The Disciplining Effect of Supervisory Scrutiny in the EU-wide Stress Test
Christoffer Kok, Carola Müller, Steven Ongena, Cosimo Pancaro
Journal of Financial Intermediation,
January
2023
Abstract
Relying on confidential supervisory data related to the 2016 EU-wide stress test, this paper presents novel empirical evidence that supervisory scrutiny associated to stress testing has a disciplining effect on bank risk. We find that banks that participated in the 2016 EU-wide stress test subsequently reduced their credit risk relative to banks that were not part of this exercise. Relying on new metrics for supervisory scrutiny that measure the quantity, potential impact, and duration of interactions between banks and supervisors during the stress test, we find that the disciplining effect is stronger for banks subject to more intrusive supervisory scrutiny during the exercise. We also find that a strong risk management culture is a prerequisite for the supervisory scrutiny to be effective. Finally, we show that a similar disciplining effect is not exerted neither by higher capital charges nor by more transparency and related market discipline induced by the stress test.
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Corporate Culture and Firm Value: Evidence from Crisis
Yiwei Fang, Franco Fiordelisi, Iftekhar Hasan, Woon Sau Leung, Gabriel Wong
Journal of Banking and Finance,
January
2023
Abstract
Based on the Competing Values Framework (CVF), we score 10-K text to measure company culture in four types (collaborative, controlling, competitive, and creative) and examine its role in firm stability. We find that firms with higher controlling culture fared significantly better during the 2008–09 crisis. Firms with stronger controlling culture experienced fewer layoffs, less negative asset growth, greater debt issuance, and increased access to credit-line facilities during the crisis. The positive effect of the controlling culture is stronger among the financially-constrained firms. Overall, the controlling culture improves firm stability through greater support from capital providers.
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Automation with Heterogeneous Agents: The Effect on Consumption Inequality
Tommaso Santini
IWH Discussion Papers,
No. 28,
2022
Abstract
In this paper, I study technological change as a candidate for the observed increase in consumption inequality in the United States. I build an incomplete market model with educational choice combined with a task-based model on the production side. I consider two channels through which technology affects inequality: the skill that an agent can supply in the labor market and the level of capital she owns. In a quantitative analysis, I show that (i) the model replicates the increase in consumption inequality between 1981 and 2008 in the US (ii) educational choice and the return to wealth are quantitatively important in explaining the increase in consumption inequality.
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Real Estate Transaction Taxes and Credit Supply
Michael Koetter, Philipp Marek, Antonios Mavropoulos
IWH Discussion Papers,
No. 26,
2022
Abstract
We exploit staggered real estate transaction tax (RETT) hikes across German states to identify the effect of house price changes on mortgage credit supply. Based on approximately 33 million real estate online listings, we construct a quarterly hedonic house price index (HPI) between 2008:q1 and 2017:q4, which we instrument with state-specific RETT changes to isolate the effect on mortgage credit supply by all local German banks. First, a RETT hike by one percentage point reduces HPI by 1.2%. This effect is driven by listings in rural regions. Second, a 1% contraction of HPI induced by an increase in the RETT leads to a 1.4% decline in mortgage lending. This transmission of fiscal policy to mortgage credit supply is effective across almost the entire bank capitalization distribution.
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Capital Markets Union: Database of Directives and Regulations
Moritz Emlein, Eleonora Sfrappini, Lena Tonzer, Cristina Zgherea
IWH Technical Reports,
No. 2,
2022
Abstract
In 2015, the European Commission adopted the Capital Markets Union (CMU) action plan. The plan aims to deepen financial integration and harmonize international standards for investments within the European Union (EU) and it outlines several actions to be implemented in order to address twelve key priority areas. We assemble a database of the legislative acts that implement the CMU. The dataset includes a list of directives and regulations at the EU level with information on publication, entry into force, and transposition dates as well as brief descriptions. This information might be useful in empirical analyses assessing the effectiveness of components of the CMU.
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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
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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Productivity, Managers’ Social Connections and the Financial Crisis
Iftekhar Hasan, Stefano Manfredonia
Journal of Banking and Finance,
August
2022
Abstract
This paper investigates whether managers’ personal connections help corporate productivity to recover after a negative economic shock. Leveraging the heterogeneity in the severity of the financial crisis across different sectors, the paper reports that (i) the financial crisis had a negative effect on within-firm productivity, (ii) the effect was long-lasting and persistent, supporting a productivity-hysteresis hypothesis, and (iii) managers’ personal connections allowed corporations to recover from this productivity slowdown. Among the possible mechanisms, we show that connected managers operating in affected sectors foster productivity recovery through higher input cost efficiency and better access to the credit market, as well as more efficient use of labour and capital.
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21.06.2022 • 14/2022
War drives up energy prices ‒ High inflation weighs on economy
While the lifting of nationwide coronavirus regulations boosts many service sectors such as the hospitality industry, supply bottlenecks are likely to weigh on the manufacturing sector throughout the summer and high inflation will dampen private consumption. Gross domestic product (GDP) in Germany is expected to decline slightly in the second quarter of 2022. The situation in the manufacturing sector is expected to ease towards the end of the year. The Halle Institute for Economic Research (IWH) forecasts that GDP will increase by 1.5% in 2022, following an increase by 2.9% in 2021. In East Germany, GDP will increase by 1%.
Oliver Holtemöller
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Social Capital, Trusting, and Trustworthiness: Evidence from Peer-to-Peer Lending
Iftekhar Hasan, Qing He, Haitian Lu
Journal of Financial and Quantitative Analysis,
No. 4,
2022
Abstract
How does social capital affect trust? Evidence from a Chinese peer-to-peer lending platform shows regional social capital affects the trustee’s trustworthiness and the trustor’s trust propensity. Ceteris paribus, borrowers from higher social capital regions receive larger bid from individual lenders, have higher funding success, larger loan size, and lower default rates, especially for low-quality borrowers. Lenders from higher social capital regions take higher risks and have higher default rates, especially for inexperienced lenders. Cross-regional transactions are most (least) likely to be realized between parties from high (low) social capital regions.
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Firm Social Networks, Trust, and Security Issuances
Ming Fang, Iftekhar Hasan, Zenu Sharma, An Yan
European Journal of Finance,
No. 4,
2022
Abstract
We observe that public firms are more likely to issue seasoned stocks rather than bonds when theirs boards are more socially-connected. These connected issuers experience better announcement-period stock returns and attract more institutional investors. This social-connection effect is stronger for firms with severe information asymmetry, higher risk of being undersubscribed, and more visible to investors. Our conjecture is this social-network effect is driven by trust in issuing firms. Given stocks are more sensitive to trust, these trusted firms are more likely to issue stocks than bonds. Trustworthiness plays an important role in firms’ security issuances in capital markets.
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