Enjoying the Quiet Life Under Deregulation? Evidence from Adjusted Lerner Indices for U.S. Banks
Michael Koetter, James W. Kolari, Laura Spierdijk
Review of Economics and Statistics,
No. 2,
2012
Abstract
The quiet life hypothesis posits that firms with market power incur inefficiencies rather than reap monopolistic rents. We propose a simple adjustment to Lerner indices to account for the possibility of foregone rents to test this hypothesis. For a large sample of U.S. commercial banks, we find that adjusted Lerner indices are significantly larger than conventional Lerner indices and trending upward over time. Instrumental variable regressions reject the quiet life hypothesis for cost inefficiencies. However, Lerner indices adjusted for profit inefficiencies reveal a quiet life among U.S. banks.
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Enhancing Market Power by Reducing Switching Costs
Jan Bouckaert, Hans Degryse, Thomas Provoost
Economics Letters,
No. 3,
2012
Abstract
A proportional decrease in switching costs increases competition and social welfare. However, a lump-sum decrease in switching costs softens competition and does not invariably increase social welfare.
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The Role of Investment Banking for the German Economy: Final Report for Deutsche Bank AG, Frankfurt/Main
Michael Schröder, M. Borell, Reint E. Gropp, Z. Iliewa, L. Jaroszek, G. Lang, S. Schmidt, K. Trela
ZEW-Dokumentationen, Nr. 12-01,
No. 1,
2011
Abstract
The aim of this study is to assess the contributions of investment banking to the economy with a particular focus on the German economy. To this end we analyse both the economic benefits and the costs stemming from investment banking.
The study focuses on investment banks as this part of banking is particularly relevant for financing companies as well as the development and use of specific products to support the needs of private and professional clients. The assessment of benefits and costs of investment banking has been conducted from a European perspective. Nevertheless there is a focus on the German economy to allow a more detailed analysis of certain aspects as for example the use of derivatives by German companies, the success of M&As in Germany or the effect of securitization on loan supply and GDP in Germany. For comparison purposes other European countries and also the U.S. have been taken into account.
The last financial crisis has shown the negative impacts of banks on the financial system and the whole economy. In a study on the contribution of investment banks to systemic risk we quantify the negative side of the investment banking business.
In the last part of the study we assess how the effects of regulatory changes on investment banking. All important changes in banking and capital market regulation are taken into account such as Basel III, additional capital requirements for systemically important financial institutions, regulation of OTC derivatives and specific taxes.
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Current Account Problems in the EMU – is there a Need to Adapt Fiscal Policy?
Toralf Pusch, Marina Grusevaja
Wirtschaftsdienst,
2011
Abstract
Leistungsbilanzungleichgewichte innerhalb der EU sind symptomatisch für die europäische Schuldenkrise. Zwischen ihnen und den nationalen Budgetdefiziten besteht ein enger Zusammenhang. Dazu, wie eine problematische Entwicklung der beiden Größen identifiziert und ein Gleichgewicht wiederhergestellt werden kann, gibt es eine Vielzahl von Vorschlägen. Die Autoren bewerten diese mit Hilfe einer Kosten-Nutzen-Analyse.
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The Role of Securitization in Bank Liquidity and Funding Management
Elena Loutskina
Journal of Financial Economics,
No. 3,
2011
Abstract
This paper studies the role of securitization in bank management. I propose a new index of “bank loan portfolio liquidity” which can be thought of as a weighted average of the potential to securitize loans of a given type, where the weights reflect the composition of a bank loan portfolio. I use this new index to show that by allowing banks to convert illiquid loans into liquid funds, securitization reduces banks' holdings of liquid securities and increases their lending ability. Furthermore, securitization provides banks with an additional source of funding and makes bank lending less sensitive to cost of funds shocks. By extension, the securitization weakens the ability of the monetary authority to affect banks' lending activity but makes banks more susceptible to liquidity and funding crisis when the securitization market is shut down.
