The Adverse Effect of Contingent Convertible Bonds on Bank Stability
Melina Ludolph
IWH Discussion Papers,
No. 1,
2022
Abstract
This paper examines the effect of CoCo bonds that qualify as additional tier 1 capital on bank fundamentals. The results reveal a significant reduction in the distance to insolvency following the hybrid bond issuance due to increased earnings volatility. Further analyses suggest a link between CoCo issuance and more active earnings management, evidenced by a higher standard deviation of loan loss provisions and impairment charges. The findings substantiate long-standing theoretical hypotheses suggesting that the regulatory design requirements for going-concern CoCos adversely affect bank stability. Furthermore, they correspond to the notion that private monitoring is largely absent as a corrective measure due to prevailing uncertainties and information frictions.
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14.12.2021 • 29/2021
German economy not yet immune to COVID 19 ‒ outlook clouded again
The current pandemic wave and supply bottlenecks cause the German economy to stagnate in winter. When infection rates go down in spring, private consumption will increase significantly. In addition, supply restrictions will be gradually reduced. As a result, the economy will regain momentum. The Halle Institute for Economic Research (IWH) forecasts that German gross domestic product will increase by 3.5% (East Germany: 2.7%) in 2022, after 2.7% (East Germany: 2.1%) in the current year. Inflation is expected to decline only slowly.
Oliver Holtemöller
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Local Product Market Competition and Bank Loans
Iftekhar Hasan, Yi Shen, Xiaoying Yuan
Journal of Corporate Finance,
2021
Abstract
We investigate the influences of local product market competition on the cost of private debt. Our evidence suggests that the cost of bank loans is significantly higher for firms headquartered in states with greater local product market competition measured by the Herfindahl-Hirschman Index for resident industries. To establish causality, we examine the recognition of the Inevitable Disclosure Doctrine and firm relocations to identify exogenous shocks to local product market competition. We find that the cost of bank loans is lower for firms facing less intense local product market competition after the adoption of IDD and higher for firms relocated to states with more competitive product markets. The results imply that banks value the characteristics of a firm's local product market when approving loan contracts.
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14.09.2021 • 23/2021
Production bottlenecks delay recovery
The German recovery made good progress over the summer 2021. However, bottlenecks in sea transport and the production of intermediate goods are weighing on world trade. The rise in raw material prices has prompted inflation rates to spike, and an increase in new infections is clouding the outlook again. A weak final quarter is therefore to be expected. The Halle Institute for Economic Research (IWH) forecasts that German gross domestic product (GDP) will increase by 2.2% in 2021 and 3.6% in 2022 (East Germany: 1.8% and 2.8%).
Oliver Holtemöller
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Political Cycles in Bank Lending to the Government
Michael Koetter, Alexander Popov
Review of Financial Studies,
No. 6,
2021
Abstract
We study how political party turnover after German state elections affects banks’ lending to the regional government. We find that between 1992 and 2018, party turnover at the state level leads to a sharp and substantial increase in lending by local savings banks to their home-state government. This effect is accompanied by an equivalent reduction in private lending. A statistical association between political party turnover and government lending is absent for comparable cooperative banks that exhibit a similar regional organization and business model. Our results suggest that political frictions may interfere with government-owned banks’ local development objectives.
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06.05.2021 • 13/2021
IWH Bankruptcy Update: Upward Trend in Bankruptcies Stopped; Reintroduction of Filing Requirement Unlikely to Generate Bankruptcy Wave
Following a rising trend in recent months, the number of corporate bankruptcies fell significantly in April. The number of impacted jobs also remained at modest levels. After a recent sharp rise in the bankruptcy statistics for microbusinesses (which has drawn little press attention), the upward trend for this subcategory loses steam. These are the key findings of the IWH Bankruptcy Update, which provides monthly statistics on corporate bankruptcies in Germany.
Steffen Müller
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Financial Analysts' Career Concerns and the Cost of Private Debt
Bill Francis, Iftekhar Hasan, Liuling Liu, Qiang Wu, Yijiang Zhao
Journal of Corporate Finance,
April
2021
Abstract
Career-concerned analysts are averse to firm risk. Not only does higher firm risk require more effort to analyze the firm, thus constraining analysts' ability to earn more remuneration through covering more firms, but it also jeopardizes their research quality and career advancement. As such, career concerns incentivize analysts to pressure firms to undertake risk-management activities, thus leading to a lower cost of debt. Consistent with our hypothesis, we find a negative association between analyst career concerns and bank loan spreads. In addition, our mediation analysis suggests that this association is achieved through the channel of reducing firm risk. Additional tests suggest that the effect of analyst career concerns on loan spreads is more pronounced for firms with higher analyst coverage. Our study is the first to identify the demand for risk management as a key channel through which analysts help reduce the cost of debt.
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Finance-Growth Nexus and Banking Efficiency: The Impact of Microfinance Institutions
Afsheen Abrar, Iftekhar Hasan, Rezaul Kabir
Journal of Economics and Business,
March-April
2021
Abstract
This paper investigates the relative importance of microfinance institutions (MFIs) at both the macro (financial development, economic growth, income inequality, and poverty) and micro levels (efficiency of traditional commercial banks). We observe a significant impact on most of the fronts. MFIs’ participation increases overall savings (total bank deposits) and credit allocation (loans to private sector) in the economy. Their involvement enhances economic welfare by reducing income inequality and poverty. Additionally, their active presence helps to discipline the traditional commercial banks by subjecting them to more competition triggering higher efficiency.
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04.03.2021 • 7/2021
IWH Bankruptcy Update: German Bankruptcy Rates Remain Low in February
Bankruptcies statistics trended sideways at a low level in February 2021. Furthermore, the Halle Institute for Economic Research (IWH) does not anticipate higher bankruptcy rates in the coming months, despite Germany’s prolonged lockdown. These are the key findings of the IWH Bankruptcy Update, which provides monthly statistics on corporate bankruptcies in Germany.
Steffen Müller
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01.02.2021 • 4/2021
During Corona, households are saving more – not for fear of unemployment but for lack of spending opportunities
During the Corona crisis, European households increased their savings dramatically. According to an analysis carried out by the Halle Institute for Economic Research (IWH), the increase in savings is largely due to the inability of households to consume in the face of government lockdown measures, rather than other factors such as economic uncertainty. IWH President Reint Gropp therefore sees potential for a significant catch-up effect in consumption as soon as the lockdown is lifted.
Reint E. Gropp
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