Sustainable Architecture for Finance in Europe (SAFE)
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The paper illustrates based on an example the importance of consistency between the empirical measurement and the concept of variables in estimated macroeconomic models. Since standard New Keynesian models do not account for demographic trends and sectoral shifts, the authors proposes adjusting hours worked per capita used to estimate such models accordingly to enhance the consistency between the data and the model. Without this adjustment, low frequency shifts in hours lead to unreasonable trends in the output gap, caused by the close link between hours and the output gap in such models.
The retirement wave of baby boomers, for example, lowers U.S. aggregate hours per capita, which leads to erroneous permanently negative output gap estimates following the Great Recession. After correcting hours for changes in the age composition, the estimated output gap closes gradually instead following the years after the Great Recession.
The authors relax the standard assumption in the dynamic stochastic general equilibrium (DSGE) literature that exogenous processes are governed by AR(1) processes and estimate ARMA (p,q) orders and parameters of exogenous processes. Methodologically, they contribute to the Bayesian DSGE literature by using Reversible Jump Markov Chain Monte Carlo (RJMCMC) to sample from the unknown ARMA orders and their associated parameter spaces of varying dimensions.
In estimating the technology process in the neoclassical growth model using post war US GDP data, they cast considerable doubt on the standard AR(1) assumption in favor of higher order processes. They find that the posterior concentrates density on hump-shaped impulse responses for all endogenous variables, consistent with alternative empirical estimates and the rigidities behind many richer structural models. Sampling from noninvertible MA representations, a negative response of hours to a positive technology shock is contained within the posterior credible set. While the posterior contains significant uncertainty regarding the exact order, the results are insensitive to the choice of data filter; this contrasts with the authors’ ARMA estimates of GDP itself, which vary significantly depending on the choice of HP or first difference filter.
This paper revisits the macroeconomic effects of the large-scale asset purchase programmes launched by the Federal Reserve and the Bank of England from 2008. Using a Bayesian VAR, we investigate the macroeconomic impact of shocks to asset purchase announcements and assess changes in their effectiveness based on subsample analysis. The results suggest that the early asset purchase programmes had significant positive macroeconomic effects, while those of the subsequent ones were weaker and in part not significantly different from zero. The reduced effectiveness seems to reflect in part better anticipation of asset purchase programmes over time, since we find significant positive macroeconomic effects when we consider shocks to survey expectations of the Federal Reserve’s last asset purchase programme. Finally, in all estimations we find a significant and persistent positive impact of asset purchase shocks on stock prices.
We use minutes from 17,000 financial advisory sessions and corresponding client portfolio data to study how active client involvement affects advisor recommendations and portfolio outcomes. We find that advisors confronted with acquiescent clients stick to their standards and recommend expensive but well diversified mutual fund portfolios. However, if clients take an active role in the meetings, advisors deviate markedly from their standards, resulting in poorer portfolio diversification and lower Sharpe ratios. Our findings that advisors cater to client requests parallel the phenomenon of doctors prescribing antibiotics to insistent patients even if inappropriate, and imply that pandering diminishes the quality of advice.
A tale of one exchange and two order books : effects of fragmentation in the absence of competition
(2018)
Exchanges nowadays routinely operate multiple, almost identically structured limit order markets for the same security. We study the effects of such fragmentation on market performance using a dynamic model where agents trade strategically across two identically-organized limit order books. We show that fragmented markets, in equilibrium, offer higher welfare to intermediaries at the expense of investors with intrinsic trading motives, and lower liquidity than consolidated markets. Consistent with our theory, we document improvements in liquidity and lower profits for liquidity providers when Euronext, in 2009, consolidated its order ow for stocks traded across two country-specific and identically-organized order books into a single order book. Our results suggest that competition in market design, not fragmentation, drives previously documented improvements in market quality when new trading venues emerge; in the absence of such competition, market fragmentation is harmful.
Andreas Hackethal: Better than a pension guarantee would be to allow citizens finally more insights.
