The Corona Recession and Bank Stress in Germany
Reint E. Gropp, Michael Koetter, William McShane
IWH Online,
Nr. 4,
2020
Abstract
We conduct stress tests for a large sample of German banks across different recoveries from the Corona recession. We find that, depending on how quickly the economy recovers, between 6% to 28% of banks could become distressed from defaulting corporate borrowers alone. Many of these banks are likely to require regulatory intervention or may even fail. Even in our most optimistic scenario, bank capital ratios decline by nearly 24%. The sum of total loans held by distressed banks could plausibly range from 127 to 624 billion Euros and it may take years before the full extent of this stress is observable. Hence, the current recession could result in an acute contraction in lending to the real economy, thereby worsening the current recession , decelerating the recovery, or perhaps even causing a “double dip” recession. Additionally, we show that the corporate portfolio of savings and cooperative banks is more than five times as exposed to small firms as that of commercial banks and Landesbanken. The preliminary evidence indicates small firms are particularly exposed to the current crisis, which implies that cooperative and savings banks are at especially high risk of becoming distressed. Given that the financial difficulties may seriously impair the recovery from the Covid-19 crisis, the pressure to bail out large parts of the banking system will be strong. Recent research suggests that the long run benefits of largely resisting these pressures may be high and could result in a more efficient economy.
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Credit Allocation when Borrowers are Economically Linked: An Empirical Analysis of Bank Loans to Corporate Customers
Iftekhar Hasan, Kristina Minnick, Kartik Raman
Journal of Corporate Finance,
June
2020
Abstract
Using detailed loan level data, we examine bank lending to corporate customers relying on principal suppliers. Customers experience larger loan spreads, higher intensity of covenants and greater likelihood of requiring collateral when they depend more on the principal supplier for inputs. The positive association between the customer’s loan spread and its dependence on the principal supplier is less pronounced when the bank has a prior loan outstanding with the principal supplier, and when the bank has higher market share in the industry. Longer relationships between the customer and its principal supplier, and between the bank and the principal supplier, mitigate lending constraints. The evidence is consistent with corporate suppliers serving as an informational bridge between the lender and the customer.
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Transmitting Fiscal Covid-19 Counterstrikes Effectively: Mind the Banks!
Reint E. Gropp, Michael Koetter, William McShane
IWH Online,
Nr. 2,
2020
Abstract
The German government launched an unprecedented range of support programmes to mitigate the economic fallout from the Covid-19 pandemic for employees, self-employed, and firms. Fiscal transfers and guarantees amount to approximately €1.2 billion by now and are supplemented by similarly impressive measures taken at the European level. We argue in this note that the pandemic poses, however, also important challenges to financial stability in general and bank resilience in particular. A stable banking system is, in turn, crucial to ensure that support measures are transmitted to the real economy and that credit markets function seamlessly. Our analysis shows that banks are exposed rather differently to deteriorated business outlooks due to marked differences in their lending specialisation to different economic sectors. Moreover, a number of the banks that were hit hardest by bleak growth prospects of their borrowers were already relatively thinly capitalised at the outset of the pandemic. This coincidence can impair the ability and willingness of selected banks to continue lending to their mostly small and medium sized entrepreneurial customers. Therefore, ensuring financial stability is an important pre-requisite to also ensure the effectiveness of fiscal support measures. We estimate that contracting business prospects during the first quarter of 2020 could lead to an additional volume of non-performing loans (NPL) among the 40 most stressed banks ‒ mostly small, regional relationship lenders ‒ on the order of around €200 million. Given an initial stock of NPL of €650 million, this estimate thus suggests a potential level of NPL at year-end of €1.45 billion for this fairly small group of banks already. We further show that 17 regional banking markets are particularly exposed to an undesirable coincidence of starkly deteriorating borrower prospects and weakly capitalised local banks. Since these regions are home to around 6.8% of total employment in Germany, we argue that ensuring financial stability in the form of healthy bank balance sheets should be an important element of the policy strategy to contain the adverse real economic effects of the pandemic.
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IWH-Transfertagung „Europas Finanzmarkt: Zwangsehe oder lose Bekanntschaft?“
Sithara Thies
Wirtschaft im Wandel,
Nr. 1,
2020
Abstract
Ein Jahrzehnt nach der weltweiten Finanzkrise steht das Finanzsystem noch immer vor enormen Herausforderungen. Wie diese in Europa gemeistert werden können, war Thema einer hochkarätig besetzten Tagung, die am 26. Februar 2020 am Leibniz-Institut für Wirtschaftsforschung Halle (IWH) stattfand.
