20.06.2016 • 24/2016
Financial market reaction to poll data suggests strong effects of a Brexit on exchange rates and the banking system both in the UK and in the EU
On 23 June 2016, there will be a referendum in the United Kingdom (UK) on the question of whether or not the country should remain in the European Union (EU). We use the polls as a measure of the likelihood of an exit to examine the likely effect of a Brexit on financial markets. “Whenever the probability in the polls of a Brexit moves above 50%, we observe a substantial depreciation of the UK pound with respect to most major currencies (including the euro), and strong decline in bank stock prices, suggesting that markets feel the financial sector (both in the UK and the EU) will be most severely affected by a Brexit”, IWH President Reint E. Gropp says. There is little effect on the euro/US Dollar exchange rate. “A huge concern is that overall market volatility both in the UK and the EU are on record highs since last Thursday, reflecting the higher uncertainty associated with Brexit and how exactly, if it happened, it would come about.” Within the UK, we see some evidence for a flight to safety into UK government bonds, but no effects for German bonds.
Reint E. Gropp
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The Role of Complexity for Bank Risk during the Financial Crisis: Evidence from a Novel Dataset
Thomas Krause, Talina Sondershaus, Lena Tonzer
Abstract
We construct a novel dataset to measure banks’ business and geographical complexity. Using these measures of complexity, we evaluate how they relate to banks’ idiosyncratic and systemic riskiness. The sample covers stock listed banks in the euro area from 2007 to 2014. Our results show that banks have increased their total number of subsidiaries while business and geographical complexity have declined. Bank stability is significantly affected by our complexity measures, whereas the direction of the effect differs across the complexity measures: Banks with a higher degree of geographical complexity and a higher share of foreign subsidiaries seem to be less stable. In contrast, a higher share of non-bank subsidiaries significantly decreases the probability for a state aid request during the recent crisis period. This heterogeneity advises against the use of a single complexity measure when evaluating the implications of bank complexity.
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03.05.2016 • 20/2016
Are Lacking Structural Reforms in the Financial Sector the Underlying Reason for the German Criticism of the ECB?
The major reason for the intense criticism of the European Central Bank’s (ECB’s) low-interest-rate policy may be the lack of structural reforms in the German banking system. The resulting persistent fragmentation increases the banking sector’s vulnerability to the low-interest-rate environment. Hence, parts of the banking sector, due to their strong ties to politicians, appear to have successfully influenced public opinion against the ECB.
Reint E. Gropp
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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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Cross-border Interbank Networks, Banking Risk and Contagion
Lena Tonzer
Journal of Financial Stability,
2015
Abstract
Recent events have highlighted the role of cross-border linkages between banking systems in transmitting local developments across national borders. This paper analyzes whether international linkages in interbank markets affect the stability of interconnected banking systems and channel financial distress within a network consisting of banking systems of the main advanced countries for the period 1994–2012. Methodologically, I use a spatial modeling approach to test for spillovers in cross-border interbank markets. The results suggest that foreign exposures in banking play a significant role in channeling banking risk: I find that countries that are linked through foreign borrowing or lending positions to more stable banking systems abroad are significantly affected by positive spillover effects. From a policy point of view, this implies that in stable times, linkages in the banking system can be beneficial, while they have to be taken with caution in times of financial turmoil affecting the whole system.
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Do We Need New Modelling Approaches in Macroeconomics?
Claudia M. Buch, Oliver Holtemöller
Financial Cycles and the Real Economy: Lessons for CESEE Countries,
2014
Abstract
The economic and financial crisis that emerged in 2008 also initiated an intense discussion on macroeconomic research and the role of economists in society. The debate focuses on three main issues. Firstly, it is argued that economists failed to predict the crisis and to design early warning systems. Secondly, it is claimed that economists use models of the macroeconomy which fail to integrate financial markets and which are inadequate to model large economic crises. Thirdly, the issue has been raised that economists invoke unrealistic assumptions concerning human behaviour by assuming that all agents are self-centred, rationally optimizing individuals. In this paper, we focus on the first two issues. Overall, our thrust is that the above statements are a caricature of modern economic theory and empirics. A rich field of research developed already before the crisis and picked up shortcomings of previous models.
