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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The Impact of Securitization on Credit Rationing: Empirical Evidence

Santiago Carbo-Valverde Hans Degryse Francisco Rodríguez-Fernández

in: Journal of Financial Stability, 2015

Abstract

We study whether banks’ involvement into different types of securitization activity – asset backed securities (ABS) and covered bonds – in Spain influences credit supply before and during the financial crisis. While both ABS and covered bonds were hit by the crisis, the former were hit more severely. Employing a disequilibrium model to identify credit rationing, we find that firms with banks that were more involved in securitization see their credit constraints more relaxed in normal periods. In contrast, only greater covered bonds issuance reduces credit rationing during crisis periods whereas ABS aggravates these firms’ credit rationing in crisis periods. Our results are in line with the theoretical predictions that a securitization instrument that retains risk (covered bond) may induce a more prudent risk behavior of banks than an instrument that provides risk transferring (ABS).

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Bank Market Power, Factor Reallocation, and Aggregate Growth

R. Inklaar Michael Koetter Felix Noth

in: Journal of Financial Stability, 2015

Abstract

Using a unique firm-level sample of approximately 700,000 firm-year observations of German small and medium-sized enterprises (SMEs), this study seeks to identify the effect of bank market power on aggregate growth components. We test for a pre-crisis sample whether bank market power spurs or hinders the reallocation of resources across informationally opaque firms. Identification relies on the dependence on external finance in each industry and the regional demarcation of regional banking markets in Germany. The results show that bank markups spur aggregate SME growth, primarily through technical change and the reallocation of resources. Banks seem to need sufficient markups to generate the necessary private information to allocate financial funds efficiently.

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The Impact of Dark Trading and Visible Fragmentation on Market Quality

Hans Degryse Frank de Jong Vincent van Kervel

in: Review of Finance, No. 4, 2015

Abstract

Two important characteristics of current equity markets are the large number of competing trading venues with publicly displayed order books and the substantial fraction of dark trading, which takes place outside such visible order books. This article evaluates the impact on liquidity of dark trading and fragmentation in visible order books. Dark trading has a detrimental effect on liquidity. Visible fragmentation improves liquidity aggregated over all visible trading venues but lowers liquidity at the traditional market, meaning that the benefits of fragmentation are not enjoyed by investors who choose to send orders only to the traditional market.

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Labor Market Volatility, Skills, and Financial Globalization

Claudia M. Buch C. Pierdzioch

in: Macroeconomic Dynamics, No. 5, 2014

Abstract

We analyze the impact of financial globalization on volatilities of hours worked and wages of high-skilled and low-skilled workers. Using cross-country, industry-level data for the years 1970–2004, we establish stylized facts that document how volatilities of hours worked and wages of workers with different skill levels have changed over time. We then document that the volatility of hours worked by low-skilled workers has increased the most in response to the increase in financial globalization. We develop a dynamic stochastic general equilibrium model of a small open economy that is consistent with the empirical results. The model predicts that greater financial globalization increases the volatility of hours worked, and this effect is strongest for low-skilled workers.

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Do Better Capitalized Banks Lend Less? Long-run Panel Evidence from Germany

Claudia M. Buch Esteban Prieto

in: International Finance, No. 1, 2014

Abstract

Higher capital features prominently in proposals for regulatory reform. But how does increased bank capital affect business loans? The real costs of increased bank capital in terms of reduced loans are widely believed to be substantial. But the negative real-sector implications need not be severe. In this paper, we take a long-run perspective by analysing the link between the capitalization of the banking sector and bank loans using panel cointegration models. We study the evolution of the German economy for the past 44 years. Higher bank capital tends to be associated with higher business loan volume, and we find no evidence for a negative effect. This result holds both for pooled regressions as well as for the individual banking groups in Germany.

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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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