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Foreign Funding Shocks and the Lending Channel: Do Foreign Banks Adjust Differently?

Felix Noth, Matias Ossandon Busch
Finance Research Letters, November 2016
Abstract
We document for a set of Latin American emerging countries that the different nature of foreign funding accessed by foreign and local banks affected their lending performance after September 2008. We show that lending growth was weaker for shock-affected foreign banks compared to shock-affected local banks. This evidence represents valuable policy information for regulators concerned with the stability and well-functioning of banking sectors.
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National Politics and Bank Default Risk in the Eurozone

Stefan Eichler, Karol Sobanski
Journal of Financial Stability, October 2016
Abstract
We study the impact of national politics on default risk of eurozone banks as measured by the stock market-based Distance to Default. We find that national electoral cycles, the power of the government as well as the government’s party ideological alignment significantly affect the stability of banks in the eurozone member countries. Moreover, we show that the impact of national politics on bank default risk is more pronounced for large as well as weakly capitalized banks.
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29.09.2016 • 40/2016

Joint Economic Forecast: German Economy on Track – Economic Policy needs to be Realigned

Thanks to a stable job market and solid consumption, the German economy is experiencing a moderate upswing. The GDP is expected to increase by 1.9 percent this year, 1.4 percent in 2017, and 1.6 percent in 2018, according to the Gemeinschaftsdiagnose (GD, joint economic forecast) that was prepared by five of Europe’s leading economic research institutes on behalf of the Federal Government. The most recent GD, which was released in April, predicted a GDP growth rate of 1.6 percent for 2016 and 1.5 percent for 2017.

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EFN Report Summer 2016: Economic Outlook for the Euro Area in 2016 and 2017

EFN Reports, No. 3, 2016
Abstract
Short run consequences of Brexit for the euro area economy mainly depend on the effects on confidence in the stability of the European Union and the currency area in particular. Anti-European (or indeed anti-globalization) movements are certainly encouraged by the British vote. More important, however, might be a reverse effect: from the perspective of the British turmoil, the euro area might in the near future appear as a zone of relative stability and calm. Against the background of a sluggish world economy, the euro area economy recently performed reasonably well: dynamics have been slowly increasing since 2013, and the rate of expansion in the first quarter of 2016 was one of the highest of the past couple of years. Looking forward, the drivers of the recovery should continue supporting growth in the second half of 2016 and for much of 2017. Our forecast is that euro area GDP will expand by 1.7% in 2016 and by 1.6% in 2017, with only a minor effect from Brexit. This year, like in 2015, average oil prices will probably be markedly lower than they were a year ago, supporting real incomes of private households and lowering production costs of firms, and monetary policy will still be supportive. Labour markets appear to continue improving slowly. Associated with the improved economic conditions, we expect a slight increase in euro area inflation during 2016, 0.3%, with a more marked increase in 2017, 1,3%.
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Mere Criticism of the ECB is no Solution

M. Fratzscher, Reint E. Gropp, Jan Pieter Krahnen, Hans-Helmut Kotz, Christian Odendahl, Beatrice Weder di Mauro, Guntram Wolff
Einzelveröffentlichungen, 2016
Abstract
Die Kritik an der EZB in Deutschland ist kontraproduktiv. Die Geldpolitik muss expansiv bleiben, damit die EZB ihrem Mandat zumindest ansatzweise gerecht wird. Das gebietet auch der Erhalt ihrer Glaubwürdigkeit. Die EZB muss nicht weniger, sondern Europas Politik muss mehr tun. Sie muss entschiedener handeln, um Europa wieder auf einen Wachstumspfad zu bringen. [Eine kürzere Version des Beitrags ist unter dem Titel “Kritik an Draghi ist noch keine Lösung“ erschienen in der Frankfurter Allgemeinen Sonntagszeitung vom 10 April 2016]. Die Politik, auch die deutsche, darf sich nicht länger ihrer Mitverantwortung für die gegenwärtige wirtschaftliche Lage in weiten Teilen Europas entziehen. Benötigt werden eine wachstumsfreundliche Fiskalpolitik, Strukturreformen zur Öffnung neuer Märkte und eine Konsolidierung und Restrukturierung des Finanzsektors. Dabei müssen vor allem wir in Deutschland uns den Spiegel vorhalten – denn die meisten dieser Reformen benötigen wir genauso dringend wie unsere europäischen Nachbarn.
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Konjunktur aktuell: Stabile Konjunktur in Deutschland trotz krisenhaften Umfelds

