全球智库信息集成服务系统

0.3 Mb

Download PDF

Highlights

• The International Monetary Fund (IMF) played a ground-breaking role in understanding the financial-sector dynamics of the euro-area crisis. It was the first public authority, and one of the first more generally, to acknowledge the role of the bank-sovereign vicious circle as the central driver of contagion in the euro area. It was the first public authority to articulate a clear vision of banking union as an essential policy response, building on its longstanding and pioneering support of banking policy integration in the European Union.
• At national level, the IMF’s approach to the financial sector was appropriate and successful in Ireland and Spain, more limited in the Greek Stand-By Arrangement, and less compelling in Portugal where vulnerabilities remained when the country exited the programme.
• The IMF should further integrate financial-sector policy together with fiscal and macroeconomic issues at the core of its operations, and should devote particular effort to adapting its processes and methodologies to the new context of European banking union.

Executive Summary

Financial sector aspects have pervaded the euro-area crisis, which can be seen as much as a financial sector crisis as a sovereign debt crisis, even though the latter narrative has dominated media coverage and political perceptions. The fragility of sovereigns in the euro area was to a great extent (though not in Greece) the result of large implicit and explicit state guarantees to national banking sectors.

The International Monetary Fund made a significant contribution to addressing the euro area’s financial sector challenges. The euro-area crisis exposed the unsustainability of the then-existing European Union banking policy framework. National authorities were ineffective in supervising banks adequately in the run-up to the crisis, and did not manage and resolve financial sector aspects of that crisis in an effective and timely manner. EU institutions, including the European Central Bank (ECB), did not generally have the skills, experience or mandate that would have enabled them to offset the national authorities’ shortcomings. The IMF was thus in a position to make a major positive difference.

At the euro-area level, the IMF played a ground-breaking role in understanding the dynamics of the crisis and promoting banking union as an essential policy response. The IMF was the first public authority, and one of the first movers more generally, to acknowledge the role of the bank-sovereign vicious circle as the central driver of contagion in the euro area. It was also the first public authority to articulate a clear vision of banking union as a policy response, building on its longstanding and pioneering support for banking policy integration in the EU. Even though its advocacy on these issues was not entirely consistent and continuous, the IMF can claim some credit for the euro area’s breakthrough decision in mid-2012 to initiate the banking union; this decision was the most important turning point in the entire sequence of crises.

In individual countries, the IMF’s approach to the financial sector was appropriate and successful in several, but not all, cases. The Stand-By Arrangement (SBA)-supported programme in Greece preserved short-term financial stability, but many of its financial sector aspects are difficult to assess on a stand-alone basis since it was followed by further IMF assistance (which falls outside the scope of this evaluation). With the Extended Fund Facility (EFF)-supported programme in Ireland, the IMF contributed significantly to the effective resolution of a major banking crisis in that country, and so did the Financial Sector Assessment Programme (FSAP) and subsequent IMF technical assistance in Spain. But the opportunity to clean up the financial sector was missed in the EFF-supported programme for Portugal.

The IMF should preserve, update and develop the institutional knowledge it has acquired about the EU financial sector framework. The Fund’s positive contribution to addressing financial sector aspects of the euro area crisis is widely acknowledged by European policymakers, providing a promising basis for future engagement. The IMF should devote particular effort to adapting its processes and methodologies to the new context of banking union, which, for the euro-area countries, makes it increasingly difficult to consider financial sector issues on a national basis.

1 Introduction

Financial sector issues, especially those relating to banks, played a central and generally under-recognised role in the euro-area crisis. Poorly controlled risk-taking by European banks throughout the 2000s left the EU banking sector highly vulnerable at the onset of the financial crisis in mid-2007, and the subsequent shocks of 2007-08 left it in a situation of systemic fragility. Unlike in the United States, this fragility was not addressed head-on and was allowed to linger. Europe’s banking problem thus long predated the emergence of the sovereign debt sustainability challenges starting at the end of 2009 (see, for example, Posen and Véron, 2009; Rehn, 2016).

The key mechanism of the euro-area crisis was what has become widely referred to as the bank-sovereign vicious circle. The modalities of this mechanism varied in different countries but its ‘doom loop’ pattern became increasingly visible as the crisis worsened, even though it was initially obscured by the unique features of the Greek situation. The bank-sovereign link is deeply embedded in the political economy of each member state. It covers the use of banks by governments as instruments of national policy, including the preferred financing of favoured sectors and of the state itself (‘financial repression’) and, conversely, the protection and promotion of domestic banks by national governments (‘banking nationalism’). Europe’s bank-sovereign links were made explicit by a joint commitment given by EU leaders in mid-October 2008 to provide national funding, capital and guarantees to their respective banking systems so that no bank would be allowed to fail (Council of the European Union, 2008).

