14.02.2023 • 4/2023
Study on Europe's top bankers: Risky business despite bonus cap
Ten years ago, the EU Parliament decided to cap the flexible remuneration of bank managers. But the cap on bonuses misses its target: Managers of systemically important European banks take high risks without changes, shows a study by the Halle Institute for Economic Research (IWH).
Michael Koetter
Read press release
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.
Read article
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.
Read article
30.11.2022 • 28/2022
Stricter rules for banks can relieve real estate markets
Exuberant price levels in the German real estate market could further exacerbate an economic crisis. Fiscal instruments exert too little influence to contain this danger, shows a study by the Halle Institute for Economic Research (IWH).
Michael Koetter
Read press release
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.
Read article
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.
Read article
Das Potenzial von Bankkreditspreads für die Konjunkturprognose
Daniel Streitz
Wirtschaft im Wandel,
No. 2,
2022
Abstract
Prognosemodelle für die zukünftige wirtschaftliche Entwicklung verwenden häufig marktbasierte Indikatoren wie Spreads von Unternehmensanleihen, die den Risikoaufschlag gegenüber einem Referenzzins angeben. Anleihespreads bilden jedoch nur die Entwicklung von Risiken für Unternehmen ab, die regelmäßig Anleihen emittieren – im Durchschnitt größere, sichere Firmen. Neuartige Daten zu Bankkrediten, die im Sekundärmarkt gehandelt werden, erlauben auch die Konstruktion von Kreditspreads. Kreditmarktdaten umfassen ein breiteres Spektrum an Firmen, inklusive kleinerer Firmen, die stärker von Finanzmarktfriktionen betroffen sind. Tests zeigen, dass Kreditspreads tatsächlich mehr Informationen über wirtschaftliche Entwicklungen beinhalten als Anleihespreads und daher das Potenzial haben, Prognosemodelle zu verbessern.
Read article
Ricardian Equivalence, Foreign Debt and Sovereign Default Risk
Stefan Eichler, Ju Hyun Pyun
Journal of Economic Behavior and Organization,
May
2022
Abstract
We study the impact of sovereign solvency on the private-public savings offset. Using data on 80 economies for 1989–2018, we find robust evidence for a U-shaped pattern in the private-public savings offset in sovereign credit ratings. While the 1:1 savings offset is observed at intermediate levels of sovereign solvency, fiscal deficits are not offset by private savings at extremely low and high levels of sovereign solvency. Particularly, the U-shaped pattern is more pronounced for countries with high levels of foreign ownership of government debt. The U-shaped pattern is an emerging market phenomenon; additionally, it is confirmed when considering foreign currency rating and external public debt, but not for domestic currency rating and domestic public debt. For considerable foreign ownership of sovereign bonds, sovereign default constitutes a net wealth gain for domestic consumers.
Read article
Firm-level Employment, Labour Market Reforms, and Bank Distress
Ralph Setzer, Moritz Stieglitz
Journal of International Money and Finance,
February
2022
Abstract
We explore the impact of financial frictions on the employment effect of labour market reforms. Our study combines a new cross-country reform database on labour market reforms with matched firm-bank data for nine euro area countries over the period 1999 to 2013. While we find that labour market reforms are overall effective in increasing employment, restricted access to bank credit can undo up to half of medium to long-term employment gains at the firm-level. Entrepreneurs without sufficient access to credit cannot reap the full benefits of more flexible employment regulation.
Read article
Firm Subsidies, Financial Intermediation, and Bank Risk
Aleksandr Kazakov, Michael Koetter, Mirko Titze, Lena Tonzer
Abstract
We study whether government subsidies can stimulate bank funding of marginal investment projects and the associated effect on financial stability. We do so by exploiting granular project-level information for the largest regional economic development programme in Germany since 1997: the Improvement of Regional Economic Structures programme (GRW). By combining the universe of subsidised firms to virtually all German local banks over the period 1998-2019, we test whether this large-scale transfer programme destabilised regional credit markets. Because GRW subsidies to firms are destabilised at the EU level, we can use it as an exogenous shock to identify bank responses. On average, firm subsidies do not affect bank lending, but reduce banks’ distance to default. Average effects conflate important bank-level heterogeneity though. Conditional on various bank traits, we show that well capitalised banks with more industry experience expand lending when being exposed to subsidised firms without exhibiting more risky financial profiles. Our results thus indicate that stable banks can act as an important facilitator of regional economic development policies. Against the backdrop of pervasive transfer payments to mitigate Covid-19 losses and in light of far-reaching transformation policies required to green the economy, our study bears important implications as to whether and which banks to incorporate into the design of transfer Programmes.
Read article