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n this paper we analyze an economy with two heterogeneous investors who both exhibit misspecified filtering models for the unobservable expected growth rate of the aggregated dividend. A key result of our analysis with respect to long-run investor survival is that there are degrees of model misspecification on the part of one investor for which there is no compensation by the other investor's deficiency. The main finding with respect to the asset pricing properties of our model is that the two dimensions of asset pricing and survival are basically independent. In scenarios when the investors are more similar with respect to their expected consumption shares, return volatilities can nevertheless be higher than in cases when they are very different.
We analyze the macroeconomic implications of increasing the top marginal income tax rate using a dynamic general equilibrium framework with heterogeneous agents and a fiscal structure resembling the actual U.S. tax system. The wealth and income distributions generated by our model replicate the empirical ones. In two policy experiments, we increase the statutory top marginal tax rate from 35 to 70 percent and redistribute the additional tax revenue among households, either by decreasing all other marginal tax rates or by paying out a lump-sum transfer to all households. We find that increasing the top marginal tax rate decreases inequality in both wealth and income but also leads to a contraction of the aggregate economy. This is primarily driven by the negative effects that the tax change has on top income earners. The aggregate gain in welfare is sizable in both experiments mainly due to a higher degree of distributional equality.
There is a growing debate about complementing the European Monetary Union by a more comprehensive fiscal union. Against this background, this paper emphasizes that there is a trade-off in designing a system of fiscal transfers ("fiscal capacity") in a union between members of different size. A system cannot guarantee symmetric treatment of members and simultaneously ensure a balanced budget. We compute hypothetical transfers for the Eurozone members from 2001 to 2012 to illustrate this trade-off. Interestingly, a symmetric system that treats shocks in small and large countries symmetrically would have produced large budgetary surpluses in 2009, the worst year of the financial crisis.
In Absatz 3 des Artikel 136 des Vertrags über die Arbeitsweise der EU (AEUV) wurde für die Verwendung von ESM Geldern festgelegt, dass diese nur dann zur Gewährung von Finanzhilfen verwendet werden dürfen, wenn „... dies unabdingbar ist, um die Stabilität des Euro-Währungsgebiets insgesamt zu wahren." Im vorliegenden Artikel argumentiert Alfons Weichenrieder, dass die nach dem griechischen Referendum entstandene Situation, die Stabilität des “Euro-Währungsgebiets insgesamt" nicht bedroht, so dass die Vergabe von neuen Krediten, zumal diese voraussichtlich unter weichen und im Zweifel nicht durchsetzbaren Auflagen vergeben würden, ein offensichtlicher Verstoß gegen die Grundlagen des ESM wäre.
In this statement the European Shadow Financial Regulatory Committee (ESFRC) is advocating a conditional relief of Greek’s government debt based on Greece meeting certain targets for structural economic reforms in areas such as its labor market and pensions sector.The authors argue that the position of the European institutions that debt relief for Greece cannot be part of an agreement is based on the illusion that Greece will be able to service its sovereign debt and reduce its debt overhang after implementing a set of fiscal and structural reforms. However, the Greek economy would need to grow at an unrealistig level to achieve debt sustainability soley on the basis of reforms.The authors therefore view a substantial debt relief as inevitable and argue that three questions must be resolved urgently, in order to structure debt relief adequately: First, which groups must accept losses associated with debt relief. Second, how much debt relief should be offered. Third, under what conditions should relief be offered.
In light of the failed negotiations with Greece, Jan Krahnen argues that an effective reform agenda for Greece can only be designed by the elected government. Fundamental reforms will take time to take full effect and euro area member states will, in the meantime, have to offer Greece a basic level of economic security.
Krahnen demands that policy makers and the professional public involved view the Greek crisis as an opportunity to take the next necessary steps to formulate a reform agenda for the European Monetary Union. A community of supranational and non-party researchers and intellectuals could take the initiative and in a structured process develop a trustworthy and realistic concept that drafts the next big step towards a political union of Europe, including elements of a fiscal union.
