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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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Banks and Sovereign Risk: A Granular View

Claudia M. Buch, Michael Koetter, Jana Ohls
IWH Discussion Papers, No. 12, 2015
published in: Journal of Financial Stability
Abstract
We identify the determinants of all German banks’ sovereign debt exposures between 2005 and 2013 and test for the implications of these exposures for bank risk. Larger, more capital market affine, and less capitalised banks hold more sovereign bonds. Around 15% of all German banks never hold sovereign bonds during the sample period. The sensitivity of sovereign bond holdings by banks to eurozone membership and inflation increased significantly since the collapse of Lehman Brothers. Since the outbreak of the sovereign debt crisis, banks prefer sovereigns with lower debt ratios and lower bond yields. Finally, we find that riskiness of government bond holdings affects bank risk only since 2010. This confirms the existence of a nexus between government debt and bank risk.
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Censored Fractional Response Model: Estimating Heterogeneous Relative Risk Aversion of European Households

Qizhou Xiong
IWH Discussion Papers, No. 11, 2015
Abstract
This paper estimates relative risk aversion using the observed shares of risky assets and characteristics of households from the Household Finance and Consumption Survey of the European Central Bank. Given that the risky share is a fractional response variable belonging to [0, 1], this paper proposes a censored fractional response estimation method using extremal quantiles to approximate the censoring thresholds. Considering that participation in risky asset markets is costly, I estimate both the heterogeneous relative risk aversion and participation cost using a working sample that includes both risky asset holders and non-risky asset holders by treating the zero risky share as the result of heterogeneous self-censoring. Estimation results show lower participation costs and higher relative risk aversion than what was previously estimated. The estimated median relative risk aversions of eight European countries range from 4.6 to 13.6. However, the results are sensitive to households’ perception of the risky asset market return and volatility.
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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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Monetary Policy under the Microscope: Intra-bank Transmission of Asset Purchase Programs of the ECB

L. Cycon, Michael Koetter
IWH Discussion Papers, No. 9, 2015
Abstract
With a unique loan portfolio maintained by a top-20 universal bank in Germany, this study tests whether unconventional monetary policy by the European Central Bank (ECB) reduced corporate borrowing costs. We decompose corporate lending rates into refinancing costs, as determined by money markets, and markups that the bank is able to charge its customers in regional markets. This decomposition reveals how banks transmit monetary policy within their organizations. To identify policy effects on loan rate components, we exploit the co-existence of eurozone-wide security purchase programs and regional fiscal policies at the district level. ECB purchase programs reduced refinancing costs significantly, even in an economy not specifically targeted for sovereign debt stress relief, but not loan rates themselves. However, asset purchases mitigated those loan price hikes due to additional credit demand stimulated by regional tax policy and enabled the bank to realize larger economic margins.
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Friend or Foe? Crowdfunding Versus Credit when Banks are Stressed

Daniel Blaseg, Michael Koetter
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.
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Stress Testing and Bank Efficiency: Evidence from Europe

Iftekhar Hasan, Fotios Pasiouras
International Journal of Corporate Finance and Accounting, No. 2, 2015
Abstract
This study examines whether and how the stress testing of European banks in 2010, 2011, and 2014 is related to their technical, allocative, and cost efficiency. Using a sample of large commercial banks operating in 20 European countries, and Data Envelopment Analysis (DEA), the authors perform comparisons between banks that were included in one of the three European stress tests and untested banks operating in the same countries. They estimate various specifications as for the inputs and outputs, cross-section and pooled estimations, and they also examine alternative samples as for the ownership of banks. In general, the authors conclude that banks included in the stress-test exercises are more efficient that their counterparties. The differences tend to be statistically significant in the case of allocative efficiency and cost efficiency, but not in the case of technical efficiency. With regards to the latter form of efficiency, the results depend upon the specification and the stress test in question.
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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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The Age of Global Value Chains: Maps and Policy Issues

Joao Amador, Filippo di Mauro
CEPR Press, 2015
Abstract
Global value chains (GVCs) - referring to the cross-border flows of goods, investment, services, know-how and people associated with international production networks - have transformed the world. Their emergence has resulted in a complete reconfiguration of world trade, bearing a strong impact on the assessment of competitiveness and economic policy. The contributions to this eBook are based on research carried out within the scope of the Eurosystem Competitiveness Research Network (CompNet), bringing together participants from EU national central banks, universities and international organisations interested in competitiveness issues. The mapping of GVCs and full awareness about their implications are essential to informed public debate and improved economic policy. 
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