Price Setting in the Euro Area: Some Stylised Facts from Individual Producer Price Data

Journal of money credit and banking (Impact Factor: 1.09). 01/2007; 44(164). DOI: 10.1111/j.1538-4616.2012.00547.x
Source: RePEc


This paper analyzes the relationship between banks’ divergent strategies toward specialization and diversification of financial activities and their ability to withstand a banking sector crash. We first generate market-based measures of banks’ systemic risk exposures using extreme value analysis. Systemic banking risk is measured as the tail beta, which equals the probability of a sharp decline in a bank’s stock price conditional on a crash in a banking index. Subsequently, the impact of (the correlation between) interest income and the components of non-interest income on this risk measure is assessed. The heterogeneity in extreme bank risk is attributed to differences in the scope of non-traditional banking activities: non-interest generating activities increase banks’ tail beta. In addition, smaller banks and better-capitalized banks are better able to withstand extremely adverse conditions. These relationships are stronger during turbulent times compared to normal economic conditions. Overall, diversifying financial activities under one umbrella institution does not improve banking system stability, which may explain why financial conglomerates trade at a discount.

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Available from: Erwan Gautier
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    • "The speed and magnitude of the adjustment in the economy reflect to a large extent the degree of price and wage rigidities. Regarding the degree of price rigidity, previous studies conducted on the basis of micro quantitative and survey data revealed a considerable degree of price stickiness, measured by the frequency of price changes, both in Portugal and in the euro area as a whole, in particular when compared with the USA (see Fabiani et al., 2007 and Martins, 2010 for survey evidence, and Vermeulen et al., 2012 and Dias et al., 2008 for micro-quantitative evidence). The information collected in the survey shows that around 70 per cent of firms do not change prices more than once a year; with this percentage being particularly high in the case of business services (Figure 1). "
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