The Euro Area's Common Pool Problem Revisited: Has the Single Supervisory Mechanism Ameliorated Forbearance and Evergreening?

47 Pages Posted: 24 Oct 2017

See all articles by Sven Steinkamp

Sven Steinkamp

Universität Osnabrück - Institute of Empirical Economic Research

Aaron Tornell

University of California, Los Angeles (UCLA) - Department of Economics; National Bureau of Economic Research (NBER); CESifo (Center for Economic Studies and Ifo Institute)

Frank Westermann

University of Osnabrueck - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute); CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute

Date Written: September 25, 2017

Abstract

The Single Supervisory Mechanism was introduced to eliminate the common-pool problem and limit uncontrolled lending by national central banks (NCBs). We analyze its effectiveness. Second, we model how, by forbearing and providing refinancing credit, NCBs avoid domestic resolution costs and, instead, share potential losses within the Euro Area. This results in “evergreening” of bad loans. Third, we construct a new evergreening index based on a large worldwide survey administered by the ifo institute. Regressions show evergreening is significantly greater in the Euro Area and where banks are in distress. Finally, greater evergreening accompanies higher growth of NCB-credit and Target2-liabilities.

Keywords: single supervisory mechanism, evergreening, nonperforming loans, common-pool problem

JEL Classification: F330, F550, E580

Suggested Citation

Steinkamp, Sven and Tornell, Aaron and Westermann, Frank, The Euro Area's Common Pool Problem Revisited: Has the Single Supervisory Mechanism Ameliorated Forbearance and Evergreening? (September 25, 2017). CESifo Working Paper Series No. 6670. Available at SSRN: https://ssrn.com/abstract=3057925

Sven Steinkamp

Universität Osnabrück - Institute of Empirical Economic Research ( email )

Barbarastr. 12
Osnabrueck, 49076
Germany

Aaron Tornell

University of California, Los Angeles (UCLA) - Department of Economics ( email )

Box 951477
Bunche Hall 8387
Los Angeles, CA 90095-1477
United States
310-794-1686 (Phone)
310-825-9528 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Frank Westermann (Contact Author)

University of Osnabrueck - Department of Economics ( email )

Rolandstr. 8
Osnabrueck, D-49069
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute ( email )

Poschinger Str. 5
Munich, 01069
Germany

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