In a nutshell
Following the outbreak of the financial crisis, no other requirement was higher on the political agenda than the stabilisation of the financial markets. IWH has conducted extensive research into the impact of these rescue packages and their political consequences.
Our experts on Financial Stability
Both the US and European governments launched a number of support and regulatory measures that were intended to meet the requirement for increased stability in the financial sector. But today, over eight years after the onset of the crisis, the impact of these actions is often in question: what was the effect of increasing banks' deposit protection, for example? Have they reduced the knock-on effects of crises, as governments hoped? Did the colossal acquisition of banking shares distort the market? Deposit protection schemes are a high-profile way of regulating a financial system. If a bank becomes insolvent, these systems guarantee that a certain amount of money will be paid out. This is intended to prevent large numbers of bank customers reclaiming their private deposits from the bank because they fear losing their assets. Actually, no bank is in a position to repay the amounts it holds to all its customers at once. Such a bank-run must therefore be prevented at all costs. But raising deposit protection in the US from USD 100,000 to USD 250,000 did not result in increased security. In fact, exactly the opposite occurred: banks began to operate in much more risky business areas. There is a simple reason for this: “If a bank successfully operates in high-risk areas, such as commercial property, it earns significantly more than in less risky areas. If it miscalculates, however, the deposit protection scheme automatically bears the bank's liability,” explains Felix Noth, Financial Market Expert at IWH. “In order to stabilise the financial system in the short-term, long-term increased risk incentives for banks are therefore accepted. And this can potentially lead to the next financial crisis.”
The usefulness of deposit protection schemes is mainly in question, because there has been a range of other measures aimed at stabilising floundering banks. Such as the Troubled Asset Relief Program (TARP) of 2008, for example, one of the largest stabilisation measures in the US, with a budget of USD 475 billion. IWH calculations for all US banks suggest, for example, that competition between those banks that received money from the TARP Program and those that did not benefit from TARP, did not suffer any long-term damage as a result of this rescue package. 112% of the funds paid out by the US Government to rescue the banks were also repaid – so American tax-payers even made a profit from rescuing the banks.
The financial crisis of recent years has primarily revealed the possible knock-on effects of various financial systems. It showed, for example, that the turmoil in Europe and the US had an impact on lending and regional employment in Latin and South American countries. But it's not only overseas funding that determines whether a bank is in foreign hands or not - its corporate structure also plays a part. Banks financed from overseas, for example, extended their loans to a much greater extent than those that belonged to overseas institutions – and therefore made a significantly greater contribution to stability.
Banks can have varying influences on systems in their native markets or in the whole of the EU. Although a single regulatory body in Europe would be desirable – how would this work? There are now many proposals for increased stability in the financial sector, ranging from a central EU Authority or national monitoring, to the separation of investment banking and deposit business. The establishment of the European banking union is a welcome first step. But current developments in the European financial market clearly show that there is still much work to be done.
Publications on "Financial Stability"
Does Machine Learning Help us Predict Banking Crises?
in: Journal of Financial Stability, forthcomingread publication
Delay Determinants of European Banking Union Implementation
in: European Journal of Political Economy, forthcoming
Most countries in the European Union (EU) delay the transposition of European Commission (EC) directives, which aim at reforming banking supervision, resolution, and deposit insurance. We compile a systematic overview of these delays to investigate if they result from strategic considerations of governments conditional on the state of their financial, regulatory, and political systems. Transposition delays pertaining to the three Banking Union directives differ considerably across the 28 EU members. Bivariate regression analyses suggest that existing national bank regulation and supervision drive delays the most. Political factors are less relevant. These results are qualitatively insensitive to alternative estimation methods and lag structures. Multivariate analyses highlight that well-stocked deposit insurance schemes speed-up the implementation of capital requirements, banking systems with many banks are slower in implementing new bank rescue and resolution rules, and countries with a more intensive sovereign-bank nexus delay the harmonization of EU deposit insurance more.
Cross-border Transmission of Emergency Liquidity
in: Journal of Banking & Finance, forthcoming
We show that emergency liquidity provision by the Federal Reserve transmitted to non-U.S. banking markets. Based on manually collected holding company structures, we identify banks in Germany with access to U.S. facilities. Using detailed interest rate data reported to the German central bank, we compare lending and borrowing rates of banks with and without such access. U.S. liquidity shocks cause a significant decrease in the short-term funding costs of the average German bank with access. This reduction is mitigated for banks with more vulnerable balance sheets prior to the inception of emergency liquidity. We also find a significant pass-through in terms of lower corporate credit rates charged for banks with the lowest pre-crisis leverage, US-dollar funding needs, and liquidity buffers. Spillover effects from U.S. emergency liquidity provision are generally confined to short-term rates.
Bonusbeschränkung bei Banken: Das Ziel der Risikoverringerung wird nicht erreicht
in: Wirtschaft im Wandel, No. 2, 2019
Im Jahr 2014 trat die Regulierung zur Deckelung der variablen Vergütung von Bankvorständen in der Europäischen Union (EU) in Kraft. Ziel dieser Regulierung ist es, die Anreize zur übermäßigen Risikoübernahme zu vermindern. Dieser Beitrag untersucht, ob die Regulierung ihr erklärtes Ziel erreichen konnte und ob sie zudem mit unbeabsichtigten Konsequenzen einherging. Der Vergleich der Vergütungsniveaus vor und nach Einführung der Deckelung zeigt: Banken haben ihre Vorstände für den Verlust variabler Vergütung mit einer permanenten Erhöhung fixer Vergütungsbestandteile entschädigt. Gleichzeitig nahm die risikogewichtete Rentabilität betroffener Institute ab, was auf ein höheres Eigenrisiko zurückzuführen ist. Abgesichert durch hohe Fixgehälter gehen Banker offenbar höhere Risiken ein. Der befürchtete Exodus talentierter Banker aus Europa blieb aus.
Fiscal Policy and Fiscal Fragility: Empirical Evidence from the OECD
in: IWH Discussion Papers, No. 13, 2019
In this paper, we use local projections to investigate the impact of consolidation shocks on GDP growth, conditional on the fragility of government finances. Based on a database of fiscal plans in OECD countries, we show that spending shocks are less detrimental than tax-based consolidation. In times of fiscal fragility, our results indicate strongly that governments should consolidate through surprise policy changes rather than announcements of consolidation at a later horizon.