Latest documents http://publikationen.ub.uni-frankfurt.de/index/index/ Fri, 19 Apr 2013 07:52:54 +0200 Fri, 19 Apr 2013 07:52:54 +0200 http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/29382 We develop a dynamic network model whose links are governed by banks' optmizing decisions and by an endogenous tâtonnement market adjustment. Banks in our model can default and engage in firesales: risk is transmitted through direct and cascading counterparty defaults as well as through indirect pecuniary externalities triggered by firesales. We use the model to assess the evolution of the network configuration under various prudential policy regimes, to measure banks' contribution to systemic risk (through Shapley values) in response to shocks and to analyze the effects of systemic risk charges. We complement the analysis by introducing the possibility of central bank liquidity provision. Marcel Bluhm; Ester Faia; Jan Pieter Krahnen workingpaper http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/29382 Fri, 19 Apr 2013 07:52:54 +0200 http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/24087 Otmar Issing; Jan Pieter Krahnen; Klaus Peter Regling; William R. White workingpaper http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/24087 Tue, 03 Apr 2012 16:40:15 +0200 http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/24245 Die aktuelle Debatte um den Umgang mit der Verschuldung Griechenlands und anderer EWU Staaten berührt die Grundlagen europäischer Wirtschaftspolitik. Die nächsten Schritte sind wohl abzuwägen, um über eine unmittelbare Kriseneindämmung hinaus eine langfristige Stabilisierung der wirtschaftlichen und politischen Strukturen in der Eurozone zu erreichen. Eine funktionsfähige Wirtschafts- und Währungsunion hat ihren Preis. Sie ist aber auch von großem Nutzen, gerade für Deutschland und die wettbewerbsstarken Regionen, die insbesondere vom einheitlichen Binnenmarkt und der monetären Stabilität profitieren. Das rechtfertigt zugleich eine Unterstützung ökonomisch schwächerer Mitglieder der Union durch die stärkeren. Historisch waren Währungsunionen ohne einen derartigen minimalen fiskalischen Ausgleich nicht dauerhaft. Deshalb sind, wenn man die Währungsunion aufrechterhalten will, zwei Extrempositionen - keine Transfers, um keinen Preis ebenso wie deren Gegenteil: jedwedes Defizit wird bedingungslos finanziert - nicht zielführend. Ein kompletter Haftungsausschluss (no bail-out) ist nicht glaubwürdig, solange unabweisbare Schuldenschnitte von insolventen Staaten oder Regionen (wegen Überschuldung) nicht möglich sind, weil sie innerhalb eines stark integrierten Bankenmarktes potentiell unkontrollierbare Rückwirkungen auslösen. Andererseits liefe die unkonditionierte, dauerhafte Finanzierung regionaler Ungleichgewichte auf Transfervolumina hinaus, die eine Überforderung der Transfergeber darstellten. Sie führte vor allem zu einer Perpetuierung der Probleme, weil Anreize zur letztlich unabdingbaren Anpassung fehlten. Damit bleiben zur Schaffung der Voraussetzungen einer funktionsfähigen Währungsunion nur Optionen, die zwischen den Polen liegen. Hans-Helmut Kotz; Jan Pieter Krahnen; Christian Leuz; Helmut Siekmann workingpaper http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/24245 Mon, 06 Feb 2012 09:28:55 +0100 http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/22703 This paper analyzes the emergence of systemic risk in a network model of interconnected bank balance sheets. Given a shock to asset values of one or several banks, systemic risk in the form of multiple bank defaults depends on the strength of balance sheets and asset market liquidity. The price of bank assets on the secondary market is endogenous in the model, thereby relating funding liquidity to expected solvency - an important stylized fact of banking crises. Based on the concept of a system value at risk, Shapley values are used to define the systemic risk charge levied upon individual banks. Using a parallelized simulated annealing algorithm the properties of an optimal charge are derived. Among other things we find that there is not necessarily a correspondence between a bank's contribution to systemic risk - which determines its risk charge - and the capital that is optimally injected into it to make the financial system more resilient to systemic risk. The analysis has policy implications for the design of optimal bank levies. JEL Classification: G01, G18, G33 Keywords: Systemic Risk, Systemic Risk Charge, Systemic Risk Fund, Macroprudential Supervision, Shapley Value, Financial Network Marcel Bluhm; Jan Pieter Krahnen workingpaper http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/22703 Wed, 14 Sep 2011 17:10:26 +0200 http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/22403 Heinz Hilgert; Jan Pieter Krahnen; Günther Merl; Helmut Siekmann workingpaper http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/22403 Fri, 12 Aug 2011 11:08:17 +0200 http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/21845 Inhaltsverzeichnis: 