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The "quiet life hypothesis (QLH)" posits that banks enjoy the advantages of market power in terms of foregone revenues or cost savings. We suggest a unified approach to measure competition and efficiency simultaneously to test this hypothesis. We estimate bank-specific Lerner indices as measures of competition and test if cost and profit efficiency are negatively related to market power in the case of German savings banks.We find that both market power and average revenues declined among these banks between 1996 and 2006. While we find clear evidence supporting the QLH, estimated effects of the QLH are small from an economical perspective.
Motivated by the recent discussion of the declining importance of deposits as banks´ major source of funding we investigate which factors determine funding costs at local banks. Using a panel data set of more than 800 German local savings and cooperative banks for the period from 1998 to 2004 we show that funding costs are not only driven by the relative share of comparatively cheap deposits of bank´s liabilities but among other factors especially by the size of the bank. In our empirical analysis we find strong and robust evidence that, ceteris paribus, smaller banks exhibit lower funding costs than larger banks suggesting that small banks are able to attract deposits more cheaply than their larger counterparts. We argue that this is the case because smaller banks interact more personally with customers, operate in customers´ geographic proximity and have longer and stronger relationships than larger banks and, hence, are able to charge higher prices for their services. Our finding of a strong influence of bank size on funding costs is also in an in- ternational context of great interest as mergers among small local banks - the key driver of bank growth - are a recent phenomenon not only in European banking that is expected to continue in the future. At the same time, net interest income remains by far the most important source of revenue for most local banks, accounting for approximately 70% of total operating revenues in the case of German local banks. The influence of size on funding costs is of strong economic relevance: our results suggest that an increase in size by 50%, for example, from EUR 500 million in total assets to EUR 750 million (exemplary for M&A transactions among local banks) increases funding costs, ceteris paribus, by approximately 18 basis points which relates to approx. 7% of banks´ average net interest margin.
In this paper, we examine the impact of mergers among German savings banks on the extent to which these savings banks engage in small business lending. The ongoing consolidation in the banking industry has sparked concerns about the continuous availability of credit to small businesses which has been further fueled by empirical studies that partly confirm a reduction in small business lending in the aftermath of mergers. However, using a proprietary data set of German savings banks we find strong evidence that in Germany merging savings banks do not significantly change the extent to which they lend to small businesses compared to prior to the merger or compared to the contemporaneous lending by non-merging banks. We investigate the merger related effects on small business lending in Germany from a bank-level perspective. Furthermore, we estimate small business lending and its continuous adjustment process simultaneously using recent General Method of Moments (GMM) techniques for panel data as proposed by Arellano and Bond (1991).
Generally, information provision and certifcation have been identified as the major economic functions of rating agencies. This paper analyzes whether the “watchlist” (rating review) instrument has extended the agencies' role towards a monitoring position, as proposed by Boot, Milbourn, and Schmeits (2006). Using a data set of Moody's rating history between 1982 and 2004, we find that the overall information content of rating action has indeed increased since the introduction of the watchlist procedure. Our findings suggest that rating reviews help to establish implicit monitoring contracts between agencies and borrowers and as such enable a finer partition of rating information, thereby contributing to a higher information quality.
Generally, information provision and certification have been identified as the major economic functions of rating agencies. This paper analyzes whether the “watchlist" (rating review) instrument has extended the agencies' role towards a monitoring position, as proposed by Boot, Milbourn, and Schmeits (2006). Using a data set of Moody's rating history between 1982 and 2004, we find that the overall information content of rating action has indeed increased since the introduction of the watchlist procedure. Our findings suggest that rating reviews help to establish implicit monitoring contracts between agencies and borrowers and as such enable a finer partition of rating information, thereby contributing to a higher information quality.