SAFE Newsletter : 2018, Q4
(2018)
Germany Inc. was an idiosyncratic form of industrial organization that put financial institutions at the center. This paper argues that the consumption of private benefits in related party transactions by these key agents can be understood as a compensation for their coordinating and monitoring function in Germany Inc. As a consequence, legal tools apt to curb tunneling remained weak in Germany from the perspective of outside shareholders. While banks were in a position to use their firm-level knowledge and influence to limit rent-seeking by other related parties, their own behavior was not subject to meaningful controls. With the dismantling of Germany Inc. banks seized their monitoring function and left an unprecedented void with regard to related party transactions. Hence, a “traditionalist” stance which opposes law reform for related party transactions in Germany negatively affects capital market development, growth opportunities and ultimately social welfare.
In recent years European financial regulation has experienced a tremendous reorientation with respect to the shadow banking system, which manifested first and foremost in its reframing as market-based finance. Initially identified as a source of systemic risk certain initiatives did not only fall much behind the envisaged changes but all to the contrary have been substantially modified in a way that they now aim at revitalizing these activities. The reorientation of European regulatory agency on shadow banking post-crisis, from curtailing it to facilitating resilient market-based finance, has been a cause for irritation by academic observers, dismissed by some as mere rebranding or taken as a sign of regulatory capture. All to the contrary, this paper documents the central role of regulatory agency in shadow banking’s reconfiguration. It does so by analyzing the European initiatives concerning the regulation of Asset-Backed Commercial Paper (ABCP) and another prime example of shadow banking, Money Market Mutual Funds (MMFs). Based on documentary analysis and expert interviews we trace the way the recently published EU frameworks for MMFs and ABCP have been designed (in particular the STS, CRR and MMF regulation in 2017). Furthermore, we show how they have been transformed in such a way that their final versions allow to re-establish the shadow banking chain linking MMFs, the ABCP market and arguably the regular banking system. This transformation is driven by a new form of pro-active European regulatory agency which aims at creating a regulatory infrastructure able to sustain the orderly flow of real economy debt. Far from being captured by the industry, they did so consciously and in cooperation with private actors in order to maintain a channel for credit creation outside of bank credit, a task made more complicated by the rushed politicized final negotiations coupled with technical complexity. This paper thereby contributes to a new strand of literature, seeing the creation and reconfiguration of the shadow banking system as characterized by the active and conscious role of state actors.
Policymakers attach an important role to the macroeconomic outlook of households. Using a representative online panel form the U.S., the authors examine how individuals' macroeconomic expectations causally affect their personal economic prospects and their behavior and provide them with different professional forecasts about the likelihood of a recession. The authors find that groups with the largest exposure to aggregate risk, such as individuals working in cyclical industries, are most likely to respond to an improved macroeconomic outlook, while a large fraction of the population is unlikely to react.
Exploiting the natural experiment of the German reunification, we examine how consumers adapt to a new environment in their macroeconomic forecasting. We document that East Germans expect higher in inflation and make larger forecast errors than West
Germans even decades after reunification. Differences in consumption baskets, financial literacy, risk aversion or trust in the central bank cannot fully account for these patterns. We find most support for the explanation that East Germans, who were used to a strong norm of zero inflation, persistently overadjusted the level of their expectations in the face of the initial inflation shock in reunified Germany. Our findings suggest that large changes in the economic environment can permanently impede people's ability to form accurate macroeconomic expectations, with an important role for the interaction of old norms and new experiences around the event.
We develop a simple theoretical model to motivate testable hypotheses about how peer-to-peer (P2P) platforms compete with banks for loans. The model predicts that (i) P2P lending grows when some banks are faced with exogenously higher regulatory costs; (ii) P2P loans are riskier than bank loans; and (iii) the risk-adjusted interest rates on P2P loans are lower than those on bank loans. We confront these predictions with data on P2P lending and the consumer bank credit market in Germany and find empirical support. Overall, our analysis indicates the P2P lenders are bottom fishing when regulatory shocks create a competitive disadvantage for some banks.
