The Identification of Technology Regimes in Banking: Implications for the Market Power-Fragility Nexus
Michael Koetter, Tigran Poghosyan
Journal of Banking and Finance,
No. 8,
2009
Abstract
Neglecting the existence of different technologies in banking can contaminate efficiency, market power, and other performance measures. By simultaneously estimating (i) technology regimes conditional on exogenous factors, (ii) efficiency conditional on risk management, and (iii) Lerner indices of German banks, we identify three distinct technology regimes: Public & Retail, Small & Specialized, and Universal & Relationship. System estimation at the regional level reveals that greater bank market power increases bank profitability but also fosters corporate defaults. Corporate defaults, in turn, lead to higher probabilities of bank distress, which supports the market power-fragility hypothesis.
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Growth, Volatility, and Credit Market Imperfections: Evidence from German Firms
Claudia M. Buch, Jörg Döpke
Journal of Economic Studies,
2008
Abstract
Purpose – The purpose of this paper is two-fold. First, it studies whether output volatility and growth are linked at the firm-level, using data for German firms. Second, it explores whether the link between volatility and growth depends on the degree of credit market imperfections.
Design/methodology/approach – The authors use a novel firm-level dataset provided by the Deutsche Bundesbank, the so-called Financial Statements Data Pool. The dataset has time series observations for German firms for the period 1997-2004, and the authors use information on the debt-to-assets or leverage ratio of firms to proxy for credit-constraints at the firm-level. As additional proxies for the importance of credit market imperfections, we use information on the size and on the legal status of firms.
Findings – The authors find that higher volatility has a negative impact on growth for small and a positive impact for larger firms. Higher leverage is associated with higher growth. At the same time, there is heterogeneity in the determinants of growth across firms from different sectors and across firms with a different legal status.
Practical implications – While most traditional macroeconomic models assume that growth and volatility are uncorrelated, a number of microeconomic models suggest that the two may be linked. However, it is unclear whether the link is positive or negative. The paper presents additional evidence regarding this question. Moreover, understanding whether credit market conditions affect the link between volatility and growth is of importance for policy makers since it suggests a channel through which the credit market can have long-run welfare implications. The results stress the importance of firm-level heterogeneity for the effects and effectiveness of economic policy measures.
Originality/value – The paper has two main novel features. First, it uses a novel firm-level dataset to analyze the determinants of firm-level growth. Second, it analyzes the growth-volatility nexus using firm-level data. To the best of the authors' knowledge, this is the first paper, which addresses the link between volatility, growth, and credit market imperfections using firm-level data.
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Business Cycle Forecast, Summer 2008: Price Hikes and Financial Crisis Cloud Growth Prospects
Wirtschaft im Wandel,
No. 7,
2008
Abstract
In the summer of 2008 the turmoil on financial markets and that on the markets for energy dim the prospects for the world economy. The acceleration of the oil price hike during the first half of the year has led to an increase in expected inflation and to higher interest rates on capital markets, while stock prices are going down. At the same time, the financial crisis is far from over, and banks in the US and in Western Europe continue in their efforts to consolidate their balance sheets. Thus, the expansion of credit supply will be scarcer in the next quarters. All this means that demand will slow in the developed economies during the next quarters. However, the massive fiscal stimulus will help the US economy to stabilize, and the world economy still benefits from the high growth dynamics in the emerging markets economies. All in all, the developed economies will not reach their potential growth rate before the second half of 2009. In Germany, the upswing comes to a temporary halt during summer of this year. Slowing foreign demand and the oil price hike induce firms to postpone investments, and private consumption, the soft spot of the upswing in Germany, is still sluggish due to high inflation rates that impair purchasing power. For the end of 2008, chances are good that growth in Germany accelerates again, because German exporters are still penetrating emerging markets as competitiveness does not diminish. All in all, the German economy will grow by 2.3% in 2008 (mainly due to the very high dynamics at the beginning of the year) and by 1.3% in 2009. A main risk of this forecast is that monetary policy fails in easing the high inflationary pressures. As to fiscal policy, efforts to reach sustainable public finances should not weaken.
