Bank Recapitalization, Regulatory Intervention, and Repayment
Thomas Kick, Michael Koetter, Tigran Poghosyan
Journal of Money, Credit and Banking,
No. 7,
2016
Abstract
We use prudential supervisory data for all German banks during 1994–2010 to test if regulatory interventions affect the likelihood that bailed-out banks repay capital support. Accounting for the selection bias inherent in nonrandom bank bailouts by insurance schemes and the endogenous administration of regulatory interventions, we show that regulators can increase the likelihood of repayment substantially. An increase in intervention frequencies by one standard deviation increases the annual probability of capital support repayment by 7%. Sturdy interventions, like restructuring orders, are effective, whereas weak measures reduce repayment probabilities. Intervention effects last up to 5 years.
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29.09.2016 • 40/2016
Joint Economic Forecast: German Economy on Track – Economic Policy needs to be Realigned
Thanks to a stable job market and solid consumption, the German economy is experiencing a moderate upswing. The GDP is expected to increase by 1.9 percent this year, 1.4 percent in 2017, and 1.6 percent in 2018, according to the Gemeinschaftsdiagnose (GD, joint economic forecast) that was prepared by five of Europe’s leading economic research institutes on behalf of the Federal Government. The most recent GD, which was released in April, predicted a GDP growth rate of 1.6 percent for 2016 and 1.5 percent for 2017.
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European Firms after the Crisis – New Insights from the 5th Vintage of the CompNet Firm-level-based Database
Elena Ashtari Tafti, Richard Bräuer, Sante De Pinto, Marco Grazioli, Matthias Mertens, Daniel Stöhlker, Marta Tagliabue
,
2016
Abstract
This report intends to shed light on the competitive stance of European firms after the crisis. In line with CompNet cutting-edge approach, we take a firm-level perspective to analyse the competitive position of European firms by drawing from the new vintage of the firm-level-based CompNet database. This micro-level approach allows us to ascertain the extent in which firms performances are heterogeneous across EU, also in relation of possible determinants of such performance.
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To Invest or Not to Invest, That Is the Question: Analysis of Firm Behavior under Anticipated Shocks
Dejan Kovač, Nikola Kleut, Boris Podobnik, Vuk Vukovic
Plos One,
No. 8,
2016
Abstract
When companies are faced with an upcoming and expected economic shock some of them tend to react better than others. They adapt by initiating investments thus successfully weathering the storm, while others, even though they possess the same information set, fail to adopt the same business strategy and eventually succumb to the crisis. We use a unique setting of the recent financial crisis in Croatia as an exogenous shock that hit the country with a time lag, allowing the domestic firms to adapt. We perform a survival analysis on the entire population of 144,000 firms in Croatia during the period from 2003 to 2015, and test whether investment prior to the anticipated shock makes firms more likely to survive the recession. We find that small and micro firms, which decided to invest, had between 60 and 70% higher survival rates than similar firms that chose not to invest. This claim is supported by both non-parametric and parametric tests in the survival analysis. From a normative perspective this finding could be important in mitigating the negative effects on aggregate demand during strong recessionary periods.
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Qual VAR Revisited: Good Forecast, Bad Story
Makram El-Shagi, Gregor von Schweinitz
Journal of Applied Economics,
No. 2,
2016
Abstract
Due to the recent financial crisis, the interest in econometric models that allow to incorporate binary variables (such as the occurrence of a crisis) experienced a huge surge. This paper evaluates the performance of the Qual VAR, originally proposed by Dueker (2005). The Qual VAR is a VAR model including a latent variable that governs the behavior of an observable binary variable. While we find that the Qual VAR performs reasonable well in forecasting (outperforming a probit benchmark), there are substantial identification problems even in a simple VAR specification. Typically, identification in economic applications is far more difficult than in our simple benchmark. Therefore, when the economic interpretation of the dynamic behavior of the latent variable and the chain of causality matter, use of the Qual VAR is inadvisable.