Mit Blick auf die gescheiterten Verhandlungen mit Griechenland, argumentiert Jan Krahnen im vorliegenden Policy Beitrag, dass eine zielführende Reformagenda nur von der gewählten Regierung Griechenlands formuliert werden kann. Die Euro-Staaten müssten Griechenland für die Zeitdauer einer Restrukturierungszeit eine Grundsicherung zusagen. Die EU-Staaten fordert Krahnen dazu auf, aus der Griechenlandkrise die notwendigen Konsequenzen zu ziehen. Auch die Eurozone brauche eine effektive Reformagenda. Die Verschuldungsdynamik innerhalb der Währungsunion, deren Auswüchse am Beispiel Griechenlands besonders deutlich werden, könne bei fehlendem guten Willen nur durch eine politische Union und eine in sie eingebettete Fiskalunion aufgelöst werden. Krahnen argumentiert, dass ein Weiterverhandeln über Restrukturierungsauflagen aus der derzeitigen verfahrenen Situation nicht herausführen wird. Entscheidend sei, ein mehr oder weniger umfassendes Paket zu schnüren, das Elemente eines teilweisen internationalen Haftungsverbunds mit Elementen eines partiellen nationalen Souveränitätsverzichts verbindet.
Negative Zinsen auf Einlagen – juristische Hindernisse und ihre wettbewerbspolitischen Auswirkungen
(2015)
Im anhaltenden Niedrigzinsumfeld tun Banken sich schwer damit, die ihnen zur Verfügung gestellte Liquidität einer renditeträchtigen Nachfrage zuzuführen. Darüberhinaus müssen sie auf Liquiditätsüberschüsse, die im Rahmen der Einlagenfazilität des Eurosystems über Nacht bei den nationalen Zentralbanken der Eurozone deponiert werden, Strafzinsen entrichtet. Vor diesem Hintergrund könnten Banken durch negative Einlagenzinsen das Anliegen verfolgen, die Nachfrage nach Aufbewahrung von (Sicht)Einlagen zu verringern. Einer solchen Strategie stehen aber aus juristischer Sicht Hindernisse entgegen, soweit der beschriebene Paradigmenwechsel auch im Rahmen existierender Kundenbeziehungen einseitig vorgenommen werden soll. Die rechtlichen Hürden sind weder Ausdruck einer realitätsfernen Haarspalterei, noch eines verbraucherschützenden Furors. Vielmehr ermöglichen sie privaten und gewerblichen Bankkunden, im Zeitpunkt der angestrebten Zinsanpassung bewusst über die Verwendung ihrer liquiden Mittel zu entscheiden.
We study the effect of weakening creditor rights on distress risk premia via a bankruptcy reform that shifts bargaining power in financial distress toward shareholders. We find that the reform reduces risk factor loadings and returns of distressed stocks. The effect is stronger for firms with lower firm-level shareholder bargaining power. An increase in credit spreads of riskier relative to safer firms, in particular for firms with lower firm-level shareholder bargaining power, confirms a shift in bargaining power from bondholders to shareholders. Out-of-sample tests reveal that a reversal of the reform's effects leads to a reversal of factor loadings and returns.
We study the effect of weakening creditor rights on distress risk premia via a bankruptcy reform that shifts bargaining power in financial distress toward shareholders. We find that the reform reduces risk factor loadings and returns of distressed stocks. The effect is stronger for firms with lower firm-level shareholder bargaining power. An increase in credit spreads of riskier relative to safer firms, in particular for firms with lower firm-level shareholder bargaining power, confirms a shift in bargaining power from bondholders to shareholders. Out-of-sample tests reveal that a reversal of the reform's effects leads to a reversal of factor loadings and returns.
When markets are incomplete, social security can partially insure against idiosyncratic and aggregate risks. We incorporate both risks into an analytically tractable model with two overlapping generations. We derive the equilibrium dynamics in closed form and show that joint presence of both risks leads to over-proportional risk exposure for households. This implies that the whole benefit from insurance through social security is greater than the sum of the benefits from insurance against each of the two risks in isolation. We measure this through interaction effects which appear even though the two risks are orthogonal by construction. While the interactions unambiguously increase the welfare benefits from insurance, they can in- or decrease the welfare costs from crowding out of capital formation. The net effect depends on the relative strengths of the opposing forces.
We investigate the relationship between anchoring and the emergence of bubbles in experimental asset markets. We show that setting a visual anchor at the fundamental value (FV) in the first period only is sufficient to eliminate or to significantly reduce bubbles in laboratory asset markets. If no FV-anchor is set, bubble-crash patterns emerge. Our results indicate that bubbles in laboratory environments are primarily sparked in the first period. If prices are initiated around the FV, they stay close to the FV over the entire trading horizon. Our insights can be related to initial public offerings and the interaction between prices set on pre-opening markets and subsequent intra-day price dynamics.
