G28 - Financial Institutions and Services: Government Policy and RegulationReturn

This critical review explains the negative impact of the euro on the Spanish economy and its distortion in the period from 2002 to 2014. In this first cycle within the euro area, there was a financial boom, without voluntary savings, which generated a lack of coordination in the economic process and structure. The result was a bubble of overconsumption and malinvestments, which burst with a deflation of capital and wages, and a switch from construction industry to tourism services as Spain's main economic sector. The economic distortion was such that it delayed the exit from the Great Recession of 2008 and the European Financial Crisis of 2010 until 2014, with a recovery and the beginning of a new cycle. The Austrian business cycle theory and capital-based macroeconomics are used to support and illustrate the case study, with quantitative techniques: not to predict, but only to show the real development and to facilitate dialogue with other economic schools.

We analyze and quantify link between quality of the banking sector and sovereign risk in the states of the European Union (EU) using data over 1999-2014. We employ two market-based measures of the sovereign risk along with several empirically and theoretically motivated variables that characterize banking sector. We perform Bayesian estimations on several panels of countries. Our results show that higher ratio of the non-performing loans represents the most important industry-specific variable that is linked with a heightened rate of the sovereign risk. On the other hand, findings related to the size and depth of the banking sector, along with the capital adequacy ratio, are less clear-cut. Higher penetration of the foreign banks and higher degree of competition characterize a diversified structure of the banking industry that seems to be beneficial for the banking sector stability and is linked with lower sovereign risk.

The paper shows the fundamental problems in the area of investment funds in terms of tax burden with special regard to closed-end real estate funds. Based on the characteristics of administrative costs, the study shows that closed-end real estate funds do not behave as investment funds. The study proves that closed-end real estate funds behave more like businesses that are hiding behind investment funds. This conclusion is confirmed on the basis of extensive research, by collecting data from annual reports of independent auditors of all types of funds. More than 51 percent of closed-end real estate funds indicate very high administrative costs and profit reduction by more than half. More than 17 percent of funds decrease their taxable income through higher administrative costs, and thus reduce their tax base to zero or to an absolute minimum. The study points out that if there was a tax-neutral environment in the area of the investment funds in the Czech Republic and investment funds paid 19% tax on corporate income, tax revenues for the state budget would increase by CZK 784 million per year.

Aggregate non-performing loans are the loans of a banking sector with delayed payments. This paper examines how aggregate non-performing loans (NPLs), as an indicator of aggregate credit risk, respond to macroeconomic developments in the Czech Republic. It uses data for the period 1993-2014 and the Bayesian estimation method of instrumental variables. This method exploits a priori information from similar studies for other countries and considers the potential endogeneity of macroeconomic developments vis-a-vis non-performing loans. The estimation results reveal a strong persistence of NPLs and a significantly positive and robust, effect of economic growth and income effect of the exchange rate on the financial condition of borrowers. We also find a significantly negative and robust effect of lending rates on the financial condition of borrowers. The effects of inflation and unemployment are significant but not as robust as the experience of other countries suggests. The balance sheet effect of the exchange rate is positive, but its significance is changing with model specifications. For economic policy, a timely, real depreciation of the koruna in response to rising credit risk could be an effective measure to stabilize the solvency of the banking sector.

The paper deals with an impact of new Basel III liquidity regulation on bank's liquidity and solvency conditions. It analyzes a change from qualitative to quantitative based regulation and compares bank's liquidity approaches within an application of LCR regulatory measures. Strict defi nition of LCR causes a change in bank's liquidity allocation and funding which is less effective, more costly and restrictive for providing credits comparing with pure economic determinants. Empirical part shows a simulation of an impact of aggregate liquidity shock and credit risk shock on annual rate of capital return consistent with bank's solvency. It proves huge liquidity buffer of the Czech banking sector due to systematic liquidity surplus, its rising capital endowment and high capital profi tability. VAR estimation shows that links among bank's liquidity characteristics, sources of liquidity shocks, market illiquidity and central bank's liquidity facilities withdrawal are quite weak with non-persistent features

The goal of the article is a qualitative and quantitative analysis of the relationship among savings, investments and credits in a business cycle in the Czech Republic. The presented analysis brings specific recommendations on the interaction between monetary policy and macroprudential regulation. The article starts with a critical analysis of the Austrian Economic School and its monetary theory of business cycle, which provides a methodological base for further empirical analysis in the paper. Based on the data of the Czech economy, the authors empirically test a hypothesis whether credits create a financial bubble when a credit growth exceeds a real GDP growth. The financial cycle had a significantly higher volatility comparing to real business cycle volatility in the Czech Republic in the period 1997-2013. The existence of the credit bubble was confirmed by statistically significant model parameters, when using the differences in relative year on year changes of banking client credits as a depended variable and relative year on year changes of real GDP as an independent variable. Currently valid European regulation doesn't allow using the same tools to host regulator and supervisor towards the bank subsidiaries and branches in a need to react to the different phases of financial cycle. If a host supervisor needs to influence and safeguard the financial stability, it has only the following tools applying to both forms of banking operations in the host countries: counter cyclical capital buffer, capital regulation of real estate exposures, and setting the loan to value (income) limits.

