15.06.2021 • 16/2021
Increase in personal contacts spurs economic activity
This summer the economic outlook in Germany is bright. As the pandemic is in retreat, the restrictions that have hampered many service activities are likely to be gradually lifted, and a strong boost in private purchases can be expected. The Halle Institute for Economic Research (IWH) forecasts that gross domestic product will increase by 3.9% in 2021 and by 4.0% in 2022. Production in East Germany is expected to increase by 3% in both years, respectively.
Oliver Holtemöller
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The Nexus between Loan Portfolio Size and Volatility: Does Bank Capital Regulation Matter?
Franziska Bremus, Melina Ludolph
Journal of Banking and Finance,
June
2021
Abstract
This paper analyzes the effects of bank capital regulation on the link between bank size and volatility. Using bank-level data for 27 advanced economies over the 2000–2014 period, we estimate a power law that relates the volume of a bank’s loan portfolio to the volatility of loan growth. Our analysis reveals, first, that more stringent capital regulation weakens the size-volatility nexus. Hence, in countries with more stringent capital regulation, large banks show, ceteris paribus, lower loan portfolio volatility. Second, the effect of tighter capital requirements on the size-volatility nexus becomes stronger for the upper tail of the bank size distribution. This is in line with capitalization decreasing with bank size, such that larger banks tend to be more affected by increasing capital requirements. Third, in countries with higher sectoral capital buffers, the size-volatility nexus is weaker.
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15.04.2021 • 12/2021
Economy in East Germany shrank less than in the West, but will have weaker momentum when pandemic disappears – Implications of the Joint Economic Forecast Spring 2021 and new data for East Germany
At 3%, the increase in gross domestic product in eastern Germany in 2021 is likely to be lower than in Germany as a whole (3.7%), as the slump due to the pandemic was smaller in 2020. In the course of the economic recovery in the second half of the year, the unemployment rate is expected to fall slightly.
Oliver Holtemöller
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Completing the European Banking Union: Capital Cost Consequences for Credit Providers and Corporate Borrowers
Michael Koetter, Thomas Krause, Eleonora Sfrappini, Lena Tonzer
Abstract
The bank recovery and resolution directive (BRRD) regulates the bail-in hierarchy to resolve distressed banks without burdening tax payers. We exploit the staggered implementation of the BRRD across 15 European Union (EU) member states to identify banks’ capital cost and capital structure responses. In a first stage, we show that average capital costs of banks increased. WACC hikes are lowest in the core countries of the European Monetary Union (EMU) compared to formerly stressed EMU and non-EMU countries. This pattern is driven by changes in the relative WACC weight of equity in response to the BRRD, which indicates enhanced financial system resilience. In a second stage, we document asymmetric transmission patterns of banks’ capital cost changes on to corporates’ borrowing terms. Only EMU banks located in core countries that exhibit higher WACC are those that also increase firms’ borrowing cost and contract credit supply. Hence, the BRRD had unintended consequences for selected segments of the real economy.
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Benchmarking New Zealand's Frontier Firms
Guanyu Zheng, Hoang Minh Duy, Gail Pacheco
IWH-CompNet Discussion Papers,
No. 1,
2021
Abstract
New Zealand has experienced poor productivity performance over the last two decades. Factors often cited as reasons behind this are the small size of the domestic market and distance to international partners and markets. While the distance reason is one that is fairly insurmountable, there are a number of other small advanced economies that also face similar domestic market constraints. This study compares the relative performance of New Zealand’s firms to those economies using novel cross-country microdata from CompNet. We present stylised facts for New Zealand relative to the economies of Belgium, Denmark, Finland, Netherlands and Sweden based on average productivity levels, as well as benchmarking laggard, median and frontier firms. This research also employs an analytical framework of technology diffusion to evaluate the extent of productivity convergence, and the impact of the productivity frontier on non-frontier firm performance. Additionally, both labour and capital resource allocation are compared between New Zealand and the other small advanced economies. Results show that New Zealand’s firms have comparatively low productivity levels and that its frontier firms are not benefiting from the diffusion of best technologies outside the nation. Furthermore, there is evidence of labour misallocation in New Zealand based on less labour-productive firms having disproportionally larger employment shares than their more productive counterparts. Counter-factual analysis illustrates that improving both technology diffusion from abroad toward New Zealand’s frontier firms, and labour allocation across firms within New Zealand will see sizable productivity gains in New Zealand.
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To Rent or not to Rent: A Household Finance Perspective on Berlin's Short-term Rental Regulation
Antonios Mavropoulos
IWH Discussion Papers,
No. 1,
2021
Abstract
With the increasing concerns that accompany the rising trends of house sharing economies, regulators impose new laws to counteract housing supply scarcity. In this paper, I investigate whether the ban on short-term entire house listings activated in Berlin in May 2016 had any adverse effects from a household finance perspective. More specifically, I derive short-term rental income and counter-factually compare it with long-term rental income to find that the ban, by decreasing the supply of short-term housing, accelerated short-term rental income but did not have any direct effect on long-term rental income. Commercial home-owners therefore would find renting on the short-term market to be financially advantageous.
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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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Why Life Insurers are Key to Economic Dynamism in Germany
Reint E. Gropp, William McShane
IWH Online,
No. 6,
2020
Abstract
Young entrepreneurial firms are of critical importance for innovation. But to bring their new ideas to the market, these startups depend on investors who understand and are willing to accept the risk associated with a new firm. Perhaps the key reason as to why the US has succeeded in producing nearly all the most successful new firms of the 21st century is the economy’s ability to supply vast sums of capital to promising startups. The volume of venture capital (VC) invested in the US is more than 60 times that of Germany. In this policy note, we argue that differences in the regulatory and structural context of institutional investors, in particular life insurance companies, is a central driver of the relative lack of VC - and thereby successful startups - in Germany.
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16.09.2020 • 18/2020
Economy recovers from the shutdown – but a quick return to pre-crisis normality is unlikely
The German economy has bounced back strongly over the summer, recovering a considerable part of the production slump caused by the shutdown in spring. Nevertheless, real gross domestic product in 2020 is likely to contract by 5.7%. In 2021, growth is expected to average 3.2% according to IWH autumn economic forecast. The decline in production in 2020 is likely to be less pronounced in East Germany com¬pared to Germany as a whole.
Oliver Holtemöller
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Private Equity and Portfolio Companies: Lessons From the Global Financial Crisis
Shai B. Bernstein, Josh Lerner, Filippo Mezzanotti
Journal of Applied Corporate Finance,
No. 3,
2020
Abstract
Critics of private equity have warned that the high leverage often used in PE-backed companies could contribute to the fragility of the financial system during economic crises. The proliferation of poorly structured transactions during booms could increase the vulnerability of the economy to downturns. The alternative hypothesis is that PE, with its operating capabilities, expertise in financial restructuring, and massive capital raised but not invested ("dry powder"), could increase the resilience of PE-backed companies. In their study of PE-backed buyouts in the U.K. - which requires and thereby makes accessible more information about private companies than, say, in the U.S. - the authors report finding that, during the 2008 global financial crisis, PE-backed companies decreased their overall investments significantly less than comparable, non-PE firms. Moreover, such PE-backed firms also experienced greater equity and debt inflows, higher asset growth, and increased market share. These effects were especially notable among smaller, riskier PE-backed firms with less access to capital, and also for those firms backed by PE firms with more dry powder at the crisis onset. In a survey of the partners and staff of some 750 PE firms, the authors also present compelling evidence that PEs firms play active financial and operating roles in preserving or restoring the profitability and value of their portfolio companies.
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