Regulation of International Financial Markets and International Banking
The research group ‘Regulation of International Financial Markets and International Banking’ analyses international capital flows as well as the consequences of regulatory changes for financial stability and intermediation. Both aspects can facilitate an efficient allocation of capital and enable risk sharing, but spark at the same time global financial instabilities. Banking regulation and supervision has accordingly changed significantly over recent years, but the impact of these comprehensive reforms on the functionality of the financial system remain unclear. In addition banks face further challenges, such as tightening monetary policy, geopolitical risks, and the emergence of new competitors due to digitalization.
Against this backdrop, the research group contributes to the literature in three ways. First, the group empirically analyses international capital flow determinants and the implications for financial stability and credit allocation. Periods characterised by a high degree of financial integration are often followed by financial crises, causing negative spill-overs to the real economy. This work package seeks to advance our understanding of how to maintain a stable banking system that is able to efficiently channel financial resources to firms and households alike.
Second, the group analyses the impact of changes in banking supervision and regulation on (inter)national activities of banks with a specific focus on the European integration process. The establishment of the European Banking Union constantly shapes the banking sector as prudential and regulatory responsibilities are transferred from the national to the Euro area level. Integrated markets allow for an early detection of soaring risks at an early stage, but new regulations can also create distortions. This work package contributes to the scant empirical evidence on this trade-off.
Third, “traditional” banks are not only operating in a tighter regulatory framework, they also face plenty of challenges threatening their business model and longer-term profitability. For example, increasing interest rates sparked deposit withdrawals and valuation losses of banks’ fixed income investment. Distortions due to the realization of political risks and rising levels of public, private, and corporate debt might bear the risk of future non-performing loans. The emergence of non-bank financial intermediaries (FinTech) challenge current business models of banks. The consequences for banks or their new competitors should be monitored.
Workpackage 1: The Shape of International Financial Markets
Workpackage 2: Evaluation of Regulatory Policies in Integrated Markets
Workpackage 3: Financial Intermediation in a Changing World
IWH Data Project: International Banking Library
The International Banking Library is a web-based platform for the exchange of research on cross-border banking. It provides access to data sources, academic research, both theoretical and empirical, on cross-border banking, as well as information on regulatory initiatives. The International Banking Library addresses researchers, policymakers, and students of international banking and economics in search of comprehensive information on international banking issues.
The contents of the International Banking Library are summarised and distributed in a quarterly newsletter, thereby adding to the international visibility of the IWH (with more than 700 subscribers from academia, central banks and the industry) and facilitating a regular exchange of our research ideas with policy makers.
IWH Data Project: Financial Markets Directives Database
In Europe, financial markets have undergone significant regulatory changes since the last financial and sovereign debt crisis. One key element is the harmonisation of rules for capital regulation, bank resolution and deposit insurance. In the euro area, the sizable change in the regulatory framework is also reflected by the establishment of the European Banking Union.
Another change that might have implications for financial structure is the establishment of a Capital Market Union. Evidence-based policymaking and the evaluation of (un-)intended consequences of such reforms needs information on when regulatory changes happen. In the European Union, the cornerstones of regulatory changes that apply to all member states are implemented by means of regulations or directives. The latter ones have to be implemented, with some scope for discretion, into national law by the member states. The Financial Markets Directives Database assembles the dates at which countries have published the key legal document related to several recent directives affecting financial markets.
The cornerstone of the database constitutes information on the European Banking Union including its three directives on capital requirements, bank resolution and deposit insurance (CRD IV, BRRD, DGSD). The database has been made publically available via the website “International Banking Library” and is part of the Centre for Evidence-based Policy Advice (IWH-CEP).
Research Cluster
Economic Dynamics and StabilityYour contact
- Department Financial Markets
EXTERNAL FUNDING
07.2017 ‐ 12.2022
The Political Economy of the European Banking Union
Causes of national differences in the implementation of the Banking Union and the resulting impact on financial stability.
01.2015 ‐ 12.2017
Dynamic Interactions between Banks and the Real Economy
Refereed Publications
Complexity and Bank Risk During the Financial Crisis
in: Economics Letters, January 2017
Abstract
We construct a novel dataset to measure banks’ complexity and relate it to banks’ riskiness. The sample covers stock listed Euro area banks from 2007 to 2014. Bank stability is significantly affected by complexity, whereas the direction of the effect differs across complexity measures.