The pressure on tax haven countries to engage in tax information exchange shows first effects on capital markets. Empirical research suggests that investors do react to information exchange and partially withdraw from previous secrecy jurisdictions that open up to information exchange. While some of the economic literature emphasizes possible positive effects of tax havens, the present paper argues that proponents of positive effects may have started from questionable premises, in particular when it comes to the effects that tax havens have for emerging markets like China and India.
n this paper we compute the optimal tax and education policy transition in an economy where progressive taxes provide social insurance against idiosyncratic wage risk, but distort the education decision of households. Optimally chosen tertiary education subsidies mitigate these distortions. We highlight the importance of two different channels through which academic talent is transmitted across generations (persistence of innate ability vs. the impact of parental education) for the optimal design of these policies and model different forms of labor as imperfect substitutes, thereby generating general equilibrium feedback effects from policies to relative wages of skilled and unskilled workers. We show that subsidizing higher education has important redistributive benefits, by shrinking the college wage premium in general equilibrium. We also argue that a full characterization of the transition path is crucial for policy evaluation. We find that optimal education policies are always characterized by generous tuition subsidies, but the optimal degree of income tax progressivity depends crucially on whether transitional costs of policies are explicitly taken into account and how strongly the college premium responds to policy changes in general equilibrium.
This paper looks into the specific influence that the European banking union will have on (future) bank client relationships. It shows that the intended regulatory influence on market conditions in principle serves as a powerful governance tool to achieve financial stability objectives.
From this vantage, it analyzes macro-prudential instruments with a particular view to mortgage lending markets – the latter have been critical in the emergence of many modern financial crises. In gauging the impact of the new European supervisory framework, it finds that the ECB will lack influence on key macro-prudential tools to push through more rigid supervisory policies vis-à-vis forbearing national authorities.
Furthermore, this paper points out that the current design of the European bail-in tool supplies resolution authorities with undue discretion. This feature which also afflicts the SRM imperils the key policy objective to re-instill market discipline on banks’ debt financing operations. The latter is also called into question because the nested regulatory technique that aims at preventing bail-outs unintendedly opens additional maneuvering space for political decision makers.
In an experimental setting in which investors can entrust their money to traders, we investigate how compensation schemes affect liquidity provision and asset prices. Investors face a trade-off between risk and return. At the benefit of a potentially higher return, they can entrust their money to a trader. However this investment is risky, as the trader might not be trustworthy. Alternatively, they can opt for a safe but low return. We study how subjects solve this trade-off when traders are either liable for losses or not, and when their bonuses are either capped or not. Limited liability introduces a conflict of interest because it makes traders value the asset more than investors. To limit losses, investors should thus restrict liquidity provision to force traders to trade at a lower price. By contrast, bonus caps make traders value the asset less than investors. This should encourage liquidity provision and decrease prices. In contrast to these predictions, we find that under limited liability investors contribute to asset price bubbles by increasing liquidity provision and that caps fail to tame bubbles. Overall, giving investors skin in the game fosters financial stability.
Since August 2009, German legislation allows for voluntary Say on Pay Votes (SoPV) during Annual General Meetings (AGMs). We examine 1,169 AGMs of all German listed firms with more than 10,000 agenda items over the period 2010-2013 to identify (1) determinants and approval rates of voluntary SoPVs, (2) the effect of voluntary SoPVs on AGM participation, and (3) the effect of SoP on executive compensation. Our data reveals that in the first four years of the voluntary say on pay regime every second firm in our sample has opted for having a SoPV. The propensity for a SoPV increases with firm size, abnormal executive compensation and free float of shares. Indeed, smaller firms with concentrated ownership do not only have a lower propensity for a SoPV, but also show a higher propensity to opt for only limited disclosure of executive compensation. Approval rates of SoPVs are lower than the approval rate for the average AGM agenda item and this effect is stronger in (i) widely held firms as well as in (ii) firms with abnormal executive compensation. Additionally, SoPVs actually can increase AGM participation; however, this result is particularly evident for widely held firms. Finally, we find stronger pay for performance elements within total executive compensation, particularly when the effect of executive compensation is lagged over the years following the vote. Overall, our results are consistent with the view that firms use voluntary SoPV to gain legitimation for executive remuneration policies in firms with low ownership concentration. This is enforced, where (small) shareholders consider executive compensation a part of the agency problem of listed firms, and where (small) shareholders consider SoPVs as a possibility to actively influence corporate decisions, with these decisions leading to a higher degree of alignment between executive management boards and shareholders.
