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 ClusterProductivity and Innovation
07.2016 ‐ 12.2018
Relationship Lenders and Unorthodox Monetary Policy: Investment, Employment, and Resource Reallocation Effects
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.
01.2015 ‐ 12.2019
Interactions between Bank-specific Risk and Macroeconomic Performance
German Research Foundation (DFG)
Democracy and Credit
in: Journal of Financial Economics, forthcoming
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.
Cross-country Evidence on the Relationship between Regulations and the Development of the Life Insurance Sector
in: Economic Modelling, forthcoming
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.
Borrowers Under Water! Rare Disasters, Regional Banks, and Recovery Lending
in: Journal of Financial Intermediation, forthcoming
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.
Badly Hurt? Natural Disasters and Direct Firm Effects
in: Finance Research Letters, forthcoming
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.
Enforcement of Banking Regulation and the Cost of Borrowing
in: Journal of Banking & Finance, 2019
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.
Politics, Banks, and Sub-sovereign Debt: Unholy Trinity or Divine Coincidence?
in: Deutsche Bundesbank Discussion Paper, No. 53, 2018
We exploit election-driven turnover in State and local governments in Germany to study how banks adjust their securities portfolios in response to the loss of political connections. We find that local savings banks, which are owned by their host county and supervised by local politicians, increase significantly their holdings of home-State sovereign bonds when the local government and the State government are dominated by different political parties. Banks' holdings of other securities, like federal bonds, bonds issued by other States, or stocks, are not affected by election outcomes. We argue that banks use sub-sovereign bond purchases to gain access to politically distant government authorities.
May the Force Be with You: Exit Barriers, Governance Shocks, and Profitability Sclerosis in Banking
in: Deutsche Bundesbank Discussion Paper, No. 49, 2018
We test whether limited market discipline imposes exit barriers and poor profitability in banking. We exploit an exogenous shock to the governance of government-owned banks: the unification of counties. County mergers lead to enforced government-owned bank mergers. We compare forced to voluntary bank exits and show that the former cause better bank profitability and efficiency at the expense of riskier financial profiles. Regarding real effects, firms exposed to forced bank mergers borrow more at lower cost, increase investment, and exhibit higher employment. Thus, reduced exit frictions in banking seem to unleash the economic potential of both banks and firms.
Basel III Capital Requirements and Heterogeneous Banks
in: IWH Discussion Papers, No. 14, 2018
I develop a theoretical model to investigate the effect of simultaneous regulation with a leverage ratio and a risk-weighted ratio on banks‘ risk taking and banking market structure. I extend a portfolio choice model by adding heterogeneity in productivity among banks. Regulators face a trade-off between the efficient allocation of resources and financial stability. In an oligopolistic market, risk-weighted requirements incentivise banks with high productivity to lend to low-risk firms. When a leverage ratio is introduced, these banks lose market shares to less productive competitors and react with risk-shifting into high-risk loans. While average productivity in the low-risk market falls, market shares in the high-risk market are dispersed across new entrants with high as well as low productivity.
Banks Fearing the Drought? Liquidity Hoarding as a Response to Idiosyncratic Interbank Funding Dry-ups
in: IWH Discussion Papers, No. 12, 2018
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
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.