Nicolas Véron

Bruegel Podcast with Ulrich Bindseil: Early Central Banks

This podcast is part of the "Read with Bruegel" summer series. I interviewed Ulrich Bindseil on his fascinating financial history essay, Central Banking before 1800: A Rehabilitation, in which he recasts the narrative of the emergence of central banking going back to the first recorded case in Barcelona in 1401. 

Financial Statements: Is limited liability the best regime for banks?

In the Financial Statements episode of September 6, I hosted the legendary Charles Goodhart and NYU Stern's Viral Acharya to discuss the proposal of moving away from limited liability for financial insiders, as suggested in a recent paper which Goodhart co-authored with Rosa Lastra. 

Financial Statements: Can supervisory reform prevent repeat bank failures in the US?

In the Financial Statements episode of August 9, I hosted specialized consultant Mayra Rodriguez Valladares and Yale University's Steven Kelly to discuss the U.S. supervisory failures, its failures revealed in March, and prospects for improvement. 

China’s state vs. private company tracker: Mid-2023 update

This is the first of a short series of belated Summer 2023 updates. It is the latest semi-annual iteration of the tracker co-produced with Tianlei Huang, as published by PIIE on July 27.

The share of China’s state sector among the country’s 100 largest listed companies, measured by aggregate market capitalization, continued to advance through mid-2023, rising from 57.2 percent in end-2022 to 61.0 percent in the first half of 2023. Companies that are majority-owned by the Chinese state accounted for nearly all of this increase. The share of the private sector, defined restrictively as firms with less than 10 percent state ownership, in the first half of 2023 dropped below 40 percent for the first time since end-2019. The private-sector share was only 8 percent at end-2010 and had reached a peak of 55.4 percent in mid-2021.

In other words, recent six-month measures of the expanding state sector contrast with the advance of the private sector during the decade preceding mid-2021. Importantly, this PIIE tracker, based on the methodology in the authors’ 2022 Working Paper, is an indication of market sentiment, not of real economic performance, and of relative shares not absolute levels of market value. It echoes, however, other dismal recent private-sector numbers. For example, China’s private-sector fixed asset investment growth was negative (minus 0.2 percent) in the first half of 2023 compared with the first half of 2022, the worst since late 2020, while state-sector investment expanded 8.1 percent.

In the definition used here, the state sector includes both mixed-ownership enterprises (MOEs) and state-owned enterprises (SOEs) shown in the chart. Still, MOEs and SOEs are worth tracking separately because state and party control is generally less direct and complete in the former than in the latter.

This PIIE tracker informs on the trend in the dynamism of China’s private sector beyond the rhetoric in China and the United States. It focuses on the respective shares of state-sector and private-sector firms among China’s largest companies and thus provides a half-yearly market-based indicator of the private-state balance in Chinese business. The continuous decline of the private-sector share among China’s largest companies over four semesters in a row through mid-2023 does not support optimism about the future dynamism of China’s economy.

Financial Statements: How to think about systemic cyber risk in financial services

In today's session, I hosted former senior U.S. official James Freis and the European Banking Federation's Alexandra Maniati for a holistic discussion of cyber risk in the financial sector. 

Financial Statements: CBDC projects gradually take shape

In today's session, I hosted Katie Fortune of the Bank of England, who expanded from their February paper, and Signe Krogstrup of the National Bank of Denmark. 

Financial Statements: How (in)effective is US banking supervision?

In yesterday's session, I hosted Wharton's Peter Conti-Brown and Rosa Lastra of Queen Mary University of London, following up on the prior session on a similar theme held in late April. 

Financial Statements: A renewed look at Russia's wartime economy

In today's session, the Bank of Finland's Iikka Korhonen gave an update of the presentation he gave a year ago on Russia's economic outlook, followed by a conversation together with Nataliia Shapoval of the Kyiv School of Economics. 

Financial Statements: Will China's financial sector remain forever state-dominated?

In today's episode, I hosted Qiao Yide of the Shanghai Development Research Foundation and Victor Shih of University of California San Diego to discuss the obstacles faced by private-sector firms in China's financial sector. 

