Inside Asset Purchase Programs: The Effects of Unconventional Policy on Banking Competition
Michael Koetter, Natalia Podlich, Michael Wedow
ECB Working Paper Series,
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.
Relative Peer Quality and Firm Performance
Bill Francis, Iftekhar Hasan, Sureshbabu Mani, Pengfei Ye
Journal of Financial Economics,
We examine the performance impact of the relative quality of a Chief Executive Officer (CEO)’s compensation peers (peers to determine a CEO's overall compensation) and bonus peers (peers to determine a CEO's relative-performance-based bonus). We use the fraction of peers with greater managerial ability scores (Demerjian, Lev, and McVay, 2012) than the reporting firm to measure this CEO's relative peer quality (RPQ). We find that firms with higher RPQ earn higher stock returns and experience higher profitability growth than firms with lower RPQ. Learning among peers and the increased incentive to work harder induced by the peer-based tournament contribute to RPQ's performance effect.
International Banking and Cross-border Effects of Regulation: Lessons from Germany
Jana Ohls, Markus Pramor, Lena Tonzer
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, foreign banks located in Germany 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 was effective in reducing lending inflows from German banks. Finally, we find that business and financial cycles matter for lending decisions.
The Forward-looking Disclosures of Corporate Managers: Theory and Evidence
Reint E. Gropp, Rasa Karapandza, Julian Opferkuch
IWH Discussion Papers,
We consider an infinitely repeated game in which a privately informed, long-lived manager raises funds from short-lived investors in order to finance a project. The manager can signal project quality to investors by making a (possibly costly) forward-looking disclosure about her project’s potential for success. We find that if the manager’s disclosures are costly, she will never release forward-looking statements that do not convey information to external investors. Furthermore, managers of firms that are transparent and face significant disclosure-related costs will refrain from forward-looking disclosures. In contrast, managers of opaque and profitable firms will follow a policy of accurate disclosures. To test our findings empirically, we devise an index that captures the quantity of forward-looking disclosures in public firms’ 10-K reports, and relate it to multiple firm characteristics. For opaque firms, our index is positively correlated with a firm’s profitability and financing needs. For transparent firms, there is only a weak relation between our index and firm fundamentals. Furthermore, the overall level of forward-looking disclosures declined significantly between 2001 and 2009, possibly as a result of the 2002 Sarbanes-Oxley Act.
Central Bank Transparency and Cross-border Banking
Stefan Eichler, Helge Littke, Lena Tonzer
We analyze the effect of central bank transparency on cross-border bank activities. Based on a panel gravity model for cross-border bank claims for 21 home and 47 destination countries from 1998 to 2010, we find strong empirical evidence that a rise in central bank transparency in the destination country, on average, increases cross-border claims. Using interaction models, we find that the positive effect of central bank transparency on cross-border claims is only significant if the central bank is politically independent. Central bank transparency and credibility are thus considered complements by banks investing abroad.
10.08.2015 • 30/2015
Germany Benefited Substantially from the Greek Crisis
The balanced budget in Germany is largely the result of lower interest payments due to the European debt crisis. Research from the Halle Institute for Economic Research (IWH) – Member of the Leibniz Association shows that the debt crisis resulted in a reduction in German bund rates of about 300 basis points (BP), yielding interest savings of more than EUR 100 billion (or more than 3% of gross domestic product, GDP) during the period 2010 to 2015. A significant part of this reduction is directly attributable to the Greek crisis. When discussing the costs to the German tax payer of saving Greece, these benefits should not be overlooked, as they tend to be larger than the expenses, even in a scenario where Greece does not repay any of its debts.
Reint E. Gropp
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Risikobewertung von Staatsanleihen im Euroraum während der Staatsschuldenkrise von Ansteckungseffekten getrieben
Manuel Buchholz, Lena Tonzer
Wirtschaft im Wandel,
Die europäische Staatsschuldenkrise hat in vielen Ländern zu Zinsaufschlägen auf Staatsanleihen geführt. Dies war vor allem in den Jahren 2010 und 2011 in Ländern wie Griechenland, Italien oder Spanien zu beobachten. Zur gleichen Zeit blieben die Kreditrisiken deutscher oder französischer Staatsanleihen auf einem moderaten Niveau. Trotz der unterschiedlichen Entwicklung in den Niveaus findet man ein hohes Maß an Gleichbewegung von Kreditrisiken in den Ländern des Euroraums. Dieser Beitrag untersucht, inwieweit dies durch strukturelle Ähnlichkeiten, internationale Verflechtungen und globale Marktentwicklungen erklärt werden kann.
Sovereign Default Risk and Decentralization: Evidence for Emerging Markets
Stefan Eichler, M. Hofmann
European Journal of Political Economy,
We study the impact of decentralization on sovereign default risk. Theory predicts that decentralization deteriorates fiscal discipline since subnational governments undertax/overspend, anticipating that, in the case of overindebtedness, the federal government will bail them out. We analyze whether investors account for this common pool problem by attaching higher sovereign yield spreads to more decentralized countries. Using panel data on up to 30 emerging markets in the period 1993–2008 we confirm this hypothesis. Higher levels of fiscal and political decentralization increase sovereign default risk. Moreover, higher levels of intergovernmental transfers and a larger number of veto players aggravate the common pool problem.
Financial Constraints of Private Firms and Bank Lending Behavior
Patrick Behr, L. Norden, Felix Noth
Journal of Banking and Finance,
We investigate whether and how financial constraints of private firms depend on bank lending behavior. Bank lending behavior, especially its scale, scope and timing, is largely driven by bank business models which differ between privately owned and state-owned banks. Using a unique dataset on private small and medium-sized enterprises (SMEs) we find that an increase in relative borrowings from local state-owned banks significantly reduces firms’ financial constraints, while there is no such effect for privately owned banks. Improved credit availability and private information production are the main channels that explain our result. We also show that the lending behavior of local state-owned banks can be sustainable because it is less cyclical and neither leads to more risk taking nor underperformance.
Sovereign Credit Risk Co-movements in the Eurozone: Simple Interdependence or Contagion?
Manuel Buchholz, Lena Tonzer
UniCredit & Universities Foundation, Working Paper Series No. 47,
published in: International Finance
We investigate credit risk co-movements and contagion in sovereign debt markets of 17 industrialized countries for the period 2008-2012. We use dynamic conditional correlations of sovereign CDS spreads to detect contagion. This approach allows separating the channels through which contagion occurs from the determinants of simple interdependence. The results show that, first, sovereign credit risk comoves considerably, in particular among eurozone countries and during the sovereign debt crisis. Second, contagion cannot be attributed to one moment in time but 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.