1. Motivation und Ausgangslage 2. Die Verwobenheit von Sparkassen und Landesbanken 3. Grundüberlegungen zur Neuordnung von Sparkassen und Landesbanken 4. Gestaltungsvorschlag 5. Handlungsempfehlungen Heinz Hilgert; Jan Pieter Krahnen; Günther Merl; Helmut Siekmann workingpaper http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/21845 Thu, 16 Jun 2011 12:53:19 +0200 http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/16868 In this paper we challenge the view that corporate bonds are always arm’s length debt. We analyze the effect of bond ratings on the stock price return to acquirers in M&A transactions, which tend to have significant effects on creditor wealth. We find acquirers abnormal returns to be higher if they are unrated, controlling for a wide variety of other effects identified in the literature. Tracing the difference in returns to distinct managerial decisions, we find that, everything else constant, rated firms increase their leverage in takeover transactions by less than their unrated counterparts. Consistent with a significant role for rating agencies, we find monitoring effects to be strongest when acquirer bonds are rated at the borderline between investment grade and junk. Finally, we are able to empirically exclude a large number of alternative explanations for the empirical regularities that we uncover. JEL Classification: G21, G24, G32, G34 Keywords: Acquisitions, Credit Ratings, Mergers and Acquisitions, Arm’s Length Debt, Abnormal Returns Reint Gropp; Christian Hirsch; Jan Pieter Krahnen workingpaper http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/16868 Fri, 29 Apr 2011 12:48:49 +0200 http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/21080 Inhaltsverzeichnis: 1. Motivation und Ausgangslage 2. Die Verwobenheit von Sparkassen und Landesbanken 3. Grundüberlegungen zur Neuordnung von Sparkassen und Landesbanken 4. Gestaltungsvorschlag 5. Handlungsempfehlungen Heinz Hilgert; Jan Pieter Krahnen; Günther Merl; Helmut Siekmann workingpaper http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/21080 Tue, 08 Mar 2011 15:32:51 +0100 http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/20385 Jan Pieter Krahnen; Klaus Regling; William White workingpaper http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/20385 Wed, 01 Dec 2010 09:56:42 +0100 http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/20384 Zusammenfassung - Das Kernanliegen des KredReorgG –die Internalisierung des systemischen Risikos in den Entscheidungsprozess und die Verantwortlichkeit von Bankeignern und –gläubigern – wird im Wesentlichen erreicht. - Die Wirksamkeit des Gesetzes steht und fällt mit der Möglichkeit, jede Bank in systemisch relevante (zu rettende) und systemisch nicht-relevante (abzuwickelnde) Teile zu zerlegen. Dieser Ansatz ist Ziel führend und international „state of the art“ (Bsp. UK). - Unsere Hauptkritik: Um die o.g. Wirksamkeit des Gesetzes überhaupt zu ermöglichen (und eine Unterlaufung der Gesetzesintention zu verhindern), bedarf es einer zusätzlichen und zwingenden Vorgabe, dass jede Bank eine Mindestmenge an Anleihen außerhalb des Kern-Finanzsektors dauerhaft platzieren muss, und dass diese Anleihen zu keinem Zeitpunkt von Banken erworben werden dürfen. - Um dies zu erreichen sind die Anlagevorschriften für Kapitalsammelstellen (Lebensversicherer, Pensionsfonds) und für Banken entsprechend zu ändern bzw. zu verschärfen. - Weitere Kritikpunkte betreffen die vermutete geringe Bedeutung der freiwilligen Verfahren (Sanierung und Reorganisation) und die Gestaltung der Sonderabgabe und der Restrukturierungsfonds. Jan Pieter Krahnen; Helmut Siekmann workingpaper http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/20384 Wed, 01 Dec 2010 09:50:26 +0100 http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/7911 SUMMARY RECOMMENDATIONS 1. One of the major lessons from the current financial crisis refers to the systemic dimension of financial risk which had been almost completely neglected by bankers and supervisors in the pre-2007 years. 2. Accordingly, the most needed change in financial regulation, in order to avoid a repetition of such a crisis in the future, consists of influencing individual bank behaviour such that systemic risk is decreased. This objective is new and distinct from what Basle II was intended to achieve. 3. It is important, therefore, to evaluate proposed new regulatory instruments on the ground of whether or not they contribute to a reduction, or containment of systemic risk. We see two new regulatory measures of paramount importance: the introduction of a Systemic Risk Charge (SRC), and the implementation of a transparent bank resolution regime. Both measures complement each other, thus both have to be realized to be effective. 4. We propose a Systemic Risk Charge (SRC), a levy capturing the contribution of any individual bank to the overall systemic risk which is distinct from the institution’s own default risk. The SRC is set up such that the more systemic risk a bank contributes, the higher is the cost it has to bear. Therefore, the SRC serves to internalize the cost of systemic risk which, up to now, was borne by the taxpayer. 