Silicon Valley Bank, Credit Suisse, EU banking reform and Basel III

This blog post was published yesterday by Bruegel (text below), and today by the Peterson Institute with minor editorial variations. 

The US and Swiss messes may nudge the EU towards better international bank capital standards compliance

Bank collapses show the importance of strong capital and liquidity positions and should signal to the EU the benefits of closer adherence to Basel III

The collapses in rapid succession of Silicon Valley Bank (SVB) and Signature Bank in the United States, and of Credit Suisse in Switzerland, have reawakened debates on banking policy. In the United States, reports assessing what went wrong are expected from both the Federal Reserve and Federal Deposit Insurance Corporation (FDIC) on 1 May. In Switzerland, the unorthodox engineering of Credit Suisse’s takeover by UBS has generated lawsuits and investigations. 

By contrast, in the European Union as in the United Kingdom, there have been no visible signs of banking-sector weakness. Since more than nine-tenths of EU banking assets are in the euro area and under European banking supervision led by the European Central Bank (ECB), that counts as a success for the single supervisory mechanism – the main finished piece of the EU banking union project, on which the EU embarked in 2012. As emphasised by ECB Supervisory Board Chair Andrea Enria, in a 21 March speech, European supervisors have been focused on both interest-rate risk and business-model risk in recent years, two areas at the core of the SVB and Credit Suisse disasters. This stands in sharp contrast to the pre-2012 period, when banking supervisors in the EU looked unable to get anything right. 

Meanwhile, EU banking union remains incomplete – and it is likely that the absence of banking sector turmoil in the EU will mean that pre-existing political obstacles will continue to prevent its completion any time soon. The two key stumbling blocks are a European deposit insurance scheme (EDIS), for which the Commission’s ill-fated proposal of 2015 has been left unadopted despite protracted negotiations, and the regulatory treatment of banks’ sovereign exposures (RTSE), which has been negotiated in parallel, outside of public view and also without concrete results.

On 16 June 2022, an acrimonious meeting of euro-area finance ministers in the Eurogroup format acknowledged the impasse. Ministers decided to shelve the discussions on EDIS and RTSE and asked the European Commission to make proposals on a more limited reform agenda of crisis management and deposit insurance (CMDI). In doing so, they admitted that the EU framework for the handling of unviable banks, which they had enshrined in 2014 in the bank recovery and resolution directive (BRRD, 2014/59/EU), had not worked as intended.

Closer to the US?

This policy area is hard to grasp, and not only because of its unseemly proliferation of four-letter acronyms. In simplistic terms, the essence of the CMDI project is to move closer to the US system in which the FDIC is the single authority for both deposit insurance and the resolution of failing banks. In that system, all deposits, insured or not, have equal and preferred status to the failing bank’s other liabilities, a feature known as general depositor preference. This creates incentives for the FDIC to finance takeovers of failing banks by sounder peers, protecting all depositors from losses in most cases. A degree of market discipline is nevertheless preserved, since uninsured depositors have incurred losses in a minority of bank failures in recent decades. 

The irony is that, by invoking a systemic risk exception and extending an unlimited guarantee to all depositors of SVB and Signature Bank, the US authorities may have departed permanently from this model, at precisely the time when the EU was considering adopting it. The European Commission had planned to publish its CMDI proposal on 8 March, then procrastinated and eventually published it on 18 April. In the meantime, the US systemic risk exception was triggered on 12 March. 

Basel III

Moving towards a US-inspired system with general depositor preference, as that proposal suggests, still makes sense for the EU. But this may be impossible without simultaneously completing the banking union, because the continued reliance on national deposit guarantee arrangements defeats the purpose of a single Europe-wide framework. In any case, time is short to wrap up CMDI before the end of the current EU legislative cycle in about spring 2024, especially as several EU countries appear unhappy with it. The CMDI proposal will likely end up being useful as a basis for public debate rather than actual legislation.

