Financial System Adaptability and Resilience
This research group investigates critical aspects of financial system adaptability and resilience. First, it analyses the impact of natural disasters on financial systems. Second, the group aims to investigate the effects of political preferences for the green transition. Third, the group's research analyses the role of culture in economies.
Research ClusterFinancial Resilience and Regulation
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)
Accounting Quality in Banking: The Role of Regulatory Interventions
in: Journal of Banking and Finance, 2018
Using the full sample of U.S. banks and hand-collected data on enforcement actions over 2000–2014, we analyze the role of these interventions in promoting several aspects of accounting quality. We find that enforcement actions issued for both risk-related and accounting-related reasons lead to significant improvements in accounting quality. This improvement is consistently found for earnings smoothing, big-bath accounting, timely recognition of future loan losses, the association of loan loss provisions with future loan charge offs, loss avoidance, and cash flow predictability and earnings persistence. Most of the effects are somewhat more potent in the crisis period and survive in several sensitivity tests. Our findings highlight the imperative role of regulatory interventions in promoting bank accounting quality.
SMEs and Access to Bank Credit: Evidence on the Regional Propagation of the Financial Crisis in the UK
in: Journal of Financial Stability, 2018
We study the sensitivity of banks’ credit supply to small and medium size enterprises (SMEs) in the UK with respect to the banks’ financial condition before and during the financial crisis. Employing unique data on the geographical location of all bank branches in the UK, we connect firms’ access to bank credit to the financial condition (i.e., bank health and the use of core deposits) of all bank branches in the vicinity of the firm for the period 2004–2011. Before the crisis, banks’ local financial conditions did not influence credit availability irrespective of the functional distance (i.e., the distance between bank branch and bank headquarters). However, during the crisis, we find that SMEs with banks within their vicinity that have stronger financial conditions faced greater credit availability when the functional distance is close. Our results point to a “flight to headquarters” effect during the financial crisis.
Crises and Rescues: Liquidity Transmission Through Global Banks
in: International Journal of Central Banking, No. 4, 2018
This paper shows that global banks transmit liquidity shocks via their network of foreign affiliates. We use the (unexpected) access of German banks' affiliates located in the United States to the Federal Reserve's Term Auction Facility. We condition on the parent banks' U.S. dollar funding needs in order to examine how affiliates located outside the United States adjusted their balance sheets when the U.S. affiliate of the same parent tapped into TAF liquidity. Our research has three main findings. First, affiliates tied to parents with higher U.S. dollar funding needs expanded their foreign assets during periods of active TAF borrowing. Second, the overall effects are driven by affiliates located in financial centers. Third, U.S.- dollar-denominated lending particularly increased in response to the TAF program.
Market Power and Risk: Evidence from the U.S. Mortgage Market
in: Economics Letters, 2018
We use mortgage loan application data of the Home Mortgage Disclosure Act (HMDA) to shed light on the role of banks’ market power on their presumably insufficient risk screening activities in the U.S. mortgage market in the pre-crisis era. We find that banks with higher market power protect their charter value. The effect is stronger for banks that have more information about local markets.
The Political Economy of Financial Systems: Evidence from Suffrage Reforms in the Last Two Centuries
in: Economic Journal, No. 611, 2018
Voting rights were initially limited to wealthy elites providing political support for stock markets. The franchise expansion induces the median voter to provide political support for banking development, as this new electorate has lower financial holdings and benefits less from the riskiness and financial returns from stock markets. Our panel data evidence covering the years 1830–1999 shows that tighter restrictions on the voting franchise induce greater stock market development, whereas a broader voting franchise is more conducive to the banking sector, consistent with Perotti and von Thadden (2006). The results are robust to controlling for other institutional arrangements and endogeneity.
Cultural Resilience, Religion, and Economic Recovery: Evidence from the 2005 Hurricane Season
in: IWH Discussion Papers, No. 9, 2021
This paper investigates the critical role of religion in the economic recovery after high-impact natural disasters. Exploiting the 2005 hurricane season in the southeast United States, we document that establishments in counties with higher religious adherence rates saw a significantly stronger recovery in terms of productivity for 2005-2010. Our results further suggest that a particular religious denomination does not drive the effect. We observe that different aspects of religion, such as adherence, shared experiences from ancestors, and institutionalised features, all drive the effect on recovery. Our results matter since they underline the importance of cultural characteristics like religion during and after economic crises.
Lender-specific Mortgage Supply Shocks and Macroeconomic Performance in the United States
in: IWH Discussion Papers, No. 3, 2021
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.
Cultural Norms and Corporate Fraud: Evidence from the Volkswagen Scandal
in: IWH Discussion Papers, No. 24, 2020
We investigate whether cultural norms shaped by religion drive consumer decisions after a corporate scandal. We exploit the notice of violation by the US Environmental Protection Agency in September 2015 accusing Volkswagen (VW) of using software to manipulate car emission values during test phases. We show that new registrations of VW cars decline significantly in German counties with a high share of Protestants following the VW scandal. Our findings document that the enforcement culture in Protestantism facilitates penalising corporate fraud. We corroborate this channel with a survey documenting that Protestants respond significantly different to fraud but not to environmental issues.
Trade Shocks, Credit Reallocation and the Role of Specialisation: Evidence from Syndicated Lending
in: IWH Discussion Papers, No. 15, 2020
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
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.