5. Major details of our SRC refer to the use of debt that may be converted into equity when systemic risk threatens the stability of the banking system. Also, the SRC raises some revenues for government. 6. The SRC has to be compared to several bank levies currently debated. The Financial Transaction Tax (FTT) does not directly address systemic risk and is therefore inferior to a SRC. Nevertheless, a FTT may offer the opportunity to subsidize on-exchange trading at the expense of off-exchange (over-the-counter, OTC) transactions, thereby enhancing financial market stability. The Financial Activity Tax (FAT) is similar to a VAT on financial services. It is the least adequate instrument among all instruments discussed above to limit systemic risk. 7. Bank resolution regime: No instrument to contain systemic risk can be effective unless the restructuring of bank debt, and the ensuing loss given default to creditors, is a real possibility. As the crisis has taught, bank restructuring is very difficult in light of contagion risk between major banks. We therefore need a regulatory procedure that allows winding down banks, even large banks, on short notice. Among other things, the procedure will require to distinguish systemically relevant exposures from those that are irrelevant. Only the former will be saved with government money, and it will then be the task of the supervisor to ensure a sufficient amount of nonsystemically relevant debt on the balance sheet of all banks. 8. Further issues discussed in this policy paper and its appendices refer to the necessity of a global level playing field, or the lack thereof, for these new regulatory measures; the convergence of our SRC proposal with what is expected to be long-term outcome of Basle III discussions; as well as the role of global imbalances. Otmar Issing; Jan Pieter Krahnen; Klaus Regling; William White workingpaper http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/7911 Fri, 20 Aug 2010 09:59:58 +0200 http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/7901 This paper analyzes loan pricing when there is multiple banking and borrower distress. Using a unique data set on SME lending collected from major German banks, we can instrument for effective coordination between lenders, carrying out a panel estimation. The analysis allows to distinguish between rents that accrue due to single bank lending, rents that accrue due to relationship lending, and rents that accrue due to the elimination of competition among multiple lenders. We find the relationship lending to have no discernible impact on loan spreads, while both single lending and coordinated multiple lending significantly increase the spread. Thus, contrary to predictions in the literature, multiple lending does not insure the borrower against hold-up. JEL Classification: D74, G21, G33, G34 Antje Brunner; Jan Pieter Krahnen workingpaper http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/7901 Thu, 19 Aug 2010 16:10:39 +0200 http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/7638 Jan Pieter Krahnen; Helmut Siekmann workingpaper http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/7638 Fri, 16 Apr 2010 13:22:24 +0200 http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/6731 Die Vorstellung selbst-stabilisierender, zum Gleichgewicht tendierender Finanzmärkte, lange Zeit als Selbstverständlichkeit angesehen, ist durch die aktuelle Banken- und Kreditkrise in Frage gestellt. Trotz ausgefeilten Risikomanagements der Banken und einer an Basel II orientierten Aufsicht ist es in den Jahren 2007-2009 zu einem Zusammenbruch des Interbankenmarktes und weiter Teile der Anleihemärkte gekommen. Die hierdurch erzwungenen massiven Staatsinterventionen zur Bankenrettung sind ohne Beispiel in der modernen Wirtschaftsgeschichte. In diesem Essay suchen wir nach Ansatzpunkten einer Erklärung für die Instabilität der Finanzmärkte. Als zentrale Krisenursache sehen wir Schwächen der Informationsarchitektur, deren Aufgabe darin besteht, glaubwürdige Information für Investoren bereitzustellen. Drei Determinanten der Instabilität werden herausgestellt, erstens die Nutzung von Schuldtiteln verbunden mit hohen Verschuldungsgraden, zweitens die Handelbarkeit von Titeln verbunden mit erhöhter Risikoübernahme, sowie drittens die zunehmende Komplexität von Finanzprodukten und Finanznetzwerken verbunden mit einer Homogenisierung der Aktiva- und Risikostrukturen von Finanzinstituten. Alle drei Faktoren verstärken die Anfälligkeit des Finanzsystems und zugleich die Bedeutung der Informationsarchitektur. Hieraus lassen sich Anforderungen an eine sinnvolle Reform der Regulierung ableiten. Neben den Anreizproblemen, die Gegenstand einer weiteren Arbeit sind (Franke/Krahnen 2009), diskutieren wir hier vier Kernthemen: glaubwürdige Informationen, makroprudentielle Aufsicht, robuste