Ms.Enrica Detragiache

Mr.Thierry Tressel

Rima Turk-Ariss

The paper investigates EU banks’ profitability through the recent financial cycle using banklevel balance sheet and income statement data. We find that banks that were more successful at protecting their profits had a less pronounced deterioration in loan quality and a larger improvement in cost efficiency. They also downsized their assets more aggressively during the crisis, and reduced reliance on wholesale funding more markedly post-crisis. Net interest margins remained broadly stable over the financial cycle, including post-crisis, and there is no clear evidence that aspects of bank business model, such as higher reliance on fees and commission income, were associated with better profitability post-crisis.

Where Have All the Profits Gone? European Bank Profitability Over the Financial Cycle

Ms.Piyabha Kongsamut

Mr.Christian Mumssen

Anne-Charlotte Paret

How can information on financial conditions be used to better understand macroeconomic developments and improve macroeconomic projections? We investigate this question for France by constructing country-specific financial conditions indices (FCIs) that are tailored to movements in GDP, investment, private consumption and exports respectively. We rely on a VAR approach to estimate the weights of the financial components of each FCI, including equity market returns (which turn out having a relatively strong weight across all FCIs), private sector risk premiums, long-term interest rates, and banks’ credit standards. We find that the tailored FCIs are useful as leading indicators of GDP, investment, and exports, and as a contemporaneous indicator of private consumption. Credit volumes turn out to be lagging indicators of growth. The indices inform us on macro-financial linkages in France and are used to improve the accuracy of quarterly forecasting models and high-frequency “nowcast” models. We show that FCI-augmented models could have significantly improved forecasts during and after the global financial crisis.

Incorporating Macro-Financial Linkages into Forecasts Using Financial Conditions Indices: The Case of France

Mr.Charles Enoch

Mr.Luc Everaert

Ms.Jianping Zhou

From Fragmentation to Financial Integration in Europe is a comprehensive study of the European Union financial system. It provides an overview of the issues central to securing a safer financial system for the European Union and looks at the responses to the global financial crisis, both at the macro level—the pendulum of financial integration and fragmentation—and at the micro level—the institutional reforms that are taking place to address the crisis. The emerging financial sector management infrastructure, including the proposed Single Supervisory Mechanism and other elements of a banking union for the euro area, are also discussed in detail.

From Fragmentation to Financial Integration in Europe

The financial crisis has highlighted the importance of various channels of financial contagion across countries. This paper first presents stylized facts of international banking activities during the crisis. It then describes a simple model of financial contagion based on bank balance sheet identities and behavioral assumptions of deleveraging. Cascade effects can be triggered by bank losses or contractions of interbank lending activities. As a result of shocks on assets or on liabilities of banks, a global deleveraging of international banking activities can occur. Simple simulations are presented to illustrate the use of the model and the relative importance of contagion channels, relying on bank losses of advanced countries’ banking systems during the financial crisis to calibrate the shock. The outcome of the simulations is compared with the deleveraging observed during the crisis suggesting that leverage is a major determinant of financial contagion.

Mr.Thierry Tressel

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