EMU reflection paper mere “wish list” or plausible way forward?

On 15 December EU leaders will discuss integration. One proposal that is mentioned in the debates in France and Germany is a repurposing of the ESM as a “European Monetary Fund”. Using a Q&A format, we consider what reforms might mean for the euro area bailout fund. [more]

Money market funds in the euro area managed assets worth EUR 1.16 trillion in mid-2017. Low interest rates did not hamper the impressive growth by EUR 260 billion during the past three years. But new EU regulation taking effect in 2018 will impose stricter rules on fund managers. However, the measured regulation will probably not cause a major restructuring of the euro area market, in contrast to the reshuffling seen in response to the US money market fund reform. In the future, Brexit could lead to competition for non-EUR denominated money market fund business between the EU and the UK. [more]

Optimism about Europe’s future surged after the French elections, while the EU is increasingly losing patience with British “divorce tactics”. Franco-German initiatives will be key to set the path for European reforms but the debate is expected to only gain speed after the formation of a new German government towards the end of the year. Meanwhile, the refugee challenge and EU external relations will remain on top of Europe’s political agenda. [more]

It is remarkable what and how much has changed in the European banking industry since the global financial crisis erupted almost exactly ten years ago: comparing H1 2017 to the peak of the boom in H1 2007, revenue composition has shifted towards more sustainable sources, with the share of net interest income up to more than half of the total and trading income much diminished. Expenses are down, but only moderately, resulting in a fall in profits to just half of the pre-crisis level. Both the absolute amount of capital and capital ratios have risen dramatically. On the other hand, total assets have declined substantially over the past decade, contributing to a massive de-risking of the sector. [more]

Yields on German government debt securities have fallen rapidly in the aftermath of the global financial and economic crisis and provided a considerable relief to the public sector budget. At the moment, federal government securities have negative yields for maturities up to 6 years and the yield on 10 year German Bunds stands at just roughly 0.4%. [more]

The German election will take place on September 24. Polls indicate a fourth term for Chancellor Merkel but it remains to be seen with which coalition she will govern. The booming economy has fostered cross-party complacency and prevented the necessary debate about how to ensure Germany’s future prosperity. [more]

The benign economic and public environment allows to fundamentally address shortcomings of the E(M)U. The next German government’s term is faced with numerous challenges ranging from Brexit and its impact on the next EU Budget to migration and the upgrade of the euro area. A revitalised relation with France provides the opportunity for substantive steps to further stabilise the euro area albeit Germany and France need to find common ground on many issues and seek the support of EU partners. European politics is still less of a topic for the German electorate not least as mainstream parties are all various shades of pro-European. However, the next government’s party composition is likely to matter for both speed and scope of changes on European level. [more]

The European project has had some ups and downs but the extent of European cooperation is unique in history. This is why the outsiders’ view on the European Union is even more interesting. [more]

European defence and security spending is a thread that connects several disparate themes: the refugee crisis and the need to better secure EU borders; US criticism of Europe’s NATO spending; and the move towards closer European integration. [more]

European banks have enjoyed a good start to the year. Revenues have risen, much more than costs. Loan loss provisions have remained low. Bottom-line profit has jumped by more than 40% compared with 12 months ago. However, the rebound has followed what was a weak period in the previous year – in fact, the industry is in many ways just back where it was in Q1 2015. What is more, judging only by the P&L, there has been relatively little change since the European debt crisis erupted in Greece seven years ago. The industry has more or less been treading water ever since, a frustrating experience after decades of strong growth and massive recent restructuring efforts. However, other performance indicators clearly show major improvements, not least with regard to banks’ de-risking and buildup of capital. [more]

The massive overvaluations on the euro-area market for residential real estate (as measured by the price-income ratios for 2007 and 2008) are a thing of the past. Currently, house prices are excessive only in several smaller countries. However, this situation is likely to change towards the end of the decade if the dynamic uptrend in German house prices continues as expected. [more]

Policymakers, clients and bankers themselves wish to know what constitutes a large bank. What is the right indicator to look at if a supervisor is interested in systemic importance and risks to financial stability? What is the right indicator to look at if a company needs a bank that can provide large-scale financing and take on substantial hedging risks? Various measures are currently in use, each with strengths and shortcomings. Regulators and academics mostly look at total assets, an accounting figure. Others reach conclusions from Tier 1 capital or market cap, two regulation- and market-based indicators. This study discusses these and other measures in detail. It draws quantitative comparisons, including across countries and different financial systems, and proposes one indicator that is best suited to measure bank size. [more]