Eigenkapitalstandards und eine notwendige Risikobegrenzung auf Derivatemärkten. JEL-Classifications: G01, G14, G18, G28, E44 Keywords: Financial Crisis, Information, Regulation, Banking, Bond Ratings, Capital Markets Jan Pieter Krahnen; Günter Franke workingpaper http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/6731 Fri, 14 Aug 2009 12:48:21 +0200 http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/6729 This paper analyzes the risk properties of typical asset-backed securities (ABS), like CDOs or MBS, relying on a model with both macroeconomic and idiosyncratic components. The examined properties include expected loss, loss given default, and macro factor dependencies. Using a two-dimensional loss decomposition as a new metric, the risk properties of individual ABS tranches can directly be compared to those of corporate bonds, within and across rating classes. By applying Monte Carlo Simulation, we find that the risk properties of ABS differ significantly and systematically from those of straight bonds with the same rating. In particular, loss given default, the sensitivities to macroeconomic risk, and model risk differ greatly between instruments. Our findings have implications for understanding the credit crisis and for policy making. On an economic level, our analysis suggests a new explanation for the observed rating inflation in structured finance markets during the pre-crisis period 2004-2007. On a policy level, our findings call for a termination of the 'one-size-fits-all' approach to the rating methodology for fixed income instruments, requiring an own rating methodology for structured finance instruments. JEL Classification: G21, G28 Keywords: credit risk, risk transfer, systematic risk Jan Pieter Krahnen; Christian Wilde workingpaper http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/6729 Fri, 14 Aug 2009 11:42:20 +0200 http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/6665 This paper analyzes the risk properties of typical asset-backed securities (ABS), like CDOs or MBS, relying on a model with both macroeconomic and idiosyncratic components. The examined properties include expected loss, loss given default, and macro factor dependencies. Using a two-dimensional loss decomposition as a new metric, the risk properties of individual ABS tranches can directly be compared to those of corporate bonds, within and across rating classes. By applying Monte Carlo Simulation, we find that the risk properties of ABS differ significantly and systematically from those of straight bonds with the same rating. In particular, loss given default, the sensitivities to macroeconomic risk, and model risk differ greatly between instruments. Our findings have implications for understanding the credit crisis and for policy making. On an economic level, our analysis suggests a new explanation for the observed rating inflation in structured finance markets during the pre-crisis period 2004-2007. On a policy level, our findings call for a termination of the 'one-size-fits-all' approach to the rating methodology for fixed income instruments, requiring an own rating methodology for structured finance instruments. JEL Classification: G21, G28 Jan Pieter Krahnen; Christian Wilde workingpaper http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/6665 Tue, 07 Jul 2009 13:13:23 +0200 http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/6282 Content A. EXECUTIVE SUMMARY, INCLUDING MAJOR RECOMMENDATIONS B. COMPLETE REPORT 1. INTRODUCTION 2. RISK MAP 2.1 Why a Risk Map is needed, and for what purpose 2.1.1 Creating a unified data base 2.1.2 Assessing systemic risk 2.1.3 Allowing for coordinated policy action 2.2 Recommendations 3. GLOBAL REGISTER FOR LOANS (CREDIT REGISTER) AND BONDS (SECURITIES REGISTER) 3.1 Objectives of a credit register 3.2 Credit registers in Europe (and beyond) 3.3 Suggestions for a supra-national Credit Register 3.4 Integrating a supra-national Securities Register 3.5 Recommendations 4. HEDGE FUNDS: REGULATION AND SUPERVISION 4.1 What are hedge funds (activities, location, size, regulation)? 4.2 What are the risks posed by hedge funds (systematic risks, interaction with prime brokers)? 4.3 Routes to better regulation (direct, indirect) 4.4 Recommendations 5. RATING AGENCIES: REGULATION AND SUPERVISION 5.1 The role of ratings in bond and structured finance markets, past and present 5.2 Elements of rating integrity (independence, compensation and incentives, transparency) 5.3 Recommendations (registration, transparency, annual report on rating performance) 6. PROCYCLICALITY: PROBLEMS AND POTENTIAL SOLUTIONS 6.1 What is meant by “procyclicality” and why is it a problem? 