The Real Impact of Ratings-based Capital Rules on the Finance-Growth Nexus
Iftekhar Hasan, Gazi Hassan, Suk-Joong Kim, Eliza Wu
International Review of Financial Analysis,
January
2021
Abstract
We investigate whether ratings-based capital regulation has affected the finance-growth nexus via a foreign credit channel. Using quarterly data on short to medium term real GDP growth and cross-border bank lending flows from G-10 countries to 67 recipient countries, we find that since the implementation of Basel 2 capital rules, risk weight reductions mapped to sovereign credit rating upgrades have stimulated short-term economic growth in investment grade recipients but hampered growth in non-investment grade recipients. The impact of these rating upgrades is strongest in the first year and then reverses from the third year and onwards. On the other hand, there is a consistent and lasting negative impact of risk weight increases due to rating downgrades across all recipient countries. The adverse effects of ratings-based capital regulation on foreign bank credit supply and economic growth are compounded in countries with more corruption and less competitive banking sectors and are attenuated with greater political stability.
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Hohes öffentliches Defizit nicht nur wegen Corona – Mittelfristige Handlungsmöglichkeiten für den Staat
Andrej Drygalla, Oliver Holtemöller, Axel Lindner, Matthias Wieschemeyer, Götz Zeddies, Katja Heinisch
Konjunktur aktuell,
Nr. 4,
2020
Abstract
Nach der Mittelfristprojektion des IWH wird das Bruttoinlandsprodukt in Deutschland in den Jahren bis 2025 preisbereinigt um durchschnittlich ½% wachsen, und damit einen Prozentpunkt langsamer als im Zeitraum von 2013 bis 2019. Dies ist nicht nur auf den starken Einbruch im Jahr 2020 zurückzuführen, sondern auch darauf, dass die Erwerbsbevölkerung spürbar zurückgehen wird. Die Staatseinnahmen expandieren deutlich langsamer als in den vergangenen Jahren. Auch nach Überwindung der Pandemiekrise dürfte der Staatshaushalt im Fall unveränderter gesetzlicher Rahmenbedingungen ein strukturelles Defizit von etwa 2% relativ zum Bruttoinlandsprodukt aufweisen, und die Schuldenbremse würde weiter verletzt. Konsolidierungsmaßnahmen zur Rückführung dieser Defizitquote auf ½% würden die Produktion in Deutschland unter die Normalauslastung drücken. Mit Hilfe des finanzpolitischen Simulationsmodells des IWH kann gezeigt werden, dass dabei eine ausgabenseitige Konsolidierung die Produktion weniger belastet als eine einnahmenseitige. Es spricht, auch aus theoretischer Sicht, viel dafür, die Schuldenbremse zwar nicht abzuschaffen, aber ein Stück weit zu lockern.
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Avoiding the Fall into the Loop: Isolating the Transmission of Bank-to-Sovereign Distress in the Euro Area
Stefan Eichler, Hannes Böhm
Journal of Financial Stability,
December
2020
Abstract
While the sovereign-bank loop literature has demonstrated the amplification between sovereign and bank risks in the Euro Area, its econometric identification is vulnerable to reverse causality and omitted variable biases. We address the loop's endogenous nature and isolate the direct bank-to-sovereign distress channel by exploiting the global, non-Eurozone related variation in banks’ stock prices. We instrument banking sector stock returns in the Eurozone with exposure-weighted stock market returns from non-Eurozone countries and take further precautions to remove Eurozone-related variation. We find that the transmission of instrumented bank distress to sovereign distress is around 50% smaller than the corresponding coefficient in the unadjusted OLS framework, confirming concerns on endogeneity. Despite the smaller relative magnitude, increasing instrumented bank distress is found to be an economically and statistically significant cause for rising sovereign fragility in the Eurozone.
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Why Life Insurers are Key to Economic Dynamism in Germany
Reint E. Gropp, William McShane
IWH Online,
Nr. 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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Changing Business Dynamism and Productivity: Shocks versus Responsiveness
Ryan A. Decker, John Haltiwanger, Ron S. Jarmin, Javier Miranda
American Economic Review,
Nr. 12,
2020
Abstract
The pace of job reallocation has declined in the United States in recent decades. We draw insight from canonical models of business dynamics in which reallocation can decline due to (i) lower dispersion of idiosyncratic shocks faced by businesses, or (ii) weaker marginal responsiveness of businesses to shocks. We show that shock dispersion has actually risen, while the responsiveness of business-level employment to productivity has weakened. Moreover, declining responsiveness can account for a significant fraction of the decline in the pace of job reallocation, and we find suggestive evidence this has been a drag on aggregate productivity.
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Financial Technologies and the Effectiveness of Monetary Policy Transmission
Iftekhar Hasan, Boreum Kwak, Xiang Li
IWH Discussion Papers,
Nr. 26,
2020
Abstract
This study investigates whether and how financial technologies (FinTech) influence the effectiveness of monetary policy transmission. We use an interacted panel vector autoregression model to explore how the effects of monetary policy shocks change with regional-level FinTech adoption. Results indicate that FinTech adoption generally mitigates monetary policy transmission to real GDP, consumer prices, bank loans, and housing prices. A subcategorical analysis shows that the muted transmission is the most pronounced in the adoption of FinTech payment and credit, compared to that of insurance. The regulatory arbitrage and competition between FinTech and banks are the possible mechanisms leading a mitigated monetary policy transmission.
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Public Bank Guarantees and Allocative Efficiency
Reint E. Gropp, Andre Guettler, Vahid Saadi
Journal of Monetary Economics,
December
2020
Abstract
A natural experiment and matched bank/firm data are used to identify the effects of bank guarantees on allocative efficiency. We find that with guarantees in place unproductive firms receive larger loans, invest more, and maintain higher rates of sales and wage growth. Moreover, firms produce less productively. Firms also survive longer in banks’ portfolios and those that enter guaranteed banks’ portfolios are less profitable and productive. Finally, we observe fewer economy-wide firm exits and bankruptcy filings in the presence of guarantees. Overall, the results are consistent with the idea that guaranteed banks keep unproductive firms in business for too long.
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