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
Economic Dynamics and Stability

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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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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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International Banking and Cross-border Effects of Regulation: Lessons from Germany

Jana Ohls Markus Pramor Lena Tonzer

in: International Journal of Central Banking, Supplement 1, March 2017

Abstract

We analyze the inward and outward transmission of regulatory changes through German banks’ (international) loan portfolio. Overall, our results provide evidence for international spillovers of prudential instruments. These spillovers are, however, quite heterogeneous between types of banks and can only be observed for some instruments. For instance, domestic affiliates of foreign-owned global banks reduce their loan growth to the German economy in response to a tightening of sector-specific capital buffers, local reserve requirements, and loan-to-value ratios in their home country. Furthermore, from the point of view of foreign countries, tightening reserve requirements is effective in reducing lending inflows from German banks. Finally, we find that business and financial cycles matter for lending decisions.

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Bank Risk Proxies and the Crisis of 2007/09: A Comparison

Felix Noth Lena Tonzer

in: Applied Economics Letters, No. 7, 2017

Abstract

The global financial crisis has again shown that it is important to understand the emergence and measurement of risks in the banking sector. However, there is no consensus in the literature which risk proxy works best at the level of the individual bank. A commonly used measure in applied work is the Z-score, which might suffer from calculation issues given poor data quality. Motivated by the variety of bank risk proxies, our analysis reveals that nonperforming assets are a well-suited complement to the Z-score in studies of bank risk.

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Complexity and Bank Risk During the Financial Crisis

Thomas Krause Talina Sondershaus Lena Tonzer

in: Economics Letters, January 2017

Abstract

We construct a novel dataset to measure banks’ complexity and relate it to banks’ riskiness. The sample covers stock listed Euro area banks from 2007 to 2014. Bank stability is significantly affected by complexity, whereas the direction of the effect differs across complexity measures.

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Sovereign Credit Risk Co-movements in the Eurozone: Simple Interdependence or Contagion?

Manuel Buchholz Lena Tonzer

in: International Finance, No. 3, 2016

Abstract

We investigate credit risk co-movements and contagion in the sovereign debt markets of 17 industrialized countries during the period 2008–2012. We use dynamic conditional correlations of sovereign credit default swap spreads to detect contagion. This approach allows us to separate contagion channels from the determinants of simple interdependence. The results show that, first, sovereign credit risk co-moves considerably, particularly among eurozone countries and during the sovereign debt crisis. Second, contagion varies across time and countries. Third, similarities in economic fundamentals, cross-country linkages in banking and common market sentiment constitute the main channels of contagion.

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Working Papers

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Do We Want These Two to Tango? On Zombie Firms and Stressed Banks in Europe

Manuela Storz Michael Koetter Ralph Setzer Andreas Westphal

in: IWH Discussion Papers, No. 13, 2017

Abstract

We show that the speed and type of corporate deleveraging depends on the interaction between corporate and financial sector health. Based on granular bank-firm data pertaining to small and medium-sized enterprises (SME) from five stressed and two non-stressed euro area economies, we show that “zombie” firms generally continued to lever up during the 2010–2014 period. Whereas relationships with stressed banks reduce SME leverage on average, we also show that zombie firms that are tied to weak banks in euro area periphery countries increase their indebtedness even further. Sustainable economic recovery therefore requires both: deleveraging of banks and firms.

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Inside Asset Purchase Programs: The Effects of Unconventional Policy on Banking Competition

Michael Koetter Natalia Podlich Michael Wedow

in: ECB Working Paper Series, No. 2017, 2017

Abstract

We test if unconventional monetary policy instruments influence the competitive conduct of banks. Between q2:2010 and q1:2012, the ECB absorbed Euro 218 billion worth of government securities from five EMU countries under the Securities Markets Programme (SMP). Using detailed security holdings data at the bank level, we show that banks exposed to this unexpected (loose) policy shock mildly gained local loan and deposit market shares. Shifts in market shares are driven by banks that increased SMP security holdings during the lifetime of the program and that hold the largest relative SMP portfolio shares. Holding other securities from periphery countries that were not part of the SMP amplifies the positive market share responses. Monopolistic rents approximated by Lerner indices are lower for SMP banks, suggesting a role of the SMP to re-distribute market power differentially, but not necessarily banking profits.

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Uncertainty, Financial Crises, and Subjective Well-being

Lena Tonzer

in: IWH Discussion Papers, No. 2, 2017

Abstract

This paper focuses on the effect of uncertainty as reflected by financial market variables on subjective well-being. The analysis is based on Eurobarometer surveys, covering 20 countries over the period from 2000 to 2013. Individuals report lower levels of life satisfaction in times of higher uncertainty approximated by stock market volatility. This effect is heterogeneous across respondents: The probability of being unsatisfied is higher for respondents who are older, less educated, and live in one of the GIIPS countries of the euro area. Furthermore, higher uncertainty in combination with a financial crisis increases the probability of reporting low values of life satisfaction.

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To Separate or not to Separate Investment from Commercial Banking? An Empirical Analysis of Attention Distortion under Multiple Tasks

Reint E. Gropp K. Park

in: IWH Discussion Papers, No. 2, 2016

Abstract

In the wake of the 2008/2009 financial crisis, a number of policy reports (Vickers, Liikanen, Volcker) proposed to separate investment banking from commercial banking to increase financial stability. This paper empirically examines one theoretical justification for these proposals, namely attention distortion under multiple tasks as in Holmstrom and Milgrom (1991). Universal banks can be viewed as combining two different tasks (investment banking and commercial banking) in the same organization. We estimate pay-performance sensitivities for different segments within universal banks and for pure investment and commercial banks. We show that the pay-performance sensitivity is higher in investment banking than in commercial banking, no matter whether it is organized as part of a universal bank or in a separate institution. Next, the paper shows that relative pay-performance sensitivities of investment and commercial banking are negatively related to the quality of the loan portfolio in universal banks. Depending on the specification, we obtain a reduction in problem loans when investment banking is removed from commercial banks of up to 12 percent. We interpret the evidence to imply that the higher pay-performance sensitivity in investment banking directs the attention of managers away from commercial banking within universal banks, consistent with Holmstrom and Milgrom (1991). Separation of investment banking and commercial banking may indeed be associated with a reduction in risk in commercial banking.

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Friend or Foe? Crowdfunding Versus Credit when Banks are Stressed

Daniel Blaseg Michael Koetter

in: IWH Discussion Papers, No. 8, 2015

Abstract

Does bank instability push borrowers to use crowdfunding as a source of external finance? We identify stressed banks and link them to a unique, manually constructed sample of 157 new ventures seeking equity crowdfunding. The sample comprises projects from all German equity crowdfunding platforms since 2011, which we compare with 200 ventures that do not use crowdfunding. Crowdfunding is significantly more likely for new ventures that interact with stressed banks. Innovative funding is thus particularly relevant when conventional financiers are facing crises. But crowdfunded ventures are generally also more opaque and risky than new ventures that do not use crowdfunding.

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