6.2 The roots of procyclicality and the lessons it suggests for policymakers 6.2.1 Underpinnings of the phenomenon 6.2.2 Lessons to be learned 6.3 Characteristics of a macrofinancial stability framework 6.4 Recommendations 7. THE ROLE OF INTERNATIONAL INSTITUTIONS AND FORA, IN PARTICULAR THE IMF, BIS AND FSF 7.1 Legitimacy 7.2 Re-focusing the work 7.3 Recommendations Otmar Issing; Jörg Asmussen; Jan Pieter Krahnen; Klaus Regling; Jens Weidmann; William White workingpaper http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/6282 Thu, 16 Apr 2009 15:42:22 +0200 http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/6281 Content New Financial Architecture (Short Version) 1. Purpose of the paper – causes of the crisis 2. Recommendations 2.1. Incentives 2.2. Transparency 2.3. Regulation and Supervision 2.4. International Institutions 3. Concluding remarks Appendix (Full text) A 1. Causes of the crisis A 2. Improving the Framework A 2.1. Incentives A 2.2. Transparency A 2.3. Regulation and Supervision A 2.4. International Institutions A 3. Concluding remarks Otmar Issing; Jörg Asmussen; Jan Pieter Krahnen; Klaus Regling; Jens Weidmann; William White workingpaper http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/6281 Thu, 16 Apr 2009 15:37:21 +0200 http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/5913 Securitization is a financial innovation that experiences a boom-bust cycle, as many other innovations before. This paper analyzes possible reasons for the breakdown of primary and secondary securitization markets, and argues that misaligned incentives along the value chain are the primary cause of the problems. The illiquidity of asset and interbank markets, in this view, is a market failure derived from ill-designed mechanisms of coordinating financial intermediaries and investors. Thus, illiquidity is closely related to the design of the financial chains. Our policy conclusions emphasize crisis prevention rather than crisis management, and the objective is to restore a “comprehensive incentive alignment”. The toe-hold for strengthening regulation is surprisingly small. First, we emphasize the importance of equity piece retention for the long-term quality of the underlying asset pool. As a consequence, equity piece allocation needs to be publicly known, alleviating market pricing. Second, on a micro level, accountability of managers can be improved by compensation packages aiming at long term incentives, and penalizing policies with destabilizing effects on financial markets. Third, on a macro level, increased transparency relating to effective risk transfer, risk-related management compensation, and credible measurement of rating performance stabilizes the valuation of financial assets and, hence, improves the solvency of financial intermediaries. Fourth, financial intermediaries, whose risk is opaque, may be subjected to higher capital requirements. JEL Classification: D82, G14, G21, G28, G30 Günter Franke; Jan Pieter Krahnen workingpaper http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/5913 Tue, 21 Oct 2008 10:40:35 +0200 http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/5740 Modern bank management comprises both classical lending business and transfer of asset risk to capital markets through securitization. Sound knowledge of the risks involved in securitization transactions is a prerequisite for solid risk management. This paper aims to resolve a part of the opaqueness surrounding credit-risk allocation to tranches that represent claims of different seniority on a reference portfolio. In particular, this paper analyzes the allocation of credit risk to different tranches of a CDO transaction when the underlying asset returns are driven by a common macro factor and an idiosyncratic component. Junior and senior tranches are found to be nearly orthogonal, motivating a search for the whereabout of systematic risk in CDO transactions. We propose a metric for capturing the allocation of systematic risk to tranches. First, in contrast to a widely-held claim, we show that (extreme) tail risk in standard CDO transactions is held by all tranches. While junior tranches take on all types of systematic risk, senior tranches take on almost no non-tail risk. This is in stark contrast to an untranched bond portfolio of the same rating quality, which on average suffers substantial losses for all realizations of the macro factor. Second, given tranching, a shock to the risk of the underlying asset portfolio (e.g. a rise in asset correlation or in mean portfolio loss) has the strongest impact, in relative terms, on the exposure of senior tranche CDO-investors. Our findings can be used to explain major stylized facts observed in credit markets. JEL Classification: G21, G28 Jan Pieter Krahnen; Christian Wilde workingpaper http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/5740 Fri, 08 Aug 2008 08:21:27 +0200 http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/5704 Modern bank management comprises both classical lending business and transfer of asset risk to capital markets through securitization. Sound knowledge of the risks involved in securitization transactions is a prerequisite for solid risk management. This paper aims to resolve a part of the opaqueness surrounding credit-risk allocation to tranches that represent claims of different seniority on