Deutschland und Europa
(2018)
Otmar Issing erörtert die Reaktionen in Deutschland auf die Pläne des französischen Präsidenten Macron aus dessen viel beachteter Rede zur Zukunft Europas an der Pariser Sorbonne. Issing wertet das Ergebnis der Sondierungsgespräche zwischen CDU/CSU und SPD als Abschied von der Vorstellung einer auf Stabilität gerichteten europäischen Gemeinschaft und mahnt an, den einheitlichen Markt und die damit verbundenen Freiheiten nicht durch überzogene Ambitionen zu gefährden und damit zunehmendes Misstrauen gegenüber Europa zu fördern.
Insbesondere in der geplanten Weiterentwicklung des ESM zu einem im Unionsrecht verankerten Europäischen Währungsfonds sieht Issing die Auslieferung der durch den Fonds zur Verfügung gestellten Mittel an eine politische Mehrheit. Zudem führe die Bestellung eines europäischen Finanzministers zur Schaffung einer die Währungsunion ergänzenden Fiskalunion und damit zur Verlagerung finanzpolitischer Kompetenz von der nationalen auf die europäische Ebene. In letzter Konsequenz bedeute dies eine Aufgabe des grundlegenden Prinzips der demokratischen Legitimierung und Kontrolle finanzpolitischer Entscheidungen.
Das Ergebnis der Sondierungsgespräche muss man als Abschied von der Vorstellung einer auf Stabilität gerichteten europäischen Gemeinschaft verstehen. Damit werden die Versprechen gebrochen, die man den Bürgern in Deutschland vor der Einführung des Euros gegeben hat.
Der Beitrag analysiert die Voraussetzungen für stabiles Geld und setzt sich dabei grundlegend mit Hayeks Thesen zu alternativen Währungssystemen sowie dessen fundamentaler Kritik an der Möglichkeit zur Gestaltung der Geldpolitik auf wissenschaftlicher Basis auseinander. Er prüft Hayeks Vorschlag zur Entnationalisierung des Geldes und seine Thesen zur Überlegenheit des im privaten Wettbewerb geschaffenen Geldes. In diesem Zusammenhang schlägt der Beitrag einen Bogen zur aktuellen Diskussion über Kryptowährungen und wirft die Frage auf, ob virtuelle Währungen wie etwa Bitcoin geeignet sind, den Hayekschen Währungswettbewerb zu entfalten. Sodann wird im Gegensatz zu Hayeks Forderung nach einer Abschaffung der Zentralbanken deren entscheidende Rolle für anhaltendes Wachstum bei stabilen Preisen skizziert und die Wichtigkeit der Unabhängigkeit von Notenbanken für die dauerhafte Durchführung einer stabilitätsorientierten Geldpolitik hervorgehoben. Gleichwohl ergeht der Hinweis, dass Notenbanken mit der Überschreitung ihres Mandats auf lange Sicht gesehen selbst den Status ihrer Unabhängigkeit unterminieren können und damit die Rückübertragung der Kompetenz für zentrale geldpolitische Entscheidungen auf Regierung und Parlament provozieren. Die Gefahren der weitgehenden Unabhängigkeit einiger weniger an der Spitze der Notenbanken anerkennend wird anschließend die Bedeutung ihrer Rechenschaftspflicht und Transparenz ihrer Entscheidungen unterstrichen.
Im Jahr 1564 veröffentlicht der Ulmer Militärexperte und -schriftsteller Leonhard Fronsperger die Schrift "Von dem Lob deß Eigen Nutzen", in der er darlegt, dass die konsequente Verfolgung des eigenen Nutzens als individuelle Handlungsmaxime im Ergebnis zu einer Förderung des Gemeinwohls führt. Das etwas mehr als hundert Seiten umfassende Werk wird in Frankfurt am Main, einem Zentrum des europäischen Buchdrucks und -handels, verlegt und findet Erwähnung im ersten veröffentlichten Katalog der Frankfurter Buchmesse. Fronsperger präsentiert seine für die damalige Zeit durchaus revolutionäre These in der Form eines satirischen Enkomions und unterlegt sie mit einer umfangreichen Gesellschaftsanalyse. Er stellt fest, dass die politischen Herrschaftsformen, die gesellschaftlichen Institutionen und die wirtschaftlichen Handelsbeziehungen auf einer konsequenten Verfolgung des eigenen Nutzens aller Akteure beruhen und dass sich die von der Kirche geforderte Ausrichtung des individuellen Handelns am Gemeinwohl in der Realität nicht finden lässt. Vielmehr hält er die Kritik der Theologen am egoistischen Handeln des Einzelnen für falsch, empfindet er doch den Staat, Wirtschaft und Gesellschaft im Großen und Ganzen als gut funktionierend.
