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The Euro Area's Common Pool Problem Revisited: Has the Single Supervisory Mechanism Ameliorated Forbearance and Evergreening

Listed author(s):
  • Sven Steinkamp
  • Aaron Tornell
  • Frank Westermann

The Single Supervisory Mechanism was introduced to eliminate the common-pool problem and limit uncontrolled lending by national central banks (NCBs). We analyze its effectiveness. Second, we model how, by forbearing and providing refinancing credit, NCBs avoid domestic resolution costs and, instead, share potential losses within the Euro Area. This results in “evergreening” of bad loans. Third, we construct a new evergreening index based on a large worldwide survey administered by the ifo institute. Regressions show evergreening is significantly greater in the Euro Area and where banks are in distress. Finally, greater evergreening accompanies higher growth of NCB-credit and Target2-liabilities.

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File URL: http://www.cesifo-group.de/DocDL/cesifo1_wp6670.pdf
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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 6670.

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Date of creation: 2017
Handle: RePEc:ces:ceswps:_6670
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  1. Acharya, Viral & Eisert, Tim & Eufinger, Christian & Hirsch, Christian, 2017. "Whatever it takes: The real effects of unconventional monetary policy," SAFE Working Paper Series 152, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.
  2. Joe Peek & Eric S. Rosengren, 2005. "Unnatural Selection: Perverse Incentives and the Misallocation of Credit in Japan," American Economic Review, American Economic Association, vol. 95(4), pages 1144-1166, September.
  3. Nyborg, Kjell G., 2017. "Central bank collateral frameworks," Journal of Banking & Finance, Elsevier, vol. 76(C), pages 198-214.
  4. Sinn, Hans-Werner, 2017. "The Euro Trap: On Bursting Bubbles, Budgets, and Beliefs," OUP Catalogue, Oxford University Press, number 9780198791447.
  5. Ricardo J. Caballero & Takeo Hoshi & Anil K. Kashyap, 2008. "Zombie Lending and Depressed Restructuring in Japan," American Economic Review, American Economic Association, vol. 98(5), pages 1943-1977, December.
  6. Aizenman, Joshua, 1992. "Competitive Externalities and the Optimal Seigniorage," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 24(1), pages 61-71, February.
  7. Casella, Alessandra, 1992. "Participation in a Currency Union," American Economic Review, American Economic Association, vol. 82(4), pages 847-863, September.
  8. Sumit Agarwal & David Lucca & Amit Seru & Francesco Trebbi, 2014. "Inconsistent Regulators: Evidence from Banking," The Quarterly Journal of Economics, Oxford University Press, vol. 129(2), pages 889-938.
  9. Milton Friedman & Anna J. Schwartz, 1963. "A Monetary History of the United States, 1867–1960," NBER Books, National Bureau of Economic Research, Inc, number frie63-1, November.
  10. Willem Buiter & Ebrahim Rahbari, 2012. "The European Central Bank as Lender of Last Resort for Sovereigns in the Eurozone," Journal of Common Market Studies, Wiley Blackwell, vol. 50, pages 6-35, September.
  11. repec:eee:jbfina:v:83:y:2017:i:c:p:232-248 is not listed on IDEAS
  12. Acharya, Viral V & Eisert, Tim & Eufinger, Christian & Hirsch, Christian, 2017. "Whatever it takes: The Real Effects of Unconventional Monetary Policy," CEPR Discussion Papers 12005, C.E.P.R. Discussion Papers.
  13. Tamura, Kentaro & Tabakis, Evangelos, 2013. "The use of credit claims as collateral for Eurosystem credit operations," Occasional Paper Series 148, European Central Bank.
  14. Eichengreen, Barry, 1990. "One Money for Europe? Lessons from the US Currency Union," Department of Economics, Working Paper Series qt6ks1k831, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  15. von Hagen, Jurgen & Suppel, Ralph, 1994. "Central bank constitutions for federal monetary unions," European Economic Review, Elsevier, vol. 38(3-4), pages 774-782, April.
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