Summary of the January Monthly Report
The role of trade in goods in the development of global imbalances
Current account balances, which are an indicator of global imbalances, continue to run through analyses conducted by international organisations as a major theme. The focus is often on the determinants of macroeconomic saving and investment decisions, of which current account balances are the mirror image. Domestic and foreign demand developments specific to individual countries have recently been coming increasingly under the spotlight. In the past, however, not enough attention has been paid to the role played by the structure of external trade, even though international trade in goods is a key determinant in the movement and size of current account balances.
A closer look at trade in individual groups of goods initially reveals relatively stable surpluses and deficits relative to the respective market value. Nonetheless, in the past few decades trade imbalances have increased owing, not least, to growing globalisation. In energy trading, moreover, price swings have played a major role. Even though it looked as though capital goods trade might come to assume a relatively prominent position, the decline in current account balances in the past few years can be explained less by specific developments in individual categories of goods; rather, shifts between deficit countries and surplus countries have been the driving factor.
A breakdown of trade in goods by exports and imports clearly shows that current account deficits are primarily consistent with relative export weakness. Among the advanced economies, the latter could also be a response to the growing importance of the emerging market economies (EMEs), whose increasing integration into global trade may well have put increasing competitive pressure on some industrial countries. Other industrial countries may have benefited on balance from the growth and shifting composition of global demand. The export structure of each individual country is likely to have determined which of the countervailing effects has dominated. Empirical findings show that such product range effects have also impacted on the movement of national current account balances, though not as powerfully as other factors. In this context, however, it must also be noted that relative characteristics of national economic structures, such as the quality of the exported products, are difficult to measure.
Despite the persistence of current account balances, which is also likely to be attributable to very slow change in export structures, experience over the past few years clearly shows that national positions are quite capable of changing over a long period. This has been demonstrated, for instance, by recent developments in some euro-area countries which, as a result of extensive adjustment processes, have not only reduced excessive domestic absorption but have also successfully improved price and non-price competitiveness alike.
The Common Credit Assessment System for assessing the eligibility of enterprises
Under the Eurosystem's decentralised monetary policy framework, national central banks (NCBs) grant liquidity-providing refinancing and intraday credit to resident credit institutions. Sufficient eligible collateral must be held for all Eurosystem lending operations. In order to protect the Eurosystem from financial risk, this collateral has to meet high standards of credit quality. Eligible collateral for refinancing includes not only securities but also credit claims against non-financial corporations. This broad collateral framework promotes the equal treatment of counterparties throughout the euro area.
In order to establish whether credit claims meet the required high standard of credit quality, the Eurosystem relies, amongst other things, on NCBs' internal credit assessment systems. The Bundesbank also conducts credit assessments to measure enterprises' credit default risk, thereby expanding and simplifying the potential uses of corporate loans as collateral for monetary policy operations. Small and medium-sized institutions without an approved internal ratings-based approach, in particular, can thus access central bank lending more easily. They can also submit credit claims against small and medium-sized enterprises (SMEs) as collateral even in cases in which the enterprises concerned do not have an external rating.
The Bundesbank's use of credit claims as collateral at the beginning of the European monetary union (EMU) represented a continuation of the long tradition of rediscount business. With the introduction of the "Single List" of collateral for monetary policy operations, corporate loans from 2007 onwards became eligible collateral throughout the euro area. During the financial crisis, banks' funding requirements rose, as did their interest in using credit claims as collateral. In order to assess the credit quality of SMEs as well, the Eurosystem's NCBs have built up internal credit assessment systems, in some cases from scratch.
The Bundesbank fundamentally redesigned its credit assessment system and transferred model-based rating functionality to the Common Credit Assessment System (CoCAS) developed jointly by the Oesterreichische Nationalbank and the Bundesbank. CoCAS can also be used by other Eurosystem NCBs for their credit assessment procedures and thus forms a basis for harmonisation in the Eurosystem. In addition, the Bundesbank has also modernised the underlying mathematical models. Whereas at the beginning of EMU a distinction was made only between eligible and ineligible credit claims, a credit quality grading scale similar in granularity to those used by external credit assessment institutions is now in use.