Wednesday, December 21st, 2016 10:51 am

Italy’s Banks

Question A: Setting the EU rules aside, and assuming it would take 2.5% of Italy’s GDP to recapitalize its banks, the Italian government would improve financial stability in Europe if it injected this amount of public funds into its banks.

Responses
 

Source: European IGM Economic Experts Panel
www.igmchicago.org/european-economic-experts-panel

Responses weighted by each expert's confidence

Source: European IGM Economic Experts Panel
www.igmchicago.org/european-economic-experts-panel

Question B: If Italy were to inject public funds into its banks without imposing losses on at least some claimants, an important cost would be the effect on future incentives (economic or political) in Europe.

Responses
 

Source: European IGM Economic Experts Panel
www.igmchicago.org/european-economic-experts-panel

Responses weighted by each expert's confidence

Source: European IGM Economic Experts Panel
www.igmchicago.org/european-economic-experts-panel

Question A Participant Responses

Participant University Vote Confidence Comment Bio/Vote History
Aghion Philippe Aghion Harvard Uncertain 5
Bio/Vote History
         
Allen Franklin Allen Imperial College London Strongly Agree 9
Italy's banks are significantly undercapitalized, particularly if you consider market rather than accounting capital.
Bio/Vote History
         
Antras Pol Antras Harvard Agree 5
It would probably improve financial stability. A different matter is whether that should be the only principle guiding tax policy.
Bio/Vote History
         
Baldwin Richard Baldwin The Graduate Institute Geneva Agree 5
Bio/Vote History
         
Besley Timothy J. Besley LSE No Opinion
Bio/Vote History
         
Blanchard Olivier Blanchard Peterson Institute Strongly Agree 9
if italy's debt is sustainable at 130%, it is surely sustainable at 132.5% if the financial system is functioning better.
Bio/Vote History
         
Bloom Nicholas Bloom Stanford Did Not Answer
Bio/Vote History
         
Blundell Richard William Blundell University College London Uncertain 5
I mildly agree with the statement but have insufficient knowledge of the current system to make a strong statement.
Bio/Vote History
         
Bénassy-Quéré Agnès Bénassy-Quéré Paris School of Economics Agree 7
Some public recapitalization is actually needed, although maybe as much as 2.5% of GDP, and not outside EU rules.
Bio/Vote History
         
Carletti Elena Carletti Bocconi Uncertain 9
The effect of injecting public funds into the Italian banking system depends a lot on how this is done and on the investors' reactions.
Bio/Vote History
         
Danthine Jean-Pierre Danthine Paris School of Economics Agree 2
The counterpart should be an equity stake in the banks that the Italian State could re-sell in the future hopefully with an overall profit
Bio/Vote History
         
De Grauwe Paul De Grauwe LSE Agree 7
Bio/Vote History
         
Eeckhout Jan Eeckhout University College London Agree 7
In the short run yes. However in the long run the financial system would be weaker.
Bio/Vote History
         
Fehr Ernst Fehr Universität Zurich Uncertain 8
In the short run stability would be higher, in the long run not if the measure is not associated with reducing future moral hazard
Bio/Vote History
         
Freixas Xavier Freixas Universitat Pompeu Fabra Strongly Agree 10
The lack of access to finance is hindering Italy's and Europe's growth. A 2.5% is not an excessive price to pay to increase future growth.
Bio/Vote History
         
Fuchs-Schündeln Nicola Fuchs-Schündeln Goethe-Universität Frankfurt Uncertain 8
Bio/Vote History
         
Galí Jordi Galí Universitat Pompeu Fabra Agree 8
Bio/Vote History
         
Garicano Luis Garicano LSE Agree 4
A bailout is probably good in short term for Financial Stability. But undermines new Euro BRRD framework and opens door to populists.
-see background information here
-see background information here
Bio/Vote History
         
Giavazzi Francesco Giavazzi Bocconi Strongly Agree 10
zombie banks would eventually drive Italy out of the euro
Bio/Vote History
         
Griffith Rachel Griffith University of Manchester Uncertain 1
Bio/Vote History
         
Guerrieri Veronica Guerrieri Chicago Booth Agree 9
Bio/Vote History
         
Guiso Luigi Guiso Einaudi Institute for Economics and Finance Agree 6
government debt is substantial, but increasing it by a few percentage points is less risk strategy than leaving banks under capitalized
Bio/Vote History
         