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Government Interventions in Banking Crises: Effects of Alternative Schemes on Bank Lending and Risk-taking
Diemo Dietrich, Achim Hauck
Scottish Journal of Political Economy,
No. 2,
2012
Abstract
We analyse the effects of policy measures to stop the fall in loan supply following a banking crisis. We apply a dynamic framework in which a debt overhang induces banks to curtail lending or to choose a fragile capital structure. Government assistance conditional on new banking activities, like on new lending or on debt and equity issues, allows banks to influence the scale of the assistance and to externalise risks, implying overinvestment or excessive risk taking or both. Assistance without reference to new activities, like granting lump sum transfers or establishing bad banks, does not generate adverse incentives but may have higher fiscal costs.
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What Drives FDI in Central-eastern Europe? Evidence from the IWH-FDI-Micro Database
Andrea Gauselmann, Mark Knell, Johannes Stephan
Post-Communist Economies,
No. 3,
2011
Abstract
The focus of this paper is on the match between strategic motives of foreign investments into Central-Eastern Europe and locational advantages offered by these countries. Our analysis makes use of the IWH-FDI-Micro Database, a unique dataset that contains information from 2009 about the determinants of locational factors, technological activity of the subsidiaries, and the potentials for knowledge spillovers in the Czech Republic, Hungary, Poland, Romania, and Slovakia. The analysis suggests that investors in these countries are mainly interested in low (unit) labour costs coupled with a well-trained and educated workforce and an expanding market with the high growth rates in the purchasing power of potential buyers. It also suggests that the financial crisis reduced the attractiveness of the region as a source for localised knowledge and technology. There appears to be a match between investors’ expectations and the quantitative supply of unqualified labour, not however for the supply of medium qualified workers. But the analysis suggests that it is not technology-seeking investments that are particularly content with the capabilities of their host economies in terms of technological cooperation. Finally, technological cooperation within the local host economy is assessed more favourably with domestic firms than with local scientific institutions – an important message for domestic economic policy.
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Can Korea Learn from German Unification?
Ulrich Blum
IWH Discussion Papers,
No. 3,
2011
Abstract
We first analyze pre-unification similarities and differences between the two Germanys and the two Koreas in terms of demographic, social, political and economic status. An important issue is the degree of international openness. “Stone-age” type communism of North Korea and the seclusion of the population prevented inner-Korean contacts and contacts with rest of the world. This may create enormous adjustment costs if institutions, especially informal institutions, change. We go on by showing how transition and integration interact in a potential unification process based on the World Bank Revised Minimum Standard Model (RMSM) and on the Salter-Swan-Meade model. In doing so, we relate the macro and external impacts on an open economy to its macro-sectoral structural dynamics. The findings suggest that it is of utmost importance to relate microeconomic policies to the macroeconomic ties and side conditions for both parts of the country. Evidence from Germany suggests that the biggest general error in unification was neglecting these limits, especially limitations to policy instruments. Econometric analysis supports these findings. In the empirical part, we consider unification as an “investment” and track down the (by-and-large immediate to medium-term) costs and the (by-and-large long-term) benefits of retooling a retarded communist economy. We conclude that, from a South-Korean
perspective, the Korean unification will become relatively much more expensive than the German unification and, thus, not only economic, but to a much larger degree political considerations must include the tying of neighboring countries into the convergence process. We finally provide, 62 years after Germany’s division and 20 years after unification, an outlook on the strength of economic inertia in order to show that it may take much more than a generation to compensate the damage inflicted by the communist system.
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A Cost Efficient International Lender of Last Resort
Tobias Knedlik
International Research Journal of Finance and Economics,
2010
Abstract
The current reform of the International Monetary Fund’s (IMF) lending instruments has transformed the Fund towards an international lender of last resort (ILOLR). Current research discusses various general frameworks for installing an ILOLR. However, it remains unclear how the ILOLR should actually operate. This paper discusses six different options for the construction of an ILOLR that supports central banks during currency crises. The paper concludes that the most cost efficient version of the ILOLR would be direct intervention by the IMF using IMF resources, with the option of using additional reserves from central banks. The paper considers measures of cost efficiency, such as cost of borrowing, intervention, and sterilization and moral hazard problems.
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