Im Folgenden dokumentieren wir zunächst die Biografie des Autors, die Entstehung und Verbreitung des Werks und seine besondere literarische Form. Anschließend diskutieren wir die zentrale These in drei verschiedenen geistesgeschichtlichen Kontexten, die jeweils von besonderer Bedeutung für die Herausbildung der neuzeitlichen Gesellschafts- und Wirtschaftstheorien sind. Erkenntnis- und staatstheoretisch weist Fronspergers Werk deutliche Parallelen zu den Analysen auf, die Niccolò Machiavelli und später Giovanni Botero in Italien zur Bedeutung der auf den individuellen fürstlichen Interessen basierenden Staatsräson bzw. zu den Triebkräften erfolgreicher Stadtentwicklung vorlegten. Markante Unterschiede gibt es dagegen zu den Ansichten der deutschsprachigen Reformatoren im Anschluss an Luther, die zwar die Unterscheidung zwischen geistlicher und weltlicher Sphäre propagieren und damit die Entwicklung einer eigenständigen Moral für das Wirtschaftsleben befördern, dort allerdings mehrheitlich die Orientierung am "Gemeinen Nutzen" propagieren. Indem Fronsperger dagegen die Verfolgung des Eigennutzes fordert, nimmt er wirtschafts- und gesellschaftstheoretische Einsichten über das Wesen und die Auswirkungen der Arbeitsteilung vorweg, die erst 150 Jahre und später von Bernard Mandeville und Adam Smith in England und Schottland formuliert wurden. Das Werk Fronspergers bietet damit ein herausragendes Beispiel dafür, wie sich aus dem Zusammenspiel von wirtschaftlichem Erfolg, einem realistischen Menschenbild und manchen Aspekten der Reformation in deren Folge ein neues normatives Verständnis von den Antriebskräften ökonomischer und gesellschaftlicher Dynamik entwickelt, das später als der "Geist des Kapitalismus" bezeichnet wird.
The increase in alternative working arrangements has sparked a debate over the positive impact of increased flexibility against the negative impact of decreased financial security. We study the prevalence and determinants of intermediated work in order to document the relative importance of the arguments for and against this recent labor market trend. We link data on individual participation and losses from a Federal Trade Commission settlement with a Multi-Level Marketing firm with detailed county-level information. Participation is greater in middle-income areas and in areas where female labor market non-participation is higher, suggesting that flexibility offers real benefits. However, losses from MLM participation are higher in areas with lower education levels and higher income inequality, suggesting that the downsides of alternative work are particularly high in certain demographics. Our results illustrate that the advantages and disadvantages of alternative work arrangements accrue to different groups.
A growing body of literature shows the importance of financial literacy in households' financial decisions. However, fewer studies focus on understanding the determinants of financial literacy. Our paper fills this gap by analyzing a specific determinant, the educational system, to explain the heterogeneity in financial literacy scores across Germany. We suggest that the lower financial literacy observed in East Germany is partially caused by a different institutional framework experienced during the Cold War, more specifically, by the socialist educational system of the GDR which affected specific cohorts of individuals. By exploiting the unique set-up of the German reunification, we identify education as a channel through which institutions and financial literacy are related in the German context.
I present a new business cycle model in which decision making follows a simple mental process motivated by neuroeconomics. Decision makers first compute the value of two different options and then choose the option that offers the highest value, but with errors. The resulting model is highly tractable and intuitive. A demand function in level replaces the traditional Euler equation. As a result, even liquid consumers can have a large marginal propensity to consume. The interest rate affects consumption through the cost of borrowing and not through intertemporal substitution. I discuss the implications for stimulus policies.
