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

Author

Listed:
  • Sven Steinkamp

    () (University Osnabrueck)

  • Aaron Tornell

    () (UC Los Angeles)

  • Frank Westermann

    () (University Osnabrueck)

Abstract

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.

Suggested Citation

  • Sven Steinkamp & Aaron Tornell & Frank Westermann, 2017. "The Euro Area’s Common Pool Problem Revisited: Has the Single Supervisory Mechanism Ameliorated Forbearance and Evergreening?," Working Papers 107, Institute of Empirical Economic Research, Osnabrueck University, revised 06 Oct 2017.
  • Handle: RePEc:iee:wpaper:wp0107
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    References listed on IDEAS

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    Cited by:

    1. Andreas Steiner & Sven Steinkamp & Frank Westermann, 2017. "Exit Strategies, Capital Flight and Speculative Attacks: Europe's Version of the Trilemma," CESifo Working Paper Series 6753, CESifo Group Munich.

    More about this item

    Keywords

    Single Supervisory Mechanism; Evergreening; Non-performing Loans; Common-pool Problem;

    JEL classification:

    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F55 - International Economics - - International Relations, National Security, and International Political Economy - - - International Institutional Arrangements
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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