25 Years IWH

Financial Markets

Research in this department centres on institutional changes in Europe’s financial markets. The department analyses the causes and consequences of banks’ international expansions, the link between market structures in banking and aggregate (financial) stability, contagion effects on international financial markets and the role of the financial system for the real economy.

The interdependence of the financial services sector with innovation and productivity in the real economy are of particular interest. Methodologically, research focuses on empirical methods that support analyses of feedback from the micro to the macro level and that allow for causal evaluations of regulatory interventions into financial systems.

Brown Bag Seminar

IWH-FIN-FIRE Workshop

Your contact

Professor Michael Koetter, PhD
Professor Michael Koetter, PhD
Leiter - Department Financial Markets
Send Message +49 345 7753-727

Refereed Publications

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Bank Response To Higher Capital Requirements: Evidence From A Quasi-natural Experiment

Reint E. Gropp Thomas Mosk Steven Ongena Carlo Wix

in: Review of Financial Studies, forthcoming

Abstract

We study the impact of higher capital requirements on banks’ balance sheets and its transmission to the real economy. The 2011 EBA capital exercise provides an almost ideal quasi-natural experiment, which allows us to identify the effect of higher capital requirements using a difference-in-differences matching estimator. We find that treated banks increase their capital ratios not by raising their levels of equity, but by reducing their credit supply. We also show that this reduction in credit supply results in lower firm-, investment-, and sales growth for firms which obtain a larger share of their bank credit from the treated banks.

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Deleveraging and Consumer Credit Supply in the Wake of the 2008-2009 Financial Crisis

Reint E. Gropp J. Krainer E. Laderman

in: International Journal of Central Banking, forthcoming

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Cross-border Transmission of Emergency Liquidity

Thomas Kick Michael Koetter Manuela Storz

in: Journal of Banking & Finance, forthcoming

Abstract

We show that emergency liquidity provision by the Federal Reserve transmitted to non-U.S. banking markets. Based on manually collected holding company structures, we identify banks in Germany with access to U.S. facilities. Using detailed interest rate data reported to the German central bank, we compare lending and borrowing rates of banks with and without such access. U.S. liquidity shocks cause a significant decrease in the short-term funding costs of the average German bank with access. This reduction is mitigated for banks with more vulnerable balance sheets prior to the inception of emergency liquidity. We also find a significant pass-through in terms of lower corporate credit rates charged for banks with the lowest pre-crisis leverage, US-dollar funding needs, and liquidity buffers. Spillover effects from U.S. emergency liquidity provision are generally confined to short-term rates.

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Crises and Rescues: Liquidity Transmission Through Global Banks

Michael Koetter Claudia M. Buch C. T. Koch

in: International Journal of Central Banking, forthcoming

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How Do Banks React to Catastrophic Events? Evidence from Hurricane Katrina

Claudia Lambert Felix Noth U. Schuewer

in: Review of Finance, forthcoming

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Working Papers

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Effectiveness and (In)Efficiencies of Compensation Regulation: Evidence from the EU Banker Bonus Cap

Stefano Colonnello Michael Koetter Konstantin Wagner

in: IWH Discussion Papers, No. 7, 2018

Abstract

We study if the regulation of bank executive compensation has unintended consequences. Based on novel data on CEO and non-CEO executives in EU banking, we show that capping the variable-to-fixed compensation ratio did not induce executives to abandon the industry. Banks indemnified executives sufficiently for the shock to retain them by raising fixed and lowering variable compensation while complying with the cap. At the same time, banks‘ risk-adjusted performance deteriorated due to increased idiosyncratic risk. Collateral damage for the financial system as a whole appears modest though, as average co-movement of banks with the market declined under the cap.

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Flooded Through the Back Door: Firm-level Effects of Banks‘ Lending Shifts

Oliver Rehbein

in: IWH Discussion Papers, No. 4, 2018

Abstract

I show that natural disasters transmit to firms in non-disaster areas via their banks. This spillover of non-financial shocks through the banking system is stronger for banks with less regulatory capital. Firms connected to a disaster-exposed bank with below median capital reduce their employment by 11% and their fixed assets by 20% compared to firms in the same region without such a bank during the 2013 flooding in Germany. Relationship banking and higher firm capital also mitigate the effects of such negative cross-regional spillovers.

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Predicting Earnings and Cash Flows: The Information Content of Losses and Tax Loss Carryforwards

Sandra Dreher Sebastian Eichfelder Felix Noth

in: IWH Discussion Papers, No. 30, 2017

Abstract

We analyse the relevance of losses, accounting information on tax loss carryforwards, and deferred taxes for the prediction of earnings and cash flows up to four years ahead. We use a unique hand-collected panel of German listed firms encompassing detailed information on tax loss carryforwards and deferred taxes from the tax footnote. Our out-of-sample predictions show that considering accounting information on tax loss carryforwards and deferred taxes does not enhance the accuracy of performance forecasts and can even worsen performance predictions. We find that common forecasting approaches that treat positive and negative performances equally or that use a dummy variable for negative performance can lead to biased performance forecasts, and we provide a simple empirical specification to account for that issue.

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Badly Hurt? Natural Disasters and Direct Firm Effects

Felix Noth Oliver Rehbein

in: IWH Discussion Papers, No. 25, 2017

Abstract

We investigate firm outcomes after a major flood in Germany in 2013. We robustly find that firms located in the disaster regions have significantly higher turnover, lower leverage, and higher cash in the period after 2013. We provide evidence that the effects stem from firms that already experienced a similar major disaster in 2002. Overall, our results document a positive net effect on firm performance in the direct aftermath of a natural disaster.

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Delay Determinants of European Banking Union Implementation

Michael Koetter Thomas Krause Lena Tonzer

in: IWH Discussion Papers, No. 24, 2017

Abstract

To safeguard financial stability and harmonise regulation, the European Commission substantially reformed banking supervision, resolution, and deposit insurance via EU directives. But most countries delay the transposition of these directives. We ask if transposition delays result from strategic considerations of governments conditional on the state of their financial, regulatory, and political systems? Supervisors might try to protect national banking systems and local politicians maybe reluctant to surrender national sovereignty to deal with failed banks. Alternatively, intricate financial regulation might require more implementation time in large and complex financial and political systems. We therefore collect data on the transposition delays of the three Banking Union directives and investigate observed delay variation across member states. Our correlation analyses suggest that existing regulatory and institutional frameworks, rather than banking market structure or political factors, matter for transposition delays.

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