The standard view suggests that removing barriers to entry and improving judicial enforcement reduces informality and boosts investment and growth. However, a general equilibrium approach shows that this conclusion may hold to a lesser extent in countries with a constrained supply of funds because of, for example, a more concentrated banking sector or lower financial openness. When the formal sector grows larger in those countries, more entrepreneurs become creditworthy, but the higher pressure on the credit market limits further capital accumulation. We show empirical evidence consistent with these predictions.
n the EU there are longstanding and ongoing pressures towards a tax that is levied on the EU level to substitute for national contributions. We discuss conditions under which such a transition can make sense, starting from what we call a "decentralization theorem of taxation" that is analogous to Oates (1972) famous result that in the absence of spill-over effects and economies of scale decentralized public good provision weakly dominates central provision. We then drop assumptions that turn out to be unnecessary for this results. While spill-over effects of taxation may call for central rules for taxation, as long as spill-over effects do not depend on the intra-regional distribution of the tax burden, decentralized taxation plus tax coordination is found superior to a union-wide tax.
Do markets correct individual behavioral biases? In an experimental asset market, we compare the outcomes of a standard market economy to those of a an island economy that removed market interactions. We observe asset price bubbles in the market economy while prices are stable in the island economy. We also find that subjects took more risk following larger losses, resulting in larger prices and consistent with a gambling for resurrection motive. This motive can translate into bubbles in the market economy because higher prices increase average losses and thus reinforce the desire to resurrect. By contrast, the absence of such a strategic complementarity in island economies can explain the more stable outcome. These results suggest that markets do not correct behavioral biases, rather the contrary.
This paper analyzes sovereign risk shift-contagion, i.e. positive and significant changes in the propagation mechanisms, using bond yield spreads for the major eurozone countries. By emphasizing the use of two econometric approaches based on quantile regressions (standard quantile regression and Bayesian quantile regression with heteroskedasticity) we find that the propagation of shocks in euro's bond yield spreads shows almost no presence of shift-contagion. All the increases in correlation we have witnessed over the last years come from larger shocks propagated with higher intensity across Europe.
Research on interbank networks and systemic importance is starting to recognise that the web of exposures linking banks balance sheets is more complex than the single-layer-of-exposure paradigm. We use data on exposures between large European banks broken down by both maturity and instrument type to characterise the main features of the multiplex structure of the network of large European banks. This multiplex network presents positive correlated multiplexity and a high similarity between layers, stemming both from standard similarity analyses as well as a core-periphery analyses of the different layers. We propose measures of systemic importance that fit the case in which banks are connected through an arbitrary number of layers (be it by instrument, maturity or a combination of both). Such measures allow for a decomposition of the global systemic importance index for any bank into the contributions of each of the sub-networks, providing a useful tool for banking regulators and supervisors. We use the dataset of exposures between large European banks to illustrate the proposed measures.
Although banks are at the center of systemic risk, there are other institutions that contribute to it. With the publication of the leveraged lending guideline in March 2013, the U.S. regulators show that they are especially worried about the private equity firms with their high-risk deals. Given these risks and the interconnectedness of the banks through the LBO loan syndicates, I shed light on the impact of a bank’s LBO loan exposure on its systemic risk. By using 3,538 observations between 2000 and 2013 from 165 global banks, I show that banks with higher LBO exposure also have a higher level of systemic risk. Other loan purposes do not show this positive relationship. The main drivers influencing this relationship positively are the bank’s interconnectedness to other LBO financing banks and its size. Lending experience with a specific PE sponsor, experience with leading LBO syndicates or a bank’s credit rating, however, lead to a lower impact of the LBO loan exposure on systemic risk.
