen Banken einen Rückgang ihres Kreditangebots und des Beschäftigungswachstums erleben. Anschließend schätzen wir die Auswirkungen der Arbeitslosigkeit auf das Wahlverhalten. Wir konstruieren ein Instrument für die Arbeitslosigkeit, das auf der Abhängigkeit gegenüber schwachen ausländischen Banken auf kommunaler Ebene basiert. Ein Anstieg der instrumentierten Arbeitslosigkeit führt zu einer Steigerung der Wählerradikalisierung um 7 Prozentpunkte.This thesis consists of three chapters linked by the European Debt Crisis as their common theme. Chapter One studies the effect of financial integration on bank credit supply and the real economy. In 2007, the European Central Bank replaces national collateral lists with a single euro area list. Banks holding newly eligible assets experience a reduction in their cost of funding.These banks lend more, especially to riskier and less productive borrowers located in other euro area countries. The borrowers in turn experience growth in employment and investment. The results highlight the unintended role of financial integration in fueling crossborder credit booms. Chapter Two investigates the political ties of too-big-to-fail bank boards in crisis times. After a bailout, governments are likely to influence bank board compositions to secure control rights. Combining two novel datasets on political ties of banks and state aid in the European Union, we find that the number of politically connected board members increases by 21.4% following government support. Bailed-out banks with such new political ties perform better in terms of market capitalisation and valuation than bailed-out banks without such ties. Chapter Three provides causal evidence on the effect of credit crunches on political radicalisation. We combine data on bank-firm connections and electoral outcomes at the city-level during the 2008-2014 Spanish Financial Crisis. First, we show that firms in a relationship with weak banks experience a reduction in their loan supply and employment growth. Next, we estimate the effects of unemployment on voting behaviour. We construct an instrument for unemployment based on the city-level exposure to foreign weak banks. We find that a one standard deviation increase in instrumented unemployment translates into a 7 percentage point increase in the radicalisation of voters

Fiscal capacity to support large banks. Bruegel Policy Contribution Issue n˚17 | 2016

During the global financial crisis and subsequent euro-debt crisis, the fiscal resources of some countries appeared to be insufficient to support their banking systems. These countries needed outside support to stabilise their banking systems and thereby their wider economies

Organisational capital and hospital performance in Hungary

The paper presents a case study that explores the possibilities of measuring own-account OC (organisational capital) and its impact on hospital performance in Hungary. The authors’ dataset consists of the 2010–2013 time series of 58 general hospitals owned by the government. Investment in own-account OC is measured both in a narrow sense and in a broad sense, depending on the range of employees contributing to OC. According to the estimates, the average stocks of OC in the examined period varied between 2.5% and 4.3% of the wages of all employees, provided that only managers and other executives were engaged in creating OC (narrow approach), and between 11.3% and 12.3% when employees in several non-managerial positions were also considered as contributors to OC (broad approach). The analysis provides some evidence that in the latter case, OC stocks have a slight positive effect on clinical performance measured by the cost weighted number of activities. In the narrow approach, a positive correlation could be detected if higher values were at-tached to the DRGs (diagnosis-related groups) of complicated interventions and of treatment of serious diseases

Should the ‘outs’ join the European banking union? Bruegel Policy Contribution Issue 2016/03 February 2016

For political reasons, European Union member states’ opinions on joining banking union range from outright refusal to active consideration. The main stance is to wait and see how the banking union develops. The wait-and-see positions are often motivated by the consideration that joining banking union might imply joining the euro. However, in the long term, banking union’s ultimate rationale is linked to cross-border banking in the single market, which goes beyond the single currency. This Policy Contribution documents the banking linkages between the nine ‘outs’ and 19 ‘ins’ of the banking union. We find that some of the major banks based in Sweden and Denmark have substantial banking claims across the Nordic and Baltic regions. We also find large banking claims from banks based in the banking union on central and eastern Europe. The United Kingdom has a special position, with London as both a global and European financial centre. We find that the out countries could profit from joining banking union, because it would provide a stable arrangement for managing financial stability. Banking union allows for an integrated approach towards supervision (avoiding ring fencing of activities and therefore a higher cost of funding) and resolution (avoiding coordination failure). On the other hand, countries can preserve sovereignty over their banking systems outside the banking union

Returns on foreign assets and liabilities: exorbitant privileges and stabilising adjustments. Bruegel Working Paper ISSUE 07 | 29 NOVEMBER 2017

Financial globalisation has led to large increases in foreign assets and liabilities in recent decades, increasing the scope for valuation changes that are potentially greater than trade or financial flows. We confirm that the United States enjoys an ‘exorbitant privilege’ on flow income from foreign assets, which is primarily related to foreign direct investment (FDI). The geographical allocation of FDI assets explains only a small part of the US yield advantage. The key reason is that US, and also British and Japanese, investors were able to outperform the average yield earned in the countries of their FDI destinations, while most continental European investors earn the average. Further research should explore if large FDI investment in ‘tax optimisation’ countries, the improper consideration of intellectual property, or financial sophistication contributed to these high yields. For several countries, valuation changes were larger than current account and financial transactions, highlighting the importance of such changes. In the European Union, the generally negative international investment positions of a number of central and southern European countries were greatly supported by EU transfers. Valuation changes on net foreign assets do not look random and played an important role in the sustainability of international investment positions before and after the 2008 crisis. Countries with negative net international investment positions tend to have positive revaluation gains, while countries with large net foreign assets tend to suffer from revaluation losses. Large net foreign asset holders including China, Saudi Arabia, Switzerland, Japan and Germany, suffered significant losses in 2007-16, helping the sustainability of the negative positions of other countries. Risk sharing was also fostered by losses suffered by the US since 2007. There is no uniform tendency in relation to the asset classes from which these losses arose. Future research should aim to better understand the drivers of these valuation changes

Total assets versus risk weighted assets: does it matter for Mrel? Bruegel Policy Contribution Issue 2016/12

Highlights • The European Union’s Bank Recovery and Resolution Directive foresees a ‘minimum requirement for own funds and eligible liabilities’ (known as MREL) that banks need to comply with in order to ensure the effectiveness of the bail-in tool. The details of how MREL should be constructed in practice are under discussion. • We look at alternative ways to compute MREL, showing how the choice of the benchmark metric (risk weighted assets, total assets or leverage exposure) can change the allocation of requirements across banks. We also review MREL in light of the global effort to ensure future resolvability of banks, highlighting some differences with, and inconsistencies in relation to, the Financial Stability Board’s total loss-absorption capacity (TLAC)