Joint Research Centre - European Commission

JOINT RESEARCH CENTRE
The European Commission's in-house science service
European Commission

Analytic Methods for Financial and Economic Protection

Institute for the Protection and the Security of the Citizen

Action: 11202

Acronym: FINEPRO

Summary:

The FINEPRO action supports EU policies in the domain of economic and financial welfare protection along two main lines: macro-econometrics and financial econometrics. It operates through two projects: Euro-area Economic Modelling Centre (EEMC) and Financial Econometrics (FINECON).

EEMC supports the policy monitoring task of the DG Economic and Financial Affairs. Main areas of activities are:

(i) Macroeconomic models estimation and model development. JRC supports DG ECFIN in the estimation, simulation and model screening of macroeconomic models, particularly with respect of QUEST III, the dynamic stochastic general equilibrium model that is used by DG ECFIN to gauge the status of the EU Member States economies.

(ii) Short-term economic analysis, with focus on output gap and structural unemployment rate (NAIRU). In application of the Stability and Growth Pact, DG ECFIN is in charge of monitoring the cyclically adjusted budget balances of EU Member States. The production function approach adopted by ECOFIN in 2002 gives the analytical framework for estimating the Member States balances. A major component is the NAIRU. EEMC has developed Program GAP

that uses inflation for estimating the NAIRU in all Member States.

(iii) Econometric Training is an essential part of EEMC support in macroeconomic modelling and short term economic analysis. JRC provides ad-hoc training session upon request of EC or Member State bodies. So far EEMC provided trainings on identification of Stochastic General Equilibrium Model, State-space Methods, Bayesian estimation and Time Series analysis.

FINECON provides research results and support EU policy-makers in the areas of single market safety, financial stability, consumers' protection, enhanced transparency. In particular, FINECON develops research on:

(i) deposit protection schemes, aimed at ensuring the safety of the citizens' savings in case of banking crises, and guaranteeing the global security and stability of the EU financial systems; and (ii) Solvency II Directive, which

aims to ensure that insurance undertakings are financially safe and can withstand adverse events, in order to protect policyholders and the security of the economic system as a whole.

In the framework of enhancing deposit protection in the EU, JRC will continue the analysis started in 2008 (see WP2008, Action 11202) aimed at introducing risk based elements in the premia paid by banks to their deposit protection schemes. The 2009 focus will be on estimating risk-based contributions that are in line with Basel II regulation, as these may better reflect the real bank's risk exposure and reduce the risk of financial

distress.

For Solvency II, JRC will continue the analysis aimed at estimating the macroeconomic impacts of Solvency II Directive (see WP 2008, Action 11202), by investigating the applicability of alternative models to validate the quantitative estimates achieved on the basis of the currently used QUEST-II

model.