This dissertation analyzes tax policy, corporations, and capital market effects. First, the Savings Directive, which has left a loophole by providing grandfathering for some securities, is examined. It can be shown that investors are not willing to pay a premium for bonds that are exempt from the withholding rate, so it may be concluded that the supply of existing loopholes is large enough to allow tax evaders to continue evasion at no additional cost. Second, tax neutrality towards alternative financing instruments for corporate investment is a ubiquitous demand in the political debate. However, the magnitude of possible efficiency costs of a departure from tax neutrality is hardly discussed. Against this background, this dissertation discusses the theory of capital structure and provides back-ofthe-envelope calculations of the possible efficiency cost of a tax distortion of the debt-equity decision. Third, the ex-dividend-day effect in relation to the Gennan tax reform of 2000/2001 is discussed. The abolishment of the imputation system allows reinvestigating the size of the exdividend- day effect. I find no structural break in the size of the German ex-dividend-day effect and no evidence of an ex-dividend-day price drop that exceeds the dividend paid. Fourth, an account of the quantitative development of tax legislation in post-war Germany is presented. It can be shown that the legislative output did not increase over the decades and is not affected by a split majority in the upper and lower houses. Finally, it turns out that an increasing fraction of this legislation is passed in December.
The syndicated loan market, as a hybrid between public and private debt markets, comprises financial institutions with access to valuable private information about borrowers as a result of close bank-borrower relationships. In this paper, we seek empirical evidence for the costs of these relationships in a sample of UK syndicated loan contracts for the time period 1996 through 2005. Using detailed financial data for both borrowers (private and public companies) and for financial institutions, we find that undercapitalized banks charge higher loan spreads for loans to opaque borrowers using various measures for borrower opaqueness and controlling for bank, borrower and loan characteristics. We further analyze this hold-up effect over the business cycle and find that it only prevails during recessions. In expansion phases, however, we do not find evidence for banks exploiting their information monopoly. This finding is consistent with theories on bank reputation in bank loan commitments. Ambiguity about borrower financial health, which induces the information monopoly in the first place, also gives banks the discretion to exploit or not exploit informational captured borrowers. Our findings are both statistically and economically significant and robust to alternative bank and macroeconomic risk proxies. We address potential concerns about unobserved borrower heterogeneity exploiting the panel data nature of our sample. Using firm-bank fixed effect regressions, we find supporting evidence for our theoretical framework. JEL Classifications: G14, G21, G22, G23, G24 Keywords: Syndicated loans; Hold-up; Lending relationships; Business cycle
Risk transfer with CDOs
(2008)
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.
This paper discusses the so-called commercial approach to microfinance under economic and ethical aspects. It first shows how microfinance has developed from a purely welfare-oriented activity to a commercially relevant line of banking business. The background of this stunning success is the – almost universal – adoption of the so-called commercial approach to microfinance in the course of the last decade. As the author argues, this commercial approach is the only sound approach to adopt if one wanted microfinance to have any social and developmental impact, and therefore the wide-spread “moralistic” criticism of the commercial approach, which has again and again been expressed in the 1990s, is ill-placed from an economic and an ethical perspective. However, some recent events in microfinance raise doubts as to whether the commercial approach has not, in a number of cases, gone too far. The evident example for such a development is the Mexican microfinance institution Compartamos, which recently undertook a financially extremely successful IPO. As it seems, some microfinance institutions have by now become so radically commercial that all of those social and development considerations, which have traditionally motivated work in the field of microfinance, seem to have lost their importance. Thus there is a conflict between commercial and developmental aspirations. However, this conflict is not inevitable. The paper concludes by showing that, and how, a microfinance institution can try to combine using the strengths of the capital market and at the same time maintaining its developmental focus and importance.
This paper discusses the effect of capital regulation on the risk taking behavior of commercial banks. We first theoretically show that capital regulation works differently in different market structures of banking sectors. In lowly concentrated markets, capital regulation is effective in mitigating risk taking behavior because banks' franchise values are low and banks have incentives to pursue risky strategies in order to increase their franchise values. If franchise values are high, on the other hand, the effect of capital regulation on bank risk taking is ambiguous as banks lack those incentives. We then test the model predictions on a cross-country sample including 421 commercial banks from 61 countries. We find that capital regulation is effective in mitigating risk taking only in markets with a low degree of concentration. The results remain robust after accounting for financial sector development, legal system effciency, and for other country and bank-specific characteristics. Keywords: Banks, market structure, risk shifting, franchise value, capital regulation