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11.08.2016 • 34/2016
2016 stress tests: Italian banks don’t look worse than German large commercial banks
The European Banking Authority today presented the results of the 2016 stress tests. They show that most European banks appear more or less stable. “What worries me is, however, that the Italian banks do not look worse than the large German commercial banks,” says Reint E. Gropp, president of the Halle Institute for Economic Research (IWH). “It appears that both Deutsche Bank and Commerzbank would benefit significantly from an increase in equity. The stress test was also missing two crucial points: One, the effect of a long lasting low interest rate environment on banks was not simulated. And second, the test did not take into consideration that many small institutions could fail at the same time. This is not an unlikely scenario, given how small banks in particular struggle with shrinking interest margins,“ says Gropp. Finally, the stress test should not distract from the urgency to solve the problems in the Italian banking system.
Reint E. Gropp
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Lend Global, Fund Local? Price and Funding Cost Margins in Multinational Banking
Rients Galema, Michael Koetter, C. Liesegang
Review of Finance,
No. 5,
2016
Abstract
In a proposed model of a multinational bank, interest margins determine local lending by foreign affiliates and the internal funding by parent banks. We exploit detailed parent-affiliate-level data of all German banks to empirically test our theoretical predictions in pre-crisis times. Local lending by affiliates depends negatively on price margins, the difference between lending and deposit rates in foreign markets. The effect of funding cost margins, the gap between local deposit rates faced by affiliates abroad and the funding costs of their parents, on internal capital market funding is positive but statistically weak. Interest margins are central to explain the interaction between internal capital markets and foreign affiliates lending.
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Banks and Sovereign Risk: A Granular View
Claudia M. Buch, Michael Koetter, Jana Ohls
Journal of Financial Stability,
2016
Abstract
We investigate the determinants of sovereign bond holdings of German banks and the implications of such holdings for bank risk. We use granular information on all German banks and all sovereign debt exposures in the years 2005–2013. As regards the determinants of sovereign bond holdings of banks, we find that these are larger for weakly capitalized banks, banks that are active on capital markets, and for large banks. Yet, only around two thirds of all German banks hold sovereign bonds. Macroeconomic fundamentals were significant drivers of sovereign bond holdings only after the collapse of Lehman Brothers. With the outbreak of the sovereign debt crisis, German banks reallocated their portfolios toward sovereigns with lower debt ratios and bonds with lower yields. With regard to the implications for bank risk, we find that low-risk government bonds decreased the risk of German banks, especially for savings and cooperative banks. Holdings of high-risk government bonds, in turn, increased the risk of commercial banks during the sovereign debt crisis.
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20.06.2016 • 24/2016
Financial market reaction to poll data suggests strong effects of a Brexit on exchange rates and the banking system both in the UK and in the EU
On 23 June 2016, there will be a referendum in the United Kingdom (UK) on the question of whether or not the country should remain in the European Union (EU). We use the polls as a measure of the likelihood of an exit to examine the likely effect of a Brexit on financial markets. “Whenever the probability in the polls of a Brexit moves above 50%, we observe a substantial depreciation of the UK pound with respect to most major currencies (including the euro), and strong decline in bank stock prices, suggesting that markets feel the financial sector (both in the UK and the EU) will be most severely affected by a Brexit”, IWH President Reint E. Gropp says. There is little effect on the euro/US Dollar exchange rate. “A huge concern is that overall market volatility both in the UK and the EU are on record highs since last Thursday, reflecting the higher uncertainty associated with Brexit and how exactly, if it happened, it would come about.” Within the UK, we see some evidence for a flight to safety into UK government bonds, but no effects for German bonds.
Reint E. Gropp
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The Role of Complexity for Bank Risk during the Financial Crisis: Evidence from a Novel Dataset
Thomas Krause, Talina Sondershaus, Lena Tonzer
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. This heterogeneity advises against the use of a single complexity measure when evaluating the implications of bank complexity.
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