International Monetary Fund. Monetary and Capital Markets Department
This Technical Note discusses the findings and recommendations in the Financial Sector Assessment Program for Spain in the areas of insolvency and creditor rights. The regime for creditor and debtor rights largely conforms to international best practices. With respect to creditor and debtor rights, the registration of real estate mortgages is efficient, reliable, and cost-effective. Owing to nonperforming loans, real estate foreclosure has been extensively used in Spain. Real estate collateral plays a critical role in Spain owing to the fact that a very large percentage of loans are collateralized with real estate. The institutional framework supporting insolvency and creditor rights has been strengthened but requires further reinforcement and more resources.
This paper looks at some technical issues when using CDS data, and if these are incorporated, the analysis or regression results are likely to benefit. The paper endorses the use of stochastic recovery in CDS models when estimating probability of default (PD) and suggests that stochastic recovery may be a better harbinger of distress signals than fixed recovery. Similarly, PDs derived from CDS data are risk-neutral and may need to be adjusted when extrapolating to real world balance sheet and empirical data (e.g. estimating banks losses, etc). Another technical issue pertains to regressions trying to explain CDS spreads of sovereigns in peripheral Europe - the model specification should be cognizant of the under-collateralization aspects in the overall OTC derivatives market. One of the biggest drivers of CDS spreads in the region has been the CVA teams of the large banks that hedge their exposure stemming from derivative receivables due to non-posting of collateral by many sovereigns (and related entities).
Mr. Ashok Vir Bhatia, Ms. Srobona Mitra, Anke Weber, Mr. Shekhar Aiyar, Luiza Antoun de Almeida, Cristina Cuervo, Mr. Andre O Santos, and Tryggvi Gudmundsson
This note weighs the merits of a capital market union (CMU) for Europe, identifies major obstacles in its path, and recommends a set of carefully targeted policy actions.
European capital markets are relatively small, resulting in strong bank-dependence, and are split sharply along national lines. Results include an uneven playing field in terms of corporate funding costs, the rationing out of collateral-constrained firms, and limited shock absorption. The benefits of integration center on expanding financial choice, ultimately to support capital formation and resilience. Capital market development and integration would support a healthy diversity in European finance. Proceeding methodically, the note identifies three key barriers to greater capital market integration in Europe: transparency, regulatory quality, and insolvency practices. Based on these findings, the note urges three policy priorities, focused on the three barriers. There is no roadblock—such steps should prove feasible without a new grand bargain.