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

Sven Steinkamp (), Aaron Tornell () and Frank Westermann
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Aaron Tornell: UC Los Angeles

No 107, IEER Working Papers from Institute of Empirical Economic Research, Osnabrueck University

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; Non-performing Loans; Common-pool Problem (search for similar items in EconPapers)
JEL-codes: F33 F55 E58 (search for similar items in EconPapers)
Pages: 46
Date: 2017-09-15, Revised 2017-10-06
New Economics Papers: this item is included in nep-cba, nep-eec and nep-mac
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