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- Sustainable Architecture for Finance in Europe (SAFE) (103) (remove)
Exploiting heterogeneity in U.S. firms' exposure to an unconventional monetary policy shock that reduced debt financing costs, I identify the impact of financing conditions on firms' toxic emissions. I find robust evidence that lower financing costs reduce toxic emissions and boost investments in emission reduction activities, especially capital-intensive pollution control activities. The effect is stronger for firms in noncompliance with environmental regulation. Examining the ability of regaining regulatory compliance by implementing pollution control activities I find that only capital-intensive activities help firms regaining compliance. These findings underscore the impact of firms' financing conditions for emissions and the environment.
Completing banking union
(2019)
To complete banking union, there should be a single European deposit insurance scheme (EDIS) alongside the single supervisor and the single resolution authority. This would ensure uniformity across the Eurozone and facilitate the removal of barriers to the mobility of liquidity and capital within the single market. That in turn would promote efficiency in the banking sector and in the economy at large — just at the time that the EU needs to boost growth in order to remain competitive with the US and China.
The EDIS promise to promptly reimburse insured deposits at a failed bank in the Eurozone should be unconditional. But who will stand behind that commitment? Who is the “E” in EDIS? Is its promise credible, even in a crisis? If a deposit guarantee scheme fails to deliver what people expect, panic would very likely erupt. Instead of strengthening financial stability, deposit insurance could destroy it.
Yet this is the risk that current proposals pose. They create the impression that there will be a single deposit guarantee scheme. There will not. Instead, there will be a complex set of liquidity and reinsurance arrangements among Member State schemes.
These defects need to be remedied. To do so, we propose creating a European Deposit Insurance Corporation (EDIC) alongside national schemes. For banks that meet EDIC’s strict entry criteria and decide to become members, EDIC will promise to reimburse promptly — in the event the member bank fails — 100 cents on the euro in euro for each euro of insured deposits, regardless of the Eurozone Member State in which the bank is headquartered.
In effect, the single deposit guarantee scheme would be created via migration to EDIC rather than mutualisation of existing schemes. This would increase the mobility of capital and liquidity and lead to a convergence of interest rates across the Eurozone. That in turn will improve the effectiveness of monetary policy, foster integration and promote growth.
The use of contractual engineering to create channels of credit intermediation outside of the realm of banking regulation has been a recurring activity in Western financial systems over the last 50 years. After the financial crisis of 2007 and 2008, this phenomenon, at that time commonly referred to as ‘shadow banking’, evoked a large-scale regulatory backlash, including several specific regulatory constraints being placed on non-bank financial institutions (NBFI). This paper proposes a different avenue for regulators to keep regulatory arbitrage under control and preserve sufficient space for efficient financial innovation. Rather than engaging in the proverbial race between hare and hedgehog that is emerging with increasingly specific regulation of particular contractual arrangements, this paper argues for a normative approach to supervision. We outline this approach in detail by showing that regulators should primarily analyse the allocation of tail risk inherent in the respective contractual arrangements. Our paper proposes to assign regulatory burdens equivalent to prudential banking regulation, in case these arrangements become only viable through indirect or direct access to an (ad hoc) public backstop. In order to make the pivotal assessment, regulators will need information about recent contractual innovations and their risk-allocating characteristics. According to the scholarship on regulatory networks serving as communities of interpretation, we suggest in particular how regulators should structure their relationships with semi-public gatekeepers such as lawyers, auditors and consultants to keep abreast of the real-world implications of evolving transactional structures. This paper then uses the rise of credit funds as a non-bank entities economically engaged in credit intermediation to apply this normative framework, pointing to recent contractual innovations that call for more regulatory scrutiny in a multipolar regulatory dialogue.
Distributed ledger technology especially in the form of publicly coordinated validation networks such as Ethereum and Bitcoin with their own monetary circles provide for a revealing litmus test for current financial regulatory schemes. The paper highlights the interrelation between distributed coordination and the emission of virtual currency to make sense of the function of the new monetary phenomenon. It then argues for the regulation of financial services on the ground of the technology to ensure integrity standards. In this respect, it is useful to gear the development of a regulatory scheme towards the existing financial regulatory principles. However, future measures of the regulators must take the distributed nature of the platforms into account by relying on a “regulated self-regulation” of the community. Finally, the article focuses on the shortcomings of the current EU regulatory regimes, especially the regulation frameworks regarding financial services, payment services and electronic money.