Hellwig Martin Hellwig Max Planck Institute for Research on Collective Goods Did Not Answer
Bio/Vote History
         
Honohan Patrick Honohan Trinity College Dublin Disagree 7
Markets can cope with bail in on this scale. They are already discounting it.
Bio/Vote History
         
Kleven Henrik Kleven Princeton Uncertain 5
Bio/Vote History
         
Krahnen Jan Pieter Krahnen Goethe University Frankfurt Uncertain 10
Inject all capital into strong banks, not weak ones, thus restructuring and scaling down the entire sector. Good plan, but will not happen.
Bio/Vote History
         
Krusell Per Krusell Stockholm University Uncertain 3
I don't have enough info to say that it would help financial institutions elsewhere; depends on cross-holdings. In long run it's likely bad.
Bio/Vote History
         
Kőszegi Botond Kőszegi Central European University No Opinion
Bio/Vote History
         
La Ferrara Eliana La Ferrara Bocconi Uncertain 2
Bio/Vote History
         
Leuz Christian Leuz Chicago Booth Uncertain 7
Helps in short-run but not clear in long-run w/o other reforms, as issue is also profitability & bank density; can increase sovereign risks
Bio/Vote History
         
Meghir Costas Meghir Yale Did Not Answer
Bio/Vote History
         
Neary Peter Neary Oxford Agree 3
Sooner or later, bullets have to be bitten, zombie banks have to be bailed out. Sooner is better. Exactly how is much harder to answer.
Bio/Vote History
         
O'Rourke Kevin O'Rourke Oxford No Opinion
Bio/Vote History
         
Pagano Marco Pagano Università di Napoli Federico II Strongly Disagree 9
This is likely to unsettle investor confidence in Italian public debt & reactivate the bank-sovereign doom loop, with knock-on EU effects.
Bio/Vote History
         
Pastor Lubos Pastor Chicago Booth Agree 8
Italy has been kicking this can down the road far too long. But it’s hard to set EU rules aside, especially the new bank resolution rules.
Bio/Vote History
         
Persson Torsten Persson Stockholm University Agree 5
Bio/Vote History
         
Pissarides Christopher Pissarides LSE Agree 7
This would be dealing with the symptoms of the banking crisis in Europe and not the cause
Bio/Vote History
         
Portes Richard Portes London Business School Strongly Agree 10
Weak banks are a major impediment to investment and growth and endanger financial stability. Public funds necessary though not sufficient.
Bio/Vote History
         
Prendergast Canice Prendergast Chicago Booth Agree 5
Bio/Vote History
         
Reichlin Lucrezia Reichlin London Business School Agree 10
Bio/Vote History
         
Repullo Rafael Repullo CEMFI Disagree 7
Setting EU rules aside to facilitate a bailout is likely to worsen long-term financial stability in Europe.
Bio/Vote History
         
Rey Hélène Rey London Business School Agree 7
NPLs are an important factor behind lack of growth, in turn an important factor behind financial instability.Issue is effect on gvt debt.
Bio/Vote History
         
Schoar Antoinette Schoar MIT Uncertain 7
Bio/Vote History
         
Van Reenen John Van Reenen MIT Agree 5
Bio/Vote History
         
Vickers John Vickers Oxford Uncertain 9
Banks have far too little capital so more is good. But another bail out would go backwards on incentives. A total mess, not only Italy.
Bio/Vote History
         
Voth Hans-Joachim Voth University of Zurich Uncertain 4
I think this could easily backfire. Bailouts done right can be a jolly goood thing but i have at least some reservations about the prospects
Bio/Vote History
         
Weder di Mauro Beatrice Weder di Mauro Gutenberg University Mainz and INSEAD Agree 7
Bio/Vote History
         
Whelan Karl Whelan University College Dublin Agree 3
This may improve financial stability in the short-run but probably sets a bad fiscal precedent for other European governments in the future.
Bio/Vote History
         
Wyplosz Charles Wyplosz The Graduate Institute Geneva Agree 7
A number of Italian banks need to be recapitalized. If it cannot be done otherwise, the government must step in.
Bio/Vote History
         
