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 Regulation

Your contact

Professor Dr Felix Noth
Professor Dr Felix Noth
- Department Financial Markets
Send Message +49 345 7753-702 Personal page

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.

See project page

Professor Michael Koetter, PhD

01.2015 ‐ 12.2019

Interactions between Bank-specific Risk and Macroeconomic Performance

Professor Dr Felix Noth

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.

Professor Michael Koetter, PhD

Refereed Publications

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Environmental Reputational Risk, Negative Media Attention and Financial Performance

Leonardo Becchetti Rocco Ciciretti Iftekhar Hasan Gabriele La Licata

in: Financial Markets, Institutions and Instruments, No. 4, 2022

Abstract

Tracing negative media attention, this paper investigates the effect of reputational risk on firm value. Decomposing reputational damage into environmental, social and corporate-governance dimensions, it reports that environmental reputational risk has the most significant negative effect on price earnings, i.e., firms exposed to environmental risk are likely to be priced at a discount or charged a higher risk premium when discounting future earnings.

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The Impact of Financial Transaction Taxes on Stock Markets: Short-Run Effects, Long-Run Effects, and Reallocation of Trading Activity

Sebastian Eichfelder Mona Noack Felix Noth

in: National Tax Journal, No. 3, 2022

Abstract

We investigate the French 2012 financial transaction tax (FTT) and find robust evidence for anticipation effects before the implementation date. Controlling for short-run effects, we only find weak evidence for a long-run reduction in trading activity. Thus, the main impact of the French FTT on trading activity is short-run. In line with liquidity clientele effects, we find a more potent effect for low-liquidity stocks and a reallocation of trading to high-liquidity stocks from the Supplemental Liquidity Provider (SLP) program. Finally, we find weak evidence for a persistent volatility reduction but no indication of a significant FTT impact on price efficiency.

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Productivity, Managers’ Social Connections and the Financial Crisis

Iftekhar Hasan Stefano Manfredonia

in: Journal of Banking and Finance, August 2022

Abstract

This paper investigates whether managers’ personal connections help corporate productivity to recover after a negative economic shock. Leveraging the heterogeneity in the severity of the financial crisis across different sectors, the paper reports that (i) the financial crisis had a negative effect on within-firm productivity, (ii) the effect was long-lasting and persistent, supporting a productivity-hysteresis hypothesis, and (iii) managers’ personal connections allowed corporations to recover from this productivity slowdown. Among the possible mechanisms, we show that connected managers operating in affected sectors foster productivity recovery through higher input cost efficiency and better access to the credit market, as well as more efficient use of labour and capital.

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The Cleansing Effect of Banking Crises

Reint E. Gropp Steven Ongena Jörg Rocholl Vahid Saadi

in: Economic Inquiry, No. 3, 2022

Abstract

We assess the cleansing effects of the 2008–2009 financial crisis. U.S. regions with higher levels of supervisory forbearance on distressed banks see less restructuring in the real sector: fewer establishments, firms, and jobs are lost when more distressed banks remain in business. In these regions, the banking sector has been less healthy for several years after the crisis. Regions with less forbearance experience higher productivity growth after the crisis with more firm entries, job creation, and employment, wages, patents, and output growth. Forbearance is greater for state-chartered banks and in regions with weaker banking competition and more independent banks.

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Trust, Politics and Post-IPO Performance: SOEs vs. the Private Sector

Bill Francis Iftekhar Hasan Xian Sun Mingming Zhou

in: Economic and Political Studies, No. 3, 2022

Abstract

This paper empirically investigates the role of social trust in the long-term performance of the initial public offerings (IPOs) in China, controlling for the formal institutional environment. We find that privately owned or smaller IPO firms experience significantly better post-IPO performance when they are incorporated in regions with more social trust. The state-owned and bigger IPO firms, on the other hand, experience better long-term post-IPO performance when they are incorporated in regions with stronger formal institutions (e.g. court enforcement and contract holding). Political pluralism turns out to benefit all IPOs in the long term. In addition, our evidence shows that stronger social trust substitutes for the quality of court enforcement but complements the role of contract holding. These results are robust after controlling for alternative definitions of ownership, outliers, non-linear effects of institutions, and the potential endogeneity of institutions in the model.

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Working Papers

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Capital Requirements, Market Structure, and Heterogeneous Banks

Carola Müller

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.

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Covered Bonds and Bank Portfolio Rebalancing

Jin Cao Ragnar E. Juelsrud Talina Sondershaus

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.

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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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Trade Shocks, Credit Reallocation and the Role of Specialisation: Evidence from Syndicated Lending

Isabella Müller

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.

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Spillovers of Asset Purchases Within the Real Sector: Win-Win or Joy and Sorrow?

Talina Sondershaus

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.

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