To estimate demand for labor, we use a combination of detailed employment data and the outcomes of procurement auctions, and compare the employment of the winner of an auction with the employment of the second ranked firm (i.e. the runner-up firm). Assuming similar ex-ante winning probabilities for both firms, we may view winning an auction as an exogenous shock to a firm’s production and its demand for labor. We utilize daily data from almost 900 construction firms and about 3,000 auctions in Austria in the time period 2006 until 2009. Our main results show that the winning firm significantly increases labor demand in the weeks following an auction but only in the years before the recent economic crisis. It employs about 80 workers more after the auction than the runner-up firm. Most of the adjustment takes place within one month after the demand shock. Winners predominantly fire fewer workers after winning than runner-up firms. In the crisis, however, firms do not employ more workers than their competitors after winning an auction. We discuss explanations like labor hoarding and productivity improvements induced by the crisis as well discuss implications for fiscal and stimulus policy in the crisis.
Bargaining with a bank
(2018)
This paper examines bargaining as a mechanism to resolve information problems. To guide the analysis, I develop a parsimonious model of a credit negotiation between a bank and firms with varying levels of impatience. In equilibrium, impatient firms accept the bank’s offer immediately, while patient firms wait and negotiate price adjustments. I test the empirical predictions using a hand-collected dataset on credit line negotiations. Firms signing the bank’s offer right away draw down their line of credit after origination and default more than late signers. Late signers negotiate price adjustments more frequently, and, consistent with the model, these adjustments predict better ex post performance.
his paper studies heterogeneity in the reaction to rank feedback. In a laboratory experiment, individuals take part in a series of dynamic real-effort contests with intermediate feedback. To solve the identification problem in estimating the causal effect of rank feedback on subsequent effort provision we implement a random multiplier in the first round of each contest. The realization of this multiplier then serves as a valid instrument for rank feedback. While rank feedback has a robust effect on subsequent effort provision on average, an explicit analysis of between-subject heterogeneity reveals that a substantial fraction of participants in fact react entirely opposite than the aggregated results indicate. We further show that this heterogeneity has consequences for overall outcomes, thereby arguing that heterogeneous sensitivities to rank feedback could have implications for the design of various policies in education and organizations.
We show that bond purchases undertaken in the context of quantitative easing efforts by the European Central Bank created a large mispricing between the market for German and Italian government bonds and their respective futures contracts. On top of the direct effect the buying pressure exerted on bond prices, we show three indirect effects through which the scarcity of bonds, resulting from the asset purchases, drove a wedge between the futures contracts and the underlying bonds: the deterioration of bond market liquidity, the increased bond specialness on the repurchase agreement market, and the greater uncertainty about bond availability as collateral.
We examine how a firms' investment behavior affects the investment of a neighboring firm. Economic theory yields ambiguous predictions regarding the direction of firm peer effects and consistent with earlier work, we find that firms display similar investment behavior within an area using OLS analysis. Exploiting time-variation in the rise of U.S. states' corporate income taxes and utilizing heterogeneity in firms' exposure to increases in corporate income tax rates, we identify the causal impact of local firms' investments. Using this as an instrumental variable in a 2SLS estimation, we find that an increases in local firms' investment reduces the investment of a local peer firm. This effect is more pronounced if local competition among firms is stronger and supports theories that firm investments are strategic substitutes due to competition.
This paper is the national report for Germany prepared for the to the 20th General Congress of the International Academy of Comparative Law 2018 and gives an overview of the regulation of crowdfunding in Germany and the typical design of crowdfunding campaigns under this legal framework. After a brief survey of market data, it delineates the classification of crowdfunding transactions in German contract law and their treatment under the applicable conflict of laws regime. It then turns to the relevant rules in prudential banking regulation and capital market law. It highlights disclosure requirements that flow from both contractual obligations of the initiators of campaigns vis-à-vis contributors and securities regulation (prospectus regime). After sketching the most important duties of the parties involved in crowdfunding, the report also looks at the key features of the respective transactions’ tax treatment.
