Natural Disasters and Bank Stability: Evidence from the U.S. Financial System
Felix Noth, Ulrich Schüwer
Journal of Environmental Economics and Management,
May
2023
Abstract
We show that weather-related natural disasters in the United States significantly weaken the financial stability of banks with business activities in affected regions. This is reflected in higher probabilities of default, lower z-scores, higher non-performing assets ratios, higher foreclosure ratios, lower returns on assets and lower equity ratios of affected banks in the years following a natural disaster. The effects are economically relevant and highlight the financial vulnerability of banks and their borrowers despite insurances and public aid programs.
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Headwinds from Germany and abroad: institutes revise forecast significantly downwards According to Germany’s five...
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COVID-19 Pandemic and Global Corporate CDS Spreads
Iftekhar Hasan, Miriam Marra, Thomas Y. To, Eliza Wu, Gaiyan Zhang
Journal of Banking and Finance,
February
2023
Abstract
We examine the impact of the COVID-19 pandemic on the credit risk of companies around the world. We find that increased infection rates affect firms more adversely as reflected by the wider increase in their credit default swap (CDS) spreads if they are larger, more leveraged, closer to default, have worse governance and more limited stakeholder engagement, and operate in more highly exposed industries. We observe that country-level determinants such as GDP, political stability, foreign direct investment, and commitment to crisis management (income support, health and lockdown policies) also affect the sensitivity of CDS spreads to COVID-19 infection rates. A negative amplification effect exists for firms with high default probability in countries with fiscal constraints. A direct comparison between global CDS and stock markets reveals that the CDS market prices in a distinct set of corporate traits and government policies in pandemic times.
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Capital Requirements, Market Structure, and Heterogeneous Banks
Carola Müller
IWH Discussion Papers,
No. 15,
2022
Abstract
Bank regulators interfere with the efficient allocation of resources for the sake of financial stability. Based on this trade-off, I compare how different capital requirements affect default probabilities and the allocation of market shares across heterogeneous banks. In the model, banks‘ productivity determines their optimal strategy in oligopolistic markets. Higher productivity gives banks higher profit margins that lower their default risk. Hence, capital requirements indirectly aiming at high-productivity banks are less effective. They also bear a distortionary cost: Because incumbents increase interest rates, new entrants with low productivity are attracted and thus average productivity in the banking market decreases.
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06.07.2020 • 13/2020
IWH issues warning of a new banking crisis
The coronavirus recession could mean the end for dozens of banks across Germany – even if Germany survives the economic crisis relatively unscathed. An analysis by the Halle Institute for Economic Research (IWH) shows that many savings banks and cooperative banks are particularly at risk. Loans worth hundreds of billions of euros are on the balance sheets of the financial institutions concerned. IWH President Gropp warns of a potentially high additional burden for the already weakened real economy.
Reint E. Gropp
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Too Connected to Fail? Inferring Network Ties from Price Co-movements
Jakob Bosma, Michael Koetter, Michael Wedow
Journal of Business and Economic Statistics,
No. 1,
2019
Abstract
We use extreme value theory methods to infer conventionally unobservable connections between financial institutions from joint extreme movements in credit default swap spreads and equity returns. Estimated pairwise co-crash probabilities identify significant connections among up to 186 financial institutions prior to the crisis of 2007/2008. Financial institutions that were very central prior to the crisis were more likely to be bailed out during the crisis or receive the status of systemically important institutions. This result remains intact also after controlling for indicators of too-big-to-fail concerns, systemic, systematic, and idiosyncratic risks. Both credit default swap (CDS)-based and equity-based connections are significant predictors of bailouts. Supplementary materials for this article are available online.
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Too connected to fail? Wie die Vernetzung der Banken staatliche
Rettungsmaßnahmen vorhersagen kann
Friederike Altgelt, Michael Koetter
Wirtschaft im Wandel,
No. 4,
2017
Abstract
Seit der globalen Finanzkrise 2007/2008 liegt aufgrund ihrer Schlüsselrolle für ein funktionierendes Finanzsystem ein besonderer Fokus auf den so genannten systemrelevanten Finanzinstitutionen (systemically important financial institutions, SIFIs). Neben der Größe von Finanzinstitutionen ist auch das Ausmaß ihrer Vernetzung im internationalen Finanzsystem entscheidend für die Klassifikation als systemrelevant. Obwohl die Vernetzung von Banken untereinander in der Regel schwer zu messen ist, kann sie aus der Entwicklung von Prämien von Kreditausfallversicherungen (den so genannten Credit Default Swap (CDS) Spreads) und Aktienrenditen abgeleitet werden. Dieser Beitrag untersucht, inwieweit sich mit Hilfe der sich daraus ergebenden Co-Crash-Probability vor der Finanzkrise vorhersagen lässt, welche Finanzinstitutionen während der Krise Teil von staatlichen Rettungsprogrammen (bailout programmes) wurden.
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The Importance of Estimation Uncertainty in a Multi-Rating Class Loan Portfolio
Henry Dannenberg
IWH Discussion Papers,
No. 11,
2011
Abstract
This article seeks to make an assessment of estimation uncertainty in a multi-rating class loan portfolio. Relationships are established between estimation uncertainty and parameters such as probability of default, intra- and inter-rating class correlation, degree of inhomogeneity, number of rating classes used, number of debtors and number of historical periods used for parameter estimations. In addition, by using an exemplary portfolio based on Moody’s ratings, it becomes clear that estimation uncertainty does indeed have an effect on interest rates.
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Real Estate Prices and Bank Stability
Michael Koetter, Tigran Poghosyan
Journal of Banking and Finance,
No. 34,
2010
Abstract
Real estate prices can deviate from their fundamental value due to rigid supply, heterogeneity in quality, and various market imperfections, which have two contrasting effects on bank stability. Higher prices increase the value of collateral and net wealth of borrowers and thus reduce the likelihood of credit defaults. In contrast, persistent deviations from fundamentals may foster the adverse selection of increasingly risky creditors by banks seeking to expand their loan portfolios, which increases bank distress probabilities. We test these hypotheses using unique data on real estate markets and banks in Germany. House price deviations contribute to bank instability, but nominal house price developments do not. This finding corroborates the importance of deviations from the fundamental value of real estate, rather than just price levels or changes alone, when assessing bank stability.
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