Completing the European Banking Union: Capital Cost Consequences for Credit Providers and Corporate Borrowers
Michael Koetter, Thomas Krause, Eleonora Sfrappini, Lena Tonzer
European Economic Review,
September
2022
Abstract
The bank recovery and resolution directive (BRRD) regulates the bail-in hierarchy to resolve distressed banks in the European Union (EU). Using the staggered BRRD implementation across 15 member states, we identify banks’ capital cost responses and subsequent pass-through to borrowers towards surprise elements due to national transposition details. Average bank capital costs increase heterogeneously across countries with strongest funding cost hikes observed for banks located in GIIPS and non-EMU countries. Only banks in core E(M)U countries that exhibit higher funding costs increase credit spreads for corporate borrowers and contract credit supply. Tighter credit conditions are only passed on to more levered and less profitable firms. On balance, the national implementation of BRRD appears to have strengthened financial system resilience without a pervasive hike in borrowing costs.
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Aktuelle Trends: Auf dem Weg zur europäischen Bankenunion: Verzögerte Umsetzung der Abwicklungsrichtlinie
Michael Koetter, Thomas Krause, Eleonora Sfrappini, Lena Tonzer
Wirtschaft im Wandel,
No. 2,
2021
Abstract
In Reaktion auf die Erfahrungen aus der letzten Finanzmarktkrise veröffentlichte die Europäische Kommission im Mai 2014 die Richtlinie zur Sanierung und Abwicklung von Kreditinstituten (Bank Recovery and Resolution Directive, BRRD). Die Richtlinie legt Regeln zur Abwicklung und Restrukturierung von Banken einschließlich eines Bail-in-Mechanismus fest, der das Verlustrisiko beim Scheitern einer Bank vorrangig deren Anteilseignern und Gläubigern aufbürdet.
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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
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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Are Bank Capital Requirements Optimally Set? Evidence from Researchers’ Views
Gene Ambrocio, Iftekhar Hasan, Esa Jokivuolle, Kim Ristolainen
Journal of Financial Stability,
October
2020
Abstract
We survey 149 leading academic researchers on bank capital regulation. The median (average) respondent prefers a 10% (15%) minimum non-risk-weighted equity-to-assets ratio, which is considerably higher than the current requirement. North Americans prefer a significantly higher equity-to-assets ratio than Europeans. We find substantial support for the new forms of regulation introduced in Basel III, such as liquidity requirements. Views are most dispersed regarding the use of hybrid assets and bail-inable debt in capital regulation. 70% of experts would support an additional market-based capital requirement. When investigating factors driving capital requirement preferences, we find that the typical expert believes a five percentage points increase in capital requirements would “probably decrease” both the likelihood and social cost of a crisis with “minimal to no change” to loan volumes and economic activity. The best predictor of capital requirement preference is how strongly an expert believes that higher capital requirements would increase the cost of bank lending.
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The Corona Recession and Bank Stress in Germany
Reint E. Gropp, Michael Koetter, William McShane
IWH Online,
No. 4,
2020
Abstract
We conduct stress tests for a large sample of German banks across different recoveries from the Corona recession. We find that, depending on how quickly the economy recovers, between 6% to 28% of banks could become distressed from defaulting corporate borrowers alone. Many of these banks are likely to require regulatory intervention or may even fail. Even in our most optimistic scenario, bank capital ratios decline by nearly 24%. The sum of total loans held by distressed banks could plausibly range from 127 to 624 billion Euros and it may take years before the full extent of this stress is observable. Hence, the current recession could result in an acute contraction in lending to the real economy, thereby worsening the current recession , decelerating the recovery, or perhaps even causing a “double dip” recession. Additionally, we show that the corporate portfolio of savings and cooperative banks is more than five times as exposed to small firms as that of commercial banks and Landesbanken. The preliminary evidence indicates small firms are particularly exposed to the current crisis, which implies that cooperative and savings banks are at especially high risk of becoming distressed. Given that the financial difficulties may seriously impair the recovery from the Covid-19 crisis, the pressure to bail out large parts of the banking system will be strong. Recent research suggests that the long run benefits of largely resisting these pressures may be high and could result in a more efficient economy.
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Too Connected to Fail? Inferring Network Ties from Price Co-movements
Jakob Bosma, Michael Koetter, Michael Wedow
Journal of Business and Economic Statistics,
No. 1,
2019
Abstract
We use extreme value theory methods to infer conventionally unobservable connections between financial institutions from joint extreme movements in credit default swap spreads and equity returns. Estimated pairwise co-crash probabilities identify significant connections among up to 186 financial institutions prior to the crisis of 2007/2008. Financial institutions that were very central prior to the crisis were more likely to be bailed out during the crisis or receive the status of systemically important institutions. This result remains intact also after controlling for indicators of too-big-to-fail concerns, systemic, systematic, and idiosyncratic risks. Both credit default swap (CDS)-based and equity-based connections are significant predictors of bailouts. Supplementary materials for this article are available online.