All is not deadlocked, however. Another rule, which transposes into EU law the international accord known as Basel III Endgame, was proposed in October 2021. Its adoption is expected before end-2023. The current, non-final version is not compliant with the Basel III template. However, the recent banking turmoil has given the Basel framework renewed legitimacy: SVB may not have failed so miserably if it had not been exempted from the Basel framework. As noted by Bundesbank President Joachim Nagel in a speech on 14 April, “it is now all the more important to implement the Basel III rules globally without any concessions”.

The EU should focus on achieving that outcome, even as it leaves its menagerie of other acronyms – EDIS, RTSE and CMDI – unfinished for the time being. By emphasising the importance of strong capital and liquidity positions, the US banking mess could usefully lead EU policymakers to adopt the Basel III Endgame in a compliant manner.

Financial Statements: US bank supervision and deposit insurance after the collapse of Silicon Valley Bank

In today's session, I hosted Dan Tarullo of Harvard Law School and Sarah Bloom Raskin of Duke Law School to discuss the recent supervisory failures and consequences for banking regulation and deposit insurance in the United States. 

Financial Statements: The quest for global insurance standards

In the session on Tuesday, March 21, I hosted Romain Paserot of the International Association of Insurance Supervisors (IAIS) and Yoshihiro Kawai of Kyoto University to discuss the IAIS's ongoing project of a globally accepted Insurance Capital Standard that would apply to large internationally active insurance groups. 

Op-ed on CNN.com: Fully reimbursing SVB depositors may prove to be a bad move

CNN.com today published this op-ed in which I express doubts about the wisdom of the unlimited guarantee of uninsured deposits, which the US authorities have applied to Silicon Valley Bank and Signature Bank with the consequence that the same will be expected in most or perhaps all future cases. While it is clear that the authorities needed to provide generous liquidity assistance this week, I am among those unconvinced that it was necessary to depart from the time-tested principle of limited deposit insurance, which I view as a regime change for US finance. 

Will China's impending overhaul of its financial regulatory system make a difference?

In a new Policy Brief published today by the Peterson Institute, Martin Chorzempa and I analyzes challenges and international points of comparison for China's ongoing reform of its financial supervisory architecture. 

Update (March 28): a lightly updated version was published today by Bruegel. 

Much of the Global South is on Ukraine's side

This blog post was published yesterday by the Peterson Institute. 

Update (March 15): the post was also published by Bruegel. 

Efforts by the United States, Europe, Japan, South Korea, and other developed economies to rally the world against Russia over its invasion of Ukraine have been only partially successful. Many countries have declined to impose sanctions on Russia. But the record of votes at the United Nations indicates that most of the world, including much if not most of the developing world, is on Ukraine's side in denouncing Russia.

That record stands in contrast to some recent commentary implying that the "Global South" has adopted a position of neutrality in the conflict. That is indeed the case of China and India, the Global South's two economic and demographic heavyweights. But votes at the United Nations General Assembly (UNGA), which adopted a resolution in February demanding an end to the war and an immediate Russian withdrawal, indicate that the rest of the Global South actually leans towards supporting Ukraine.

For simplicity, the "Global South" is defined here on a criterion of gross domestic product (GDP) per capita, using GDP at market exchange rates estimated by the World Bank.[1] All countries with 2021 GDP per capita above US$15,000 are considered part of the "Global North," with the addition of Bulgaria and Romania (GDP per capita $12,221 and $14,858, respectively) as members of the European Union. Under that definition, both Russia and Ukraine are in the Global South, as are China and India. Conversely, some geographically southern countries such as Chile and Uruguay are classified as part of the Global North under this GDP per capita criterion. Thus defined, the Global South represents 85 percent of the world's population and nearly 39 percent of global GDP.

Each country's position on the Russia-Ukraine war is determined on the basis of its UNGA vote on February 23, 2023, whose outcome was broadly similar to those of earlier UNGA votes on Ukraine in 2022. While specific motivations may vary, it is natural to classify votes in favor of the resolution, which demanded that Russia "immediately, completely and unconditionally withdraw all of its military forces from the territory of Ukraine," as favorable to Ukraine, and those against it as favorable to Russia. The other two options, namely abstentions and no-shows, are bundled together as signaling neutrality.

