Avoiding the Fall into the Loop: Isolating the Transmission of Bank-to-Sovereign Distress in the Euro Area
Stefan Eichler, Hannes Böhm
Journal of Financial Stability,
December
2020
Abstract
While the sovereign-bank loop literature has demonstrated the amplification between sovereign and bank risks in the Euro Area, its econometric identification is vulnerable to reverse causality and omitted variable biases. We address the loop's endogenous nature and isolate the direct bank-to-sovereign distress channel by exploiting the global, non-Eurozone related variation in banks’ stock prices. We instrument banking sector stock returns in the Eurozone with exposure-weighted stock market returns from non-Eurozone countries and take further precautions to remove Eurozone-related variation. We find that the transmission of instrumented bank distress to sovereign distress is around 50% smaller than the corresponding coefficient in the unadjusted OLS framework, confirming concerns on endogeneity. Despite the smaller relative magnitude, increasing instrumented bank distress is found to be an economically and statistically significant cause for rising sovereign fragility in the Eurozone.
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Financial Technologies and the Effectiveness of Monetary Policy Transmission
Iftekhar Hasan, Boreum Kwak, Xiang Li
Abstract
This study investigates whether and how financial technologies (FinTech) influence the effectiveness of monetary policy transmission. We use an interacted panel vector autoregression model to explore how the effects of monetary policy shocks change with regional-level FinTech adoption. Results indicate that FinTech adoption generally mitigates the transmission of monetary policy to real GDP, consumer prices, bank loans, and housing prices, with the most significant impact observed in the weakened transmission to bank loan growth. The relaxed financial constraints, regulatory arbitrage, and intensified competition are the possible mechanisms underlying the mitigated transmission.
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Public Bank Guarantees and Allocative Efficiency
Reint E. Gropp, Andre Guettler, Vahid Saadi
Journal of Monetary Economics,
December
2020
Abstract
A natural experiment and matched bank/firm data are used to identify the effects of bank guarantees on allocative efficiency. We find that with guarantees in place unproductive firms receive larger loans, invest more, and maintain higher rates of sales and wage growth. Moreover, firms produce less productively. Firms also survive longer in banks’ portfolios and those that enter guaranteed banks’ portfolios are less profitable and productive. Finally, we observe fewer economy-wide firm exits and bankruptcy filings in the presence of guarantees. Overall, the results are consistent with the idea that guaranteed banks keep unproductive firms in business for too long.
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Marginal Returns to Talent for Material Risk Takers in Banking
Moritz Stieglitz, Konstantin Wagner
IWH Discussion Papers,
No. 20,
2020
Abstract
Economies of scale can explain compensation differentials over time, across firms of different size, different hierarchy-levels, and different industries. Consequently, the most talented individuals tend to match with the largest firms in industries where marginal returns to their talent are greatest. We explore a new dimension of this size-pay nexus by showing that marginal returns also differ across activities within firms and industries. Using hand-collected data on managers in European banks well below the level of executive directors, we find that the size-pay nexus is strongest for investment banking business units and for banks with a market-based business model. Thus, managerial compensation is most sensitive to size increases for activities that can easily be scaled up.
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Role of the Community Reinvestment Act in Mortgage Supply and the U.S. Housing Boom
Vahid Saadi
Review of Financial Studies,
No. 11,
2020
Abstract
This paper studies the role of the Community Reinvestment Act (CRA) in the U.S. housing boom-bust cycle. I find that enhanced CRA enforcement in 1998 increased the growth rate of mortgage lending by CRA-regulated banks to CRA-eligible census tracts. I show that during the boom period house price growth was higher in the eligible census tracts because of the shift in mortgage supply of regulated banks. Consequently, these census tracts experienced a worse housing bust. I find that CRA-induced mortgages were awarded to borrowers with lower FICO scores and were more frequently delinquent.
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Do Conventional Monetary Policy Instruments Matter in Unconventional Times?
Manuel Buchholz, Kirsten Schmidt, Lena Tonzer
Journal of Banking and Finance,
September
2020
Abstract
This paper investigates how declines in the deposit facility rate set by the ECB affect euro area banks’ incentives to hold reserves at the central bank. We find that, in the face of lower deposit rates, banks with a more interest-sensitive business model are more likely to reduce reserve holdings and allocate freed-up liquidity to loans. The result is driven by banks in the non-GIIPS countries of the euro area. This reveals that conventional monetary policy instruments have limited effects in restoring monetary policy transmission during times of crisis.
