Banks and Sovereign Risk: A Granular View
Claudia M. Buch, Michael Koetter, Jana Ohls
Abstract
In this paper, we use detailed data on the sovereign debt holdings of all German banks to analyse the determinants of sovereign debt exposures and the implications of sovereign exposures for bank risk. Our main findings are as follows. First, sovereign bond holdings are heterogeneous across banks. Larger, weakly capitalised banks and banks with a small depositor base hold more sovereign bonds. Around 31% of all German banks hold no sovereign bonds at all. Second, the sensitivity of banks to macroeconomic factors increased significantly in the post-Lehman period. Banks hold more bonds from euro area countries, from low-inflation countries, and from countries with high sovereign bond yields. Third, there has been no marked impact of sovereign bond holdings on bank risk. This result could indicate the widespread absence of marking-to-market for sovereign bond holdings at the onset of the sovereign debt crisis in Europe.
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Taxes, Banks and Financial Stability
Reint E. Gropp
SAFE White Paper Series 6,
August
2013
Abstract
In response to the financial crisis of 2008/2009, numerous new taxes on financial institutions have been discussed or implemented around the world. This paper discusses the connection between the incidence of the taxes, their incentive effects, and policy makers’ objectives. Combining basic insights from banking theory with standard models of tax incidence shows that the incidence of such taxes will disproportionately fall on small and medium size enterprises. The arguments presented suggest it is unlikely that the taxes will have a beneficial impact on financial stability or raise significant amounts of revenue without increasing the cost of capital to bank dependent firms significantly.
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Exchange Rate Regime, Real Misalignment and Currency Crises
Oliver Holtemöller, Sushanta Mallick
Economic Modelling,
Nr. 34,
2013
Abstract
Based on 69 sample countries, this paper examines the effect of macroeconomic fundamentals on real effective exchange rates (REER) in these sample countries. Using the misalignment of actual REER from its equilibrium level, we have estimated the factors explaining the extent of currency over- or under-valuation. Overall, we find that the higher the flexibility of the currency regime, the lower is the misalignment. The estimates are robust to different sub-samples of countries. We then explore the impact of such misalignment on the probability of a currency crisis in the next period, indicating the extent to which misalignment could be used as a leading indicator of a potential crisis. This paper thus makes a new contribution to the debate on the choice of exchange rate regime by bringing together real exchange rate misalignment and currency crisis literature.
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Flight Patterns and Yields of European Government Bonds
Gregor von Schweinitz
IWH Discussion Papers,
Nr. 10,
2013
Abstract
The current European Debt Crisis has led to a reinforced effort to identify the sources of risk and their influence on yields of European Government Bonds. Until now, the potentially nonlinear influence and the theoretical need for interactions reflecting flight-to-quality and flight-to-liquidity has been widely disregarded. I estimate government bond yields of the Euro-12 countries without Luxembourg from May 2003 until December 2011. Using penalized spline regression, I find that the effect of most explanatory variables is highly nonlinear. These nonlinearities, together with flight patterns of flight-to-quality and flight-to-liquidity, can explain the co-movement of bond yields until September 2008 and the huge amount of differentiation during the financial and the European debt crisis without the unnecessary assumption of a structural break. The main effects are credit risk and flight-to-liquidity, while the evidence for the existence of flight-to-quality and liquidity risk (the latter measured by the bid-ask spread and total turnover of bonds) is comparably weak.
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The New EU Countries and Euro Adoption
Hubert Gabrisch, Martina Kämpfe
Intereconomics,
Nr. 3,
2013
Abstract
In the new member states of the EU which have not yet adopted the euro, previous adoption strategies have come under scrutiny. The spillovers and contagion from the global financial crisis revealed a new threat to the countries’ real convergence goal, namely considerable vulnerability to the transmission of financial instability to the real economy. This paper demonstrates the existence of extreme risks for real convergence and argues in favour of a new adoption strategy which does not announce a target date for the currency changeover and which allows for more flexible and countercyclical monetary, fiscal and wage policies.
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Sovereign Credit Risk Co-movements in the Eurozone: Simple Interdependence or Contagion?
Manuel Buchholz, Lena Tonzer
UniCredit & Universities Foundation, Working Paper Series No. 47,
Nr. 47,
2013
publiziert in: International Finance
Abstract
We investigate credit risk co-movements and contagion in sovereign debt markets of 17 industrialized countries for the period 2008-2012. We use dynamic conditional correlations of sovereign CDS spreads to detect contagion. This approach allows separating the channels through which contagion occurs from the determinants of simple interdependence. The results show that, first, sovereign credit risk comoves considerably, in particular among eurozone countries and during the sovereign debt crisis. Second, contagion cannot be attributed to one moment in time but varies across time and countries. Third, similarities in economic fundamentals, cross-country linkages in banking, and common market sentiment constitute the main channels of contagion.
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Money and Inflation: Consequences of the Recent Monetary Policy
Makram El-Shagi, Sebastian Giesen
Journal of Policy Modeling,
Nr. 4,
2013
Abstract
We use a multivariate state space framework to analyze the short run impact of money on prices in the United States. The key contribution of this approach is that it allows to identify the impact of money growth on inflation without having to model money demand explicitly.
Using our results, that provide evidence for a substantial impact of money on prices in the US, we analyze the consequences of the Fed's response to the financial crisis. Our results indicate a raise of US inflation above 5% for more than a decade. Alternative exit strategies that we simulate cannot fully compensate for the monetary pressure without risking serious repercussions on the real economy. Further simulations of a double dip in the United States indicate that a repetition of the unusually expansive monetary policy – in addition to increased inflation – might cause growth losses exceeding the contemporary easing of the crisis.
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Islamic Finance in Europe
Pierluigi Caristi, Stéphane Couderc, Angela di Maria, Filippo di Mauro, Beljeet Kaur Grewal, Lauren Ho, Sergio Masciantonio, Steven Ongena, Sajjad Zaher
ECB Occasional Paper,
Nr. 146,
2013
Abstract
Islamic finance is based on ethical principles in line with Islamic religious law. Despite its low share of the global financial market, Islamic finance has been one of this sector's fastest growing components over the last decades and has gained further momentum in the wake of the financial crisis. The paper examines the development of and possible prospects for Islamic finance, with a special focus on Europe. It compares Islamic and conventional finance, particularly as concerns risks associated with the operations of respective institutions, as well as corporate governance. The paper also analyses empirical evidence comparing Islamic and conventional financial institutions with regard to their: (i) efficiency and profitability; and (ii) stability and resilience. Finally, the paper considers the conduct of monetary policy in an Islamic banking context. This is not uncomplicated given the fact that interest rates - normally a cornerstone of monetary policy - are prohibited under Islamic finance. Liquidity management issues are thus discussed here, with particular reference to the euro area.
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