Regulation of International Financial Markets and International Banking
This research group analyses international capital flows as well as the consequences of regulatory changes for financial stability and intermediation. Both aspects can facilitate an efficient allocation of capital and enable risk sharing, but spark at the same time global financial instabilities. Banking regulation and supervision has accordingly changed significantly over recent years, but the impact of these comprehensive reforms on the functionality of the financial system remain unclear. In addition banks face further challenges, such as tightening monetary policy, geopolitical risks, and the emergence of new competitors due to digitalization.
Against this backdrop, the research group contributes to the literature in three ways. First, the group empirically analyses international capital flow determinants and the implications for financial stability and credit allocation. Periods characterised by a high degree of financial integration are often followed by financial crises, causing negative spill-overs to the real economy. This work package seeks to advance our understanding of how to maintain a stable banking system that is able to efficiently channel financial resources to firms and households alike.
Second, the group analyses the impact of changes in banking supervision and regulation on (inter)national activities of banks with a specific focus on the European integration process. The establishment of the European Banking Union constantly shapes the banking sector as prudential and regulatory responsibilities are transferred from the national to the Euro area level. Integrated markets allow for an early detection of soaring risks at an early stage, but new regulations can also create distortions. This work package contributes to the scant empirical evidence on this trade-off.
Third, “traditional” banks are not only operating in a tighter regulatory framework, they also face plenty of challenges threatening their business model and longer-term profitability. For example, increasing interest rates sparked deposit withdrawals and valuation losses of banks’ fixed income investment. Distortions due to the realization of political risks and rising levels of public, private, and corporate debt might bear the risk of future non-performing loans. The emergence of non-bank financial intermediaries (FinTech) challenge current business models of banks. The consequences for banks or their new competitors should be monitored.
Workpackage 1: The Shape of International Financial Markets
Workpackage 2: Evaluation of Regulatory Policies in Integrated Markets
Workpackage 3: Financial Intermediation in a Changing World
IWH Data Project: International Banking Library
The International Banking Library is a web-based platform for the exchange of research on cross-border banking. It provides access to data sources, academic research, both theoretical and empirical, on cross-border banking, as well as information on regulatory initiatives. The International Banking Library addresses researchers, policymakers, and students of international banking and economics in search of comprehensive information on international banking issues. The contents of the International Banking Library are summarised and distributed in a quarterly newsletter, thereby adding to the international visibility of the IWH (with more than 700 subscribers from academia, central banks and the industry) and facilitating a regular exchange of our research ideas with policy makers.
IWH Data Project: Financial Markets Directives Database
In Europe, financial markets have undergone significant regulatory changes since the last financial and sovereign debt crisis. One key element is the harmonisation of rules for capital regulation, bank resolution and deposit insurance. In the euro area, the sizable change in the regulatory framework is also reflected by the establishment of the European Banking Union. Another change that might have implications for financial structure is the establishment of a Capital Market Union. Evidence-based policymaking and the evaluation of (un-)intended consequences of such reforms needs information on when regulatory changes happen. In the European Union, the cornerstones of regulatory changes that apply to all member states are implemented by means of regulations or directives. The latter ones have to be implemented, with some scope for discretion, into national law by the member states. The Financial Markets Directives Database assembles the dates at which countries have published the key legal document related to several recent directives affecting financial markets. The cornerstone of the database constitutes information on the European Banking Union including its three directives on capital requirements, bank resolution and deposit insurance (CRD IV, BRRD, DGSD). The database has been made publically available via the website “International Banking Library” and is part of the Centre for Evidence-based Policy Advice (IWH-CEP).
Research Cluster
Economic Dynamics and StabilityYour contact
- Department Financial Markets
EXTERNAL FUNDING
07.2017 ‐ 12.2022
The Political Economy of the European Banking Union
Causes of national differences in the implementation of the Banking Union and the resulting impact on financial stability.
01.2015 ‐ 12.2017
Dynamic Interactions between Banks and the Real Economy
Refereed Publications
Capital Controls and International Interest Rate Differentials
in: Applied Economics, 2010
Abstract
Since the Asian crises it is often taken as granted that capital markets have significant functional deficits. Often these deficits are believed to be so very strong that the ability of free capital markets to guarantee a more or less correct international allocation of capital is denied. It is argued that speculation dominates capital markets so much that capital allocation is purely random. This is one of the major arguments backing the present trend to re-establish capital controls, which emerged after the capital market distortions observed during the Asian flu. In the present article it is shown that capital markets, while certainly prone to many distortions, are well capable of roughly guiding capital to the proper place. Though allocation is not model-like perfect, this steals the thunder from the idea, that closed or government-guided capital markets were able to perform better.
Working Papers
How Do EU Banks’ Funding Costs Respond to the CRD IV? An Assessment Based on the Banking Union Directives Database
in: IWH Discussion Papers, No. 12, 2024
Abstract
The establishment of the European Banking Union constitutes a major change in the regulatory framework of the banking system. Main parts are implemented via directives that show staggered transposition timing across EU member states. Based on the newly compiled Banking Union Directives Database, we assess how banks’ funding costs responded to the Capital Requirements Directive IV (CRD IV). Our findings show an upward trend in funding costs which is driven by an increase in cost of equity and partially offset by a decline in cost of debt. The diverging trends are most present in countries with an ex-ante lower regulatory capital stringency, which is in line with banks’ short-run adjustment needs but longer-run benefits from increased financial stability.
The Effect of Firm Subsidies on Credit Markets
in: IWH Discussion Papers, No. 24, 2022
Abstract
<p>We use granular project-level information for the largest regional economic development program in German history to study whether government subsidies to firms affect the quantity and quality of bank lending. We combine the universe of recipient firms under the Improvement of Regional Economic Structures program (GRW) with their local banks during 1998-2019. The modalities of GRW subsidies to firms are determined at the EU level. Therefore, we use it to identify bank outcomes. Banks with relationships to more subsidized firms exhibit higher lending volumes without any significant differences in bank stability. Subsidized firms, in turn, borrow more indicating that banks facilitate regional economic development policies.</p>
Climate Change-Related Regulatory Risks and Bank Lending
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.
Explaining Regional Disparities in Housing Prices Across German Districts
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.
Stress-ridden Finance and Growth Losses: Does Financial Development Break the Link?
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.
