Do Conventional Monetary Policy Instruments Matter in Unconventional Times?
Manuel Buchholz, Kirsten Schmidt, Lena Tonzer
Journal of Banking and Finance,
September
2020
Abstract
This paper investigates how declines in the deposit facility rate set by the ECB affect euro area banks’ incentives to hold reserves at the central bank. We find that, in the face of lower deposit rates, banks with a more interest-sensitive business model are more likely to reduce reserve holdings and allocate freed-up liquidity to loans. The result is driven by banks in the non-GIIPS countries of the euro area. This reveals that conventional monetary policy instruments have limited effects in restoring monetary policy transmission during times of crisis.
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Flight from Safety: How a Change to the Deposit Insurance Limit Affects Households‘ Portfolio Allocation
H. Evren Damar, Reint E. Gropp, Adi Mordel
IWH Discussion Papers,
No. 19,
2019
Abstract
We study how an increase to the deposit insurance limit affects households‘ portfolio allocation by exogenously reducing uninsured deposit balances. Using unique data that identifies insured versus uninsured deposits, along with detailed information on Canadian households‘ portfolio holdings, we show that households respond by drawing down deposits and shifting towards mutual funds and stocks. These outflows amount to 2.8% of outstanding bank deposits. The empirical evidence, consistent with a standard portfolio choice model that is modified to accommodate uninsured deposits, indicates that more generous deposit insurance coverage results in nontrivial adjustments to household portfolios.
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Do Conventional Monetary Policy Instruments Matter in Unconventional Times?
Manuel Buchholz, Kirsten Schmidt, Lena Tonzer
Abstract
This paper investigates how declines in the deposit facility rate set by the ECB affect euro area banks’ incentives to hold reserves at the central bank. We find that, in the face of lower deposit rates, banks with a more interest-sensitive business model are more likely to reduce reserve holdings and allocate freed-up liquidity to loans. The result is driven by well-capitalized banks in the non-GIIPS countries of the euro area. This reveals that conventional monetary policy instruments have limited effects in restoring monetary policy transmission during times of crisis.
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Delay Determinants of European Banking Union Implementation
Michael Koetter, Thomas Krause, Lena Tonzer
European Journal of Political Economy,
2019
Abstract
Most countries in the European Union (EU) delay the transposition of European Commission (EC) directives, which aim at reforming banking supervision, resolution, and deposit insurance. We compile a systematic overview of these delays to investigate if they result from strategic considerations of governments conditional on the state of their financial, regulatory, and political systems. Transposition delays pertaining to the three Banking Union directives differ considerably across the 28 EU members. Bivariate regression analyses suggest that existing national bank regulation and supervision drive delays the most. Political factors are less relevant. These results are qualitatively insensitive to alternative estimation methods and lag structures. Multivariate analyses highlight that well-stocked deposit insurance schemes speed-up the implementation of capital requirements, banking systems with many banks are slower in implementing new bank rescue and resolution rules, and countries with a more intensive sovereign-bank nexus delay the harmonization of EU deposit insurance more.
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01.04.2019 • 8/2019
Bank profitability increases after eliminating consolidation barriers
When two banks merge because political consolidation barriers are abolished, the combined entity is considerably more profitable and useful to the real economy. This is the headline result of an analysis of compulsory savings banks mergers carried out by the Halle Institute for Economic Research (IWH). The study yields important insights for the German and the European banking market.
Michael Koetter
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SMEs and Access to Bank Credit: Evidence on the Regional Propagation of the Financial Crisis in the UK
Hans Degryse, Kent Matthews, Tianshu Zhao
Journal of Financial Stability,
2018
Abstract
We study the sensitivity of banks’ credit supply to small and medium size enterprises (SMEs) in the UK with respect to the banks’ financial condition before and during the financial crisis. Employing unique data on the geographical location of all bank branches in the UK, we connect firms’ access to bank credit to the financial condition (i.e., bank health and the use of core deposits) of all bank branches in the vicinity of the firm for the period 2004–2011. Before the crisis, banks’ local financial conditions did not influence credit availability irrespective of the functional distance (i.e., the distance between bank branch and bank headquarters). However, during the crisis, we find that SMEs with banks within their vicinity that have stronger financial conditions faced greater credit availability when the functional distance is close. Our results point to a “flight to headquarters” effect during the financial crisis.
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Channeling the Iron Ore Super-cycle: The Role of Regional Bank Branch Networks in Emerging Markets
Helge Littke
IWH Discussion Papers,
No. 11,
2018
Abstract
The role of the financial system to absorb and to intermediate commodity boom induced windfall gains efficiently presents one of the most pressing issues for developing economies. Using an exogenous increase in iron ore prices in March 2005, I analyse the role of regional bank branch networks in Brazil in reallocating capital from affected to non-affected regions. For the period from March 2004 to March 2006, I find that branches directly exposed to this shock by their geographical location experience an increase in deposit growth in the post-shock period relative to non-affected branches. Given that these deposits are not reinvested locally, I further show that branches located in the non-affected region increase lending growth depending on their indirect exposure to the booming regions via their branch network. Even tough, these results provide evidence against a Dutch Disease type crowding out of the non-iron ore sector, further evidence suggests that this capital reallocation is far from being optimal.
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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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Delay Determinants of European Banking Union Implementation
Michael Koetter, Thomas Krause, Lena Tonzer
Abstract
To safeguard financial stability and harmonise regulation, the European Commission substantially reformed banking supervision, resolution, and deposit insurance via EU directives. But most countries delay the transposition of these directives. We ask if transposition delays result from strategic considerations of governments conditional on the state of their financial, regulatory, and political systems? Supervisors might try to protect national banking systems and local politicians maybe reluctant to surrender national sovereignty to deal with failed banks. Alternatively, intricate financial regulation might require more implementation time in large and complex financial and political systems. We therefore collect data on the transposition delays of the three Banking Union directives and investigate observed delay variation across member states. Our correlation analyses suggest that existing regulatory and institutional frameworks, rather than banking market structure or political factors, matter for transposition delays.
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Macroprudential Policy and Intra-group Dynamics: The Effects of Reserve Requirements in Brazil
Chris Becker, Matias Ossandon Busch, Lena Tonzer
Abstract
This paper examines whether intra-group dynamics matter for the transmission of macroprudential policy. Using novel bank-level data on the Brazilian banking system, we investigate the effect of reserve requirements targeting headquarter banks’ deposit share on credit supply by their municipal bank branches. For identification purposes, we exploit that reserve requirements are adjusted following global economic cycles. Our results reveal a lending channel of reserve requirements for branches whose parent banks are more exposed to targeted deposits. Branch ownership and exposure to internal liquidity are central in explaining the results. Our findings reveal limitations in current macroprudential policy frameworks.
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