In the mid-1990s, institutional investors entered the syndicated loan market and started to serve borrowers as lead arrangers. Why are non-banks able to compete for this role against banks? How do the composition of syndicates and loan pricing differ among lead arrangers? By using a dataset of 12,847 leveraged loans between 1997 and 2012, I aim to answer these questions. Non-banks benefit from looser regulatory requirements, have industry expertise which helps them in the screening and monitoring of borrowers and focus on firms that ask for loans only instead of additional cross-selling of other services. I can show that non-banks specialize on more opaque and less experienced borrowers, are more likely than banks to choose participants that help to reduce potentially higher information asymmetries and earn 105 basis points more than banks.
This paper analyzes the influence Leveraged Buyouts (LBOs) have on the operating performance of the LBO target companies’ direct competitors. A unique and hand-collected data set on LBOs in the United States in the period 1985-2009 allows us to analyze the effects different restructuring activities as part of the LBO have on the competitors’ revenues. These restructuring activities include changes to leverage, governance, or operating business, as well as M&A activities of the LBO target company. We find that although LBOs itself have a negative influence on competitors’ revenue growth, some restructuring mechanisms might actually benefit competing companies.
The Liikanen Group proposes contingent convertible (CoCo) bonds as a potential mechanism to enhance financial stability in the banking industry. Especially life insurance companies could serve as CoCo bond holders as they are already the largest purchasers of bank bonds in Europe. We develop a stylized model with a direct financial connection between banking and insurance and study the effects of various types of bonds such as non-convertible bonds, write-down bonds and CoCos on banks' and insurers' risk situations. In addition, we compare insurers' capital requirements under the proposed Solvency II standard model as well as under an internal model that ex-ante anticipates additional risks due to possible conversion of the CoCo bond into bank shares. In order to check the robustness of our findings, we consider different CoCo designs (write-down factor, trigger value, holding time of bank shares) and compare the resulting capital requirements with those for holding non-convertible bonds. We identify situations in which insurers benefit from buying CoCo bonds due to lower capital requirements and higher coupon rates. Furthermore, our results highlight how the Solvency II standard model can mislead insurers in their CoCo investment decision due to economically irrational incentives.
I assess how Basel III, Solvency II and the low interest rate environment will affect the financial connection between the bank and insurance sector by changing the funding patterns of banks as well as the investment strategies of life insurance companies. Especially for life insurance companies, the current low interest rate environment poses a key risk since declining returns on investments jeopardize the guaranteed return on life insurance contracts, a core component of traditional life insurance contracts in several European countries. I consider a contingent claim framework with a direct financial connection between banks and life insurers via bank bonds. The results indicate that life insurers' demand for bank bonds increases over the mid-term but ultimately declines in the long-run. Since life insurers are the largest purchasers of bank bonds in Europe, banks could lose one of their main funding sources. In addition, I show that shareholder value driven life insurers' appetite for risk increases when the gap between asset return and liability growth diminishes. To check the robustness of the findings, I calibrate a prolonged low interest rate scenario. The results show that the insurer's risk appetite is even higher when interest rates remain persistently low. A sensitivity analysis regarding industry-specific regulatory safety levels reveals that contagion between bank and life insurer is driven by the insurers' demand for bank bonds which itself depends on the regulatory safety level of banks.
The creation of the Banking Union is likely to come with substantial implications for the governance of Eurozone banks. The European Central Bank, in its capacity as supervisory authority for systemically important banks, as well as the Single Resolution Board, under the EU Regulations establishing the Single Supervisory Mechanism and the Single Resolution Mechanism, have been provided with a broad mandate and corresponding powers that allow for far-reaching interference with the relevant institutions’ organisational and business decisions. Starting with an overview of the relevant powers, the present paper explores how these could – and should – be exercised against the backdrop of the fundamental policy objectives of the Banking Union. The relevant aspects directly relate to a fundamental question associated with the reallocation of the supervisory landscape, namely: Will the centralisation of supervisory powers, over time, also lead to the streamlining of business models, corporate and group structures of banks across the Eurozone?
This paper examines the dynamic relationship between credit risk and liquidity in the sovereign bond market in the context of the European Central Bank (ECB) interventions. Using a comprehensive set of liquidity measures obtained from a detailed, quote-level dataset of the largest interdealer market for Italian government bonds, we show that changes in credit risk, as measured by the Italian sovereign credit default swap (CDS) spread, generally drive the liquidity of the market: a 10% change in the CDS spread leads a 11% change in the bid-ask spread. This relationship is stronger, and the transmission is faster, when the CDS spread is above the 500 basis point threshold, estimated endogenously, and can be ascribed to changes in margins and collateral, as well as clientele effects. Moreover, we show that the Long-Term Refinancing Operations (LTRO) intervention by the ECB weakened the sensitivity of the liquidity provision by the market makers to changes in the Italian government's credit risk. We also document the importance of market-wide and dealer-specific funding liquidity measures in determining the market liquidity for Italian government bonds.
