Critical functions and public interest in banking services: Need for clarification? Banking Union Scrutiny. Bruegel Report, November 2017

Under the EU framework for dealing with banking problems, resolution is seen as an exception to be granted only if liquidation under national insolvency proceedings is not warranted. We look at the recent liquidation of two Italian banks to show how resolution and liquidation differ substantially when it comes to the scope of legislation applicable to the use of public funds. We argue that more clarity would be needed as to the role that the concepts of critical functions and public interest play in Member States’ decision to grant liquidation aid, and that the two-tier system – in which resolution is done at the EU level but insolvency remains a national prerogative – raises issues in the context of Banking Union

Income convergence during the crisis: did EU funds provide a buffer? Bruegel Working Paper Issue 6 2016

This paper shows that economic convergence continued during the crisis for the EU as a whole, although at a slower pace, but for regions in the EU14, and especially in the euro area, convergence appears to have stopped during the crisis, or even switched to a divergence path

Italy’s constitutional referendum: a roundup of the political commentary

On Sunday, 4 December, Italians are going to the polls to approve or reject the proposed constitutional reform, promoted by PM Matteo Renzi. The referendum may also carry political and economic consequences, as Renzi has stated he would resign in case the reform should not be approved. In the run up to the vote, Silvia Merler summarises some of the most interesting commentary on the topic

Bank liquidation in the European Union: clarification needed. Bruegel Policy Contribution Issue n˚01 | January 2018

Critical functions and public interest. What role do they play in Member States’ decision to grant liquidation aid? The author of this paper looks at how resolution and liquidation differ substantially when it comes to the scope of legislation applicable to the use of public funds and how the diversity in national insolvency regimes is a source of uncertainty about the outcome of liquidation procedures

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)

THE BLACK SHEEP? ITALY AND THE PUZZLE OF EUROPEAN FISCAL SOLIDARITY

Over the past decade, two crises have scarred the European Economic and Monetary Union (EMU): the sovereign debt crisis of 2010 and the COVID-19 crisis of 2020. From an economic standpoint, these events could not be more different The Eurozone debt crisis was an asymmetric shock with origins endogenous to domestic economic policymaking. It was born out of ten years of economic divergence but became a trigger for massive convergence of the Eurozone South towards the growth model of the Eurozone North. Politically, that crisis cracked open a cleavage on the issue of intra-EMU fiscal solidarity, underpinned by a discourse that saw the EMU split between Northern fiscal ‘saints’ and Southern ‘sinners’. The COVID-19 pandemic was a symmetric shock – a virus spreading globally – whose origins were exogenous to domestic economic policymaking. Yet, it risked having a diversified economic impact across countries due to potentially sizeable asymmetries in the economic recovery. The diversified debt legacy left by the Eurozone crisis on Member States’ balance sheets limited the fiscal space of some countries and their ability to spend to tackle the impact of an otherwise symmetric shock. Given the non-economic origins of the crisis and its potential to revive the risk of a two-speed Eurozone, the COVID-19 shock would appear to be a politically uncontroversial case for cross-border fiscal solidarity within the EMU. Yet, the early phase of crisis management featured a reminiscence of the familiar north-south tensions and a manifested unwillingness to engage in fiscal solidarity. The Next Generation EU package agreed in July 2020 constituted a major step forward, by allowing for large size EU issuance to finance unprecedented cross-border fiscal transfers. Yet, the political process underpinning the agreement was acrimonious and the resulting solidarity is clearly framed as a one-off event. Why was an unprecedented, symmetric, and exogenous shock like COVID-19 not enough to overcome the North-South cleavage on fiscal solidarity in the EMU? This is the puzzle central to this work, which uses a range of quantitative and qualitative analyses to explore the political economy of the EU fiscal solidarity discussion both before and during the COVID-19 crisis

Squaring the cycle: capital flows, financial cycles, and macro-prudential policy in the euro area. Bruegel Working Paper 2015/14, November 2015

• Before the financial and economic crisis, monetary policy unification and interest rate convergence resulted in the divergence of euroarea countries’ financial cycles. This divergence is deeply rooted in the financial integration spurred by currency union and strongly correlated with intra-euro area capital flows. Macro-prudential policy will need to deal with potentially divergent financial cycles, while catering for potential cross-border spillovers from domestic policies, which domestic authorities have little incentive to internalise. • The current framework is unfit to deal effectively with these challenges. The European Central Bank should be responsible for consistent and coherent application of macro-prudential policy, with appropriate divergences catering for national differences in financial conditions. The close link between domestic financial cycles and intra-euro area capital flows raises the question of whether macro-prudential policy in the euro area can be compatible with free flows of capital. Financial cycle divergence had its counterpart in the build-up of macroeconomic imbalances, so effective implementation of the Macroeconomic Imbalance Procedure would support and strengthen macro-prudential policy

Analysis of developments in EU capital flows in the global context. Bruegel Final study Bruegel N° 2015.2574, November 2015

Free movement of capital, which is one of the four fundamental economic freedoms of the European Union, can enhance welfare if it leads to better allocation of financial and productive resources. However, it can also be a source of vulnerability, with far-reaching spillovers. Monitoring and assessing capital flows is therefore crucial for policymakers, market participants and analysts