Zilibotti Fabrizio Zilibotti Universität Zurich Disagree 5
Bio/Vote History
         

Question B Participant Responses

Participant University Vote Confidence Comment Bio/Vote History
Aghion Philippe Aghion Harvard Agree 5
Bio/Vote History
         
Allen Franklin Allen Imperial College London Agree 8
Shareholders and non-retail bondholders need to be penalised if a bank fails to provide the right incentives going forward.
Bio/Vote History
         
Antras Pol Antras Harvard Strongly Agree 8
It seems pretty clear that bailouts generate a moral hazard problem. They also have a significant impact on government budgets.
Bio/Vote History
         
Baldwin Richard Baldwin The Graduate Institute Geneva Agree 5
Bio/Vote History
         
Besley Timothy J. Besley LSE No Opinion
Bio/Vote History
         
Blanchard Olivier Blanchard Peterson Institute Agree 9
this is the old moral hazard argument. i believe it is relevant, but of marginal importance empirically.
Bio/Vote History
         
Bloom Nicholas Bloom Stanford Did Not Answer
Bio/Vote History
         
Blundell Richard William Blundell University College London Agree 5
Agree with the statement but again not enough current knowledge of the to be very confident of this specific case.
Bio/Vote History
         
Bénassy-Quéré Agnès Bénassy-Quéré Paris School of Economics Agree 9
In practice it is not possible to move directly from a bail out to a bail in regime, but at least the direction should be made clear.
Bio/Vote History
         
Carletti Elena Carletti Bocconi Agree 10
The rules leave the possibility of injecting public funds without private losses, but I agree that this may have important signaling effects
Bio/Vote History
         
Danthine Jean-Pierre Danthine Paris School of Economics Agree 3
But the cost could be containd if this is clearly viewed as a transition to a new regime where this will no longer be possible.
Bio/Vote History
         
De Grauwe Paul De Grauwe LSE Agree 8
Bio/Vote History
         
Eeckhout Jan Eeckhout University College London Strongly Agree 8
Bio/Vote History
         
Fehr Ernst Fehr Universität Zurich Agree 8
Bio/Vote History
         
Freixas Xavier Freixas Universitat Pompeu Fabra Strongly Agree 10
In the absence of significant costs to some claim holders, it will be in the interest of banks to take more risks in the future.
Bio/Vote History
         
Fuchs-Schündeln Nicola Fuchs-Schündeln Goethe-Universität Frankfurt Agree 6
Bio/Vote History
         
Galí Jordi Galí Universitat Pompeu Fabra Agree 8
Bio/Vote History
         
Garicano Luis Garicano LSE Agree 6
At the very least it would introduce confusion among investors as the BRRD framework requires 8% bail in.
Bio/Vote History
         
Giavazzi Francesco Giavazzi Bocconi Disagree 9
it has happened elsewhere in Europe and there is no dign of a serious deterioration of incentives
Bio/Vote History
         
Griffith Rachel Griffith University of Manchester Agree 5
Bio/Vote History
         
Guerrieri Veronica Guerrieri Chicago Booth Uncertain 9
Bio/Vote History
         
Guiso Luigi Guiso Einaudi Institute for Economics and Finance Disagree 7
Imposing losses can be severely destabilising
Bio/Vote History
         
Hellwig Martin Hellwig Max Planck Institute for Research on Collective Goods Did Not Answer
Bio/Vote History
         
Honohan Patrick Honohan Trinity College Dublin Strongly Agree 8
Got to get away from bailing out bank creditors with public funds. If not now, when? It's not just EU rules, cf FSB resolution principles
-see background information here
Bio/Vote History
         
Kleven Henrik Kleven Princeton Agree 4
Bio/Vote History
         
Krahnen Jan Pieter Krahnen Goethe University Frankfurt Strongly Agree 9
Europe's new regulatory architecture aims for market discipline through bail-inability of equity and junior debt. US pursues different model
-see background information here
Bio/Vote History
         
Krusell Per Krusell Stockholm University Agree 7
The expectations of future bailouts will likely be affected and induce excessive risk-taking.
Bio/Vote History
         
Kőszegi Botond Kőszegi Central European University No Opinion
Bio/Vote History
         
La Ferrara Eliana La Ferrara Bocconi Agree 3
Bio/Vote History
         
Leuz Christian Leuz Chicago Booth Agree 8
Bending BRRD would create bad political incentives & undermine EU rules but excluding missold retail would not have same moral hazard effect
Bio/Vote History
         