Many Americans claim Social Security benefits early, though this leaves them with lower benefits throughout retirement. We build a lifecycle model that closely tracks claiming patterns under current rules, and we use it to predict claiming delays if, by delaying benefits, people received a lump sum instead of an annuity. We predict that current early claimers would defer claiming by a year given actuarially fair lump sums, and the predictions conform with respondents’ answers to a strategic survey about the lump sum. In other words, such a reform could provide an avenue for encouraging delayed retirement without benefit cuts or tax increases. Moreover, many people would still defer claiming even for smaller lump sums.
Implications of money-back guarantees for individual retirement accounts: protection then and now
(2019)
In the wake of the financial crisis and continued volatility in international capital markets, there is growing interest in mechanisms that can protect people against retirement account volatility. This paper explores the consequences for savers’ wellbeing of implementing market-based retirement account guarantees, using a life cycle consumption and portfolio choice model where investors have access to stocks, bonds, and tax-qualified retirement accounts. We evaluate the case of German Riester plans adopted in 2002, an individual retirement account produce that includes embedded mandatory money-back guarantees. These guarantees influenced participant consumption, saving, and investment behavior in the higher interest rate environment of that era, and they have even larger impacts in a low-return world such as the present. Importantly, we conclude that abandoning these guarantees could enhance old-age consumption for over 80% of retirees, particularly lower earners, without harming consumption during the accumulation phase. Our results are of general interest for other countries implementing default investment options in individual retirement accounts, such as the U.S. 401(k) defined contribution plans and the Pan European Pension Product (PEPP) recently launched by the European Parliament.
This paper examines how networks of professional contacts contribute to the development of the careers of executives of North American and European companies. We build a dynamic model of career progression in which career moves may both depend upon existing networks and contribute to the development of future networks. We test the theory on an original dataset of nearly 73 000 executives in over 10 000 _rms. In principle professional networks could be relevant both because they are rewarded by the employer and because they facilitate job mobility. Our econometric analysis suggests that, although there is a substantial positive correlation between network size and executive compensation, with an elasticity of around 20%, almost all of this is due to unobserved individual characteristics. The true causal impact of networks on compensation is closer to an elasticity of 1 or 2% on average, all of this due to enhanced probability of moving to a higher-paid job. And there appear to be strongly diminishing returns to network size.
Wider die schwarze Null
(2019)
A plea against "black zero"
(2019)
In this paper, we investigate the relation between buildings' energy efficiency and the probability of mortgage default. To this end, we construct a novel panel dataset by combining Dutch loan-level mortgage information with provisional building energy ratings that are calculated by the Netherlands Enterprise Agency. By employing the Logistic regression and the extended Cox model, we find that buildings' energy efficiency is associated with lower likelihood of mortgage default. The results hold for a battery of robustness checks. Additional findings indicate that credit risk varies with the degree of energy efficiency.
Abundant studies show that individuals often struggle and frequently fail to form a correct perception of how much they are worth in terms of income or net wealth, both in absolute terms and relative to others. The authors find that wealth misperception arises even in a frictionless environment. They show that this wealth misperception is related to low cognitive abilities and inattention, and that subjects who misperceive wealth have a greater tendency to borrow and spend out of gains. A standard optimal consumption choice model, enriched with a rational but inattentive agent à la Gabaix aligns the key experimental findings.
Self-control failure is among the major pathologies (Baumeister et al. (1994)) affecting individual investment decisions which has hardly been measurable in empirical research. We use cigarette addiction identified from checking account transactions to proxy for low self-control and compare over 5,000 smokers to 14,000 nonsmokers. Smokers self-directing their investment trade more frequently, exhibit more biases and achieve lower portfolio returns. We also find that smokers, some of which might be aware of their limited levels of self-control, exhibit a higher propensity than nonsmokers to delegate decision making to professional advisors and fund managers. We document that such precommitments work successfully.
A common prediction of macroeconomic models of credit market frictions is that the tightness of financial constraints is countercyclical. As a result, theory implies a negative collateralizability premium; that is, capital that can be used as collateral to relax financial constraints provides insurance against aggregate shocks and commands a lower risk compensation compared with non-collateralizable assets. We show that a longshort portfolio constructed using a novel measure of asset collateralizability generates an average excess return of around 8% per year. We develop a general equilibrium model with heterogeneous firms and financial constraints to quantitatively account for the collateralizability premium.
It has been documented that vertical customer-supplier links between industries are the basis for strong cross-sectional stock return predictability (Menzly and Ozbas (2010)). We show that robust predictability also arises from horizontal links between industries, i.e., from the fact that industries are competitors or offer products, which are substitutes for each other. These horizontally linked industries exhibit positively correlated fundamentals. The signal derived from this type of connectedness is the basis for significant alpha in sorted portfolio strategies, and informed investors take the related information into account when they form their portfolios. We thus provide evidence of return predictability based on a new type of economic links between industries not captured in previous studies.
