Regulation of International Financial Markets and International Banking

This research group analyses causes and consequences of banks' international activities and the regulatory framework they operate in.

Internationally active banks can facilitate an efficient international allocation of capital and provide channels for international risk sharing. But they can also be a source of financial instabilities themselves, thus contributing to international contagion and risk-shifting. This is one reason for the current re-regulation of international banking.

The research group contributes to the literature in three ways. First, the group empirically analyses the channels through which shocks are transmitted by internationally active banks. Second, the group analyses the build-up of aggregate imbalances in integrated banking markets and resulting consequences for the real economy. Third, the group analyses the impact of changes in banking supervision and regulation on (inter)national activities of banks, with a special focus on the European integration process.

 

IWH Data Project: International Banking Library

Research Cluster
Financial Stability and Regulation

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Professor Dr Lena Tonzer
Professor Dr Lena Tonzer
Mitglied - Department Financial Markets
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EXTERNAL FUNDING

07.2017 ‐ 12.2022

The Political Economy of the European Banking Union

European Social Fund (ESF)

Causes of national differences in the implementation of the Banking Union and the resulting impact on financial stability.

see project's webpage

Professor Dr Lena Tonzer

01.2015 ‐ 12.2017

Dynamic Interactions between Banks and the Real Economy

German Research Foundation (DFG)

Professor Dr Felix Noth

Refereed Publications

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Drivers of Systemic Risk: Do National and European Perspectives Differ?

Claudia M. Buch Thomas Krause Lena Tonzer

in: Journal of International Money and Finance, March 2019

Abstract

With the establishment of the Banking Union, the European Central Bank has been granted the power to impose stricter regulations than the national regulator if systemic risks are not adequately addressed at the national level. We ask whether there is a cross-border externality in the sense that a bank’s systemic risk differs when applying a national versus a European perspective. On average, banks’ contribution to systemic risk is similar at the two regional levels, and so is the ranking of banks. Generally, larger banks and banks with a lower share of loans are more systemically important. The effects of these variables are qualitatively but not quantitatively similar at the national versus the European level.

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Political Influence and Financial Flexibility: Evidence from China

Xian Gu Iftekhar Hasan Yun Zhu

in: Journal of Banking and Finance, February 2019

Abstract

This paper investigates how political influence affects firms’ financial flexibility and speed of adjustment toward target leverage ratios. We find that at the macro level, firms in environments with high political advantages, proxied by provincial affiliations with heads of state as well as political status and party rank of provincial leaders, adjust faster. At the micro level, firms that are state-owned, have CPC members as executives, or bear low exposure to changes in political uncertainty adjust faster. When interacted, the micro-level political factors have more significant impact.

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Banks Response to Higher Capital Requirements: Evidence from a Quasi-natural Experiment

Reint E. Gropp Thomas Mosk Steven Ongena Carlo Wix

in: Review of Financial Studies, No. 1, 2019

Abstract

We study the impact of higher capital requirements on banks’ balance sheets and their transmission to the real economy. The 2011 EBA capital exercise is an almost ideal quasi-natural experiment to identify this impact with a difference-in-differences matching estimator. We find that treated banks increase their capital ratios by reducing their risk-weighted assets, not by raising their levels of equity, consistent with debt overhang. Banks reduce lending to corporate and retail customers, resulting in lower asset, investment, and sales growth for firms obtaining a larger share of their bank credit from the treated banks.

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Big Fish in Small Banking Ponds? Cost Advantages and Foreign Affiliate Presences

Michael Koetter Rients Galema

in: Journal of International Money and Finance, 2018

Abstract

We distinguish cost advantage at home from cost advantage vis-à-vis incumbent banks in destination markets to explain the probability of foreign bank affiliate lending. We combine detailed affiliate lending data of all German banks with public bank micro data from 59 destination markets. The likelihood to operate foreign affiliates depends positively on both types of cost advantage. Only cost advantage at home is economically significant. Generally, risk, return, and unobservable bank traits explain a larger share of the variation in foreign affiliate operations. Less profitable, more risky, and larger banks are more likely to operate affiliates abroad.

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Hidden Gems and Borrowers with Dirty Little Secrets: Investment in Soft Information, Borrower Self-selection and Competition

Reint E. Gropp Andre Guettler

in: Journal of Banking and Finance, No. 2, 2018

Abstract

This paper empirically examines the role of soft information in the competitive interaction between relationship and transaction banks. Soft information can be interpreted as a valuable signal about the quality of a firm that is observable to a relationship bank, but not to a transaction bank. We show that borrowers self-select to relationship banks depending on whether their observed soft information is positive or negative. Competition affects the investment in learning the soft information from firms by relationship banks and transaction banks asymmetrically. Relationship banks invest more; transaction banks invest less in soft information, exacerbating the selection effect.

