شاخص های ثبات مالی و توسعه بدهی های عمومی

This paper investigates the inter-linkages between financial stability and fiscal policy. It analyzes the effect of selected financial stability indicators on the probability of future debt deterioration, controlling for several macroeconomic variables. We find significant evidence that a fragile banking system can put at risk public finances. Weak bank profitability, low asset quality and a weak capital base increase the fragility of the banking system, thus, raising the probability of future fiscal troubles.

One of the major consequences of the recent financial crisis is its impact on government finances. Total support packages from governments and monetary authorities during the recent crisis have reached unprecedented levels. These actions coupled with the cyclical deterioration of fiscal positions and discretionary fiscal expansions have led to a substantial pick up in debt to GDP ratios in many OECD countries. Although the recent crisis and the response to it was unprecedented, it certainly implies that policy makers from now on will put more of their attention on financial market developments and will try to avert analogous dramatic events in future years. Several actions towards this direction have already been agreed at the G20 and EU context (G20, 2009). For example, strengthening financial supervision and regulation, reforming international financial institutions to overcome the recent crisis and prevent future ones, creating the Financial Stability Board (FSB) to improve macro-prudential surveillance at the global level, and taking decisive and coordinated fiscal policy actions in order to restore confidence, growth and jobs, etc. Moreover, the Ecofin Council agreed on 9 June 2009 that “… an independent macro-prudential body covering all financial sectors, the European Systemic Risk Board (ESRB), should be established…”.1 In this context the European Commission on 12 September 2012 (European Commission, 2012) unveiled its proposals for a single supervisory mechanism for banks in the euro area, giving enhanced powers to the ECB, in an effort to strengthen the functioning of the Economic and Monetary Union (EMU) and break the vicious cycle between the banking sector vulnerabilities and sovereign debt financing problems. On 19 March 2013 the European Parliament and the Council reached an agreement on this major legislative package entrusting the European Central Bank with responsibility for the supervision of banks in the framework of the Single Supervisory Mechanism and adapting the operating rules of the European Banking Authority (EBA) to this new framework. Given the links between fiscal policy and the financial sector, it is of great importance to better understand the feedback loops between government activity and financial market stability. Financial market instability can have significant implication for public finances, either directly (to the extent that it requires government intervention, involving some short of bail out) or through its effects on economic activity.2 An ailing banking system will mean that financial intermediation breaks down and credit extended to the private sector is substantially reduced impacting negatively on economic activity. At the same time, as we have observed in the recent crisis, the monetary policy channel could become dysfunctional. Given the banks’ effort to reduce their activities and improve their balance sheets and capital base, lowering policy rates to kick-start economic activity is not automatically translated into increased lending to the private sector. Hence, fiscal intervention will be required to restore confidence in the stability of the banking and financial system (given the public good character of financial stability) and to sustain economic activity, as was indeed the case in the recent crisis.3 Given these important inter-linkages between financial stability and fiscal policy, this paper builds on financial soundness indicators (FSIs) of the banking system to investigate whether their evolution can provide an indication of the fiscal cost (in terms of higher debt ratio) that governments might have to incur in the event of financial instability. We are building on two recent strands of the literature. First, Cihak and Schaeck, 2007 and Cihak and Schaeck, 2010 who use financial soundness indicators reported in the Global Financial Stability Report (GFSR) of the International Monetary Fund (IMF). These indicators refer to bank profitability (return on assets, return on equity), bank asset quality (non performing loans (NPLs) to total loans, loan loss provisions to non performing loans), and bank capital adequacy (regulatory capital to risk weighted assets, capital to assets). The findings of Cihak and Schaeck, 2007 and Cihak and Schaeck, 2010 provide evidence that a certain subset of FSIs may help predict a banking crisis. The second strand of the literature relates to the study of Furceri and Zdzienicka (2012a) who show that banking crises are associated with significant and long lasting increases in government debt. Building on these two pieces of work we relate the evolution in FSIs to the accumulation of debt and claim that FSIs can be a relevant predictor of future debt crisis that are driven by the occurrence of a banking crisis and its related fiscal costs. The channels concerned involve both the direct effects (i.e., the bank recapitalization operations and other government interventions) and indirect effects (i.e., the decline in output due to the financial sector collapse). Put it differently, the evolution of such indicators can have predictive power for the performance of the banking systems and can warn the relevant authorities on the likely macroeconomic and budgetary implications and risks that an event of financial instability might entail (e.g., in Ireland and in Spain banking sector vulnerabilities led to a sovereign debt problems).4 Taking this into account, fiscal authorities, in close cooperation with financial supervisors, should keep track of the developments in the financial system. Employing different modelling techniques (logit, logit fixed effects and instrumental variable probit analysis), and using data for 20 OECD countries over the period 1997–2010, we find significant econometric evidence that financial stability indicators can be linked with future debt deterioration episodes. Indicatively, a 1 percentage point (p.p.) increase in the returns on assets ratio reduces the probability of future fiscal troubles by about 0.084–0.124. Similarly, a 1 p.p. increase in the ratio of NPLs to total loans raises the probability of subsequent debt deterioration by about 0.015. Finally, a 1 p.p. increase in the regulatory-capital-to-risk-weighted-assets reduces the probability of debt deterioration by about 0.02–0.03. In addition, we find that the effect of higher regulatory-capital-to-risk-weighted-assets in lowering future fiscal risks increases as we pass from weak to more severe debt crisis episodes. Overall, FSIs can provide valuable information to the fiscal policy maker, both as regards their direct effect on the probability of future debt deterioration episodes, as well as indirectly through their likely impact on output growth and the debt ratio sub-components. Our findings provide evidence that early signs of instability that can be used to initiate action that could involve creating additional fiscal space (fiscal buffers), in particular in good times, and putting in place appropriate supervisory and regulatory actions to avert a possible destabilization of the banking sector and subsequent fiscal troubles. The rest of the paper is organized as follows: Section 2 discusses the direct and indirect fiscal costs of financial and banking crisis and overviews previous related studies. In Section 3 we provide data information related to the financial soundness indicators and the dependent variables considered in the empirical analysis. Section 4 presents the methodology, regression analysis, robustness checks and findings. Section 5 summarizes the main findings and concludes. A Data appendix presents detailed information about the variables used in the analysis.5