Meghir Costas Meghir Yale Did Not Answer
Bio/Vote History
         
Neary Peter Neary Oxford Disagree 3
Possibility of moral hazard in medium term versus high probability of financial instability in short term. A tough choice but a clear one.
Bio/Vote History
         
O'Rourke Kevin O'Rourke Oxford No Opinion
Bio/Vote History
         
Pagano Marco Pagano Università di Napoli Federico II Strongly Agree 10
Such massive bailout would strengthen banks' moral hazard & leave the EU overbanking problem unsolved, confirming that no exit is possible.
-see background information here
-see background information here
-see background information here
Bio/Vote History
         
Pastor Lubos Pastor Chicago Booth Agree 6
Breaking the new EU bank resolution rules within the first year would undermine the credibility of the banking union.
Bio/Vote History
         
Persson Torsten Persson Stockholm University Agree 5
Bio/Vote History
         
Pissarides Christopher Pissarides LSE Strongly Agree 9
It would be shifting the burden to tax payers. Claimants might think something similar in future
Bio/Vote History
         
Portes Richard Portes London Business School Agree 10
Problem in Italy is that bailing would hurt not wealthy retail bond holders, victims of misselling must be compensated.
Bio/Vote History
         
Prendergast Canice Prendergast Chicago Booth Agree 8
Bio/Vote History
         
Reichlin Lucrezia Reichlin London Business School Disagree 10
not if recap but also provide incentives/rules aiming at consolidation/governance reform
Bio/Vote History
         
Repullo Rafael Repullo CEMFI Strongly Agree 7
Bio/Vote History
         
Rey Hélène Rey London Business School Agree 7
Equity holders and junior bond holders should take some losses. Moral hazard can also be dealt with by taking action against management.
Bio/Vote History
         
Schoar Antoinette Schoar MIT Strongly Agree 8
Bio/Vote History
         
Van Reenen John Van Reenen MIT Agree 6
Bio/Vote History
         
Vickers John Vickers Oxford Strongly Agree 9
A 100% bail-out after 8 years of "reform" would take us back to square one on TBTF.
Bio/Vote History
         
Voth Hans-Joachim Voth University of Zurich Agree 7
There is already a lot of concern in Germany about EMU rules being broken. This could be the final straw
Bio/Vote History
         
Weder di Mauro Beatrice Weder di Mauro Gutenberg University Mainz and INSEAD Agree 9
Bio/Vote History
         
Whelan Karl Whelan University College Dublin Agree 5
This would undermine the EU's BRRD approach though it always seemed likely loss imposition was more a policy intended for small countries.
Bio/Vote History
         
Wyplosz Charles Wyplosz The Graduate Institute Geneva Strongly Agree 9
We have adopted bail-in rules. Ditching them aside would indeed send a terrible signal. But the rules need to be better thought through.
Bio/Vote History
         
Zilibotti Fabrizio Zilibotti Universität Zurich Agree 8
Bio/Vote History
         

About the European IGM Economic Experts Panel

This panel explores the views of European economists on vital public policy issues. It does this by polling them on important policy questions, by including a way for them to explain their answers briefly if they wish, and by disseminating these responses directly to the public in a simple format.

To that end, our panel was chosen to include distinguished experts with a keen interest in public policy from the main areas of economics, to be geographically diverse, and to include older and younger scholars. As with the IGM’s US panel, the experts are all outstanding researchers in their fields. The panel includes recipients of top national and international prizes in economics, fellows of the Econometric society and the European Economic Association, members of distinguished national and international policymaking bodies in Europe, recipients of significant grants for economic research, highly accomplished affiliates and program directors of the Centre for Economic Policy Research and the National Bureau of Economic Research, and past and current editors of leading academic journals in the profession. This approach not only provides a set of panelists whose names will be familiar to other economists and the media, but also delivers a group with impeccable qualifications to speak on public policy matters in Europe and beyond.

Questions for the European IGM Economic Experts Panel are emailed individually to all members of the panel. They are phrased as statements with which one can agree or disagree. The experts are also asked how confident they are in their knowledge of the issue associated with the question (10 being highest). Each panelist responds electronically at his or her convenience. Panelists may consult whatever resources they like before answering. They may also include brief comments with their responses, or provide links to relevant sources.

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