Real and Financial Innovation

This research group contributes to the scientific literature in three main ways. First, it provides new ways to identify shocks to the financial sector in financial systems and analyses how these shocks affect intermediaries with regard to risk taking (stability), efficiency (productivity) and the market structure in banking markets in general. Second, the identified external shocks are central to measure effects that financial intermediaries have on the real sector of financial systems. Because financial intermediaries play a special role in financial systems and are subject to many regulations, it is very important to understand how, e.g., risk taking incentives or different competition structures in banking markets affect real sector outcome like sales, GDP growth or employment. Third, the group focuses on the effects of foreign banks in financial systems and specifically how shocks to these banks (e.g., via their holding companies during the recent financial crisis) affect activities (e.g., lending) in the host countries.

Research Cluster
Productivity and Innovation

Your contact

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

EXTERNAL FUNDING

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
Professor Dr Steffen Müller

01.2015 ‐ 12.2019

Interactions between Bank-specific Risk and Macroeconomic Performance

German Research Foundation (DFG)

Professor Dr Felix Noth

Refereed Publications

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Democracy and Credit

Manthos D. Delis Iftekhar Hasan Steven Ongena

in: Journal of Financial Economics, forthcoming

Abstract

Does democratization reduce the cost of credit? Using global syndicated loan data from 1984 to 2014, we find that democratization has a sizable negative effect on loan spreads: a 1-point increase in the zero-to-ten Polity IV index of democracy shaves at least 19 basis points off spreads, but likely more. Reversals to autocracy hike spreads more strongly. Our findings are robust to the comprehensive inclusion of relevant controls, to the instrumentation with regional waves of democratization, and to a battery of other sensitivity tests. We thus highlight the lower cost of loans as one relevant mechanism through which democratization can affect economic development.

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Cross-country Evidence on the Relationship between Regulations and the Development of the Life Insurance Sector

Chrysovalantis Gaganis Iftekhar Hasan Fotios Pasiouras

in: Economic Modelling, forthcoming

Abstract

Using a global sample, this study sketches the impact of insurance regulations on the life insurance sector, revealing a significant negative association between supervisory control on policy conditions of life annuities as well as pension products and the development of the industry. A similar inverse relation is observed between the index of capital requirements and insurance development. These results hold when we control for demographic factors, economic factors, religious inclination, culture, as well as for other relevant regulations. We also find some evidence that while the overall supervisory power does not matter, the ability to intervene at an early stage could have a positive effect on insurance development. Additionally, the impact of some regulations appears to differ between advanced and developing countries.

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Borrowers Under Water! Rare Disasters, Regional Banks, and Recovery Lending

Michael Koetter Felix Noth Oliver Rehbein

in: Journal of Financial Intermediation, forthcoming

Abstract

We show that local banks provide corporate recovery lending to firms affected by adverse regional macro shocks. Banks that reside in counties unaffected by the natural disaster that we specify as macro shock increase lending to firms inside affected counties by 3%. Firms domiciled in flooded counties, in turn, increase corporate borrowing by 16% if they are connected to banks in unaffected counties. We find no indication that recovery lending entails excessive risk-taking or rent-seeking. However, within the group of shock-exposed banks, those without access to geographically more diversified interbank markets exhibit more credit risk and less equity capital.

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Badly Hurt? Natural Disasters and Direct Firm Effects

Felix Noth Oliver Rehbein

in: Finance Research Letters, forthcoming

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.

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Enforcement of Banking Regulation and the Cost of Borrowing

Yota D. Deli Manthos D. Delis Iftekhar Hasan Liuling Liu

in: Journal of Banking & Finance, 2019

Abstract

We show that borrowing firms benefit substantially from important enforcement actions issued on U.S. banks for safety and soundness reasons. Using hand-collected data on such actions from the main three U.S. regulators and syndicated loan deals over the years 1997–2014, we find that enforcement actions decrease the total cost of borrowing by approximately 22 basis points (or $4.6 million interest for the average loan). We attribute our finding to a competition-reputation effect that works over and above the lower risk of punished banks post-enforcement and survives in a number of sensitivity tests. We also find that this effect persists for approximately four years post-enforcement.

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Working Papers

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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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Thou Shalt not Bear False Witness Against Your Customers: Cultural Norms and the Volkswagen Scandal

Iftekhar Hasan Felix Noth Lena Tonzer

in: IWH Discussion Papers, No. 21, 2019

Abstract

This paper investigates whether cultural norms shaped by religion drive consumer decisions after a corporate scandal. We exploit the unexpected notice of violation by the US Environmental Protection Agency in September 2015, accusing the car producer Volkswagen (VW) to have used software to manipulate car emission values during test phases. Using a difference-in-difference model, we show that new registrations of VW (diesel) cars decline significantly in German counties with a high share of Protestants following the VW scandal. Our results suggest that the enforcement culture rooted in Protestantism affects consumer decisions and penalises corporate fraud.

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Do Asset Purchase Programmes Shape Industry Dynamics? Evidence from the ECB's SMP on Plant Entries and Exits

Manfred Antoni Michael Koetter Steffen Müller Talina Sondershaus

in: IWH Discussion Papers, No. 12, 2019

Abstract

Asset purchase programmes (APPs) may insulate banks from having to terminate relationships with unproductive customers. Using administrative plant and bank data, we test whether APPs impinge on industry dynamics in terms of plant entry and exit. Plants in Germany connected to banks with access to an APP are approximately 20% less likely to exit. In particular, unproductive plants connected to weak banks with APP access are less likely to close. Aggregate entry and exit rates in regional markets with high APP exposures are also lower. Thus, APPs seem to subdue Schumpeterian cleansing mechanisms, which may hamper factor reallocation and aggregate productivity growth.

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‘And Forgive Us Our Debts’: Do Christian Moralities Influence Over-indebtedness of Individuals?

Iftekhar Hasan Konstantin Kiesel Felix Noth

in: IWH Discussion Papers, No. 8, 2019

Abstract

This paper analyses whether Christian moralities and rules formed differently by Catholics and Protestants impact the likelihood of households to become overindebted. We find that over-indebtedness is lower in regions in which Catholics outweigh Protestants, indicating that Catholics‘ forgiveness culture and a stricter enforcement of rules by Protestants serve as explanations for our results. Our results provide evidence that religion affects the financial situations of individuals and show that even 500 years after the split between Catholics and Protestants, the differences in the mind-sets of both denominations play an important role for situations of severe financial conditions.

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What Drives Banks‘ Geographic Expansion? The Role of Locally Non-diversifiable Risk

Reint E. Gropp Felix Noth Ulrich Schüwer

in: IWH Discussion Papers, No. 6, 2019

Abstract

We show that banks that are facing relatively high locally non-diversifiable risks in their home region expand more across states than banks that do not face such risks following branching deregulation in the 1990s and 2000s. These banks with high locally non-diversifiable risks also benefit relatively more from deregulation in terms of higher bank stability. Further, these banks expand more into counties where risks are relatively high and positively correlated with risks in their home region, suggesting that they do not only diversify but also build on their expertise in local risks when they expand into new regions.

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