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21.03.2018 • 5/2018
What is holding back the banking union?
The European Commission wants to better regulate and monitor the European banking sector. In many EU Member States, however, the necessary directives are being implemented extremely slowly. Surprisingly, the reasons for this do not lie in politics and banking structures, but in the institutional framework conditions and existing regulations in the Member States, as argued by Michael Koetter, Thomas Krause and Lena Tonzer from the Halle Institute for Economic Research (IWH).
Michael Koetter
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Economic Transition in Unified Germany and Implications for Korea
Hyung-Gon Jeong, Gerhard Heimpold
H.-G. Jeong and G. Heimpold (eds.): Economic Transition in Unified Germany and Implications for Korea. Policy References 17-13. Sejong: Korea Institute for International Economic Policy,
2017
Abstract
The reunification of Germany, which marked the end of the Cold War in the 20th century, is regarded as one of the most exemplary cases of social integration in human history. Nearly three decades after the German reunification, the economic and social shocks that occurred at the beginning of the reunification process have largely been resolved. Moreover, the unified Germany has grown into one of the most advanced economies in the world.
The unification process that Germany underwent may not necessarily be the way that the Republic of Korea would choose. However, the economic and social exchanges between East and West Germany prior to unification, and the cooperation in a myriad of policies based on these exchanges, served as the crucial foundation for unification. The case of Germany will surely help us find a better way for the re-unification of the Korean Peninsula.
In this context, this is the first edition of a joint research which provides diverse insights on social and economic issues during the process of unification. It consists of nine chapters whose main topics include policies on macroeconomic stabilization, the privatization of state-owned enterprises in East Germany, labor policies and the migration of labor, integration of the social safety nets of the North and South, and securing finances for reunification. To start with, the first part covers macroeconomic stabilization measures, which include policies implemented by the federal government of Germany to overcome macroeconomic shocks directly after the reunification. There was a temporary setback in the economy at the initial phase of reunification as the investment per GDP went down and the level of fiscal debt escalated, reverting to its original trend prior to the reunification. While it appears the momentum for growth was compromised by reunification from the perspective of growth rate of real GDP, this state did not last long and benefits have outpaced the costs since 2000.
In the section which examines the privatization of state-owned enterprises in East Germany, an analysis was conducted on the modernization of industrial infrastructure of East German firms. There was a surge in investment in East German area at the beginning stages but this was focused on a specific group of firms. Most of the firms were privatized through unofficial channels, with a third of these conducted in a management buy-out (MBO) process that was highly effective. Further analysis of a firm called Jenoptik, which was successfully bailed out, is incorporated as to draw implications of its accomplishments.
In the section on migration, we examine how the gap between the unemployment rates in the West and East have narrowed as the population flow shifted from the West to East. Consequently, there was no significant deviation in terms of the Gross Regional Domestic Product (GRDP) per capita in each state of East Germany. However, as the labor market stabilized in East Germany and population flows have weakened, the deviation will become larger. Meanwhile, if we make a prediction about the movement of population between the North and the South, which show a remarkable difference in their economic circumstances, a radical reunification process such as Germany’s case would force 7% of the population of the North to move towards the South. Upon reunification, the estimated unemployment rate in North Korea would remain at least 30% for the time being. In order to reduce the initial unemployment rate, it is crucial to design a program that trains the unemployed and to build a system that predicts changes in labor demand.
It seems nearly impossible to apply the social safety nets of the South to the North, as there is a systemic difference in ideologies. Taking steps toward integration would be the most suitable option in the case of the Koreas. We propose to build a sound groundwork for stabilizing the interest rates and exchange rates, maintain stable fiscal policies, raise momentum for economic growth and make sure people understand the means required to financially support the North in order to reduce the gap between the two.
This book was jointly organized and edited by Dr. Hyung-gon Jeong of the Korea Institute for International Economic Policy (KIEP) and Dr. Gerhard Heimpold of the Halle Institute for Economic Research (IWH). We believe that this report, which examines numerous social and economic agendas that emerged during the reunification of Germany, will provide truly important reference for both Koreas. It is also our view that it will serve as a stepping-stone to establish policies in regard to South-North exchanges across numerous sectors prior to discussions of reunification. KIEP will continue to work with IWH and contribute its expertise to the establishment of grounds for unification policies.
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09.08.2017 • 29/2017
Networked and protected
During the financial crisis, billions were spent to rescue banks that were according to their governments too big to be allowed to fail. But a study by Michael Koetter from the Halle Institute for Economic Research (IWH) and co-authors shows that besides the size of the banks, the centrality within the global financial network was also pivotal for financial institutions to receive a bail-out.
Michael Koetter
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