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

IWH Research Seminar in Economics

PhD Graduates of the Department

Your contact

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

Refereed Publications

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CEO Network Centrality and the Likelihood of Financial Reporting Fraud

Salim Chahine Yiwei Fang Iftekhar Hasan Mohamad Mazboudi

in: Abacus, forthcoming

Abstract

This paper investigates the association between CEO’s relative position in the social network and the likelihood of being involved in corporate fraud. Tracing a large sample of US publicly listed firms, we find that CEO network centrality is inversely related to the likelihood of fraudulent financial reporting. We also document a significant spillover effect of financial reporting behaviour from the dominant (most central) CEO to other CEOs in the same social network, suggesting that the ethical corporate behaviour of CEOs is, on average, influenced by that of their dominant CEO in the network. We further find that the role of CEO network centrality in reducing fraud risk is more prominent in firms with lower auditor quality. Overall, our results suggest that network centrality is an important CEO trait that promotes ethical financial reporting behaviour within social networks.

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Gender, Credit, and Firm Outcomes

Manthos D. Delis Iftekhar Hasan Maria Iosifidi Steven Ongena

in: Journal of Financial and Quantitative Analysis, forthcoming

Abstract

Small and micro enterprises are usually majority-owned by entrepreneurs. Using a unique sample of loan applications from such firms, we study the role of owners’ gender in bank credit decisions and post-credit-decision firm outcomes. We find that, ceteris paribus, female entrepreneurs are more prudent loan applicants than are males, since they are less likely to apply for credit or to default after loan origination. The relatively more aggressive behavior of male applicants pays off, however, in terms of higher average firm performance after loan origination.

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Political Uncertainty and Bank Loan Contracts: Does Government Quality Matter?

Iftekhar Hasan Ying-Chen Huang Yin-Siang Huang Chih-Yung Lin

in: Journal of Financial Services Research, forthcoming

Abstract

We investigate the relation between political uncertainty and bank loan spreads using a sample of loan contracts for the G20 firms during the period from 1982 to 2015. We find that banks charge firms higher loan spreads and require more covenants during election years when domestic political risks are elevated. Greater differences in the support ratios of opinion polls on candidates lead to the lower cost of bank loans. This political effect also lessens when the government quality of the borrower’s country is better than that of the lender’s country. Better quality government can lower the political risk component of bank loan spreads.

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Social Capital, Trusting, and Trustworthiness: Evidence from Peer-to-Peer Lending

Iftekhar Hasan Qing He Haitian Lu

in: Journal of Financial and Quantitative Analysis, forthcoming

Abstract

How does social capital affect trust? Evidence from a Chinese peer-to-peer lending platform shows regional social capital affects the trustee’s trustworthiness and the trustor’s trust propensity. Ceteris paribus, borrowers from higher social capital regions receive larger bid from individual lenders, have higher funding success, larger loan size, and lower default rates, especially for low-quality borrowers. Lenders from higher social capital regions take higher risks and have higher default rates, especially for inexperienced lenders. Cross-regional transactions are most (least) likely to be realized between parties from high (low) social capital regions.

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To Securitize or To Price Credit Risk?

Danny McGowan Huyen Nguyen

in: Journal of Financial and Quantitative Analysis, forthcoming

Abstract

Do lenders securitize or price loans in response to credit risk? Exploiting exogenous variation in regional credit risk due to foreclosure law differences along US state borders, we find that lenders securitize mortgages that are eligible for sale to the Government Sponsored Enterprises (GSEs) rather than price regional credit risk. For non-GSE-eligible mortgages with no GSE buyback provision, lenders increase interest rates as they are unable to shift credit risk to loan purchasers. The results inform the debate surrounding the GSEs' buyback provisions, the constant interest rate policy, and show that underpricing regional credit risk increases the GSEs' debt holdings. 

