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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Competition, Cost Structure, and Labour Leverage: Evidence from the U.S. Airline Industry
Konstantin Wagner
IWH Discussion Papers,
Nr. 21,
2020
Abstract
I study the effect of increasing competition on financial performance through labour leverage. To capture competition, I exploit variation in product market contestability in the U.S. airline industry. First, I find that increasing competitive pressure leads to increasing labour leverage, proxied by labour share. This explains the decrease in operating profitability through labour rigidities. Second, by exploiting variation in human capital specificity, I show that contestability of product markets induces labour market contestability. Whereas affected firms might experience more stress through higher wages or loss of skilled human capital, more mobile employee groups benefit from competitions through higher labour shares.
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Capital Misallocation and Innovation
Christian Schmidt, Yannik Schneider, Sascha Steffen, Daniel Streitz
SSRN Solutions Research Paper Series,
2020
Abstract
This paper documents that "zombie" lending by undercapitalized banks distorts competition and impedes corporate innovation. This misallocation of capital prevents both the exit of zombie and entry of healthy firms in affected industries adversely impacting output and competition. Worse, capital misallocation depresses patent applications, particularly in high technology- and R&D-intensive sectors, and industries with neck- and-neck competition. We strengthen our results using an IV approach to address reverse causality and innovation survey data from the European Commission. Overall, our results are consistent with externalities imposed on healthy firms through the misallocation of capital.
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Are Bank Capital Requirements Optimally Set? Evidence from Researchers’ Views
Gene Ambrocio, Iftekhar Hasan, Esa Jokivuolle, Kim Ristolainen
Journal of Financial Stability,
October
2020
Abstract
We survey 149 leading academic researchers on bank capital regulation. The median (average) respondent prefers a 10% (15%) minimum non-risk-weighted equity-to-assets ratio, which is considerably higher than the current requirement. North Americans prefer a significantly higher equity-to-assets ratio than Europeans. We find substantial support for the new forms of regulation introduced in Basel III, such as liquidity requirements. Views are most dispersed regarding the use of hybrid assets and bail-inable debt in capital regulation. 70% of experts would support an additional market-based capital requirement. When investigating factors driving capital requirement preferences, we find that the typical expert believes a five percentage points increase in capital requirements would “probably decrease” both the likelihood and social cost of a crisis with “minimal to no change” to loan volumes and economic activity. The best predictor of capital requirement preference is how strongly an expert believes that higher capital requirements would increase the cost of bank lending.
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How Effective are Bank Levies in Reducing Leverage Given the Debt Bias of Corporate Income Taxation?
Franziska Bremus, Kirsten Schmidt, Lena Tonzer
SUERF Policy Brief,
Nr. 21,
2020
Abstract
To finance resolution funds, the regulatory toolkit has been expanded in many countries by bank levies. In addition, these levies are often designed to reduce incentives for banks to rely excessively on wholesale funding resulting in high leverage ratios. At the same time, corporate income taxation biases banks’ capital structure towards debt financing in light of the deductibility of interest on debt. A recent paper published in the Journal of Banking and Finance shows that the implementation of bank levies can significantly reduce leverage ratios, however, only in case corporate income taxes are not too high. The result demonstrates that the effectiveness of regulatory tools can depend upon non-regulatory measures such as corporate taxes, which differ at the country level.
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Interactions Between Bank Levies and Corporate Taxes: How is Bank Leverage Affected?
Franziska Bremus, Kirsten Schmidt, Lena Tonzer
Journal of Banking and Finance,
September
2020
Abstract
Regulatory bank levies set incentives for banks to reduce leverage. At the same time, corporate income taxation makes funding through debt more attractive. In this paper, we explore how regulatory levies affect bank capital structure, depending on corporate income taxation. Based on bank balance sheet data from 2006 to 2014 for a panel of EU-banks, our analysis yields three main results: The introduction of bank levies leads to lower leverage as liabilities become more expensive. This effect is weaker the more elevated corporate income taxes are. In countries charging very high corporate income taxes, the incentives of bank levies to reduce leverage turn insignificant. Thus, bank levies can counteract the debt bias of taxation only partially.
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Trade Shocks, Credit Reallocation and the Role of Specialisation: Evidence from Syndicated Lending
Isabella Müller
IWH Discussion Papers,
Nr. 15,
2020
Abstract
This paper provides evidence that banks cut lending to US borrowers as a consequence of a trade shock. This adverse reaction is stronger for banks with higher ex-ante lending to US industries hit by the trade shock. Importantly, I document large heterogeneity in banks‘ reaction depending on their sectoral specialisation. Banks shield industries in which they are specialised in and at the same time reduce the availability of credit to industries they are not specialised in. The latter is driven by low-capital banks and lending to firms that are themselves hit by the trade shock. Banks‘ adjustments have adverse real effects.
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Borrowers Under Water! Rare Disasters, Regional Banks, and Recovery Lending
Michael Koetter, Felix Noth, Oliver Rehbein
Journal of Financial Intermediation,
July
2020
Abstract
We show that local banks provide corporate recovery lending to firms affected by adverse regional macro shocks. Banks that reside in counties unaffected by the natural disaster that we specify as macro shock increase lending to firms inside affected counties by 3%. Firms domiciled in flooded counties, in turn, increase corporate borrowing by 16% if they are connected to banks in unaffected counties. We find no indication that recovery lending entails excessive risk-taking or rent-seeking. However, within the group of shock-exposed banks, those without access to geographically more diversified interbank markets exhibit more credit risk and less equity capital.
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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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