The bank-sovereign link exists in all jurisdictions, but it became uniquely destabilising, and thus a vicious circle, in the context of the EU’s single market and single currency. From the 1990s onwards, cross-border market integration and a competitive level playing field were enforced through increasingly powerful European policy frameworks, including regulatory harmonisation and EU competition policy. Banking policy frameworks covering supervision and crisis management, however, remained almost entirely national until well into the crisis, despite reforms such as the so-called Lamfalussy Process of EU-level regulatory and supervisory cooperation, introduced in the early 2000s, and the creation of three European supervisory authorities in January 2011 following the Larosière Report of February 2009. This mismatch created perverse incentives for national authorities to neglect prudential aims for the sake of banking nationalism, which prevented banking supervision from being sufficiently effective in almost all advanced EU member states (Véron, 2013). In the euro area, the problem was compounded by the impossibility of devaluing in the event of a sudden stop.

The set of reforms known as banking union provided a fundamental response to this policy challenge, even though it came late and remains incomplete. Initiated at a euro-area summit on 28-29 June 2012, the banking union policy package aims explicitly to break the bank-sovereign vicious circle through a transfer of most instruments of banking sector policy in the euro area from the national to the European level. Its inception was instrumental in enabling the ECB to announce its Outright Monetary Transactions (OMT) programme, which in turn marked the turning point of the crisis and the start of a broad normalisation of sovereign credit conditions[1]. As described below, however, banking union remains incomplete and will require new policy initiatives if it is to achieve its stated objective of breaking the bank-sovereign vicious circle in the euro area.

Banking union consists of three pillars, under a standard though somewhat simplified classification. These are: (1) a Single Supervisory Mechanism (SSM) that establishes the ECB as the central supervisor of euro-area banks; (2) a Single Resolution Mechanism (SRM) that establishes a new framework for bank crisis management and resolution (though less centralised than the SSM), with a new agency, the Single Resolution Board (SRB), as the hub for corresponding decision making; and (3) a European Deposit Insurance Scheme (EDIS), designed to eventually mutualise the resources and mechanisms through which euro-area countries protect guaranteed deposits.

Even though the three pillars are mutually dependent, banking union is being implemented in a staggered and protracted sequence. The SSM was announced in late June 2012 and has been in force since 4 November 2014. The SRM was announced in December 2012 and has been in force since 1 January 2016, but its financial arm, the Single Resolution Fund (SRF, managed by the SRB) will only reach its steady state in 2024, and even then might lack an effective fiscal backstop[2]. A proposal for the European Deposit Insurance Scheme, published by the European Commission in November 2015, would see the EDIS reach a steady state in 2024 at the same time as the SRF but, at the time of writing, no decision has been made to implement this scheme.

Given the essential importance of the bank-sovereign vicious circle and of banking union in the euro-area crisis, section 2 of this paper is devoted to the IMF’s role in identifying and addressing these topics. It first reviews the IMF’s surveillance of the European financial system since the start of the crisis, with a focus on the role that the Fund played in the gradual identification of the bank-sovereign vicious circle and its acknowledgement by European policymakers in the period 2010-12. It then analyses the sequence of IMF contributions to the elaboration of the policies now known as banking union. The rest of the paper focuses on individual countries. Section 3 discusses the financial-sector aspects of the assistance programmes for Greece (Stand-By Arrangement 2010-12), Ireland (Extended Arrangement 2010-13) and Portugal (Extended Arrangement 2011-14), as well as the IMF’s involvement in Spain (2012-14). Section 4 analyses salient selected themes from the reviewed cases. Section 5 concludes[3].

While each IMF programme was country-specific, their contents were partly determined by the shared EU and euro-area policy framework. The IMF acted in coordination with the European Commission and the ECB, forming a ‘troika’ with these two institutions (Kincaid, 2016). The European Commission was mainly represented in troika discussions by its Directorate-General for Economic and Financial Affairs (DG ECFIN)[4]. On financial sector aspects, however, the Commission’s Directorate-General for Competition (DG COMP) played an influential and autonomous role as the enforcer of the European Union’s unique policy framework for state aid control, with oversight of any national publicly-funded interventions in the banking sector[5]. Another significant EU-level policy framework governs central bank lending operations to banks. The ECB transacts with financial institutions under its monetary policy mandate. In addition, national central banks of the Eurosystem play a lender-of-last-resort role when providing emergency liquidity assistance (ELA), which is supplied under the control of the ECB to ensure compatibility with monetary policy[6]. These central bank interventions powerfully interacted with sovereign financing, through the banks’ purchases of sovereign securities and other mechanisms.

