Financial System Adaptability and Resilience
Financial Systems differ between countries. Their configuration is sticky and does not change suddenly. A well-functioning financial system is essential for economic development by efficiently allocating capital to the highest net present value projects.
However, the resilience of financial systems is frequently challenged. For example, the Great Financial Crisis of 2007/08 was a large blow from within the system: New financial instruments fuelled a credit bubble in the United States' housing markets, which almost brought down the global financial system when it eventually burst. The crisis triggered hefty government interventions and regulatory actions to make financial systems more resilient.
More frequently, challenges like the Covid-19 pandemic, the climate crisis and the green transition of economies, and the energy crisis triggered by the war in Ukraine, again highlight the crucial importance of resilient financial systems that adapt themselves and facilitate adequate responses to shocks of the real economy alike.
The research group “Financial System Adaptability and Resilience” investigates three critical aspects of financial system adaptability and resilience. First, it uses the occurrence of major natural disasters in the United States and Germany to analyse the impact of these events on financial systems. Natural disasters are becoming more frequent and more severe because of climate change. Therefore, evidence about the role of banks in providing funding to spur economic recovery is critical.
Investigations across different configurations of financial systems, such as bank- vs. market-based economies (e. g., Germany vs. the United States), allow for highlighting which components of financial systems seem better equipped to increase financial systems resiliency.
Second, the climate crisis requires economies to transform production technologies in order to source sustainable and renewable energy inputs. By using micro-data on German plants and their headquarters' banking relationships and information about the local and federal state leading political parties in Germany, the group aims to investigate the effects of political preferences for the green transition. This group's research will thereby enhance our understanding how climate policies balance the necessary need to reduce emissions with the economic burden imposed on agents during any large-scale transition of societies.
Third, the group's research analyses the role of culture in economies. The idea is that various aspects of culture, like religion, can work as a device that holds societies together and facilitate economic transactions. Using well-established empirical laboratories coming from significant natural disasters (for example, Hurricane Katrina in 2005), the group investigates whether local economies with a higher cultural imprint coming from religion found it easier to recover faster. Other incidents for which culture can play a vital role are big corporate scandals.
Using the Volkswagen Scandal from 2015, research by this group analyses the essential role of cultural imprints for consumer reactions in responding to large corporate scandals. This is important since government and regulatory intervention tend to come late or insufficient to punish corporate wrongdoings.
Workpackage 1: Development of Financial Systems after Significant Natural Disasters
Workpackage 2: Financial Systems' Role in the Economies' Green Transition
Workpackage 3: Cultural Aspects within Financial Systems
Research Cluster
Financial Resilience and RegulationYour contact

- Department Financial Markets
EXTERNAL FUNDING
08.2022 ‐ 07.2025
OVERHANG: Debt overhang and green investments - the role of banks in climate-friendly management of emission-intensive fixed assets
The collaborative project “Debt Overhang and Green Investments” (OVERHANG) aims to investigate the role of banks in the climate-friendly management of emission-intensive fixed assets. This will identify policy-relevant insights on financial regulation, government-controlled lending and financial stability, as well as raise awareness among indebted stakeholders.
01.2015 ‐ 12.2019
Interactions between Bank-specific Risk and Macroeconomic Performance
07.2016 ‐ 12.2018
Relationship Lenders and Unorthodox Monetary Policy: Investment, Employment, and Resource Reallocation Effects
Leibniz Association
We combine a number of unique and proprietary data sources to measure the impact of relationship lenders and unconventional monetary policy during and after the European sovereign debt crisis on the real economy. Establishing systematic links between different research data centers (Forschungsdatenzentren, FDZ) and central banks with detailed micro-level information on both financial and real activity is the stand-alone proposition of our proposal. The main objective is to permit the identification of causal effects, or their absence, regarding which policies were conducive to mitigate financial shocks and stimulate real economic activities, such as employment, investment, or the closure of plants.
Refereed Publications

National Culture and Housing Credit
in: Journal of Empirical Finance, March 2020
Abstract
Using a sample of around 30 countries over the period 2001–2015, this study provides evidence that deeply rooted cultural differences are significantly associated with the use of mortgage debt. More detailed, we find that power distance and uncertainty avoidance have a negative impact on the value of the total outstanding residential loans to GDP. This finding is robust across various specifications and the use of alternative measures of mortgage debt. In contrast, trust has a positive and robust impact on all the measures of mortgage debt. Other dimensions of national culture like long-term orientation, individualism, and indulgence, also appear to matter; however, their impact depends on the control variables and the employed measure of mortgage debt.