The European Commission has published a Green Paper outlining possible measures to create a single market for capital in Europe. Our comments on the Commission’s capital markets union project use the functional finance approach as a starting point. Policy decisions, according to the functional finance perspective, should be essentially neutral (agnostic) in terms of institutions (level playing field). Our main angle, from which we assess proposals for the capital markets union agenda, are information asymmetries and the agency problems (screening, monitoring) which arise as a result. Within this perspective, we make a number of more specific proposals.
The paper traces the developments from the formation of the European Economic and Monetary Union to this date. It discusses the fact that the primary mandate of the European System of Central Banks (ESCB) is confined to safeguarding price stability and does not include general economic policy. Finally, the paper contributes to the discussion on whether the primary law of the European Union would support a eurozone exit. The Treaty of Maastricht imposed the strict obligation on the European Union (EU) to establish an economic and monetary union, now Article 3(4) TEU. This economic and monetary union is, however, not designed as a separate entity but as an integral part of the EU. The single currency was to become the currency of the EU and to be the legal tender in all Member States unless an exemption was explicitly granted in the primary law of the EU, as in the case of the UK and Denmark. The newly admitted Member States are obliged to introduce the euro as their currency as soon as they fulfil the admission criteria. Technically, this has been achieved by transferring the exclusive competence for the monetary policy of the Member States whose currency is the euro on the EU, Article 3(1)(c) TFEU and by bestowing the euro with the quality of legal tender, the only legal tender in the EU, Article 128(1) sentence 3 TFEU.
Die deutsche Steuerpolitik kombiniert hohe Steuersätze mit zahlreichen Ausnahmen. Das reißt Gerechtigkeitslücken, lenkt Investitionen in die falschen Zwecke und verkompliziert das Steuersystem mitunter bis zur Unkenntlichkeit. Bei der Erbschaftsteuer ist dies besonders augenfällig. Der Versuch mit minimalinvasiven Korrekturen Konsistenz in die Erbschaft- und Schenkungsteuer zu bringen ist fast zwangsläufig zum Scheitern verurteilt. Vieles spricht stattdessen für deutlich abgesenkte Steuersätze und eine gleichzeitige Abschaffung der Vergünstigungen für Betriebsvermögen.
This paper explores how banks adjust their risk-based capital ratios and asset allocations following an exogenous shock to their asset quality caused by Hurricane Katrina in 2005. We find that independent banks based in the disaster areas increase their risk-based capital ratios after the hurricane, while those part of a bank holding company do not. The effect on independent banks mainly comes from the subgroup of high-capitalized banks. These banks increase their holdings in government securities and reduce loans to non-financial firms. Hence, banks that become more stable achieve this at the cost of reduced lending.
A number of recent studies regress a "narratively" identified measure of a macroeconomic shock directly on an outcome variable. In this note, we argue that this approach can be viewed as the reduced-form regression of an instrumental variable approach in which the narrative time series is used as an instrument for an endogenous series of interest. This motivates evaluating the validity of narrative measures through the lens of a randomized experiment. We apply our framework to four recently constructed narrative measures of tax shocks by Romer and Romer (2010), Cloyne (2013), and Mertens and Ravn (2012). All of them turn out to be weak instruments for observable measures of taxes. After correcting for weak instruments, we find that using any of the considered narrative tax measures as an instrument for cyclically adjusted tax revenues yields tax multiplier estimates that are indistinguishable from zero. We conclude that the literature currently understates the uncertainty associated with quantifying the tax multiplier.
This paper studies a dynamic stochastic general equilibrium model involving climate change. Our model allows for damages on economic growth resulting from global warming. In the calibration, we capture effects from climate change and feedback effects on the temperature dynamics. We solve for the optimal state-dependent abatement policy. In our simulations, the costs of this policy measured in terms of lost GDP growth are moderate. On the other hand, postponing abatement action could reduce the probability that the climate can be stabilized. For instance, waiting for 10 years reduces this probability from 60% to 30%. Waiting for another 10 years leads to a probability that is less than 10%. Finally, doing nothing opens the risk that temperatures might explode and economic growth decreases significantly.
