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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Should I Stay or Should I Go? Bank Productivity and Internationalization Decisions
Claudia M. Buch, C. T. Koch, Michael Koetter
Journal of Banking and Finance,
Nr. 42,
2014
Abstract
Differences in firm-level productivity explain international activities of non-financial firms quite well. We test whether differences in bank productivity determine international activities of banks. Based on a dataset that allows tracking banks across countries and across different modes of foreign entry, we model the ordered probability of maintaining a commercial presence abroad and the volume of banks’ international assets empirically. Our research has three main findings. First, more productive banks are more likely to enter foreign markets in increasingly complex modes. Second, more productive banks also hold larger volumes of foreign assets. Third, higher risk aversion renders entry less likely, but it increases the volume of foreign activities conditional upon entry.
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The Euro Plus Pact: Cost Competitiveness and External Capital Flows in the EU Countries
Hubert Gabrisch, K. Staehr
Abstract
The Euro Plus Pact was approved by 23 EU countries in March 2011 and came into force shortly afterwards. The Pact stipulates a range of quantitative targets meant to strengthen cost competitiveness with the aim of preventing the accumulation of external financial imbalances. This paper uses Granger causality tests and vector autoregressive models to assess the short-term linkages between changes in the relative unit labour cost and changes in the current account balance. The sample consists of annual data for 27 EU countries for the period 1995-2012. The main finding is that changes in the current account balance precedes changes in relative unit labour costs, while there is no discernible effect in the opposite direction. The divergence in unit labour costs between the countries in Northern Europe and the countries in Southern and Eastern Europe may thus partly be the result of capital flows from the core of Europe to the periphery prior to the global financial crisis. The results also suggest that the measures in the Euro Plus Pact to restrain the growth of unit labour costs may not affect the current account balance in the short term.
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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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Predicting Financial Crises: The (Statistical) Significance of the Signals Approach
Makram El-Shagi, Tobias Knedlik, Gregor von Schweinitz
Journal of International Money and Finance,
Nr. 35,
2013
Abstract
The signals approach as an early-warning system has been fairly successful in detecting crises, but it has so far failed to gain popularity in the scientific community because it cannot distinguish between randomly achieved in-sample fit and true predictive power. To overcome this obstacle, we test the null hypothesis of no correlation between indicators and crisis probability in three applications of the signals approach to different crisis types. To that end, we propose bootstraps specifically tailored to the characteristics of the respective datasets. We find (1) that previous applications of the signals approach yield economically meaningful results; (2) that composite indicators aggregating information contained in individual indicators add value to the signals approach; and (3) that indicators which are found to be significant in-sample usually perform similarly well out-of-sample.
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Testing for Structural Breaks at Unknown Time: A Steeplechase
Makram El-Shagi, Sebastian Giesen
Computational Economics,
Nr. 1,
2013
Abstract
This paper analyzes the role of common data problems when identifying structural breaks in small samples. Most notably, we survey small sample properties of the most commonly applied endogenous break tests developed by Brown et al. (J R Stat Soc B 37:149–163, 1975) and Zeileis (Stat Pap 45(1):123–131, 2004), Nyblom (J Am Stat Assoc 84(405):223–230, 1989) and Hansen (J Policy Model 14(4):517–533, 1992), and Andrews et al. (J Econ 70(1):9–38, 1996). Power and size properties are derived using Monte Carlo simulations. We find that the Nyblom test is on par with the commonly used F type tests in a small sample in terms of power. While the Nyblom test’s power decreases if the structural break occurs close to the margin of the sample, it proves far more robust to nonnormal distributions of the error term that are found to matter strongly in small samples although being irrelevant asymptotically for all tests that are analyzed in this paper.
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Regional Origins of Employment Volatility: Evidence from German States
Claudia M. Buch, M. Schlotter
Empirica,
Nr. 1,
2013
Abstract
Greater openness for trade can have positive welfare effects in terms of higher growth. But increased openness may also increase uncertainty through a higher volatility of employment. We use regional data from Germany to test whether openness for trade has an impact on volatility. We find a downward trend in the unconditional volatility of employment, paralleling patterns for output volatility. The conditional volatility of employment, measuring idiosyncratic developments across states, in contrast, has remained fairly unchanged. In contrast to evidence for the US, we do not find a significant link between employment volatility and trade openness.
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Macroeconomic Imbalances as Indicators for Debt Crises in Europe
Tobias Knedlik, Gregor von Schweinitz
Journal of Common Market Studies,
Nr. 5,
2012
Abstract
European authorities and scholars published proposals on which indicators of macroeconomic imbalances might be used to uncover risks for the sustainability of public debt in the European Union. We test the ability of four proposed sets of indicators to send early-warnings of debt crises using a signals approach for the study of indicators and the construction of composite indicators. We find that a broad composite indicator has the highest predictive power. This fact still holds true if equal weights are used for the construction of the composite indicator in order to reflect the uncertainty about the origin of future crises.
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Limited Investor Attention and the Mispricing of American Depositary Receipts
Stefan Eichler
Economics Letters,
Nr. 3,
2012
Abstract
I test whether more investor attention leads to a better exploitation of arbitrage opportunities and, in turn, to less mispricing of American Depositary Receipts (ADRs). Using data on 536 stocks I find that more investor attention significantly reduces ADR mispricing.
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