The purpose of this paper is to create a financial fragility model for the Czech financial sector. We adapt the Goodhart-Tsomocos model which is based on general equilibrium with incomplete markets, money and default. The calibration of the model is based on publicly available data from the period 2003-2011. Finally, we perform comparative statics to show how the key variables of the model respond to possible events. The model can be used by government institutions to stress-test the banking sector, as well as by banking and other financial institutions to estimate the development of, inter alia, the default rates of their clients. The model also incorporates default of households and may be used, after further extension, in predicting households' default rates with respect to the behaviour of banks in consequence of changes in macroeconomic parameters of the environment.

The paper deals with deposit insurance schemes as an integral part of the present system of the banking regulation. Insurance premiums, limits and the rates of compensation and consequences of deposit insurance are then discussed from the theoretical and practical points of view. The moral hazard of banks and depositors and adverse selection are the main undesirable accompanying effects, which are directly connected with the scale of insurance protection in banks. The European Union unifi es the rules of compensation. However, data analysis shows that there are still differences in the levels of protection because of different averages in deposits per household. Some possible alternatives to depositor protection in banks are also analyzed. Although deposit insurance is accompanied by problems, it is the best form of depositor protection.

The authors of the paper discuss reasons as well as current stage of the regulation of the financial (mostly banking) sector. They are not in favor of strict rejection of the regulation, but they are not in favor of strong regulation of the financial sector either. The article is based on the economic theory that there are objective economic reasons as well as specific financial features which cannot recommend and provide clear, simple, and unilateral solution about what level of regulation is appropriate in the financial market. The authors offer some economic ideas that can be useful for preparing and evaluating new regulation of the banking sector. The paper also defines theoretical assumptions of an ideal financial system. Based on those assumptions, the authors formulate and describe problems of real working financial (banking) system, and these problems create necessary condition, but not sufficient condition for imposing regulation. Finally, the paper describes and discusses impacts of concrete new banking regulatory proposals (increasing capital requirements, creating conservation and countercyclical capital buffers, calculating leverage ratio and liquidity ratio, and imposing bank levy).

The article deals with the export credit promotion in the Czech Republic. The econometric analysis of the gravity model of Czech trade shows that the credit support provided by specialized government agency, Czech Export Bank, has a positive but statistically weak influence on export. The other determinants of the Czech export in our model are GDP, distance, gross fixed capital formation, and policy risk. The comparison of estimated tax revenues from the supported projects with government subsidies provided to the Czech Export Bank shows that export promotion does not create a financial burden for the government budget. The budgetary costs of export credit support are offset by the tax revenues generated by supported export.

This paper analyses various approaches to dealing with problematic assets of the banking sector. These approaches include the establishment of an asset management company, capital injection and sale of the bank, purchase and assumption transactions, liquidation or bridge bank. All these approaches are evaluated with respect to Czech transformation experience and with respect to experience of other foreign countries. The paper concludes that the establishment of Czech Consolidation Agency (Czech Consolidation Bank, respectively) was the least suitable approach to dealing with problematic assets in the Czech banking sector during the period of the transformation. The paper furthermore suggests that other methods, such as the liquidation accompanied with deposit insurance payments, publicly assisted mergers and acquisitions, or finally privately or publicly assisted purchase and assumption transactions should have been used instead. The knowledge of these alternative approaches to weak-bank restructuring is supposed to guarantee that Czech authorities will not step up to establish a similar inefficient asset management company, should banking-sector problems emerge once again.

Badly defined institutional framework caused many problems of the Czech transition. Designers of the economic reform did not respect the importance of precisely functioning market institutions. No doubts that building institutions supports the functioning of markets. The article analyses why Czech economists and politicians did not understand the problem in the beginning and how they attempted to correct this initial mistake. The Czech (Slovak) economy was in a worse situation if compared with other central European countries because any private sector did not exist there before 1990. Both formal and informal institutions were built here in the green field. After politically sensitive problems with financial crime the building of institutions was accelerated in late 1990s. The process of re-building Czech market institutions continues within EU now.