The Ex Ante versus Ex Post Effect of Public Guarantees
H. Evren Damar, Reint E. Gropp, Adi Mordel
The Role of Central Banks in Financial Stability: How has it Changed?,
2013
Abstract
In October 2006, Dominion Bond Rating Service (DBRS) introduced new ratings for banks that account for the potential of government support. The rating changes are not a reflection of any changes in the respective banks’ credit fundamentals. We use this natural experiment to evaluate the consequences of bail out expectations for bank behavior using a difference in differences approach. The results suggest a striking difference between the effects of bail out probabilities during calm times (“ex ante”) versus during crisis times (“ex post”). During calm times, higher bail-out probabilities result in higher risk taking, consistent with the moral hazard view and much of the empirical literature. However, in crisis times, we find that banks with higher bail out probabilities tend to increase their risk taking less compared to banks that were ex ante unlikely to be bailed-out. Charter values are one part of the explanation: Supported banks may have a funding advantage relative to non-supported banks during the crisis. However, we cannot rule out that other factors also may be playing a role, including tighter supervision of supported banks in crisis times.
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Changing Forces of Gravity: How the Crisis Affected International Banking
Claudia M. Buch, Katja Neugebauer, Christoph Schröder
IWH Discussion Papers,
No. 15,
2013
Abstract
The global financial crisis has brought to an end a rather unprecedented period of banks’ international expansion. We analyze the effects of the crisis on international banking. Using a detailed dataset on the international assets of all German banks with foreign affiliates for the years 2002-2011, we study bank internationalization before and during the crisis. Our data allow analyzing not only the international assets of the banks’ headquarters but also of their foreign affiliates. We show that banks have lowered their international assets, both along the extensive and the intensive margin. This withdrawal from foreign markets is the result of changing market conditions, of policy interventions, and of a weakly increasing sensitivity of banks to financial frictions.
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Banks and Sovereign Risk: A Granular View
Claudia M. Buch, Michael Koetter, Jana Ohls
Abstract
In this paper, we use detailed data on the sovereign debt holdings of all German banks to analyse the determinants of sovereign debt exposures and the implications of sovereign exposures for bank risk. Our main findings are as follows. First, sovereign bond holdings are heterogeneous across banks. Larger, weakly capitalised banks and banks with a small depositor base hold more sovereign bonds. Around 31% of all German banks hold no sovereign bonds at all. Second, the sensitivity of banks to macroeconomic factors increased significantly in the post-Lehman period. Banks hold more bonds from euro area countries, from low-inflation countries, and from countries with high sovereign bond yields. Third, there has been no marked impact of sovereign bond holdings on bank risk. This result could indicate the widespread absence of marking-to-market for sovereign bond holdings at the onset of the sovereign debt crisis in Europe.
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Taxes, Banks and Financial Stability
Reint E. Gropp
White Paper Series, No. 6,
August
2013
Abstract
In response to the financial crisis of 2008/2009, numerous new taxes on financial institutions have been discussed or implemented around the world. This paper discusses the connection between the incidence of the taxes, their incentive effects, and policy makers’ objectives. Combining basic insights from banking theory with standard models of tax incidence shows that the incidence of such taxes will disproportionately fall on small and medium size enterprises. The arguments presented suggest it is unlikely that the taxes will have a beneficial impact on financial stability or raise significant amounts of revenue without increasing the cost of capital to bank dependent firms significantly.
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Sovereign Credit Risk Co-movements in the Eurozone: Simple Interdependence or Contagion?
Manuel Buchholz, Lena Tonzer
UniCredit & Universities Foundation, Working Paper Series No. 47,
No. 47,
2013
published in: International Finance
Abstract
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.
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Islamic Finance in Europe
Pierluigi Caristi, Stéphane Couderc, Angela di Maria, Filippo di Mauro, Beljeet Kaur Grewal, Lauren Ho, Sergio Masciantonio, Steven Ongena, Sajjad Zaher
ECB Occasional Paper,
No. 146,
2013
Abstract
Islamic finance is based on ethical principles in line with Islamic religious law. Despite its low share of the global financial market, Islamic finance has been one of this sector's fastest growing components over the last decades and has gained further momentum in the wake of the financial crisis. The paper examines the development of and possible prospects for Islamic finance, with a special focus on Europe. It compares Islamic and conventional finance, particularly as concerns risks associated with the operations of respective institutions, as well as corporate governance. The paper also analyses empirical evidence comparing Islamic and conventional financial institutions with regard to their: (i) efficiency and profitability; and (ii) stability and resilience. Finally, the paper considers the conduct of monetary policy in an Islamic banking context. This is not uncomplicated given the fact that interest rates - normally a cornerstone of monetary policy - are prohibited under Islamic finance. Liquidity management issues are thus discussed here, with particular reference to the euro area.
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Financial Crisis Risk, ECB “Non-standard“ Measures, and the External Value of the Euro
Stefan Eichler
Quarterly Review of Economics and Finance,
No. 3,
2012
Abstract
I study the impact of banking and sovereign debt crisis risk of EMU member states on the external value of the euro. Using a regime switching model, I find that the external value of the euro has significantly responded to financial crisis risk during the period of November 2008–November 2011, while no significant effect is found for the period from February 2006 to October 2008. This suggests that the monetary expansion and interest rate cuts associated with the ECB's “non-standard” measures may have reduced the external value of the euro.
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Are Universal Banks Bad for Financial Stability? Germany During the World Financial Crisis
Diemo Dietrich, Uwe Vollmer
Quarterly Review of Economics and Finance,
No. 2,
2012
Abstract
This case study explores the contribution of universal banking to financial stability in Germany during the recent financial crisis. Germany is a prototype for universal banking and has suffered from a rather small number of banking crises in the past. We review the banking literature and analyze the major institutional and regulatory features of the German financial system to establish a nexus between universal banking and stability.
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What Drives Banking Sector Fragility in the Eurozone? Evidence from Stock Market Data
Stefan Eichler, Karol Sobanski
Journal of Common Market Studies,
No. 4,
2012
Abstract
This article explores the determinants of banking sector fragility in the eurozone. For this purpose, a stock-market-based banking sector fragility indicator is calculated for eight member countries from 1999 to 2009 using the Merton model (1974). Using a panel framework, it is found that the macroeconomic environment, the structure of the banking sector and the intensity of banking regulation all have an effect on banking sector fragility in the eurozone.
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Aktuelle Trends: Der Geldmultiplikator: Eingeschränkte Geldschöpfung im Euroraum und in den USA
Makram El-Shagi
Wirtschaft im Wandel,
No. 6,
2012
Abstract
Über Jahre stabile Zusammenhänge der Geldpolitik sind in den Turbulenzen im Bankensektor im Zuge der jüngsten Krisen zusammengebrochen. Durch die starken Veränderungen auf dem Bankenmarkt – nicht zuletzt das in der Krise erschütterte und nur teilweise zurückgekehrte Vertrauen der Banken untereinander – hat sich die Transmission der Geldpolitik auf die Geldmenge stark verändert.
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