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The European Commission is trying to reboot the CMU project: The High-Level Forum on Capital Markets Union – a group of 28 selected experts from industry, academia and civil society – is expected to submit policy recommendations by the end of May 2020 which will feed into the Commission’s new CMU agenda. This contribution is largely based on a letter to the High-Level Forum that gives feedback on the Interim Report published in February. There, we introduce a comprehensive approach to distinguish, from a functional finance perspective, between the ‘game changers’ and what is nice to have. We highlight the importance of common and consistent supervisory practices across Member States and recommend building up a European Securities and Exchange Commission (E-SEC) according to the American model.
We study how the Eurosystem Collateral Framework for corporate bonds helps the European Central Bank (ECB) fulfill its policy mandate. Using the ECBs eligibility list, we identify the first inclusion date of both bonds and issuers. We find that due to the increased supply and demand for pledgeable collateral following eligibility, (i) securities lending market trading activity increases, (ii) eligible bonds have lower yields, and (iii) the liquidity of newly-issued bonds declines, whereas the liquidity of older bonds is una↵ected/improves. Corporate bond lending relaxes the constraint of limited collateral supply, thereby making the market more cohesive and complete. Following eligibility, bond-issuing firms reduce bank debt and expand corporate bond issuance, thus increasing overall debt size and extending maturity.
We study how the Eurosystem Collateral Framework for corporate bonds helps the European Central Bank (ECB) fulfill its policy mandate. Using the ECBs eligibility list, we identify the first inclusion date of both bonds and issuers. We find that due to the increased supply and demand for pledgeable collateral following eligibility, (i) securities lending market trading activity increases, (ii) eligible bonds have lower yields, and (iii) the liquidity of newly-issued bonds declines, whereas the liquidity of older bonds is unaffected/improves. Corporate bond lending relaxes the constraint of limited collateral supply, thereby making the market more cohesive and complete. Following eligibility, bond-issuing firms reduce bank debt and expand corporate bond issuance, thus increasing overall debt size and extending maturity.
This Policy Letter presents a proposal for designing a program of government assistance for firms hurt by the Coronavirus crisis in the European Union (EU). In our recent Policy Letter 81, we introduced a new, equity-type instrument, a cash-against-tax surcharge scheme, bundled across firms and countries in a European Pandemic Equity Fund (EPEF). The present Policy Letter 84 focuses on the principles and conditions relevant for the operationalization of a EPEF. Our proposal has several desirable features. It: a) offers better risk sharing opportunities, augmenting the resilience of businesses and EU economies; b) is need-based, thereby contributing to an effective use of resources; c) builds on conditions and credible controls, addressing adverse selection and moral hazard; d) is accessible to smaller and medium-sized firms, the backbone of Europe’s economy; e) applies Europe-wide uniform eligibility criteria, strengthening support among member states; f) is a scheme of limited duration, reducing (perceived) government interference in businesses; g) creates a template for a growth-oriented public policy, aligning public and private sector interests; and h) builds on the existing institutional infrastructure and requires minimal legislative adjustments.
Household finance
(2020)
Household financial decisions are complex, interdependent, and heterogeneous, and central to the functioning of the financial system. We present an overview of the rapidly expanding literature on household finance (with some important exceptions) and suggest directions for future research. We begin with the theory and empirics of asset market participation and asset allocation over the lifecycle. We then discuss house-hold choices in insurance markets, trading behavior, decisions on retirement saving, and financial choices by retirees. We survey research on liabilities, including mortgage choice, refinancing, and default, and household behavior in unsecured credit markets, including credit cards and payday lending. We then connect the household to its social environment, including peer effects, cultural and hereditary factors, intra-household financial decision making, financial literacy, cognition and educational interventions. We also discuss literature on the provision and consumption of financial advice.
The case for corona bonds
(2020)
Corona bonds are feasible and important to preserve the European project. We set out a number of principles that might serve as a blueprint for the European institutions. Importantly, Corona bonds could be issued through a new public law entity and include all the safeguards required for the protection of the fundamental values of the EU. This proposal is pragmatic in the sense that it facilitates the choice European leaders have to make now; necessary to secure the resilience of the European Union. The political risks are significantly higher now than in 2010. The gargantuan challenge of tackling the combined impact of climate change, migration, digitalization, geopolitical shifts, and the spread of autocracy, requires leadership and joint action by the Council and the Eurogroup.
The spreading of the Covid-19 virus causes a reduction in economic activity worldwide and may lead to new risks to financial stability. The authors draw attention to the urgency of the targeted mitigation strategies on the European level and suggest taking coordinated action on the fiscal side to provide liquidity to affected firms in the corporate sector. Otherwise, virus-related cashflow interruptions could lead to a new full-blown banking crisis. Monetary policy measures are unlikely to mitigate cash liquidity shortages at the level of individual firms. Coordinated action at European level is decisive to prevent markets from losing confidence in the resilience of banks, particularly in countries with limited fiscal capacity. In contrast to the euro crisis of 2011, the cause of the current crisis does not lie in the financial markets; therefore, the risk of moral hazard for banks or states is low.
This policy letter adds to the current discussion on how to design a program of government assistance for firms hurt by the Coronavirus crisis. While not pretending to provide a cure-all proposal, the advocated scheme could help to bring funding to firms, even small firms, quickly, without increasing their leverage and default risk. The plan combines outright cash transfers to firms with a temporary, elevated corporate profit tax at the firm level as a form of conditional payback. The implied equity-like payment structure has positive risk-sharing features for firms, without impinging on ownership structures. The proposal has to be implemented at the pan-European level to strengthen Euro area resilience.
Capital in the corona crisis
(2020)