Sovereign Credit Risk Co-movements in the Eurozone: Simple Interdependence or Contagion?
in: International Finance, No. 3, 2016
Abstract
We investigate credit risk co-movements and contagion in the sovereign debt markets of 17 industrialized countries during the period 2008–2012. We use dynamic conditional correlations of sovereign credit default swap spreads to detect contagion. This approach allows us to separate contagion channels from the determinants of simple interdependence. The results show that, first, sovereign credit risk co-moves considerably, particularly among eurozone countries and during the sovereign debt crisis. Second, contagion varies across time and countries. Third, similarities in economic fundamentals, cross-country linkages in banking and common market sentiment constitute the main channels of contagion.
Taxing Banks: An Evaluation of the German Bank Levy
in: Journal of Banking and Finance, November 2016
Abstract
Bank distress can have severe negative consequences for the stability of the financial system. Regimes for the restructuring and resolution of banks, financed by bank levies, aim at reducing these costs. This paper evaluates the German bank levy, which has been implemented since 2011. Our analysis offers three main insights. First, revenues raised through the levy were lower than expected. Second, the bulk of the payments were contributed by large commercial banks and by the central institutions of savings banks and credit unions. Third, for those banks, which were affected by the levy, we find evidence for a reduction in lending and higher deposit rates.
Lend Global, Fund Local? Price and Funding Cost Margins in Multinational Banking
in: Review of Finance, No. 5, 2016
Abstract
In a proposed model of a multinational bank, interest margins determine local lending by foreign affiliates and the internal funding by parent banks. We exploit detailed parent-affiliate-level data of all German banks to empirically test our theoretical predictions in pre-crisis times. Local lending by affiliates depends negatively on price margins, the difference between lending and deposit rates in foreign markets. The effect of funding cost margins, the gap between local deposit rates faced by affiliates abroad and the funding costs of their parents, on internal capital market funding is positive but statistically weak. Interest margins are central to explain the interaction between internal capital markets and foreign affiliates lending.
Uncertainty, Bank Lending, and Bank-level Heterogeneity
in: IMF Economic Review, No. 4, 2015
Abstract
We analyze how uncertainty affects bank lending. We measure uncertainty as the cross-sectional dispersion of shocks to bank-level variables. Comparing this measure of uncertainty in banking to more traditional measures of uncertainty, we find similar but no identical patterns. Higher uncertainty in banking has negative effects on bank lending. This effect is heterogeneous across banks: lending by banks that are better capitalized and have higher liquidity buffers tends to be affected less. Also, the degree of internationalization matters, as loan supply by banks in financially open countries is affected less by uncertainty. The impact of the ownership status of the individual bank is less important, in contrast.
Working Papers
Friend or Foe? Crowdfunding Versus Credit when Banks are Stressed
in: IWH Discussion Papers, No. 8, 2015
Abstract
Does bank instability push borrowers to use crowdfunding as a source of external finance? We identify stressed banks and link them to a unique, manually constructed sample of 157 new ventures seeking equity crowdfunding. The sample comprises projects from all German equity crowdfunding platforms since 2011, which we compare with 200 ventures that do not use crowdfunding. Crowdfunding is significantly more likely for new ventures that interact with stressed banks. Innovative funding is thus particularly relevant when conventional financiers are facing crises. But crowdfunded ventures are generally also more opaque and risky than new ventures that do not use crowdfunding.
Explaining Regional Disparities in Housing Prices across German Districts
in: IZA Institute of Labor Economics, March 2022
Abstract
Over the last decade, German housing prices have increased unprecedentedly. Drawing on quality-adjusted housing price data at the district level, we document large and increasing regional disparities: growth rates were higher in 1) the largest seven cities, 2) districts located in the south, and 3) districts with higher initial price levels. Indications of price bubbles are concentrated in the largest cities and in the purchasing market. Prices seem to be driven by the demand side: increasing population density, higher shares of academically educated employees and increasing purchasing power explain our findings, while supply remained relatively constrained in the short term.