Motivating High‐impact Innovation: Evidence from Managerial Compensation Contracts
in: Financial Markets, Institutions and Instruments, No. 3, 2019
Abstract
We investigate the relationship between Chief Executive Officer (CEO) compensation and firm innovation and find that long‐term incentives in the form of options, especially unvested options, and protection from managerial termination in the form of golden parachutes are positively related to corporate innovation, and particularly to high‐impact, exploratory (new knowledge creation) invention. Conversely, non‐equity pay has a detrimental effect on the input, output and impact of innovation. Tests using the passage of an option expensing regulation (FAS 123R) as an exogenous shock to option compensation suggest a causal interpretation for the link between long‐term pay incentives, patents and citations. Furthermore, we find that the decline in option pay following the implementation of FAS 123R has led to a significant reduction in exploratory innovation and therefore had a detrimental effect on innovation output. Overall, our findings support the idea that compensation contracts that protect from early project failure and incentivize long‐term commitment are more suitable for inducing high‐impact corporate innovation.

Lock‐in Effects in Relationship Lending: Evidence from DIP Loans
in: Journal of Money, Credit and Banking, No. 4, 2019
Abstract
Do prior lending relationships result in pass‐through savings (lower interest rates) for borrowers, or do they lock in higher costs for borrowers? Theoretical models suggest that when borrowers experience greater information asymmetry, higher switching costs, and limited access to capital markets, they become locked into higher costs from their existing lenders. Firms in Chapter 11 seeking debtor‐in‐possession (DIP) financing often fit this profile. We investigate the presence of lock‐in effects using a sample of 348 DIP loans. We account for endogeneity using the instrument variable (IV) approach and the Heckman selection model and find consistent evidence that prior lending relationship is associated with higher interest costs and the effect is more severe for stronger existing relationships. Our study provides direct evidence that prior lending relationships do create a lock‐in effect under certain circumstances, such as DIP financing.

Badly Hurt? Natural Disasters and Direct Firm Effects
in: Finance Research Letters, 2019
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.

How Do Banks React to Catastrophic Events? Evidence from Hurricane Katrina
in: Review of Finance, No. 1, 2019
Abstract
This paper explores how banks react to an exogenous shock caused by Hurricane Katrina in 2005, and how the structure of the banking system affects economic development following the shock. Independent banks based in the disaster areas increase their risk-based capital ratios after the hurricane, while those that are part of a bank holding company on average do not. The effect on independent banks mainly comes from the subgroup of highly capitalized banks. These independent and highly capitalized banks increase their holdings in government securities and reduce their total loan exposures to non-financial firms, while also increasing new lending to these firms. With regard to local economic development, affected counties with a relatively large share of independent banks and relatively high average bank capital ratios show higher economic growth than other affected counties following the catastrophic event.
Working Papers

Capital Requirements, Market Structure, and Heterogeneous Banks
in: IWH Discussion Papers, No. 15, 2022
Abstract
Bank regulators interfere with the efficient allocation of resources for the sake of financial stability. Based on this trade-off, I compare how different capital requirements affect default probabilities and the allocation of market shares across heterogeneous banks. In the model, banks‘ productivity determines their optimal strategy in oligopolistic markets. Higher productivity gives banks higher profit margins that lower their default risk. Hence, capital requirements indirectly aiming at high-productivity banks are less effective. They also bear a distortionary cost: Because incumbents increase interest rates, new entrants with low productivity are attracted and thus average productivity in the banking market decreases.

Covered Bonds and Bank Portfolio Rebalancing
in: Norges Bank Working Papers, No. 6, 2021
Abstract
We use administrative and supervisory data at the bank and loan level to investigate the impact of the introduction of covered bonds on the composition of bank balance sheets and bank risk. Covered bonds, despite being collateralized by mortgages, lead to a shift in bank lending from mortgages to corporate loans. Young and low-rated firms in particular receive more credit, suggesting that overall credit risk increases. At the same time, we find that total balance sheet liquidity increases. We identify the channel in a theoretical model and provide empirical evidence: Banks with low initial liquidity and banks with sufficiently high risk-adjusted return on firm lending drive the results.

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

Trade Shocks, Credit Reallocation and the Role of Specialisation: Evidence from Syndicated Lending
in: IWH Discussion Papers, No. 15, 2020
Abstract
This paper provides evidence that banks cut lending to US borrowers as a consequence of a trade shock. This adverse reaction is stronger for banks with higher ex-ante lending to US industries hit by the trade shock. Importantly, I document large heterogeneity in banks‘ reaction depending on their sectoral specialisation. Banks shield industries in which they are specialised in and at the same time reduce the availability of credit to industries they are not specialised in. The latter is driven by low-capital banks and lending to firms that are themselves hit by the trade shock. Banks‘ adjustments have adverse real effects.

Spillovers of Asset Purchases Within the Real Sector: Win-Win or Joy and Sorrow?
in: IWH Discussion Papers, No. 22, 2019
Abstract
Events which have an adverse or positive effect on some firms can disseminate through the economy to firms which are not directly affected. By exploiting the first large sovereign bond purchase programme of the ECB, this paper investigates whether more lending to some firms spill over to firms in the surroundings of direct beneficiaries. Firms operating in the same industry and region invest less and reduce employment. The paper shows the importance to consider spillover effects when assessing unconventional monetary policies: Differences between treatment and control groups can be entirely attributed to negative effects on the control group.