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

Firm Social Networks, Trust, and Security Issuances
in: European Journal of Finance, No. 4, 2022
Abstract
We observe that public firms are more likely to issue seasoned stocks rather than bonds when theirs boards are more socially-connected. These connected issuers experience better announcement-period stock returns and attract more institutional investors. This social-connection effect is stronger for firms with severe information asymmetry, higher risk of being undersubscribed, and more visible to investors. Our conjecture is this social-network effect is driven by trust in issuing firms. Given stocks are more sensitive to trust, these trusted firms are more likely to issue stocks than bonds. Trustworthiness plays an important role in firms’ security issuances in capital markets.

Social Capital, Trusting, and Trustworthiness: Evidence from Peer-to-Peer Lending
in: Journal of Financial and Quantitative Analysis, No. 4, 2022
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.

Commitment or Constraint? The Effect of Loan Covenants on Merger and Acquisition Activity
in: Finance Research Letters, June 2022
Abstract
We investigate how loan covenants associated with potential target firms affect takeover deals. We propose two possible channels. Under a discipline channel, the target firm becomes an attractive candidate for takeovers and merger deals are facilitated. Under a constraint channel, covenants hinder merger activity. We find support for the latter channel. Takeover likelihood is lower, deal failures are more common, the likelihood of price renegotiation is higher, and acquisition premium is lower when the target is bound by covenants. Covenant tightness exacerbates this effect.

Political Ties and Raising Capital in Global Markets: Evidence from Yankee Bonds
in: Journal of Corporate Finance, June 2022
Abstract
This paper examines whether state-to-state political ties help firms obtain better terms when raising funds in global capital markets. Focusing on the Yankee bonds market, we find that issuances by firms from countries with close political ties with the US feature lower yield spreads, higher issuance amounts, and longer maturities. Such an association is more pronounced for firms located in low income and highly indebted countries as well as firms in government-related industries, first-time issuers, and relatively smaller firms. Our study provides evidence supporting the notion that country-level political relationship is an important factor when raising capital in international markets.

Bank Failures, Local Business Dynamics, and Government Policy
in: Small Business Economics, No. 4, 2022
Abstract
Using MSA-level data over 1994–2014, we study the effect of bank failures on local business dynamics, in the form of net business formation and net job creation. We find that at least one bank failure in the metropolitan statistical area (MSA) with the mean population prevents approximately 475 net businesses from forming in that area, compared with MSAs that experience no bank failures, ceteris paribus. The equivalent effect on net job creation is 16,433 net job losses. Our results are even stronger for small businesses, which are usually more dependent on bank-firm relationships. These effects point to significant welfare losses stemming from bank failures, highlighting an important role for government intervention. We show that the Troubled Asset Relief Program (TARP) is effective in reducing the negative effects of bank failures on local business dynamics. This positive effect of TARP is quite uniform across small and large firms.
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.