We design, field and exploit survey data from a representative sample of the French population to examine whether informative social interactions enter householdsístockholding decisions. Respondents report perceptions about their circle of peers with whom they interact about Önancial matters, their social circle and the population. We provide evidence for the presence of an information channel through which social interactions ináuence perceptions and expectations about stock returns, and financial behavior. We also find evidence of mindless imitation of peers in the outer social circle, but this does not permeate as many layers of financial behavior as informative social interactions do.
Do competition and incentives offered to designated market makers (DMMs) improve market liquidity? Using data from NYSE Euronext Paris, we show that an exogenous increase in competition among DMMs leads to a significant decrease in quoted and effective spreads, mainly through a reduction in adverse selection costs. In contrast, changes in incentives, through small changes in rebates and requirements for DMMs, do not have any tangible effect on market liquidity. Our results are of relevance for designing optimal contracts between exchanges and DMMs and for regulatory market oversight.
Households buy life insurance as part of their liquidity management. The option to surrender such a policy can serve as a buffer when a household faces a liquidity need. In this study, we investigate empirically which individual and household specific sociodemographic factors influence the surrender behavior of life insurance policyholders. Based on the Socio-Economic Panel (SOEP), an ongoing wide-ranging representative longitudinal study of around 11,000 private households in Germany, we construct a proxy to identify life insurance surrender in the data. We use this proxy to conduct fixed effect regressions and support the results with survival analyses. We find that life events that possibly impose a liquidity shock to the household, such as birth of a child and divorce increase the likelihood to surrender an existing life insurance policy for an average household in the panel. The acquisition of a dwelling and unemployment are further aspects that can foster life insurance surrender. Our results are robust with respect to different models and hold conditioning on region specific trends; they vary however for different age groups. Our analyses contribute to the existing literature supporting the emergency fund hypothesis. The findings obtained in this study can help life insurers and regulators to detect and understand industry specific challenges of the demographic change.
n der Literatur wird oftmals angeführt, dass die Grunderwerbsteuer weder aus Sicht des Äquivalenzprinzips noch aus Sicht des Leistungsfähigkeitsprinzips zu rechtfertigen ist und daher in einem modernen Steuersystem nichts verloren hätte. Das vorliegende Papier weist darauf hin, dass die Grunderwerbsteuer Parallelen zur Grundsteuer aufweist und sich, zumindest aus ökonomischer Sicht, in eine Grundsteuer umbauen ließe. Dies könnte insbesondere dann interessant sein, wenn die derzeitige deutsche Grundsteuer in eine reine Flächensteuer umgebaut wird, die den Wert der Bebauung unbesteuert lässt. Ein Umbau der Grunderwerbsteuer, bei der der Kaufpreis dynamisiert wird und dann einer jährlichen Steuer unterworfen wird, hat einige Vorteile. Diese resultieren daraus, dass der negative Effekt auf die Zahl der Immobilientransaktionen (Lock-in-Effekt) abgemildert würde. Könnte die Dynamisierung treffsicher an die regionale Immobilienpreisentwicklung angepasst werden, entfällt der Lock-in-Effekt für Immobilien, die bereits einmal der dynamisierten Grunderwerbsteuer unterworfen waren, sogar komplett. Dies hat nicht nur positive Effekte auf das Funktionieren des Wohnungs- und Arbeitsmarktes, sondern kann auch dem Problem der Share Deals entgegen wirken.
In this note, we first highlight different developments for banks under direct ECB supervision within the SSM that may prompt further investigation by supervisors. We find that banks that were weakly capitalized at the start of direct ECB supervision (1) still face elevated levels of non-performing loans, (2) are less cost-efficient and (3) reduced their share of subordinated debt financing over the last years. We then stress the importance of continuous and ongoing cost-benefit analysis regarding banking supervision in Europe. We also encourage processes to question existing supervisory practices to ensure a lean and efficient banking supervision. Finally, we underline the need of continuous and intensified coordination among regulatory bodies in the Banking Union since the efficacy of European bank supervision rests on its interplay with many different institutions.
This document was requested by the European Parliament's Committee on Economic and Monetary Affairs. It was originally published on the European Parliament’s webpage.
