Bank-specific Shocks and the Real Economy
Claudia M. Buch, Katja Neugebauer
Journal of Banking and Finance,
Nr. 8,
2011
Abstract
Governments often justify interventions into the financial system in the form of bail outs or liquidity assistance with the systemic importance of large banks for the real economy. In this paper, we analyze whether idiosyncratic shocks to loan growth at large banks have effects on real GDP growth. We employ a measure of idiosyncratic shocks which follows Gabaix (forthcoming). He shows that idiosyncratic shocks to large firms have an impact on US GDP growth. In an application to the banking sector, we find evidence that changes in lending by large banks have a significant short-run impact on GDP growth. Episodes of negative loan growth rates and the Eastern European countries in our sample drive these results.
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Competition, Risk-shifting, and Public Bail-out Policies
Reint E. Gropp, H. Hakenes, Isabel Schnabel
Review of Financial Studies,
Nr. 6,
2011
Abstract
This article empirically investigates the competitive effects of government bail-out policies. We construct a measure of bail-out perceptions by using rating information. From there, we construct the market shares of insured competitor banks for any given bank, and analyze the impact of this variable on banks' risk-taking behavior, using a large sample of banks from OECD countries. Our results suggest that government guarantees strongly increase the risk-taking of competitor banks. In contrast, there is no evidence that public guarantees increase the protected banks' risk-taking, except for banks that have outright public ownership. These results have important implications for the effects of the recent wave of bank bail-outs on banks' risk-taking behavior.
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Is Rated Debt Arm's Length? Evidence from Mergers and Acquisitions
Reint E. Gropp, C. Hirsch, Jan Pieter Krahnen
CFS Working Papers, No. 2011/10,
Nr. 10,
2011
Abstract
In this paper we challenge the view that corporate bonds are always arm's length debt. We analyze the effect of bond ratings on the stock price return to acquirers in M&A transactions, which tend to have significant effects on creditor wealth. We find acquirers abnormal returns to be higher if they are unrated, controlling for a wide variety of other effects identified in the literature. Tracing the difference in returns to distinct managerial decisions, we find that, everything else constant, rated firms increase their leverage in takeover transactions by less than their unrated counterparts. Consistent with a significant role for rating agencies, we find monitoring effects to be strongest when acquirer bonds are rated at the borderline between investment grade and junk. Finally, we are able to empirically exclude a large number of alternative explanations for the empirical regularities that we uncover.
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The Impact of Bank and Non-bank Financial Institutions on Local Economic Growth in China
Xiaoqiang Cheng, Hans Degryse
Journal of Financial Services Research,
Nr. 2,
2010
Abstract
This paper provides evidence on the relationship between finance and growth in a fast growing country, such as China. Employing data of 27 Chinese provinces over the period 1995–2003, we study whether the financial development of two different types of financial institutions — banks and non-banks — have a (significantly different) impact on local economic growth. Our findings indicate that banking development shows a statistically significant and economically more pronounced impact on local economic growth.
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The Determinants of Bank Capital Structure
Reint E. Gropp, Florian Heider
Review of Finance,
Nr. 4,
2010
Abstract
The paper shows that mispriced deposit insurance and capital regulation were of second-order importance in determining the capital structure of large U.S. and European banks during 1991 to 2004. Instead, standard cross-sectional determinants of non-financial firms’ leverage carry over to banks, except for banks whose capital ratio is close to the regulatory minimum. Consistent with a reduced role of deposit insurance, we document a shift in banks’ liability structure away from deposits towards non-deposit liabilities. We find that unobserved time-invariant bank fixed-effects are ultimately the most important determinant of banks’ capital structures and that banks’ leverage converges to bank specific, time-invariant targets.
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Shocks at Large Banks and Banking Sector Distress: The Banking Granular Residual
S. Blank, Claudia M. Buch, Katja Neugebauer
Journal of Financial Stability,
Nr. 4,
2009
Abstract
Size matters in banking. In this paper, we explore whether shocks originating at large banks affect the probability of distress of smaller banks and thus the stability of the banking system. Our analysis proceeds in two steps. In a first step, we follow Gabaix and construct a measure of idiosyncratic shocks at large banks, the so-called Banking Granular Residual. This measure documents the importance of size effects for the German banking system. In a second step, we incorporate this measure of idiosyncratic shocks at large banks into an integrated stress-testing model for the German banking system following De Graeve et al. (2008). We find that positive shocks at large banks reduce the probability of distress of small banks.
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Great Moderation at the Firm Level? Unconditional vs. Conditional Output Volatility
Claudia M. Buch, Jörg Döpke, K. Stahn
B.E. Journal of Economic Analysis and Policy,
Nr. 1,
2009
Abstract
We test whether there has been a “Great Moderation“ of output volatility at the firm level. The multifactor residual model proposed by Pesaran (2006) is used to isolate the idiosyncratic component of firms' sales growth from macroeconomic developments. This methodology is applied to a balanced panel of about 1,200 German firms covering a 35-year period (1971-2005). Our research has three main findings. First, unconditional firm-level volatility and aggregate output volatility have seen similar downward trends. Second, conditional, idiosyncratic firm-level volatility does not exhibit a downward trend. Third, there is a positive link between growth and volatility at the firm level.
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Does Export Openness Increase Firm-level Output Volatility?
Claudia M. Buch, Jörg Döpke, H. Strotmann
World Economy,
Nr. 4,
2009
Abstract
There is a widespread concern that increased trade may lead to increased instability and thus risk at the firm level. Greater export openness can indeed affect firm-level volatility by changing the exposure and the reaction of firms to macroeconomic developments. The net effect is ambiguous from a theoretical point of view. This paper provides firm-level evidence on the link between openness and volatility. Using comprehensive data on more than 21,000 German manufacturing firms for the period 1980–2001, we analyse the evolution of firm-level output volatility and the link between volatility and export openness. Our paper has three main findings. First, firm-level output volatility is significantly higher than the level of aggregate volatility, but it displays similar patterns. Second, increased export openness lowers firm-level output volatility. This effect is primarily driven by variations along the extensive margin, i.e. by the distinction between exporters and non-exporters. Variations along the intensive margin, i.e. the volume of exports, tend to have a dampening impact on volatility as well. Third, small firms are more volatile than large firms.
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Cross-Border Bank Contagion in Europe
Reint E. Gropp, M. Lo Duca, Jukka M. Vesala
International Journal of Central Banking,
Nr. 1,
2009
Abstract
We analyze cross-border contagion among European banks in the period from January 1994 to January 2003. We use a multinomial logit model to estimate, in a given country, the number of banks that experience a large shock on the same day (“coexceedances”) as a function of common shocks and lagged coexceedances in other countries. Large shocks are measured by the bottom 95th percentile of the distribution of the daily percentage change in distance to default of banks.We find evidence of significant cross-border contagion among large European banks, which is consistent with a tiered cross-border interbank structure. The results also suggest that contagion increased after the introduction of the euro.
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