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Business cycle forecast 2008: German upswing takes a break
Wirtschaft im Wandel,
No. 1,
2008
Abstract
Economic growth in the industrial countries will be much more muted in 2008 than in the past year. One cause is the prolonged oil price hike during 2007. The second and more important cause is the intensification of tensions on world financial markets. Due to problems in the financial sector, credit expansion will slow next year in the euro area as well as in the US. This will dampen demand in the real economy. A significant downswing in the industrial countries, however, is not the most likely scenario: in the US, expansive economic policy and a weak dollar that gives production in the US a competitive edge will prevent the economy from sliding into recession. In the euro area, high profitability of firms and structural improvements in the working of labour markets will help the economy cope with the stronger euro and with higher costs of external financing due to the turmoil in the financial sector. In Germany, the upswing has still not reached the demand of private households. The main reason is that real wages were stagnating in 2007 and will not rise by much in 2008, since inflation has accelerated considerably at the end of last year. In addition, weaker dynamics of external demand will dampen export growth. This and the end of tax incentives for investment at the end of 2007 will dampen investment activity. All in all, the economy will slow down in the first half of 2008. However, chances are good that the upswing will only have taken a break: when the dampening external shocks have ceased, the driving powers of the upswing will prevail; dynamic employment growth is a reflection of the strong confidence of firms. A major risk for employment and for the German economy in general is, however, the possibility that the policy concerning the labour markets changes course; bad omens are the recent the introduction of minimum wages for postal services and the announced extension of unemployment benefits for persons older than 50.
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East German Economy: Demand Push Stronger than Structural Deficiencies
Wirtschaft im Wandel,
No. 7,
2007
Abstract
In 2006, growth of production was surprisingly strong in Eastern Germany. The structural deficiencies there would have suggested a slower pace. In particular, linkages with national and international business cycles have been underestimated. To a large part, the reason why output grew by 3 per cent did not come from Eastern Germany itself, but from the Old Länder and from abroad. In the New Länder, the strong upward swing in investment activity stimulated the economy. However, owing to a small increase in total income of private households, their purchasing power lagged behind.
The improved ability of East German firms to absorb cyclical impulses from exports and from Germany’s general investment activity proved to be a crucial factor. In particular, the endowment of workplaces with modern production facilities as well as the continued reduction in the disadvantages with respect to cost-competitiveness in the tradable goods sector were beneficial. The labour cost advantage compared to West German competitors increased further while the disadvantage compared to those from Central and Eastern Europe decreased.
Benefiting from these factors, economic activity in Eastern Germany will grow faster than in the Old Länder as long as the upswing in Germany and abroad remains strong. In 2007 and 2008, investments – especially in equipment – and exports will be the driving forces again. For exports, the strongly expanding markets in Central and Eastern Europe as well as in Russia will gain in importance. As income and employment prospects improve, private consumption will support the growth in production. Registered unemployment should decrease below the 1-million threshold.
Manufacturing will remain the primary force of the upswing; its advantages in production costs will not vanish as long as, even in presence of scarcity of skilled labour, salaries and wages do not increase more than in Western Germany. In the wake of robust economic growth, the New Länder will make further progress in catching up with respect to production and income.
Companies will regain support from the banking industry. Yet, investment capital still stems from public funding programmes to a non-negligible extent. In the medium run, access to credit will ease as a result of further improvements in the firms’ net worth position. However, dependency on internal funds remains high and exposes companies to comparatively strong cyclical risks. In an economic downturn, the structural deficiencies of the East German economy will impair economic expansion.
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Do House Prices Drive Aggregate Consumption?
Marian Berneburg, Axel Lindner
Wirtschaft im Wandel,
No. 10,
2006
Abstract
In recent times increasing house prices have been credited with a stong positive influence on aggre-gate consumption. But it is questionable in how far higher prices are at all able to lift the purchasing power of the economy as whole: The seller’s profit of a high price, equals the buyer’s loss. But while a positive correlation between house prices and consumption is evident, it is not a sign of irra-tional behaviour by market participants. In fact it seems that both factors are driven by other pa-rameters: the interest rate and expectations about future interest rates and economic activity. For a selection of four developed countries, the follow-ing article tries to give an explanation for the house price developments of the past 15 years. While disregarding country specific risk as well as institutional aspects and demographic factors, a present value caluclation forms the basis for esti-mating a fundamentally justified price movement. Expectations for future rents and discount rates are being proxied by a moving average of past values. It can be observed how interest rate changes and long-run economic growth, two as-pects that clearly also drive private consumption, play a key role here.
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Are the Central and Eastern European Transition Countries still vullnerable to an Financial Crisis? Results from the Signals Approach
Axel Brüggemann, Thomas Linne
IWH Discussion Papers,
No. 157,
2002
Abstract
The aim of the paper is to analyse the vulnerability of the Central and Eastern European accession countries to the EU as well as that of Turkey and Russia to a financial crisis. Our methodology is an extension of the signals approach. We develop a composite indicator to measure the evolution of the risk potential in each country. Our findings show that crises in Central and Eastern Europe are caused by much the usual suspects as in others emerging markets. In particular an overvalued exchange rate, weak exports and dwindling currency reserves have good predictive power for assessing crisis vulnerabilities.
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