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Working Papers

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Banking Globalization, Local Lending, and Labor Market Effects: Micro-level Evidence from Brazil

Felix Noth Matias Ossandon Busch

in: IWH Discussion Papers, forthcoming

Abstract

This paper estimates the effect of a foreign funding shock to banks in Brazil after the collapse of Lehman Brothers in September 2008. Our robust results show that bank-specific shocks to Brazilian parent banks negatively affected lending by their individual branches and trigger real economic consequences in Brazilian municipalities: More affected regions face restrictions in aggregated credit and show weaker labor market performance in the aftermath which documents the transmission mechanism of the global financial crisis to local labor markets in emerging countries. The results represent relevant information for regulators concerned with the real effects of cross-border liquidity shocks.

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Cultural Resilience, Religion, and Economic Recovery: Evidence from the 2005 Hurricane Season

Iftekhar Hasan Stefano Manfredonia Felix Noth

in: IWH Discussion Papers, No. 9, 2021

Abstract

This paper investigates the critical role of religion in the economic recovery after high-impact natural disasters. Exploiting the 2005 hurricane season in the southeast United States, we document that establishments in counties with higher religious adherence rates saw a significantly stronger recovery in terms of productivity for 2005-2010. Our results further suggest that a particular religious denomination does not drive the effect. We observe that different aspects of religion, such as adherence, shared experiences from ancestors, and institutionalised features, all drive the effect on recovery. Our results matter since they underline the importance of cultural characteristics like religion during and after economic crises.

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Deposit Competition and the Securitisation Boom

Danny McGowan Huyen Nguyen

in: IWH Discussion Papers, No. 6, 2021

Abstract

We provide novel evidence that regulatory-induced deposit market competition provoked banks to enter the securitisation market. Exploiting the state-specific removal of interstate bank branching restrictions across U.S states between 1994 and 2006 as an exogenous source of deposit competition, we document four key results. First, the interstate branching deregulation leads to an intensification of deposit market competition. Second, this rise in the cost of deposits increases the probability that a bank operates an ‘originate-to-distribute’ model by 6%. Third, the securitisation effect holds across bank asset classes but is most pronounced for mortgages. Finally, the results are strongest among small and single state banks owing to their reliance on deposit funding. The evidence is consistent with theories where increasing the cost of deposits creates incentives for banks to use securitisation as a cheaper loan funding model. The findings highlight a hitherto neglected supply-side explanation for the rapid expansion in securitisation before the financial crisis and speak to the debate about banking competition policy.

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Completing the European Banking Union: Capital Cost Consequences for Credit Providers and Corporate Borrowers

Michael Koetter Thomas Krause Eleonora Sfrappini Lena Tonzer

in: IWH Discussion Papers, No. 4, 2021

Abstract

The bank recovery and resolution directive (BRRD) regulates the bail-in hierarchy to resolve distressed banks without burdening tax payers. We exploit the staggered implementation of the BRRD across 15 European Union (EU) member states to identify banks’ capital cost and capital structure responses. In a first stage, we show that average capital costs of banks increased. WACC hikes are lowest in the core countries of the European Monetary Union (EMU) compared to formerly stressed EMU and non-EMU countries. This pattern is driven by changes in the relative WACC weight of equity in response to the BRRD, which indicates enhanced financial system resilience. In a second stage, we document asymmetric transmission patterns of banks’ capital cost changes on to corporates’ borrowing terms. Only EMU banks located in core countries that exhibit higher WACC are those that also increase firms’ borrowing cost and contract credit supply. Hence, the BRRD had unintended consequences for selected segments of the real economy.

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Lender-specific Mortgage Supply Shocks and Macroeconomic Performance in the United States

Franziska Bremus Thomas Krause Felix Noth

in: IWH Discussion Papers, No. 3, 2021

Abstract

This paper provides evidence for the propagation of idiosyncratic mortgage supply shocks to the macroeconomy. Based on micro-level data from the Home Mortgage Disclosure Act for the 1990-2016 period, our results suggest that lender-specific mortgage supply shocks affect aggregate mortgage, house price, and employment dynamics at the regional level. The larger the idiosyncratic shocks to newly issued mortgages, the stronger are mortgage, house price, and employment growth. While shocks at the level of shadow banks significantly affect mortgage and house price dynamics, too, they do not matter much for employment.

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