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Linking Distress of Financial Institutions to Macrofinancial Shocks
Alexander Al-Haschimi, Stéphane Dées, Filippo di Mauro, Martina Jančoková
ECB Working Paper,
No. 1749,
2014
Abstract
This paper links granular data of financial institutions to global macroeconomic variables using an infinite-dimensional vector autoregressive (IVAR) model framework. The approach taken allows for an assessment of the two-way links between the financial system and the macroeconomy, while accounting for heterogeneity among financial institutions and the role of international linkages in the transmission of shocks. The model is estimated using macroeconomic data for 21 countries and default probability estimates for 35 euro area financial institutions. This framework is used to assess the impact of foreign macroeconomic shocks on default risks of euro area financial firms. In addition, spillover effects of firm-specific shocks are investigated. The model captures the important role of international linkages, showing that economic shocks in the US can generate a rise in the default probabilities of euro area firms that are of a significant magnitude compared to recent historical episodes such as the financial crisis. Moreover, the potential heterogeneity across financial firms.
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Financial Stability and Central Bank Governance
Michael Koetter, Kasper Roszbach, G. Spagnolo
International Journal of Central Banking,
No. 4,
2014
Abstract
The financial crisis has ignited a debate about the appropriate objectives and the governance structure of Central Banks. We use novel survey data to investigate the relation between these traits and banking system stability focusing in particular on their role in micro-prudential supervision. We find that the separation of powers between single and multiple bank supervisors cannot explain credit risk prior or during the financial crisis. Similarly, a large number of Central Bank governance traits do not correlate with system fragility. Only the objective of currency stability exhibits a significant relation with non-performing loan levels in the run-up to the crisis. This effect is amplified for those countries with most frequent exposure to IMF missions in the past. Our results suggest that the current policy discussion whether to centralize prudential supervision under the Central Bank and the ensuing institutional changes some countries are enacting may not produce the improvements authorities are aiming at. Whether other potential improvements in prudential supervision due to, for example, external disciplinary devices, such as IMF conditional lending schemes, are better suited to increase financial stability requires further research.
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The Dynamics of Bank Spreads and Financial Structure
Reint E. Gropp, Christoffer Kok, J.-D. Lichtenberger
Quarterly Journal of Finance,
No. 4,
2014
Abstract
This paper investigates the effect of within banking sector competition and competition from financial markets on the dynamics of the transmission from monetary policy rates to retail bank interest rates in the euro area. We use a new dataset that permits analysis for disaggregated bank products. Using a difference-in-difference approach, we test whether development of financial markets and financial innovation speed up the pass through. We find that more developed markets for equity and corporate bonds result in a faster pass-through for those retail bank products directly competing with these markets. More developed markets for securitized assets and for interest rate derivatives also speed up the transmission. Further, we find relatively strong effects of competition within the banking sector across two different measures of competition. Overall, the evidence supports the idea that developed financial markets and competitive banking systems increase the effectiveness of monetary policy.
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The Political Determinants of Sovereign Bond Yield Spreads
Stefan Eichler
Journal of International Money and Finance,
No. 46,
2014
Abstract
This paper analyzes the political determinants of sovereign bond yield spreads using data for 27 emerging markets in the period 1996 to 2009. I find strong evidence that countries with parliamentary systems (as opposed to presidential regimes) and a low quality of governance face higher sovereign yield spreads, while the degree of democracy and elections play no significant role. A higher degree of political stability and the power to implement austerity measures significantly reduce sovereign yield spreads particularly in autocratic regimes, while no significant effect is detected for democratic countries. Overall, political determinants have a more pronounced impact on sovereign bond yield spreads in autocratic and closed regimes than in democratic and open countries.
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