Crises, rescues, and policy transmission through international banks
Claudia M. Buch
Bundesbank Discussion Paper 15/2011,
2011
Abstract
The World Financial Crisis has shaken the fundamentals of international banking
and triggered a downward spiral of asset prices. To prevent a further meltdown of
markets, governments have intervened massively through rescues measures aimed at recapitalizing banks and through liquidity support. We use a detailed, banklevel dataset for German banks to analyze how the lending and borrowing of their foreign affiliates has responded to domestic (German) and to US crisis support schemes. We analyze how these policy interventions have spilled over into
foreign markets. We identify loan supply shocks by exploiting that not all banks
have received policy support and that the timing of receiving support measures
has differed across banks. We find that banks covered by rescue measures of the
German government have increased their foreign activities after these policy
interventions, but they have not expanded relative to banks not receiving support.
Banks claiming liquidity support under the Term Auction Facility (TAF) program
have withdrawn from foreign markets outside the US, but they have expanded
relative to affiliates of other German banks.
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Government Interventions in Banking Crises: Effects of Alternative Schemes on Bank Lending and Risk-taking
Diemo Dietrich, Achim Hauck
Scottish Journal of Political Economy,
No. 2,
2012
Abstract
We analyse the effects of policy measures to stop the fall in loan supply following a banking crisis. We apply a dynamic framework in which a debt overhang induces banks to curtail lending or to choose a fragile capital structure. Government assistance conditional on new banking activities, like on new lending or on debt and equity issues, allows banks to influence the scale of the assistance and to externalise risks, implying overinvestment or excessive risk taking or both. Assistance without reference to new activities, like granting lump sum transfers or establishing bad banks, does not generate adverse incentives but may have higher fiscal costs.
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Stock Market-Induced Currency Crises: A New Type of Twins
Stefan Eichler, Dominik Maltritz
Review of Development Economics,
No. 2,
2011
Abstract
This paper explores the link between currency crises and the stock market in emerging economies. By integrating foreign stock market investors in a currency crisis model, we reveal a new fundamental inconsistency as a potential crisis trigger: since emerging economies' stock markets often have high returns, whereas central bank reserves grow slowly or decline, the amount of reserves foreign investors can deplete when selling their stocks and repatriating the proceeds grows over time and is considerably higher than funds that have been invested in the stock market. Capital withdrawals of foreign stock market investors can trigger currency crises by depleting central bank reserves, particularly in successful countries with booming stock markets and large foreign investment.
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Central and Eastern European Countries in the Global Financial Crisis: A Typical Twin Crisis?
Diemo Dietrich, Tobias Knedlik, Axel Lindner
Post-Communist Economies,
No. 4,
2011
Abstract
This paper shows that during the Great Recession, banking and currency crises occurred simultaneously in Central and Eastern Europe. Events, however, differed widely from what happened during the Asian crisis that usually serves as the model case for the concept of twin crises. We look at three elements that help explaining the nature of events in Central and Eastern Europe: the problem of currency mismatches, the relation between currency and banking crises, and the importance of multinational banks for financial stability. It is shown that theoretical considerations concerning internal capital markets of multinational banks help understand what happened on capital markets and in the financial sector of the region. We discuss opposing effects of multinational banking on financial stability and find that institutional differences are the key to understand differing effects of the global financial crisis. In particular, we argue that it matters if international activities are organized by subsidiaries or by cross-border financial services, how large the share of foreign currency-denominated credit is and whether the exchange rate is fixed or flexible. Based on these three criteria we give an explanation why the pattern of the crisis in the Baltic States differed markedly from that in Poland and the Czech Republic, the two largest countries of the region.
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A Cost Efficient International Lender of Last Resort
Tobias Knedlik
International Research Journal of Finance and Economics,
2010
Abstract
The current reform of the International Monetary Fund’s (IMF) lending instruments has transformed the Fund towards an international lender of last resort (ILOLR). Current research discusses various general frameworks for installing an ILOLR. However, it remains unclear how the ILOLR should actually operate. This paper discusses six different options for the construction of an ILOLR that supports central banks during currency crises. The paper concludes that the most cost efficient version of the ILOLR would be direct intervention by the IMF using IMF resources, with the option of using additional reserves from central banks. The paper considers measures of cost efficiency, such as cost of borrowing, intervention, and sterilization and moral hazard problems.
