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,
Nr. 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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Electoral Credit Supply Cycles Among German Savings Banks
Reint E. Gropp, Vahid Saadi
IWH Online,
Nr. 11,
2015
Abstract
In this note we document political lending cycles for German savings banks. We find that savings banks on average increase supply of commercial loans by €7.6 million in the year of a local election in their respective county or municipality (Kommunalwahl). For all savings banks combined this amounts to €3.4 billion (0.4% of total credit supply in Germany in a complete electoral cycle) more credit in election years. Credit growth at savings banks increases by 0.7 percentage points, which corresponds to a 40% increase relative to non-election years. Consistent with this result, we also find that the performance of the savings banks follows the same electoral cycle. The loans that the savings banks generate during election years perform worse in the first three years of maturity and loan losses tend to be realized in the middle of the election cycle.
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Uncertainty, Bank Lending, and Bank-level Heterogeneity
Claudia M. Buch, Manuel Buchholz, Lena Tonzer
IMF Economic Review,
Nr. 4,
2015
Abstract
We analyze how uncertainty affects bank lending. We measure uncertainty as the cross-sectional dispersion of shocks to bank-level variables. Comparing this measure of uncertainty in banking to more traditional measures of uncertainty, we find similar but no identical patterns. Higher uncertainty in banking has negative effects on bank lending. This effect is heterogeneous across banks: lending by banks that are better capitalized and have higher liquidity buffers tends to be affected less. Also, the degree of internationalization matters, as loan supply by banks in financially open countries is affected less by uncertainty. The impact of the ownership status of the individual bank is less important, in contrast.
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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,
Nr. 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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Financial Integration, Housing, and Economic Volatility
Elena Loutskina, Philip E. Strahan
Journal of Financial Economics,
Nr. 1,
2015
Abstract
The Great Recession illustrates the sensitivity of the economy to housing. This paper shows that financial integration, fostered by securitization and nationwide branching, amplified the positive effect of housing price shocks on the economy during the 1994–2006 period. We exploit variation in credit supply subsidies across local markets from government-sponsored enterprises to measure housing price changes unrelated to fundamentals. Using this instrument, we find that house price shocks spur economic growth. The effect is larger in localities more financially integrated, through both secondary loan market and bank branch networks. Financial integration thus raised the effect of collateral shocks on local economies, increasing economic volatility.
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Financial Stability and Central Bank Governance
Michael Koetter, Kasper Roszbach, G. Spagnolo
International Journal of Central Banking,
Nr. 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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Financial Incentives and Loan Officer Behavior: Multitasking and Allocation of Effort Under an Incomplete Contract
Patrick Behr, Alejandro H. Drexler, Reint E. Gropp, Andre Guettler
Abstract
In this paper we investigate the implications of providing loan officers with a compensation structure that rewards loan volume and penalizes poor performance versus a fixed wage unrelated to performance. We study detailed transaction information for more than 45,000 loans issued by 240 loan officers of a large commercial bank in Europe. We examine the three main activities that loan officers perform: monitoring, originating, and screening. We find that when the performance of their portfolio deteriorates, loan officers increase their effort to monitor existing borrowers, reduce loan origination, and approve a higher fraction of loan applications. These loans, however, are of above-average quality. Consistent with the theoretical literature on multitasking in incomplete contracts, we show that loan officers neglect activities that are not directly rewarded under the contract, but are in the interest of the bank. In addition, while the response by loan officers constitutes a rational response to a time allocation problem, their reaction to incentives appears myopic in other dimensions.
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Taxing Banks: An Evaluation of the German Bank Levy
Claudia M. Buch, Björn Hilberg, Lena Tonzer
Abstract
Bank distress can have severe negative consequences for the stability of the financial system, the real economy, and public finances. Regimes for restructuring and restoring banks financed by bank levies and fiscal backstops seek to reduce these costs. Bank levies attempt to internalize systemic risk and increase the costs of leverage. This paper evaluates the effects of the German bank levy implemented in 2011 as part of the German bank restructuring law. Our analysis offers three main insights. First, revenues raised through the bank levy are minimal, because of low tax rates and high thresholds for tax exemptions. Second, the bulk of the payments were contributed by large commercial banks and the head institutes of savings banks and credit unions. Third, the levy had no effect on the volume of loans or interest rates for the average German bank. For the banks affected most by the levy, we find evidence of fewer loans, higher lending rates, and lower deposit rates.
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