a reference portfolio. In particular, this paper analyzes the allocation of credit risk to different tranches of a CDO transaction when the underlying asset returns are driven by a common macro factor and an idiosyncratic component. Junior and senior tranches are found to be nearly orthogonal, motivating a search for the where about of systematic risk in CDO transactions. We propose a metric for capturing the allocation of systematic risk to tranches. First, in contrast to a widely-held claim, we show that (extreme) tail risk in standard CDO transactions is held by all tranches. While junior tranches take on all types of systematic risk, senior tranches take on almost no non-tail risk. This is in stark contrast to an untranched bond portfolio of the same rating quality, which on average suffers substantial losses for all realizations of the macro factor. Second, given tranching, a shock to the risk of the underlying asset portfolio (e.g. a rise in asset correlation or in mean portfolio loss) has the strongest impact, in relative terms, on the exposure of senior tranche CDO-investors. Our findings can be used to explain major stylized facts observed in credit markets. JEL Classification: G21, G28 Jan Pieter Krahnen; Christian Wilde workingpaper http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/5704 Mon, 28 Jul 2008 10:32:05 +0200 http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/242 This paper analyses the role of collateral in loan contracting when companies are financed by multiple bank lenders and relationship lending can be present. We conjecture and empirically validate that relationship lenders, who enjoy an informational advantage over arm’s-length banks, are more senior to strengthen their bargaining power in future renegotiation if borrower’s face financial distress. This deters costly conflicts between lenders and fosters workout decisions by the best informed party. Consistent with our conjecture, we find that relationship lender in general have a higher probability to be collateralized, and a higher degree of collateralization (i.e. seniority). Furthermore, we show that seniority and the status of relationship lending increases the likelihood that a bank invests in a risky workout of distressed borrowers. Both findings support the view that collateral is a strategic instrument intended to influence the bargaining position of banks. Our result further suggest that seniority and relationship lending are complementary to each other. JEL Classification: G21 Ralf Elsas; Jan Pieter Krahnen workingpaper http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/242 Thu, 28 Feb 2008 09:48:06 +0100 http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/2399 In the recent theoretical literature on lending risk, the coordination problem in multi-creditor relationships have been analyzed extensively. We address this topic empirically, relying on a unique panel data set that includes detailed credit-file information on distressed lending relationships in Germany. In particular, it includes information on creditor pools, a legal institution aiming at coordinating lender interests in borrower distress. We report three major findings. First, the existence of creditor pools increases the probability of workout success. Second, the results are consistent with coordination costs being positively related to pool size. Third, major determinants of pool formation are found to be the number of banks, the distribution of lending shares, and the severity of the distress shock. Klassifizierung: D74, G21, G33, G34 Antje Brunner; Jan Pieter Krahnen workingpaper http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/2399 Thu, 13 Jul 2006 11:32:51 +0200 http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/2735 Jan Pieter Krahnen workingpaper http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/2735 Mon, 15 May 2006 14:33:29 +0200 http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/2805 We study a set of German open-end mutual funds for a time period during which this industry emerged from its infancy. In those years, the distribution channel for mutual funds was dominated by the brick-and-mortar retail networks of the large universal banks. Using monthly observations from 12/1986 through 12/1998, we investigate if cross-sectional return differences across mutual funds affect their market shares. Although such a causal relation has been established in highly competitive markets, such as the United States, the rigid distribution system in place in Germany at the time may have caused retail performance and investment performance to uncouple. In fact, although we observe stark differences in investment performance across mutual funds (and over time), we find no evidence that cross-sectional performance differences affect the market shares of these funds. Klassifikation: G 23 Jan Pieter Krahnen; Frank A. Schmid; Erik Theissen workingpaper http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/2805 Thu, 04 May 2006 08:46:12 +0200