This paper investigates the effect of the conventional and unconventional (e.g. Quantitative Easing - QE) monetary policy intervention on the insurance industry. We first analyze the impact on the stock performances of 166 (re)insurers from the last QE programme launched by the European Central Bank (ECB) by constructing an event study around the announcement date. Then we enlarge the scope by looking at the monetary policy surprise effects on the same sample of (re)insurers over a timeframe of 12 years, also extending the analysis to the Credit Default Swaps (CDS) market. In the second part of the paper by building a set of balance sheet-based indices, we identify the characteristics of (re)insurers that determine sensitivity to monetary policy actions. Our evidences suggest that a single intervention extrapolated from the comprehensive strategy cannot be utilized to estimate the effect of monetary policy intervention on the market. With respect to the impact of monetary policies, we show how the effect of interventions changes over time. Expansionary monetary policy interventions, when generating an instantaneous reduction of interest rates, generated movement in stock prices in the same direction till September 2010. This effect turned positive during the European sovereign debt crisis. However, the effect faded away in 2014-2015. The pattern is confirmed by the impact on the CDS market. With regard to the determinants of these effects, our analysis suggests that sensitivity is mainly driven by asset allocation and in particular by exposure to fixed income assets.
A new governance architecture for european financial markets? Towards a european supervision of CCPs
(2018)
Does the new European outlook on financial markets, as voiced by the EU Commission since the beginning of the Capital Market Unions imply a movement of the EU towards an alignment of market integration and direct supervision of common rules? This paper sets out to answer this question for the case of common supervision for Central Counterparties (CCPs) in the European Union. Those entities gained crucial importance post-crisis due to new regulation which requires the mandatory clearing of standardized derivative contracts, transforming clearing houses into central nodes for cross-border financial transactions. While the EU-wide regulatory framework EMIR, enacted in 2012, stipulates common regulatory requirements, the framework still relies on home-country supervision of those rules, arguably leading to regulatory as well as supervisory arbitrage. Therefore, the regulatory reform to stabilize the OTC derivatives market replicated at its center a governance flaw, which had been identified as one of the major causes for the gravity of the financial crisis in the EU: the coupling of intense competition based on private risk management systems with a national supervision of European rules. This paper traces the history of this problem awareness and inquires which factors account for the fact that only in 2017 serious negotiations at the EU level ensued that envisioned a common supervision of CCPs to fix the flawed system of governance. Analyzing this shift in the European governance architecture, we argue that Brexit has opened a window of opportunity for a centralization of supervision for CCPs. Brexit aligns the urgency of the problem with material interests of crucial political stakeholder, in particular of Germany and France, providing the possibility for a grand European bargain.
This paper investigates inertia within and across banks in retail deposit markets using detailed panel data on consumer choices and account characteristics. In a structural choice model, I find that costs of inertia are around one third higher for switching accounts across compared to switching within banks. Observable proxies of bank-level switching costs (number and type of additional financial products) explain most of this cost premium, while online banking usage reduces inertia. Consistent with theory, I provide evidence that banks incorporate inertia in their pricing as older accounts pay lower rates than comparable newer accounts. Counterfactual policies reducing inertia shift market share to more competitive smaller banks, but only eliminating inertia within banks already results in high potential gains in consumer surplus. This suggests that facilitating bank switching alone might be insufficient to improve consumer choices.
We propose a spatiotemporal approach for modeling risk spillovers using time-varying proximity matrices based on observable financial networks and introduce a new bilateral specification. We study covariance stationarity and identification of the model, and analyze consistency and asymptotic normality of the quasi-maximum-likelihood estimator. We show how to isolate risk channels and we discuss how to compute target exposure able to reduce system variance. An empirical analysis on Euro-area cross-country holdings shows that Italy and Ireland are key players in spreading risk, France and Portugal are the major risk receivers, and we uncover Spain's non-trivial role as risk middleman.
SAFE Newsletter : 2018, Q1
(2018)
SAFE Newsletter : 2018, Q3
(2018)
SAFE Newsletter : 2018, Q2
(2018)
Bitcoin stands like no other cryptocurrency for the profound transformation of financial markets in the digital economy. While the last few months saw the free trade in goods struggle against trends towards protectionism, cryptocurrencies seemed to tear down one border after the other – physical, geographic, and legal ones alike. A libertarian’s wet dream. Blockchain presents itself as a fortress against state intervention, for whatever purpose. Finally, a technological, market-based solution would put an end to the problem of monetary policy, payment transactions, and make whole chunks of government regulation superfluous. ...
