In 2010-2012, the Eurozone experienced a second – this time homegrown – wave of the global crisis contradicting expectations that the recovery from the sudden and steep 2009 recession was underway. The new wave of crisis almost derailed the financial and banking markets of the Eurozone member states, pushing them from integration to re-segmentation, as investors suddenly valued the risks of sovereign defaults, which had previously been judged as almost nil, as large.
Banks have intensified their vocation to hold domestic assets, while the evaluations that the stock markets made of the banks have given more weight to sovereign risks. Furthermore, funding conditions for banks that have become asymmetric between peripheral and core countries have caused pro-segmentation effects. As a result of all this, the rising sovereign default premium has translated into higher funding costs even for non-financial firms in countries affected by the sovereign crisis.
The segmentation of the banking market in the Eurozone has raised serious problems due to the differential effects of the common monetary policy, prompting the European Central Bank (ECB) to tackle it also with new instruments. Furthermore, by amplifying market imperfections, segmentation may have further enhanced the importance of the credit channel of monetary policy transmission, thereby further increasing the differential impact of the common monetary policy across euro area countries.
A simple look at the evolution of lending standards as reported by the Bank Lending Survey (BLS), conducted by the ECB, tells us that the supply of loans by banks to small and medium-sized enterprises (SMEs, the corporate segment more sensitive to the evolution of bank lending policies) was reaching neutrality between the second quarter of 2009 and the first of 2010 after the strong restriction of the credit offer implemented between the third quarter of 2008 and the first of 2009. At this stage, lending standards moved in the same direction for what would later be peripheral/crisis countries (Portugal, Spain, Italy and Cyprus) and for non-crisis countries (France, Germany, Luxembourg, Malta, Netherlands, Slovakia and Slovenia).
Subsequently, from the second quarter of 2010 to the second quarter of 2012, a large difference in terms of the degree of credit supply restriction arose between the two groups of countries. While the degree of restriction has not increased (or decreased slightly) for non-crisis countries, it has started to increase sharply for peripheral countries. Finally, since the second quarter of 2012 the degree of restriction has been declining and has nevertheless followed a common trend between the two groups of countries. The reduction in the supply of bank credit during the crisis has presumably contributed to depressing the economies of the countries in crisis and of the Eurozone as a whole.
The Banking Union (BU) was launched in 2012 precisely to break the pernicious link between sovereigns and banks. It implies a transfer of responsibilities for banking policy from the national to the Eurozone level. The BU has two main components: the Single Supervisory Mechanism (SSM), and the Single Resolution Mechanism (SRM), to which a common Deposit Insurance Scheme (Dis) should have been added. While there has been progress with the SRM as well, the introduction of the SSM has come much faster and the ECB will be fully in charge of it from 4 November 2014.
In order to understand how the markets are evaluating the Banking Union, Ferri and Pesic have identified four relevant events, i.e. dates in which the ECB has produced press releases which have revealed to the markets important details on the progress of the introduction of the SSM or crucial details about how it was progressing.
Using an Event Study Analysis, the authors compare share prices for SSM-included banks with those of a comparable sample of non-SSM listed Eurozone banks around events identified as major news. The main finding is that the markets would have moved from an initial negative sentiment towards the SSM, a sort of panic reaction, to then move, with a more rational reaction, to appreciate the SSM.
Beyond the technical analysis, which it would be difficult to present in detail here, the exclusion from the SSM in June 2014 of three banks which were originally included in the list communicated on 23 October 2013 allows for an indirect verification of the degree of appreciation of the SSM by the markets on that date. These are a German bank, Wuenstenrot, and two Italian banks, Credito Valtellinese and Credito Emiliano.
The exclusion became public in an ECB document released on 26 June 2014, although in this case there was no press release from the ECB and it cannot be excluded that the news leaked a few days earlier. Nonetheless, it is instructive to compare the equity performance of these three banks against a benchmark of comparable banks – from the same countries, of similar size and financial characteristics. Each of these three banks underperformed its benchmark equity following the release of the ECB document suggesting that, as of June 2014, the markets were now believing in the effectiveness of the SSM.
These results therefore suggest some conclusions. The 2010-2012 Eurozone crisis had triggered a vicious circle between sovereign debt and banks. The Banking Union (BU) was launched with the aim of breaking that vicious circle. Originally it was believed that the BU would be made up of a coherent (harmonious) trio of institutional innovations: Single Supervisory Mechanism (SSM), entrusting banking supervision to the ECB; Single Resolution Mechanism (Srm), to ensure equal treatment of banking crises across the euro area and to reduce the burden on taxpayers; Deposit Insurance Scheme (Dis) at Eurozone level.
By European standards the BU was approved rather quickly in 2012-2013. However, the institutional trio made progress at different speeds. On the one hand, the SSM accelerated more to be fully operational starting November 4, 2014. On the other hand, the SRM has been approved, but it will take twelve years for it to reach full functionality and the DIS has been shelved due to political rifts.
Since the trio (Ssm-Srm-Dis) has almost been demoted to a solo (Ssm plus a newborn Srm without Dis) one wonders if the good intentions of the BU have been achieved. The best way is to evaluate this by trying to understand how the markets have reacted to the implementation phases of the SSM, the only truly complete one of the three institutions.
The results commented above were obtained by monitoring the flow of information disclosed by the BBE of how it was in practice assuming responsibility for the SSM. Thus, four events were identified between October 2013 and July 2014, dates in which the ECB released relevant news on the SSM.
Comparing, using rigorous event analysis, stock prices around the event dates for listed banks included in the SSM with those of a comparison sample of Eurozone banks listed but not included in the SSM, whenever outlier returns are found (negative) positive this suggests the approval (dissatisfaction) of the markets with the SSM and, through it, with the way in which the BU is being achieved. The results show that the SSM had a twofold impact. It seems that the markets did not take well the initial phase of implementation of the SSM in October 2013, while they gradually began to appreciate the following steps of the SSM during 2014.
Further research may ask why the markets were filled with initial negative sentiment, then subsequently appreciate the SSM. In particular, it would be interesting to distinguish whether the initial dissatisfaction of the markets derived from uncertainties about the SSM itself or whether it came from doubts about the other components of the BU (Srm and Dis). Possible support for the latter hypothesis would be an invitation to European political leaders to accelerate the full implementation of the trio to avoid leaving the BU in an incoherent set-up (in a cacophony).