2 Euro-Area-Level Aspects

A. Financial system analysis

Pre-crisis surveillance by the IMF largely missed the build-up of risk in the euro-area banking system. Successive Article IV reports on euro-area policies[7] aptly characterised the shortcomings of cross-border financial integration and corresponding policy challenges (as discussed below), but otherwise devoted only partial attention to financial system developments. They focused on a limited set of indicators, such as banks’ profitability, share prices, market indicators of distance-to-default and reported capital ratios, which did not adequately capture the accumulation of risks in banks’ balance sheets. This observation echoes the identification of shortcomings in general evaluations of the IMF’s surveillance in the run-up to the financial and economic crisis (IEO, 2011; Pisani-Ferry, Sapir, and Wolff, 2011).

The IMF’s underwhelming performance in this respect was comparable to that of most other observers, including most market participants. They similarly failed to identify the overextension of banks’ balance sheets that ultimately provided the basis for Europe’s banking crisis starting in late July 2007. The IMF correctly analysed just before that date that “financial indicators may have peaked [and] there are signs that the credit cycle is gradually turning,” but it also stated that “the [euro area] financial system is viewed as relatively healthy” and that analyses by the European Commission and ECB “had confirmed the robustness of the financial system” – statements that would be shown to be questionable shortly afterwards (IMF, 2007: 17-18).

After the crisis began in July/August 2007, the IMF took a long time to adjust its assessment of the soundness of the euro-area banking system. In 2008, the Euro Area Policies Article IV Staff Report observed that “The euro area’s financial system entered the turmoil from a position of strength” and that “the area’s financial system remains sound” (IMF, 2008a: 3, 7), and correspondingly missed the imminent financial panic and subsequent recession. This was in spite of widespread concerns expressed by market participants and other observers at the time (for example Borio, 2008; Véron, 2008), and it appears that the IMF took national and European authorities’ reassurances too much at face value. At an IMF Executive Board meeting in July 2008, staff made sanguine statements in response to questions and comments from executive directors:

“With respect to [bank] balance sheets, the situation is generally stronger in the euro area than elsewhere, with some exceptions within the area. (…) It is true that European banks are more highly leveraged than U.S. banks, but the former hold relatively less risky assets than the latter. (…) Overall, the staff is fairly confident that the regulatory and legal and accounting frameworks currently in place – Basel II and the International Financial Reporting Standards – can ensure there will be adequate recognition of bank losses in the euro area, even if this may be somewhat less timely than in the United States”[8].

By contrast, in the months following the panic of late September and early October 2008, the IMF was ground-breaking in highlighting European banks’ unaddressed vulnerabilities. The April 2009 Global Financial Stability Report (GFSR) was a landmark contribution that shed an unflattering light on European banks’ unacknowledged losses, and contrasted them with the more timely disclosures in the US and the far lower exposures in Japan (IMF, 2009a: Table 1.3)[9]. This analysis was updated in the three subsequent GFSRs of October 2009, April 2010 and October 2010. Though it attracted a lot of attention from outside analysts[10], and also considerable pushback and criticism from European country authorities and the ECB, as well as internal debate within the IMF, it was comprehensively vindicated by later developments[11]. The banks’ vulnerabilities in terms of undercapitalisation, funding, asset quality and sovereign risk exposures were appropriately identified and characterised. Correspondingly, the 2009 Article IV Staff Report for the euro area frontloaded its analysis of the financial sector, in contrast to the practice in previous years, noting that “the financial sector remains key to the shape and the robustness of the economic recovery.” That report aptly emphasised the “need to take further decisive action, especially in the financial sector. (…) A resolute and coordinated cleanup of the banking system is essential to restore trust” (IMF, 2009d: 4, 9).

As a consequence, the IMF appropriately pressed for aggressive bank stress testing and recapitalisation. The IMF publicly criticised the lack of disclosure of results of the first round of EU stress tests in the late summer of 2009[12]. Subsequently, the IMF correctly emphasised that the stress-testing rounds of mid-2010 and mid-2011 would not be sufficient to restore trust in the European banking system unless they were followed up with appropriate action (IMF, 2010c: 14; IMF, 2011b: 13-15).