Nicht nur die Geräuschkulisse des Brexits absorbierte ein Stück weit die Aufmerksamkeit für das Urteil des Europäischen Gerichtshofs (EuGH) zur Zulässigkeit des Anleihenkaufprogramms der EZB. Denn immerhin entschied Luxemburg damit über eine der nach wie vor seltenen Vorlagen aus Karlsruhe. Dazu mag auch beigetragen haben, dass seit der Stellungnahme des Generalanwalts Wathelet nicht mehr damit gerechnet wurde, dass der EuGH der Europäischen Zentralbank (EZB) einen sprichwörtlichen Strich durch die Rechnung machen würde. Dennoch ist das Urteil aus einigen Gründen bemerkenswert.
How demanding and consistent is the 2018 stress test design in comparison to previous exercises?
(2018)
Bank regulators have the discretion to discipline banks by executing enforcement actions to ensure that banks correct deficiencies regarding safe and sound banking principles. We highlight the trade-offs regarding the execution of enforcement actions for financial stability. Following this we provide an overview of the differences in the legal framework governing supervisors’ execution of enforcement actions in the Banking Union and the United States. After discussing work on the effect of enforcement action on bank behaviour and the real economy, we present data on the evolution of enforcement actions and monetary penalties by U.S. regulators. We conclude by noting the importance of supervisors to levy efficient monetary penalties and stressing that a division of competences among different regulators should not lead to a loss of efficiency regarding the execution of enforcement actions.
This paper analyzes how the combination of borrowing constraints and idiosyncratic risk affects the equity premium in an overlapping generations economy. I find that introducing a zero-borrowing constraint in an economy without idiosyncratic risk increases the equity premium by 70 percent, which means that the mechanism described in Constantinides, Donaldson, and Mehra (2002) is dampened because of the large number of generations and production. With social security the effect of the zero-borrowing constraint is a lot weaker. More surprisingly, when I introduce idiosyncratic labor income risk in an economy without a zero-borrowing constraint, the equity premium increases by 50 percent, even though the income shocks are independent of aggregate risk and are not permanent. The reason is that idiosyncratic risk makes the endogenous natural borrowing limits much tighter, so that they have a similar effect to an exogenously imposed zero-borrowing constraint. This intuition is confirmed when I add idiosyncratic risk in an economy with a zero-borrowing constraint: neither the equity premium nor the Sharpe ratio change, because the zero-borrowing constraint is already tighter than the natural borrowing limits that result when idiosyncratic risk is added.
Departing from the principle of absolute priority, CoCo bonds are particularly exposed to bank losses despite not having ownership rights. This paper shows the link between adverse CoCo design and their yields, confirming the existence of market monitoring in designated bail-in debt. Specifically, focusing on the write-down feature as loss absorption mechanism in CoCo debt, I do find a yield premium on this feature relative to equity-conversion CoCo bonds as predicted by theoretical models. Moreover, and consistent with theories on moral hazard, I find this premium to be largest when existing incentives for opportunistic behavior are largest, while this premium is non-existent if moral hazard is perceived to be small. The findings show that write-down CoCo bonds introduce a moral hazard problem in the banks. At the same time, they support the idea of CoCo investors acting as monitors, which is a prerequisite for a meaningful role of CoCo debt in banks' regulatory capital mix.
This paper provides a complete characterization of optimal contracts in principal-agent settings where the agent's action has persistent effects. We model general information environments via the stochastic process of the likelihood-ratio. The martingale property of this performance metric captures the information benefit of deferral. Costs of deferral may result from both the agent's relative impatience as well as her consumption smoothing needs. If the relatively impatient agent is risk neutral, optimal contracts take a simple form in that they only reward maximal performance for at most two payout dates. If the agent is additionally risk-averse, optimal contracts stipulate rewards for a larger selection of dates and performance states: The performance hurdle to obtain the same level of compensation is increasing over time whereas the pay-performance sensitivity is declining.