Konjunktur aktuell, No. 1, 2016
Abstract
Die deutsche Konjunktur ist trotz internationaler Risiken und politischer Verwerfungen kraftvoll in das Jahr 2016 gestartet. Beschäftigung und Einkommen nehmen zu, und die Binnennachfrage steigt deutlich, auch weil der Staat zusätzliche Ausgaben im Zusammenhang mit der Flüchtlingsmigration tätigt. Allerdings dürfte es im Frühjahr zu einer vorübergehenden Verlangsamung der Dynamik kommen, darauf deuten Stimmungsindikatoren hin. Mit Fortschritten bei der Bewältigung der aktuellen politischen Probleme in Europa dürfte die Zuversicht wieder zunehmen und die deutsche Konjunktur insgesamt stabil bleiben, sodass das Bruttoinlandsprodukt im Jahr 2016 wohl mit einer Rate von 1,5% expandieren wird.
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To Separate or not to Separate Investment from Commercial Banking? An Empirical Analysis of Attention Distortion under Multiple Tasks

Reint E. Gropp, K. Park
IWH Discussion Papers, No. 2, 2016
Abstract
In the wake of the 2008/2009 financial crisis, a number of policy reports (Vickers, Liikanen, Volcker) proposed to separate investment banking from commercial banking to increase financial stability. This paper empirically examines one theoretical justification for these proposals, namely attention distortion under multiple tasks as in Holmstrom and Milgrom (1991). Universal banks can be viewed as combining two different tasks (investment banking and commercial banking) in the same organization. We estimate pay-performance sensitivities for different segments within universal banks and for pure investment and commercial banks. We show that the pay-performance sensitivity is higher in investment banking than in commercial banking, no matter whether it is organized as part of a universal bank or in a separate institution. Next, the paper shows that relative pay-performance sensitivities of investment and commercial banking are negatively related to the quality of the loan portfolio in universal banks. Depending on the specification, we obtain a reduction in problem loans when investment banking is removed from commercial banks of up to 12 percent. We interpret the evidence to imply that the higher pay-performance sensitivity in investment banking directs the attention of managers away from commercial banking within universal banks, consistent with Holmstrom and Milgrom (1991). Separation of investment banking and commercial banking may indeed be associated with a reduction in risk in commercial banking.
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EFN Report Winter 2015/16: Economic Outlook for the Euro Area in 2016 and 2017

EFN Reports, No. 1, 2016
Abstract
At present, growth in manufacturing and investment activity are weak, particularly in China but, to a lesser extent, in advanced economies as well. World activity in many service sectors, however, proves resilient. Worldwide demand is primarily backed by low interest rates and low prices for energy and commodities. However, the latter also cause serious risks for the stability of economies that are dependent on commodity export revenues. Since the sovereign debt crisis began to recede during 2013, fiscal policies have become ever less restrictive in most member states of the currency union. In 2016, fiscal policy in the euro area will even become a bit expansive. However, we expect only a moderate acceleration of the recovery in the euro area, because foreign demand will not expand by much due to the weakness of emerging market economies, and internal demand will still be dragged down by high debt levels of firms and households in many member countries. In particular, according to our forecasts, the euro area GDP will grow by 1.8% in 2016 and 2017, and this will be accompanied by a decline in the unemployment rate below 10%. Our inflation forecast for 2016 is 1.1%. For 2017, we expect inflation to increase up to 1.5% as during next year the dampening effects of decreasing energy prices will slowly fade off.
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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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Ökonomische Wirksamkeit der Konjunktur stützenden finanzpolitischen Maßnahmen der Jahre 2008 und 2009. Forschungsvorhaben im Auftrag des Bundesministeriums der Finanzen

IWH Online, No. 4, 2015
Abstract
Die weltweite Finanzkrise hat zu einem starken Einbruch der wirtschaftlichen Aktivität geführt. Davon waren in Deutschland vor allem der Export, aber auch die Unternehmensinvestitionen betroffen. Übertreibungen im Immobiliensektor oder eine übermäßige Verschuldung, die anderenorts eine große Rolle spielten, waren hierzulande nicht zu konstatieren. Gleichwohl war aufgrund der internationalen Verflechtungen auch das deutsche Bankensystem stark von der Krise beeinträchtigt. Der Einbruch der Konjunktur im Jahr 2009 nahm schließlich ein Ausmaß an, das die Wirtschaftspolitik über die Maßnahmen zur Stabilisierung des Finanzsystems hinaus unter Handlungsdruck setzte. Dies lag nicht zuletzt daran, dass die Möglichkeiten der Geldpolitik aufgrund der Probleme im Bankensektor eingeschränkt waren. Das Vertrauen der Menschen in die Erholung der Weltwirtschaft war erheblich beeinträchtigt. In Deutschland wurden finanzpolitische Maßnahmen beschlossen, die sich verteilt auf die Jahre 2009 bis 2012 auf insgesamt gut fünf Prozent in Relation zum Bruttoinlandsprodukt beliefen; hinzu kam ein umfangreiches Kredit- und Kreditbürgschaftsprogramm zur Sicherung der Kreditversorgung.
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