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Banks’ Equity Performance and the Term Structure of Interest Rates
Elyas Elyasiani, Iftekhar Hasan, Elena Kalotychou, Panos K. Pouliasis, Sotiris Staikouras
Financial Markets, Institutions and Instruments,
Nr. 2,
2020
Abstract
Using an extensive global sample, this paper investigates the impact of the term structure of interest rates on bank equity returns. Decomposing the yield curve to its three constituents (level, slope and curvature), the paper evaluates the time-varying sensitivity of the bank’s equity returns to these constituents by using a diagonal dynamic conditional correlation multivariate GARCH framework. Evidence reveals that the empirical proxies for the three factors explain the variations in equity returns above and beyond the market-wide effect. More specifically, shocks to the long-term (level) and short-term (slope) factors have a statistically significant impact on equity returns, while those on the medium-term (curvature) factor are less clear-cut. Bank size plays an important role in the sense that exposures are higher for SIFIs and large banks compared to medium and small banks. Moreover, banks exhibit greater sensitivities to all risk factors during the crisis and postcrisis periods compared to the pre-crisis period; though these sensitivities do not differ for market-oriented and bank-oriented financial systems.
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The Dilemma of International Diversification: Evidence from the European Sovereign Debt Crisis
Bill Francis, Iftekhar Hasan, Gergana L. Kostova, Sami Ben Naceur
Asia-Pacific Journal of Financial Studies,
Nr. 2,
2020
Abstract
This paper tests how capital markets value the international diversification of banks in good and in bad economic times by investigating changes in domestic and foreign sovereign debt ratings before and during the European sovereign debt crisis. Tracing 320 European banks in 29 countries and 226 credit rating announcements for European sovereigns between 1 January 2001 and 15 August 2012, we show that the market values banks with access to foreign funds. Despite occasional adverse effects immediately following negative news regarding sovereign credit rating changes, international diversification was found to be beneficial to European banks, especially during periods of distress.
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12.03.2020 • 4/2020
Konjunktur aktuell: Wirtschaft im Bann der Corona-Epidemie
Die Corona-Epidemie blockiert die konjunkturelle Erholung in Deutschland. Aus dem Ausland fällt Nachfrage aus, im Inland wird Konsum, soweit er Infektionsrisiken mit sich bringt, unterlassen, und Investitionen werden aufgeschoben. Unter der Annahme, dass die Epidemie in den fortgeschrittenen Volkswirtschaften noch zeitnah eingedämmt werden kann, beträgt der Produktionszuwachs im Jahr 2020 nach der Frühjahrsprognose des Leibniz-Instituts für Wirtschaftsforschung Halle (IWH) 0,6%. Dabei dürfte die Expansion in Ostdeutschland mit 0,9% höher ausfallen als in Westdeutschland. Sollte die Ausbreitung der Krankheit nicht drastisch reduziert werden können, ist mit einer Rezession in Deutschland zu rechnen.
Oliver Holtemöller
Pressemitteilung lesen
Foreign Bank Ownership and Income Inequality: Empirical Evidence
Manthos D. Delis, Iftekhar Hasan, Nikolaos Mylonidis
Applied Economics,
Nr. 11,
2020
Abstract
Using country-level panel data over 1995–2013 on within-country income inequality and foreign bank presence, this paper establishes a positive relation between the two, running from higher foreign bank presence to income inequality. Given that foreign bank participation increased by 62% over the period 1995 to 2013, our baseline results imply a 5.8% increase in the Gini coefficient on average over this period, ceteris paribus. These results are robust to the inclusion of country and year fixed effects and to the use of restrictions on foreign bank entry in the host countries as an instrumental variable. We show that this positive effect is channelled through the lack of greenfield entry and the associated lower levels of competition.
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18.02.2020 • 3/2020
Presseeinladung zur IWH-Konferenz „Europas Finanzmarkt: Zwangsehe oder lose Bekanntschaft?“ am 26. Februar 2020
Ein Jahrzehnt nach der weltweiten Finanzkrise steht das Finanzsystem noch immer vor enormen Herausforderungen. Wie diese in Europa gemeistert werden können, ist Thema einer hochkarätig besetzten Tagung am Leibniz-Institut für Wirtschaftsforschung Halle (IWH). Zur Eröffnung spricht Claudia Buch, Vizepräsidentin der Deutschen Bundesbank.
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Kommentar: Die Krise von 2008/2009 ist noch nicht vorbei
Reint E. Gropp
Wirtschaft im Wandel,
Nr. 2,
2019
Abstract
Kurzfristig war die Finanzkrise, ursprünglich ausgelöst durch exzessive Vergabe von Hypotheken an weniger kreditwürdige Haushalte, verbunden mit der weitverbreiteten Verbriefung dieser Hypotheken, mit schweren realwirtschaftlichen Konsequenzen verbunden. Die Volkswirtschaften aller Industrieländer schrumpften stark, die Arbeitslosigkeit stieg kräftig an. Firmen waren nicht in der Lage, neue Investitionen zu finanzieren, da es für Banken in vielen Ländern nicht möglich war, Kredite zu vergeben. Gleichzeitig führten die Rettungsaktionen der Regierungen zu einer starken Erhöhung der Schuldenstände und zu einer Nullzinspolitik, verbunden mit Anleihekäufen, der wichtigsten Zentralbanken.
Wo stehen wir heute, über zehn Jahre nach der Pleite von Lehman, die symbolisch noch immer eng mit der Krise verbunden ist? Und gibt es langfristige Auswirkungen auf die Wirtschaft – Auswirkungen, die wir noch heute spüren und möglicherweise noch viele Jahre spüren werden?
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