This paper tries to shed some light on the inter-linkages between financial stability and fiscal policy. It builds on two pieces of empirical evidence. On the one hand, the findings of Cihak and Schaeck, 2007 and Cihak and Schaeck, 2010 provide some evidence that a certain subset of FSIs may help predict a banking crisis. On the other hand, the study of Furceri and Zdzienicka (2012a) shows that banking crises are associated with significant and long lasting increases in government debt. Building on this evidence we relate the evolution of FSIs to the accumulation of debt. We analyze the relationship between selected financial stability indicators of the banking sector (taken from the GFSR of the IMF) and debt ratio developments. More specifically, we investigate to what extent financial stability indicators can provide information on future debt deterioration episodes, controlling for other fiscal and macroeconomic variables. Logit, logit fixed effects and IV probit analysis suggests that regulatory capital to risk weighted assets, non-performing loans to total loans, loan loss provisions to NPLs and bank profitability indicators (returns on assets and on equity) exert a statistically significant effect on the probability of debt deterioration.36 An increase in the regulatory-capital-to-risk-weighted-assets leads to a sound capital base for the aggregate banking system and reduces the risks of subsequent banking sector vulnerabilities which could be translated into increased fiscal burden. Alternatively, an eroding capital base signals future fiscal risks. The deterioration of the asset quality of the banking sector can pose a very significant risk for fiscal policy makers as it might lead to government intervention and assumption of private sector liabilities. We find statistically significant evidence that higher returns on assets (on equity) reduce the probability of future fiscal troubles. The effect of higher regulatory capital to risk weighted assets in lowering future fiscal risks increases as we pass from weak to more severe debt deterioration episodes. This implies that macro-prudential authorities have a very significant role in ensuring that the banking system is adequately capitalized in order to reduce the likely future fiscal risks that might have to be borne by society. Moreover, we find evidence that the FSIs can provide valuable information to the fiscal policy maker, both as regards their direct effect on the probability of future debt deterioration episodes, as well as indirectly through their likely impact on output growth and the debt ratio sub-components. Overall, a fragile and ill-performing banking system poses risks to the soundness of public finances. These findings are particularly relevant because during the 2008–09 financial crisis policymakers around the globe were faced with a triple task, to safeguard the stability of the financial system, to ensure that unsound banking practices were punished and that they will not be repeated in the future, and that the fiscal consequences of the bail out operations will be contained. Nevertheless, the fiscal cost of banking sector rescue plans were, at time, immense, and have put increased pressure on public finances in many industrialized countries, and have now contributed to the on-going euro area sovereign debt crisis.37 Therefore, our findings imply that if aggregate bank ratios provide signals for the build up of imbalances in banking systems (Cihak and Schaeck, 2007 and Cihak and Schaeck, 2010), they can also provide valuable information on prospective fiscal costs that a country might have to incur in the event of financial instability. Although our findings do not directly link aggregate bank ratios with the cost of past banking crises as those identified by Laeven and Valencia (2008), they do carry qualitative information on the importance of the inter-linkages between financial stability concerns and fiscal policy risks. These early signs of instability can be used to initiate action that could involve creating additional fiscal space (fiscal buffers), in particular in good times, and putting in place appropriate supervisory and regulatory action to avert the collapse of the banking sector.38 Hence, while underscoring the preliminary character of our conclusions and the data limitation (both in terms of comparability across countries and in terms of the time series dimension, as also discussed in Babihuga, 2007, Cihak and Schaeck, 2007 and Cihak and Schaeck, 2010), we have shown that aggregate bank ratios that reflect financial soundness are relevant for policy analysis and their developments should be kept on track by fiscal policy makers. Alternatively, macro-prudential supervisors should be in close coordination with fiscal policy makers to monitor the links between financial market and fiscal policy developments, i.e., financial stability and fiscal policy risks should be jointly analyzed. Moreover, the mandate of a macro-prudential body could also involve monitoring and assessing the potential feedback effects between the financial system and fiscal policy making.39 This is particularly relevant in view of the significant feedback effects that exist between fiscal policy and financial stability, which can work either directly or indirectly though the real economy and could also have significant consequences in terms of the additional burden to borne by society in the event of a systemic banking crisis. Further research is needed on this front to better understand and disentangle the various channels through which banking and financial stability intertwines with fiscal policy decisions and outcomes.