In 2009, staff in the IMF European Department were first to identify the bank–sovereign vicious circle in the euro area. Channels of contagion, from sovereigns to banks and to a lesser extent from banks to sovereigns, had been described in pre-crisis literature, but less so the mutual reinforcement between them in the context of a supranational financial system that was integrated by binding policy instruments. Following the Icelandic crisis of late 2008, research on bank-sovereign linkages was jointly undertaken by staff at the Fund’s European and Research departments. The European Regional Economic Outlook report of May 2009 included a chapter on the fiscal risks resulting from “the use of public balance sheets to shore up the financial system” (IMF, 2009c: Chapter 2)[13]. At the same time, Mody (2009) exposed “the possibility that sovereign spreads, the health of the financial sector, and growth prospects support a mutually reinforcing [bad] equilibrium”[14]. In the literature analysis conducted for this evaluation, the author found no other authors or organisations that identified the bank-sovereign vicious circle with similar clarity in 2009, let alone earlier.

In 2010, the bank–sovereign vicious circle was further characterised by a few analysts, but it did not feature widely in either IMF analysis or the public debate. For example, Candelon and Palm (2010) noted that while “the consequences of fiscal imbalances for currency/banking crises has [sic] been largely investigated (…) [o]n the contrary, only few papers have scrutinised the potential mutation of banking crises into sovereign debt ones. (…) Reinhart and Rogoff even portrayed this lack of empirical studies regarding banking and debt crises as ‘a forgotten story’”[15]. Illustrating this point, the April 2010 GFSR included a chart showing contagion from sovereigns to financial systems, as had just happened in Greece, but not the other way around. In an update of the same analysis in the October 2010 GFSR, dotted lines were added from banks to sovereigns, and “linkages to the banking system” were mentioned as among several factors contributing to elevated sovereign risks, but the emphasis remained on the sovereign-to-bank channel – underplaying an essential part of the dynamic nature of the contagion (IMF, 2010a: Figure 1.5; IMF, 2010d: Figure 1.5 and text p. 4). The fact that the IMF was slow to build on the early insights from its staff in 2009 about the bank-sovereign vicious circle may partly be attributed to its increased focus on adjustment programmes, starting in 2010 – including work on the Greek SBA, which diverted resources from euro-area-wide analytical work.

In 2011, the bank-sovereign vicious circle narrative became widely recognised. Particularly following the developments in Ireland in November 2010, this narrative became increasingly prevalent in academic and other independent studies of the euro-area crisis throughout 2011[16]. But it took some additional time for the IMF to fully realise the implications. The widely noted speech by the managing director in Jackson Hole in August 2011 (Lagarde, 2011), which emphasised the “urgent” need for recapitalisation of European banks, illustrated the lingering ambiguities of the IMF’s stance at that date[17]. On the one hand, the MD made the pioneering proposal “to mobilise EFSF [European Financial Stabilisation Facility] or other European-wide funding to recapitalise banks directly,” which was fully aligned with the vicious circle analysis (see Section IIB). On the other hand, she presented this proposal as only “one option” and thus implied that massive recapitalisations might be funded by national budgets instead – which would inevitably have exacerbated the vicious circle[18].

The bank-sovereign vicious circle became a major feature of the IMF’s interpretation of the euro-area crisis in the autumn of 2011, well ahead of European authorities’ interpretations. In July, the Article IV Staff Report on euro-area policies stated that “the approach to banking problems remains national, thus perpetuating the intertwining of banks and sovereigns” (IMF, 2011b: ‘Key Issues’). A simple and coherent IMF description of the vicious circle was developed by the IMF’s Research Department in the late summer of 2011[19], and from then on the bank-sovereign vicious circle was consistently and publicly exposed by IMF senior staff and management (see, for example, Chopra, 2011; Lagarde, 2012). The EU did not adopt this analytical paradigm until the spring or early summer of 2012[20].

In sum, the IMF was wrong footed by the financial crisis starting in mid-2007, but from early 2009 it was mostly ahead of other public institutions in the identification of the unique dynamics of the financial system crisis in the euro area. The Fund’s identification of these dynamics played an important role in the genesis of Europe’s banking union.

B. Institutional architecture and banking union

The IMF’s European Department identified and highlighted inadequacies of the European Union’s bank policy framework at an early stage, well before the start of the financial crisis[21]. For example, Article IV consultations for the euro area in 2005 led to a characterisation of barriers to cross-border financial integration in the EU and of the need for more centralised banking supervision (IMF, 2005: Chapters IV to VI). Resulting financial stability concerns were expressed in Article IV staff reports for 2005, 2006 and 2007. Several publications that were initiated by the European Department in 2007, combined with outreach initiatives, provided important analytical contributions to the debate on EU banking policy architecture and went into some detail in outlining possible policy responses[22].

