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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How Do Insured Deposits Affect Bank Risk? Evidence from the 2008 Emergency Economic Stabilization Act

Claudia Lambert Felix Noth Ulrich Schüwer

in: Journal of Financial Intermediation, January 2017

Abstract

This paper tests whether an increase in insured deposits causes banks to become more risky. We use variation introduced by the U.S. Emergency Economic Stabilization Act in October 2008, which increased the deposit insurance coverage from $100,000 to $250,000 per depositor and bank. For some banks, the amount of insured deposits increased significantly; for others, it was a minor change. Our analysis shows that the more affected banks increase their investments in risky commercial real estate loans and become more risky relative to unaffected banks following the change. This effect is most distinct for affected banks that are low capitalized.

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On the Nonexclusivity of Loan Contracts: An Empirical Investigation

Hans Degryse Vasso Ioannidou Erik von Schedvin

in: Management Science, No. 12, 2016

Abstract

We study how a bank's willingness to lend to a previously exclusive firm changes once the firm obtains a loan from another bank ("outside loan") and breaks an exclusive relationship. Using a difference-in-difference analysis and a setting where outside loans are observable, we document that an outside loan triggers a decrease in the initial bank's willingness to lend to the firm, i.e., outside loans are strategic substitutes. Consistent with concerns about coordination problems and higher indebtedness, we find that this reaction is more pronounced the larger the outside loan and it is muted if the initial bank's existing and future loans retain seniority and are protected with valuable collateral. Our results give a benevolent role to transparency enabling banks to mitigate adverse effects from outside loans. The resulting substitute behavior may also act as a stabilizing force in credit markets limiting positive comovements between lenders, decreasing the possibility of credit freezes and financial crises.

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Foreign Funding Shocks and the Lending Channel: Do Foreign Banks Adjust Differently?

Felix Noth Matias Ossandon Busch

in: Finance Research Letters, November 2016

Abstract

We document for a set of Latin American emerging countries that the different nature of foreign funding accessed by foreign and local banks affected their lending performance after September 2008. We show that lending growth was weaker for shock-affected foreign banks compared to shock-affected local banks. This evidence represents valuable policy information for regulators concerned with the stability and well-functioning of banking sectors. 

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Decision-making Power in Foreign Subsidiaries and Its Effect on Financial Constraints: An Analysis for Selected European Transition Economies on the Basis of the IWH FDI Micro Database 2013

Felix Noth Andrea Gauselmann

in: Eastern European Economics, No. 6, 2016

Abstract

This article analyzes whether the distribution of decision-making power between the headquarters and foreign subsidiaries of multinational enterprises (MNEs) affects the foreign affiliates’ financial constraints. The findings show that not much decision-making power has as yet been moved from headquarters to foreign subsidiaries in European post-transition economies. The high concentration of decision-making power within the MNE’s subsidiary points toward higher financial constraints. However, a nonlinear effect is found, which suggests that financial constraints within the subsidiary only increase with more decision-making power when the power granted to the subsidiary is at a low level. For subsidiaries that already have autonomy in decision-making, granting more power in this regard has no effect on financial constraints.

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Relative Peer Quality and Firm Performance

Bill Francis Iftekhar Hasan Sureshbabu Mani Pengfei Ye

in: Journal of Financial Economics, No. 1, 2016

Abstract

We examine the performance impact of the relative quality of a Chief Executive Officer (CEO)’s compensation peers (peers to determine a CEO's overall compensation) and bonus peers (peers to determine a CEO's relative-performance-based bonus). We use the fraction of peers with greater managerial ability scores (Demerjian, Lev, and McVay, 2012) than the reporting firm to measure this CEO's relative peer quality (RPQ). We find that firms with higher RPQ earn higher stock returns and experience higher profitability growth than firms with lower RPQ. Learning among peers and the increased incentive to work harder induced by the peer-based tournament contribute to RPQ's performance effect.

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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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