The resulting picture is one of unanimity of the Global North: Its 57 countries all approved the resolution. By contrast, the 136 countries of the Global South embraced a range of positions, with China and India both being neutral, as illustrated by figure 1.

The pro-Ukraine camp represents almost two-thirds of the Global South's countries, and more than a third of its population. In terms of GDP, neutral China dominates the Global South with nearly half of the total (49 percent), but the pro-Ukraine camp, which includes large countries such as Brazil, Indonesia, Mexico, Nigeria, and the Philippines, makes up more than half of the rest (28 percent).

All things equal, a country's support for Ukraine is somewhat correlated with its wealth. But here too, the reality is nuanced. This is illustrated in figure 2, based on the ranking of all UN countries (including those in the Global North) by GDP per capita. All countries in the fourth (richest) quartile voted in favor of the UNGA resolution. But a majority did so in the other three quartiles as well, albeit only by a tiny margin in the first (poorest) quartile. Because of the outsized impact of the world's two most populated countries, both neutral, the share of the pro-Ukraine vote is actually higher in the first quartile than in either the second (which includes India) or the third quartile (which includes China) in terms of both population and GDP.

There is no question that the comparatively rich countries of North America, Europe, and East Asia are more engaged on the side of Ukraine than most of their peers in the Global South, even among those that supported Ukraine at the UNGA, as a recent opinion poll has documented. Strikingly, financial sanctions have been imposed on Russia by all ten richest jurisdictions of the Group of Twenty (G20), and by none of the ten poorer G20 countries. Even so, it would be inaccurate to play down the significant level of support that Ukraine keeps receiving from many of the world's less affluent countries.

Note

1. Source: World Bank, World Development Indicators, last updated December 22, 2022. For countries with nonsovereign dependencies that are reported separately by the World Bank (e.g., China with Hong Kong, the United States with Puerto Rico, Denmark with Greenland), and to the extent data were available, these dependencies are included in the GDP and population numbers. That leaves out jurisdictions without UN representation, such as Taiwan (absent from the World Bank dataset), Kosovo, the West Bank, and Gaza. All population numbers are as of 2021; GDP is as of 2021 for most countries, and 2020 for a few late reporters. In five cases (Eritrea, North Korea, South Sudan, Venezuela, and Yemen), UN estimates have been inserted as the World Bank does not provide recent data.

Financial Statements: A post-mortem of the Danske Bank fraud

In yesterday's session, I hosted Jesper Berg of the Danish Financial Supervisory Authority and David Enrich of the New York Times to discuss the lessons from the landmark settlement of Danske Bank following large-scale financial malpractice at its Estonian branch in the early 2010s. 

Financial Statements: The Party vs. shareholders: What drives corporate governance in China?

In today's session, Stanford Law School's Curtis Milhaupt and my PIIE colleague and coauthor Tianlei Huang debated the unique role of the Chinese Communist Party in corporate governance, and how to think about it in comparative terms vis-à-vis neighboring East Asian and other major economies. 

Financial Statements: Lessons for systemic liquidity risk from recent crises

Belatedly - in the session two weeks ago, I hosted Raghuram Rajan and Megan Greene to revisit the recent liquidity episodes and what may have been driving them.  

China’s state vs. private company tracker: now on a half-yearly pace

Following the in-depth analysis which Tianlei Huang and I published nearly a year ago on the respective shares of the private sector and state sector among China's largest companies, and the first update we published in October, the Peterson Institute has decided to publish our findings on market capitalization data as a regular tracker. The blog post below, published yesterday by PIIE, is the first such iteration.  

The private sector’s share of China’s largest listed companies continued to decline to 43 percent in the second half of 2022

The market assessment of economic and political developments in the second half of 2022 does not signal a decisive return to private-sector-led growth in China, even though that period includes the month of December, when China’s party-state unexpectedly ended its prior zero-COVID policy and signaled a more positive stance towards private sector development.