Differences of view between IMF departments, however, prevented this pioneering analysis from influencing policy to the extent it could have. The suggestion to pool supervisory responsibility at the supranational level was fiercely opposed by EU member state authorities. This made it impossible for the European Commission and ECB to publicly articulate proposals such as the IMF’s at that time. The European national authorities’ concerns were echoed in IMF internal debates, principally by the Monetary and Capital Markets (MCM) Department[23]. As a result, public expression of the European Department staff recommendations only used coded, euphemistic terms. The notion of a pan-European banking supervisory authority was referred to as “joint responsibility and accountability,” and the option of a European resolution and/or deposit guarantee fund was referred to as “a burden-sharing agreement” or “ex ante mechanisms to share costs of [bank] failures” (IMF 2007: 20 and 27). These watered-down formulations reduced the impact of the IMF’s otherwise novel analysis. Even so, the European Department’s work on the EU banking policy framework proved controversial when presented to the Executive Board in July 2007. According to the minutes of the meeting, several European Directors expressed the views that the tone of staff recommendations was “too alarmist;” that there was too much emphasis on “the misalignment of incentives” of national prudential authorities; and that financial supervision, being an EU matter, “should not be a focus of discussion on euro area policies”[24]. In 2008, staff presented a toned-down version of a ‘European mandate’ for financial sector authorities in the EU, implying no change to the institutional architecture (IMF, 2008b: Chapter IV).

Following the post-Lehman panic, IMF staff made ground-breaking policy proposals to address the challenge of bank restructuring and resolution, which were endorsed by IMF management in early 2010. The shift of focus from supervision to bank restructuring was justified by the fact that in the meantime, EU policymakers were making progress with the establishment of the European Banking Authority (EBA), which was agreed in 2009 and became effective in January 2011[25]. In 2009, the staff complemented the IMF’s advocacy in favour of “a resolute and coordinated cleanup of the [euro area] banking system” with well-argued proposals to create special resolution regimes for banks in all EU member states, building on established US practice and the more recent UK Banking Act 2009, and prefiguring the EU Bank Recovery and Resolution Directive (BRRD) (IMF, 2009e: Chapter II; Cihak and Nier, 2009)[26]. In early 2010, staff from the European (corresponding author), MCM and Legal Departments went further by suggesting a blueprint for the supranational pooling of corresponding powers in a European Resolution Authority (ERA), with accompanying legal and financial arrangements to ensure effectiveness (Fonteyne and others, 2010). The ERA proposal was forcefully endorsed by the managing director in a public address in Brussels (Strauss-Kahn, 2010) and referred to in the euro-area Article IV Consultations in June[27]. It can be seen as a prefiguration of the SRM[28].

Until late 2011, these proposals referred to EU-level arrangements, implying that the UK and other non-euro-area member states would be included. This stance was consistent with the EU legal framework, which did not contain a separate financial regulatory regime for the euro area and considered financial regulation as a component of EU Internal Market legislation, which applies to all member states[29]. But it also heightened the political obstacles to implementing the proposals, since the UK (together with Sweden and several non-euro central and eastern European countries) was even more opposed to a pooling of banking policy sovereignty than were most euro-area member states, and was also more advanced in tackling systemic fragility in its own domestic banking sector. Developments to overcome this logjam were protracted. An important change was the acknowledgement by the UK government in mid-2011 that the “remorseless logic” of monetary union would justify further institutional build-up in the euro area[30]. Nevertheless, the Fund’s Article IV Staff Report for the euro area in 2011 still advocated the ERA proposal in the context of “the EU financial stability framework,” with no mention of specific arrangements for the euro area (IMF, 2011b: 16-17)[31].

The IMF eventually acknowledged the political obstacles to a pan-EU banking union, and focused its advocacy of an integrated banking policy framework on the euro area. This shift was consistent with the contemporary recognition of the euro area’s bank-sovereign vicious circle (analysed above). An early step was the managing director’s above-mentioned suggestion of direct bank recapitalisation by the EFSF in her Jackson Hole speech of late August 2011. The next development was the suggestion, in a speech by the managing director in Berlin in January 2012, that direct bank recapitalisation, supervisory integration and what had earlier been the ERA proposal should be combined into a single policy package for the euro area (Lagarde, 2012). This text appears to be the first time that a public authority set out the vision of banking union as it was eventually endorsed by European leaders later in 2012:

“To break the feedback loop between sovereigns and banks, we need more risk sharing across borders in the banking system. In the near term, a pan-euro area facility that has the capacity to take direct stakes in banks will help break this link. Looking further ahead, monetary union needs to be supported by financial integration in the form of unified supervision, a single bank resolution authorit