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Working Papers

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Climate Change-Related Regulatory Risks and Bank Lending

Isabella Müller Eleonora Sfrappini

in: ECB Working Paper, No. 2670, 2022

Abstract

We identify the effect of climate change-related regulatory risks on credit real-location. Our evidence suggests that effects depend borrower's region. Following an increase in salience of regulatory risks, banks reallocate credit to US firms that could be negatively impacted by regulatory interventions. Conversely, in Europe, banks lend more to firms that could benefit from environmental regulation. The effect is moderated by banks' own loan portfolio composition. Banks with a portfolio tilted towards firms that could be negatively a affected by environmental policies increasingly support these firms. Overall, our results indicate that financial implications of regulation associated with climate change appear to be the main drivers of banks' behavior.

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Explaining Regional Disparities in Housing Prices Across German Districts

Lars Brausewetter Stephan L. Thomsen Johannes Trunzer

in: IWH Discussion Papers, No. 13, 2022

Abstract

Over the last decade, German housing prices have increased unprecedentedly. Drawing on quality-adjusted housing price data at the district level, we document large and increasing regional disparities: Growth rates were higher in 1) the largest seven cities, 2) districts located in the south, and 3) districts with higher initial price levels. Indications of price bubbles are concentrated in the largest cities and in the purchasing market. Prices seem to be driven by the demand side: Increasing population density, higher shares of academically educated employees and increasing purchasing power explain our findings, while supply remained relatively constrained in the short term.

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Stress-ridden Finance and Growth Losses: Does Financial Development Break the Link?

Serafín Martínez-Jaramillo Ricardo Montañez-Enríquez Matias Ossandon Busch Manuel Ramos-Francia Anahí Rodríguez-Martínez José Manuel Sánchez-Martínez

in: IWH Discussion Papers, No. 3, 2022

Abstract

Does financial development shield countries from the pass-through of financial shocks to real outcomes? We evaluate this question by characterising the probability density of expected GDP growth conditional on financial stability indicators in a panel of 28 countries. Our robust results unveil a non-linear nexus between financial stability and expected GDP growth, depending on countries’ degree of financial development. While both domestic and global financial factors affect expected growth, the effect of global factors is moderated by financial development. This result highlights a previously unexplored channel trough which financial development can break the link between financial (in)stability and GDP growth.

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Firm Subsidies, Financial Intermediation, and Bank Risk

Aleksandr Kazakov Michael Koetter Mirko Titze Lena Tonzer

in: IWH Discussion Papers, No. 2, 2022

Abstract

We study whether government subsidies can stimulate bank funding of marginal investment projects and the associated effect on financial stability. We do so by exploiting granular project-level information for the largest regional economic development programme in Germany since 1997: the Improvement of Regional Economic Structures programme (GRW). By combining the universe of subsidised firms to virtually all German local banks over the period 1998-2019, we test whether this large-scale transfer programme destabilised regional credit markets. Because GRW subsidies to firms are destabilised at the EU level, we can use it as an exogenous shock to identify bank responses. On average, firm subsidies do not affect bank lending, but reduce banks’ distance to default. Average effects conflate important bank-level heterogeneity though. Conditional on various bank traits, we show that well capitalised banks with more industry experience expand lending when being exposed to subsidised firms without exhibiting more risky financial profiles. Our results thus indicate that stable banks can act as an important facilitator of regional economic development policies. Against the backdrop of pervasive transfer payments to mitigate Covid-19 losses and in light of far-reaching transformation policies required to green the economy, our study bears important implications as to whether and which banks to incorporate into the design of transfer Programmes.

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Completing the European Banking Union: Capital Cost Consequences for Credit Providers and Corporate Borrowers

Michael Koetter Thomas Krause Eleonora Sfrappini Lena Tonzer

in: IWH Discussion Papers, No. 4, 2021

Abstract

The bank recovery and resolution directive (BRRD) regulates the bail-in hierarchy to resolve distressed banks without burdening tax payers. We exploit the staggered implementation of the BRRD across 15 European Union (EU) member states to identify banks’ capital cost and capital structure responses. In a first stage, we show that average capital costs of banks increased. WACC hikes are lowest in the core countries of the European Monetary Union (EMU) compared to formerly stressed EMU and non-EMU countries. This pattern is driven by changes in the relative WACC weight of equity in response to the BRRD, which indicates enhanced financial system resilience. In a second stage, we document asymmetric transmission patterns of banks’ capital cost changes on to corporates’ borrowing terms. Only EMU banks located in core countries that exhibit higher WACC are those that also increase firms’ borrowing cost and contract credit supply. Hence, the BRRD had unintended consequences for selected segments of the real economy.

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