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Exit Expectations and Debt Crises in Currency Unions

Alexander Kriwoluzky, G. J. Müller, M. Wolf
IWH Discussion Papers, No. 18, 2015
Abstract
Membership in a currency union is not irreversible. Exit expectations may emerge during sovereign debt crises, because exit allows countries to reduce their liabilities through a currency redenomination. As market participants anticipate this possibility, sovereign debt crises intensify. We establish this formally within a small open economy model of changing policy regimes. The model permits explosive dynamics of debt and sovereign yields inside currency unions and allows us to distinguish between exit expectations and those of an outright default. By estimating the model on Greek data, we quantify the contribution of exit expectations to the crisis dynamics during 2009 to 2012.
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International Banking and Liquidity Risk Transmission: Evidence from Canada

James Chapman, H. Evren Damar
IMF Economic Review, No. 3, 2015
Abstract
This paper investigates how liquidity conditions in Canada may affect domestic and/or foreign lending of globally active Canadian banks, and whether this transmission is influenced by individual bank characteristics. It finds that Canadian banks expanded their foreign lending during the recent financial crisis, often through acquisitions of foreign banks. It also finds evidence that internal capital markets play a role in the lending activities of globally active Canadian banks during times of heightened liquidity risk.
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The Impact of Securitization on Credit Rationing: Empirical Evidence

Santiago Carbo-Valverde, Hans Degryse, Francisco Rodríguez-Fernández
Journal of Financial Stability, 2015
Abstract
We study whether banks’ involvement into different types of securitization activity – asset backed securities (ABS) and covered bonds – in Spain influences credit supply before and during the financial crisis. While both ABS and covered bonds were hit by the crisis, the former were hit more severely. Employing a disequilibrium model to identify credit rationing, we find that firms with banks that were more involved in securitization see their credit constraints more relaxed in normal periods. In contrast, only greater covered bonds issuance reduces credit rationing during crisis periods whereas ABS aggravates these firms’ credit rationing in crisis periods. Our results are in line with the theoretical predictions that a securitization instrument that retains risk (covered bond) may induce a more prudent risk behavior of banks than an instrument that provides risk transferring (ABS).
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“The German Saver” and the Low Policy Rate Environment

Reint E. Gropp, Vahid Saadi
IWH Online, No. 9, 2015
Abstract
It is widely claimed that “the German saver” suffers (i.e. generates significantly lower returns on her savings) in the low interest environment that Germany currently experiences relative to a high interest rate environment. With “low interest rate environment”, the observers tend to mean “low policy rates”, i.e. the European Central Bank’s (ECB) main refinancing rate.
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Financial Constraints on Growth: Comparing the Balkans to Other Transition Economies

Hubert Gabrisch
Eastern European Economics, No. 4, 2015
Abstract
This article applies an adjusted growth diagnostic approach to identify the currently most binding constraint on financing growth in the West Balkan countries. Since this group of economies faces both structural and systemic transformation problems, the original supply-side approach might not be sufficient to detect the most binding constraint. The results of the analysis indicate that the binding constraint on credit and investment growth in the region is the high and increasing share of nonperforming loans, primarily in the household sector, due to policy failures. This article compares the Balkan countries to a group of advanced transition economies. Single-country and panel regressions indicate that demand-side factors do not play a constraining role on growth in the West Balkan countries, but they do in the advanced transition economies.
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Interest Benefits from the Debt Crisis to the German Budget: Updated Calculations

IWH Online, No. 8, 2015
Abstract
In a recent IWH online note, the IWH suggested that due to “flight to safety” effects, Germany was able to issue government debt at lower rates than otherwise would have been possible. The total savings was calculated to be around Euro 100 billion or about 3 percent of German GDP. This note provides further evidence on the interest savings to the German budget that extend the calculations in two dimensions. Using this refined methodology, we obtain interest savings to the German budget of just under Euro 90 billion.
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Bank Risk Proxies and the Crisis of 2007/09: A Comparison