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Government Interventions in Banking Crises: Assessing Alternative Schemes in a Banking Model of Debt Overhang
Diemo Dietrich, Achim Hauck
Abstract
We evaluate policy measures to stop the fall in loan supply following a banking crisis. We apply a dynamic framework in which a debt overhang induces banks to curtail lending or to choose a fragile capital structure. Government assistance conditional on new banking activities, like on new lending or on debt and equity issues, allows banks to influence the scale of the assistance and to externalize risks, implying overinvestment or excessive risk taking or both. Assistance granted without reference to new activities, like establishing a bad bank, does not generate adverse incentives but may have higher fiscal costs.
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Potential Effects of Basel II on the Transmission from Currency Crises to Banking Crises – The Case of South Korea
Tobias Knedlik, Johannes Ströbel
Journal of Money,
No. 13,
2010
Abstract
In this paper we evaluate potential effects of the Basel II accord on preventing the transmission from currency crises to banking crises by analyzing the South Korean crisis of 1997. We show that regulatory capital reserves under Basel II would have been lower than those under Basel I, and that therefore Basel II would have had adverse effects on the development of the crisis. Furthermore we investigate whether the behavior of rating agencies has changed since the East Asian crisis. We find no evidence that rating agencies have started to take micro-mismatches into account. Thus, we have reservations concerning the effectiveness of Basel II.
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Tentative Recovery, Public Debt on the Rise
Wirtschaft im Wandel,
2. Sonderausgabe
2009
Abstract
In autumn 2009, the world economy appears to be growing again. The situation has improved mainly because drastic measures of central banks and governments stabilized the financial sector. More recently, the real economy is supported by fiscal programs taking effect. However, recoveries are usually slow if, as it is the case now, recessions have been intertwined with banking and housing crises. Thus, the industrial economies will not gain much dynamics this year and next, while chances for an upswing in emerging economies are much better.
The German economy stabilized during summer as well, with remarkably robust private consumption. An upswing, however, is, due to several factors, not in sight: Some important export markets will not rebound quickly, and consumption will be dampened by rising unemployment that, up to now, has been contained, not least with the aid of short-term working schemes. All in all, production shrinks by 5% in 2009 and will increase by no more than 1.2% next year. Public deficits are on the rise, with (in relation to GDP) 3.2% this year and 5.2% in 2010.
A credit crunch due to deteriorating balance sheets of banks is a major risk for the German economy. Policy should address this problem by making sure that equity ratios are sufficiently high. One way would be to impose public capital on banks that do not comply with certain regulatory ratios. These should be higher than the ones presently in force. Fiscal policy should begin consolidating in 2011, mainly by dampening the rise of expenditures. Tax cuts are only justified if they are accompanied by very ambitious spending cuts.
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German Economy on the Brink of Recession
Wirtschaft im Wandel,
2. Sonderausgabe
2008
Abstract
In autumn 2008, the word economy is in a downswing, caused by the commodity and energy price hike of the first half of the year, housing crises in the US and some other important countries, and in particular by the financial crisis that has recently intensified. The downswing will continue this year and for some time during 2009, and will only come to an end later next year if governments and central banks succeed in stabilizing financial markets in the coming months. In this case, lower prices of commodities and still high growth dynamics in important emerging markets countries will lead to a tentative revival of the world economy.
The German economy is on the brink of a recession. It is particularly vulnerable to a global downswing because exports of investment goods are of upmost importance for the overall economy. Because the uncertainty about the worldwide effects of the financial crisis is very high, the forecast is split. A more probable scenario is based on the assumption of a stabilizing world economy. In this scenario, the growth rate of the German economy in 2009 is 0.2%. The second scenario is based on the assumption of a worldwide recession next year and forecasts that German GDP will shrink by 0.8% in 2009.
Concerning policy, the institutes recommend a strengthening of the capital base of banks via injection of government money. This should be done in a way that gives incentives to banks for attracting additional capital from private sources.
A special chapter of the report analyzes the nature and causes of the price hikes of energy and commodities in the first half of 2008.
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The Role of Credit Ratings in Banking Regulations. Credit Ratings Are Insufficiently Anticipating the Risk for Currency Crises.
Tobias Knedlik, Johannes Ströbel
Wirtschaft im Wandel,
No. 10,
2007
Abstract
This contribution analyses whether the behaviour of rating agencies has changed since their failure to predict the Asian crisis. The paper finds no robust econometric evidence that rating agencies have started to take micro-mismatches into account when assigning sovereign ratings. Thus, given the current approach of credit rating agencies, we have reservations concerning the effectiveness of Basel II to prevent the transmission from currency crises to banking crises for potential future crises.
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