Banking and insurance regulation
The action provides statistical analyses, computation tools, and modelling support to the Commission services in charge of financial markets regulation, taxation, and competition policies.
The action's competences on statistics, econometrics, and financial markets modelling have been deployed by the Commission especially for improving prudential regulation for banks and insurances and for tackling systemic financial risk.
The SYstemic Model of Banking Originated Losses, SYMBOL, was developed by FINEPRO, in cooperation with the Directorate-General Internal Market and Services and academics, to assess the impact of EC legislative proposals in the field of banking regulation. SYMBOL simulates potential crises in the banking sector under various assumptions, and allows assessing the cumulative effects of different regulatory measures (e.g. higher capital requirements, strengthened deposit insurance, and introduction of resolution funds) and their most effective combinations.
The action has contributed to the Impact Assessments of: the Directive on Deposit Guarantee Schemes (2010), to enhance the protection of the savings of the European citizens; the EC Legislative package on Capital Requirements (CRD4, 2011) to strengthen banks capital requirements in line with Basel III international standards; the Directive on a common system of financial transaction tax (2011); the 2011 Commission annual report on the public finances in the economic and monetary union (EMU), and the proposal for a new EU framework for Crisis Management and Bank Resolution (2012) to orderly resolve banks in distress and preserve market stability.
The action is also working in the field of insurance and pension funds and is conducting exploratory research on modeling the links between the banking, insurance and pension funds sectors.
Macroeconomic analysis for the monitoring of the EU economic stance
The action supports the Directorate-General for Economic and Financial Affairs (DG ECFIN) in the development, estimation and simulation of QUEST III, the dynamic stochastic general equilibrium model used by the Commission to analyze the status of the EU economy. QUEST is an important analytic instrument for monitoring the EU 2020 objectives and the impact of the flagships initiatives, in particular for the integrated surveillance of member countries economic stance, including their fiscal policy, reform programmes, and overall sustainability of public finances.
QUEST III belongs to the class of Dynamic Stochastic General Equilibrium (DSGE) models that is now widely used by international institutions and central banks and that is the workhorse of modern macroeconomic modelling. QUEST III is used by DG ECFIN for macroeconomic policy analysis. DSGE models have rigorous microeconomic foundations derived from utility and profit optimisation and include frictions in goods, labour and financial markets.
To deal with the wide range of policy issues in DG ECFIN, different model versions have been built, each with a specific focus and regional and sectoral disaggregation. Many of the main applications deal with fiscal and monetary policy interactions. New model variants also include housing and financial sectors. QUEST III has been estimated on euro area, EU member country and US data using Bayesian estimation methods. These analyses are used for example to analyze imbalances and rebalancing scenarios for Euro Area Member Countries. Moreover they help understanding the mechanisms driving the economic cycle as well as the impact of fiscal policies in the context of the current crisis.
DSGE models also require the use of advanced computational and methodological tools. In this context, the action contributes to the DYNARE project, a toolbox widely used in policy institutions and Universities for the development of macro-economic models.
Monitoring fiscal imbalances in application of the Growth and Stability Pact
The Stability and Growth Pact (SGP) is a rule-based framework for the coordination of national fiscal policies in the economic and monetary union (EMU). It was established to safeguard sound public finances, an important requirement for EMU to function properly.
The concepts of potential growth and output gap form a crucial part of the toolkit for assessing the cyclical position of the economy and its productive capacity. Potential growth constitutes a summary indicator of the economy's capacity to generate sustainable, non-inflationary, growth, whilst the output gap is an indication of the degree of overheating or slack relative to this growth potential. These concepts have become an essential ingredient of the fiscal surveillance process emanating from the SGP.
Estimating the output gap is difficult since potential growth is not directly observable. The estimates obtained from the ECOFIN Council approved production function methodology have been providing essential information to policy makers since their initial release in 2002.
The action has implemented this methodology into the estimation platform GAP that is currently used by the European Commission to calculate output gap and potential output. This information has been used by policy makers for their ongoing discussions regarding the appropriate mix of macroeconomic and structural policies in the various EU economies, with the former geared to eliminating cyclical slack and the latter being used to raise the output potential of their respective economies.