Felix Noth, Lena Tonzer
IWH Discussion Papers, No. 13, 2015
published in: Applied Economics Letters
Abstract
Motivated by the variety of bank risk proxies, our analysis reveals that nonperforming assets are a well-suited complement to the Z-score in studies of bank risk. We investigate four proxies for bank risk that are frequently used in the literature. Our analysis shows that non-performing assets are a good proxy for bank risk for two reasons. First, non-performing assets nest the alternative proxies as shown by the high share of variation in non-performing assets explained by the Z-score, loan loss reserves and loan loss provisions. Second, non-performing assets are well-suited to explain bank failures one year ahead. The latter point also holds for the Z-score whereby the information content of the Z-score seems to differ from the other variables. We conclude that non-performing assets are a well-suited complement to the Z-score, which may come with calculation issues regarding the volatility of profitability, in studies of bank risk.
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Bank Market Power, Factor Reallocation, and Aggregate Growth

R. Inklaar, Michael Koetter, Felix Noth
Journal of Financial Stability, 2015
Abstract
Using a unique firm-level sample of approximately 700,000 firm-year observations of German small and medium-sized enterprises (SMEs), this study seeks to identify the effect of bank market power on aggregate growth components. We test for a pre-crisis sample whether bank market power spurs or hinders the reallocation of resources across informationally opaque firms. Identification relies on the dependence on external finance in each industry and the regional demarcation of regional banking markets in Germany. The results show that bank markups spur aggregate SME growth, primarily through technical change and the reallocation of resources. Banks seem to need sufficient markups to generate the necessary private information to allocate financial funds efficiently.
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Germany’s Benefit from the Greek Crisis

IWH Online, No. 7, 2015
Abstract
This note shows that the German public sector balance benefited significantly from the European/Greek debt crisis, because of lower interest payments on public sector debt. This is due to two effects: One, in crisis times investors disproportionately seek out safe investments (“flight to safety“), bidding down the returns on safe-haven assets. We show that German bunds strongly benefited from this effect during the Greek debt crisis. Second, while the European Central Bank (ECB) monetary policy stance was quite close to an “optimal“ monetary policy stance for Germany from 1999 to 2007, during the crisis monetary policy was too accommodating from a German perspective, due to the emerging disparities across the Euro area. As a result of these two effects, our calculations suggest that the German sovereign saved more than 100 billion Euros in interest expenses between 2010 and mid-2015. That is, Germany benefited from the Greek crisis even in case that Greece defaults on all its debt (a total of 90 billions) owed to the German government via diverse channels (European Stability Mechanism [ESM], International Monetary Fund [IMF], or directly).
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EFN Report Summer 2015: Economic Outlook for the Euro Area in 2015 and 2016

EFN Reports, No. 3, 2015
Abstract
External conditions for the euro area economy are still favourable, albeit somewhat less so than at the beginning of the year. Oil prices are by more than a third lower than they were on average in 2014, but about 10 USD higher than in January. Long term interest rates are still very low, but by half a percentage point higher than in January. Worldwide growth in production and trade has disappointed in the first quarter of 2015, and recent leading indicators point to no more than a slightly faster expansion of world production for the rest of the year. The risks of contagion from the Greek crisis to the partner countries appear limited, because financial exposure to the Greek banking sector has been very much reduced. The EU nowadays has instruments with considerable power to fight losses of confidence, and the other countries that received financial assistance in the euro crisis appear politically much more stable, and their economies (including that of Cyprus in the first quarter of this year) have started growing at quite satisfactory rates. According to our forecasts, the euro area GDP will grow by 1.6% in 2015 and by 2.1% in 2016, as negative factors slowly become less important. Both private consumption and investment will expand at a good pace, and the unemployment rate will diminish, but still remain above 10% by the end of 2016. The main risk is that the Greek crisis has a more negative effect on confidence than initially expected. Our inflation forecast for 2015 is 0.2%, with the possibility of a mild deflation not excluded. During the first quarter of 2015 rising oil prices were the main contributors to the ascending inflation expectations, while during the second quarter upward surprises over expected inflation have come from manufactured goods and services. For 2016, we expect that inflation will increase up to 1.2%, still below the 2% ECB’s target.
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