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

The Political Economy of Financial Systems: Evidence from Suffrage Reforms in the Last Two Centuries
in: Economic Journal, No. 611, 2018
Abstract
Voting rights were initially limited to wealthy elites providing political support for stock markets. The franchise expansion induces the median voter to provide political support for banking development, as this new electorate has lower financial holdings and benefits less from the riskiness and financial returns from stock markets. Our panel data evidence covering the years 1830–1999 shows that tighter restrictions on the voting franchise induce greater stock market development, whereas a broader voting franchise is more conducive to the banking sector, consistent with Perotti and von Thadden (2006). The results are robust to controlling for other institutional arrangements and endogeneity.

What Type of Finance Matters for Growth? Bayesian Model Averaging Evidence
in: World Bank Economic Review, No. 2, 2018
Abstract
We examine the effect of finance on long-term economic growth using Bayesian model averaging to address model uncertainty in cross-country growth regressions. The literature largely focuses on financial indicators that assess the financial depth of banks and stock markets. We examine these indicators jointly with newly developed indicators that assess the stability and efficiency of financial markets. Once we subject the finance-growth regressions to model uncertainty, our results suggest that commonly used indicators of financial development are not robustly related to long-term growth. However, the findings from our global sample indicate that one newly developed indicator—the efficiency of financial intermediaries—is robustly related to long-term growth.

Corporate Social Responsibility and Firm Financial Performance: The Mediating Role of Productivity
in: Journal of Business Ethics, No. 3, 2018
Abstract
This study treats firm productivity as an accumulation of productive intangibles and posits that stakeholder engagement associated with better corporate social performance helps develop such intangibles. We hypothesize that because shareholders factor improved productive efficiency into stock price, productivity mediates the relationship between corporate social and financial performance. Furthermore, we argue that key stakeholders’ social considerations are more valuable for firms with higher levels of discretionary cash and income stream uncertainty. Therefore, we hypothesize that those two contingencies moderate the mediated process of corporate social performance with financial performance. Our analysis, based on a comprehensive longitudinal dataset of the U.S. manufacturing firms from 1992 to 2009, lends strong support for these hypotheses. In short, this paper uncovers a productivity-based, context-dependent mechanism underlying the relationship between corporate social performance and financial performance.

Should Banks Diversify or Focus? Know Thyself: The Role of Abilities
in: Economic Systems, No. 1, 2018
Abstract
The paper investigates whether diversification/focus across assets, industries and borrowers affects bank performance when banks’ abilities (screening and monitoring) are considered. The initial results show that diversification (focus) at the asset, industry and borrower levels is expected to decrease (increase) returns. However, once banks’ screening and monitoring abilities are controlled for, the effect of diversification/focus either gets weaker or disappears. Further, in some cases, these abilities enhance banks’ long-run performance, but in others they prove to be costly, at least, in the short run. Thus, the level of monitoring and screening abilities should be taken into consideration in understanding, planning and implementing diversification/focus strategies.

Regional Banking Instability and FOMC Voting
in: Journal of Banking and Finance, 2018
Abstract
This study analyzes if regionally affiliated Federal Open Market Committee (FOMC) members take their districts’ regional banking sector instability into account when they vote. Considering the period 1979–2010, we find that a deterioration in a district's bank health increases the probability that this district's representative in the FOMC votes to ease interest rates. According to member-specific characteristics, the effect of regional banking sector instability on FOMC voting behavior is most pronounced for Bank presidents (as opposed to Governors) and FOMC members who have career backgrounds in the financial industry or who represent a district with a large banking sector.
Working Papers

Banks Fearing the Drought? Liquidity Hoarding as a Response to Idiosyncratic Interbank Funding Dry-ups
in: IWH Discussion Papers, No. 12, 2018
Abstract
Since the global financial crisis, economic literature has highlighted banks’ inclination to bolster up their liquid asset positions once the aggregate interbank funding market experiences a dry-up. To this regard, we show that liquidity hoarding and its detrimental effects on credit can also be triggered by idiosyncratic, i.e. bankspecific, interbank funding shocks with implications for monetary policy. Combining a unique data set of the Brazilian banking sector with a novel identification strategy enables us to overcome previous limitations for studying this phenomenon as a bankspecific event. This strategy further helps us to analyse how disruptions in the bank headquarters’ interbank market can lead to liquidity and lending adjustments at the regional bank branch level. From the perspective of the policy maker, understanding this market-to-market spillover effect is important as local bank branch markets are characterised by market concentration and relationship lending.

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

Bank-specific Shocks and House Price Growth in the U.S.
in: IWH Discussion Papers, No. 3, 2017
Abstract
This paper investigates the link between mortgage supply shocks at the banklevel and regional house price growth in the U.S. using micro-level data on mortgage markets from the Home Mortgage Disclosure Act for the 1990-2014 period. Our results suggest that bank-specific mortgage supply shocks indeed affect house price growth at the regional level. The larger the idiosyncratic shocks to newly issued mortgages, the stronger is house price growth. We show that the positive link between idiosyncratic mortgage shocks and regional house price growth is very robust and economically meaningful, however not very persistent since it fades out after two years.

How Effective is Macroprudential Policy during Financial Downturns? Evidence from Caps on Banks' Leverage
in: Working Papers of Eesti Pank, No. 7, 2015
Abstract
This paper investigates the effect of a macroprudential policy instrument, caps on banks' leverage, on domestic credit to the private sector since the Global Financial Crisis. Applying a difference-in-differences approach to a panel of 69 advanced and emerging economies over 2002–2014, we show that real credit grew after the crisis at considerably higher rates in countries which had implemented the leverage cap prior to the crisis. This stabilising effect is more pronounced for countries in which banks had a higher pre-crisis capital ratio, which suggests that after the crisis, banks were able to draw on buffers built up prior to the crisis due to the regulation. The results are robust to different choices of subsamples as well as to competing explanations such as standard adjustment to the pre-crisis credit boom.

Monetary Policy under the Microscope: Intra-bank Transmission of Asset Purchase Programs of the ECB
in: IWH Discussion Papers, No. 9, 2015
Abstract
With a unique loan portfolio maintained by a top-20 universal bank in Germany, this study tests whether unconventional monetary policy by the European Central Bank (ECB) reduced corporate borrowing costs. We decompose corporate lending rates into refinancing costs, as determined by money markets, and markups that the bank is able to charge its customers in regional markets. This decomposition reveals how banks transmit monetary policy within their organizations. To identify policy effects on loan rate components, we exploit the co-existence of eurozone-wide security purchase programs and regional fiscal policies at the district level. ECB purchase programs reduced refinancing costs significantly, even in an economy not specifically targeted for sovereign debt stress relief, but not loan rates themselves. However, asset purchases mitigated those loan price hikes due to additional credit demand stimulated by regional tax policy and enabled the bank to realize larger economic margins.