There is substantial disagreement about the consequences of the Tax Cuts and Jobs Act (TCJA) of 2017, which constitutes the most extensive tax reform in the United States in more than 30 years. Using a large-scale two-country dynamic general equilibrium model with nominal rigidities, we find that the TCJA increases GDP by about 2% in the medium-run and by about 2.5% in the long-run. The shortrun impact depends crucially on the degree and costs of variable capital utilization, with GDP effects ranging from 1 to 3%. At the same time, the TCJA does not pay for itself. In our analysis, the reform decreases tax revenues and raises the debt-to-GDP ratio by about 15 percentage points in the medium-run until 2025. We show that combining the TCJA with spending cuts can dampen the increase in government indebtedness without reducing its expansionary effect.
In diesem explorativen Beitrag machen wir uns Gedanken über die Zukunft von Deutscher Bank und Commerzbank und entwickeln einen neuen Zugang zu dem Thema: Statt einer Fusion von DB und CB schlagen wir eine Teilfusion nur der Datenzentren vor – es entsteht auf diese Weise die Grundlage für eine Open Banking Plattform als „utility“, also als Betrieb im Eigentum der Nutzer, an der perspektivisch weitere Finanzinstitute teilnehmen können. Die über die Daten kooperierenden Institute bleiben mit Blick auf Produkte und Dienstleistungen unverändert Konkurrenten – „national champions“ entstehen auf diese Weise nicht. Aber es wird damit in Europa die Basis für einen erfolgversprechenden Wettbewerb mit den großen Datenplattformen aus USA und China (Facebook, Amazon, Alipay) gelegt, die früher oder später in den Finanzmarkt eindringen werden. Das von uns vorgeschlagene Modell einer offenen Datenplattform für Banken verhindert das Entstehen von „national champions“ und schützt damit auch das Kernanliegen der Bankenunion: Die Schaffung eines Finanzsystems, dessen Banken jede für sich ausscheiden können ohne eine systemische Krise auszulösen, und ohne den Steuerzahler zu einer Rettungsaktion zu zwingen
Alexander Ludwig: The discussion about lower delayed retirement credits in the German public pension system misses the point. Instead, it would be more important to increase both, delayed retirement credits and early retirement penalties, and to link them to the longer life expectancy of the working population.
This paper sheds light on the life insurance sector’s liquidity risk exposure. Life insurers are important long-term investors on financial markets. Due to their long-term investment horizon they cannot quickly adapt to changes in macroeconomic conditions. Rising interest rates in particular can expose life insurers to run-like situations, since a slow interest rate passthrough incentivizes policyholders to terminate insurance policies and invest the proceeds at relatively high market interest rates. We develop and empirically calibrate a granular model of policyholder behavior and life insurance cash flows to quantify insurers’ liquidity risk exposure stemming from policy terminations. Our model predicts that a sharp interest rate rise by 4.5pp within two years would force life insurers to liquidate 12% of their initial assets. While the associated fire sale costs are small under reasonable assumptions, policy terminations plausibly erase 30% of life insurers’ capital due to mark-to-market accounting. Our analysis reveals a mechanism by which monetary policy tightening increases liquidity risk exposure of non-bank financial intermediaries with long-term assets.
This paper studies insurance demand for individuals with limited financial literacy. We propose uncertainty about insurance payouts, resulting from contract complexity, as a novel channel that affects decision-making of financially illiterate individuals. Then, a trade-off between second-order (risk aversion) and third-order (prudence) risk preferences drives insurance demand. Sufficiently prudent individuals raise insurance demand upon an increase in contract complexity, while the effect is reversed for less prudent individuals. We characterize competitive market equilibria that feature complex contracts since firms face costs to reduce complexity. Based on the equilibrium analysis, we propose a monetary measure for the welfare cost of financial illiteracy and show that it is mainly driven by individuals’ risk aversion. Finally, we discuss implications for regulation and consumer protection.
Telemonitoring devices can be used to screen consumer characteristics and mitigate information asymmetries that lead to adverse selection in insurance markets. Nevertheless, some consumers value their privacy and dislike sharing private information with insurers. In a secondbest efficient Miyazaki-Wilson-Spence (MWS) framework, we allow consumers to reveal their risk type for an individual subjective cost and show analytically how this affects insurance market equilibria as well as social welfare. We find that information disclosure can substitute deductibles for consumers whose transparency aversion is sufficiently low. This can lead to a Pareto improvement of social welfare. Yet, if all consumers are offered cross-subsidizing contracts, the introduction of a screening contract decreases or even eliminates cross-subsidies. Given the prior existence of a cross-subsidizing MWS equilibrium, utility is shifted from individuals who do not reveal their private information to those who choose to reveal. Our analysis informs the discussion on consumer protection in the context of digitalization. It shows that new technologies challenge cross-subsidization in insurance markets, and it stresses the negative externalities that digitalization has on consumers who are unwilling to take part in this development.