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Interactions Between Bank Levies and Corporate Taxes: How is Bank Leverage Affected?
Franziska Bremus, Kirsten Schmidt, Lena Tonzer
Journal of Banking and Finance,
September
2020
Abstract
Regulatory bank levies set incentives for banks to reduce leverage. At the same time, corporate income taxation makes funding through debt more attractive. In this paper, we explore how regulatory levies affect bank capital structure, depending on corporate income taxation. Based on bank balance sheet data from 2006 to 2014 for a panel of EU-banks, our analysis yields three main results: The introduction of bank levies leads to lower leverage as liabilities become more expensive. This effect is weaker the more elevated corporate income taxes are. In countries charging very high corporate income taxes, the incentives of bank levies to reduce leverage turn insignificant. Thus, bank levies can counteract the debt bias of taxation only partially.
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Trade Shocks, Credit Reallocation and the Role of Specialisation: Evidence from Syndicated Lending
Isabella Müller
IWH Discussion Papers,
No. 15,
2020
Abstract
This paper provides evidence that banks cut lending to US borrowers as a consequence of a trade shock. This adverse reaction is stronger for banks with higher ex-ante lending to US industries hit by the trade shock. Importantly, I document large heterogeneity in banks‘ reaction depending on their sectoral specialisation. Banks shield industries in which they are specialised in and at the same time reduce the availability of credit to industries they are not specialised in. The latter is driven by low-capital banks and lending to firms that are themselves hit by the trade shock. Banks‘ adjustments have adverse real effects.
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Lokaler Schock trifft lokale Bank: Die Folgen der Hochwasser des Jahres 2013 für das deutsche Finanzsystem
Benjamin Freudenstein, Michael Koetter, Felix Noth
Wirtschaft im Wandel,
No. 2,
2020
Abstract
Welche Auswirkungen makroökonomische Schocks in Form von Naturkatastrophen auf Banken haben und welche realwirtschaftlichen Implikationen sich daraus ergeben können, wurde unter dem Titel „Katrina und die Folgen: Sicherere Banken und positive Produktionseffekte“ bereits an früherer Stelle in der „Wirtschaft im Wandel“ dargestellt. Daran anknüpfend stellt dieser Artikel einen Forschungsbeitrag vor, der die Folgen der Hochwasser des Jahres 2013 in Deutschland für die Sparkassen und Genossenschaftsbanken und deren Unternehmenskunden untersucht. Im Mittelpunkt steht die Frage, ob lokale Banken die negativen Effekte des Hochwassers mildern, indem sie die Kreditvergabe an Unternehmen ausweiten. Der Befund ist erstens, dass Banken, die Beziehungen zu betroffenen Unternehmen haben, ihre Kreditvergabe um 3% relativ zu Banken ohne Beziehungen zu betroffenen Unternehmen ausweiten, und zweitens, dass bei Sparkassen mit Zugang zu nicht betroffenen regionalen Märkten keine signifikante Erhöhung des Kreditrisikos zu beobachten ist. Ein gegenüber regionalen Katastrophen widerstandsfähiges Finanzsystem sollte somit aus lokalen Banken bestehen, die gleichwohl überregional verbunden sind, damit ausreichende Möglichkeiten zur Diversifikation bestehen.
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Borrowers Under Water! Rare Disasters, Regional Banks, and Recovery Lending
Michael Koetter, Felix Noth, Oliver Rehbein
Journal of Financial Intermediation,
July
2020
Abstract
We show that local banks provide corporate recovery lending to firms affected by adverse regional macro shocks. Banks that reside in counties unaffected by the natural disaster that we specify as macro shock increase lending to firms inside affected counties by 3%. Firms domiciled in flooded counties, in turn, increase corporate borrowing by 16% if they are connected to banks in unaffected counties. We find no indication that recovery lending entails excessive risk-taking or rent-seeking. However, within the group of shock-exposed banks, those without access to geographically more diversified interbank markets exhibit more credit risk and less equity capital.
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