Latest data from PIIE’s semiannual tracker, “China’s state vs. private company tracker: Which sector dominates?”—which tracks market value of China’s top 100 listed companies (ranked by market value)—show a continued decline of the share of the private sector, from 44.5 percent at mid-2022 to 42.8 percent at year-end, continuing the downward trend of the previous two half-year periods from the 55.4 percent peak observed in mid-2021. Still, the private sector share remains higher than it was throughout the 2010s, when it rose dramatically from 8 percent at end-2010 to 36 percent at end-2019 (see figure).

It remains to be seen, then, whether China’s trajectory will be a pivot back to a Maoist-style economy that represses the private sector, or merely a new phase of market-driven development under changed political conditions. Building on our PIIE Working Paper published in 2022, the data presented here inform on the trend in the dynamism of China’s private sector beyond the rhetoric in China and the United States. The tracker focuses on the respective shares of state-sector and private-sector companies among China’s largest companies and thus provides a half-yearly market-based indicator of the private-state balance among Chinese companies. As in a previous update, the data at end-2022 suggest that President Xi Jinping’s “corporate rectification campaign” started in the summer of 2021 has dealt a heavy but far from lethal blow to China’s hitherto fast-rising private sector.

Recent discussions have focused on hybrid firms or ambiguous boundaries between private and state control. But the divide between the state sector and the private sector remains highly meaningful in analyzing contemporary China. As PIIE’s Nicholas Lardy and others have documented, the performance patterns and economic contributions of private-sector companies have differed from those of state firms since the early emergence of the former and restructuring of the latter during the bumpy era of the 1980s and 1990s. Large listed companies provide a decent proxy for the broader category of China’s largest companies, as more than half of the latter’s total revenue is made in listed entities. Stock prices are intrinsically forward-looking, subject to the whims of the market and occasional state intervention but not to political censorship or accounting manipulation.

The measures in PIIE’s semiannual tracker are not linked to general market price movements or index levels: If stock prices of state-sector listed firms rise or fall as much as those of private-sector listed firms, the relative shares that we track remain flat. As such, the respective shares of the private and state sectors can be viewed as decorrelated from cyclical growth and stock market dynamics, albeit somewhat related to structural growth trends if, as Lardy and others have argued, China’s growth is driven by private-sector expansion.

The measures in the tracker are based on the same methodology as in our 2022 PIIE Working Paper. All listed mainland Chinese companies are considered, including those that use mystifying variable-interest-entity arrangements, and are grouped into three categories: “state-owned enterprises” (SOEs) in which the state owns more than half of equity; “mixed-ownership enterprises” (MOEs) in which the state owns between 10 and 50 percent; and “nonpublic enterprises” in which the state owns less than a tenth of total equity, a conservative definition of China’s “true” private sector. In the definition used here, the state sector includes both MOEs and SOEs. Still, MOEs and SOEs are worth tracking separately, because state and party control is generally less direct and complete in the former than in the latter.

Even though market capitalizations can be observed in real time, these observations are intended to inform on structural trends rather than high-frequency fluctuations. To that effect, the data has been compiled yearly from 2010 to 2020 and half-yearly since 2021, as shown in the figure.

In 2022, additional quarterly monitoring indicated a pattern of small fluctuations rather than a monotonous soft decline: The share of the private sector fell to 42.1 percent at the end of the first quarter, then rose to 44.5 percent at mid-year, then fell back to 40.8 percent at the end of September (the lowest observation since end-2019), then rose back to its latest observed level of 42.8 percent at end-December. These additional quarterly data are not shown in the figure because that higher-frequency observation is not planned in future.

To sum up, the tug of war between the state and private sectors, as observed through the prism of market data presented here, remained largely static during a year that was otherwise rich in dramatic developments. Future updates will shed light on how the recent apparent signals of greater party-state friendliness towards the private sector are altering market participants’ assessment of its prospects relative to the state sector. 

Financial Statements: The City of London after Brexit: An update

In today's session of the Financial Statements series, William Wright and Caroline Atkinson debated the still unfolding structural consequences of the UK exit from the European Union, exactly two years about a previous session that was held only a few weeks after the British departure from the EU Internal Market.