The banking system is highly interconnected and these connections can be conveniently represented as an interbank network. This survey presents a systematic overview of the recent advances in the theoretical literature on interbank networks. We assess our current understanding of the structure of interbank networks, of how network characteristics affect contagion in the banking system and of how banks form connections when faced with the possibility of contagion and systemic risk. In particular, we highlight how the theoretical literature on interbank networks offers a coherent way of studying interconnections, contagion processes and systemic risk, while emphasizing at the same time the challenges that must be addressed before general results on the link between the structure of the interbank network and financial stability can be established. The survey concludes with a discussion of the policy relevance of interbank network models with a special focus on macroprudential policies and monetary policy.
Against the background of the European debt crisis, the Research Center SAFE, in the fall of 2013, had issued a call for papers on the topic “Austerity and Economic Growth: Concepts for Europe”, with the objective of soliciting research proposals focusing on the nature of the relationship between austerity, debt sustainability and growth. Each of the five funded projects brought forth an academic paper and a shortened, non-technical policy brief. These policy papers are presented in the present collection of policy letters, edited by Alfons Weichenrieder.
The first paper by Alberto Alesina, Carlo Favero and Francesco Giavazzi looks into the question of how fiscal consolidations influence the real economy. Harris Dellas and Dirk Niepelt emphasize that fiscal austerity is a signal that investors use to tell apart governments with high and low default costs that accordingly will have a high or low probability of repayment.The paper by Benjamin Born, Gernot Müller and Johannes Pfeiffer,looks at the impact of austerity measures on government bond spreads. Oscar Jorda and Alan M. Taylor, in the fourth contribution, put into question whether the narrative records of fiscal consolidation plans are really exogenous. The final study by Enrique Mendoza, Linda Tesar and Jing Zhang suggests that fiscal consolidation should largely depend on expenditure cuts, rather than tax increases that may fail, when fiscal space is exhausted.
Spätestens seit die Europäische Zentralbank (EZB) ihr Ankaufprogramm für Wertpapiere bekannt gegeben hat, ist die Diskussion über die Wirksamkeit dieser Maßnahmen auch in Europa angekommen. Wegen der besonderen institutionellen Umstände des Euroraums – Kauf von Anleihen der einzelnen Nationalstaaten und des Verbots der monetären Finanzierung – reichen die möglichen Nebenwirkungen hierzulande über den rein geldpolitischen Horizont hinaus.
Regulatory failures, which came to the fore after the financial crisis of 2007-2009, lead to the question of why some activities by financial institutions were not regulated prior to the crisis of 2007, even though regulators knew about certain dangers to financial stability? The repo-market, although centrally involved in the last crisis, still awaits stringent regulation. At the same time, the regulatory cycle seems to come to an end, boding ill for future crises which will be amplified by this market. In this situation, NGOs are needed to make regulators act upon their knowledge and to tighten their regulations.
Greece: threatening recovery
(2015)
Despite the catastrophic phase between 2008 and the end of 2014, much of a previously unsustainable development has been corrected in Greece and there are clear signs that the deterioration came to a halt in 2014. But what is publicly known about the priorities of the newly elected Syriza government suggests that they may be going largely into the wrong direction.
This paper investigates whether a fiscal stimulus implies a different impact for flexible and rigid labour markets. The analysis is done for 11 advanced OECD economies. Using quarterly data from 1999 to 2013, I estimate a panel threshold structural VAR model in which regime switches are determined by OECD’s employment protection legislation index. My empirical results indicate significant differences between rigid and flexible labour markets regarding the impact of the fiscal stimulus on output and unemployment. While the impulse response of real GDP to a government spending shock is positive and more effective in flexible labour markets, it has less impact in the rigid ones. Moreover, it is found that a fiscal stimulus leads to higher overall unemployment in highly regulated countries.
Does exchange of information between tax authorities influence multinationals' use of tax havens?
(2015)
Since the mid-1990s, countries offering tax systems that facilitate international tax avoidance and evasion have been facing growing political pressure to comply with the internationally agreed standards of exchange of tax information. Using data of German investments in tax havens, we find evidence that the conclusion of a bilateral tax information exchange agreement (TIEA) is associated with fewer operations in tax havens and the number of German affiliates has on average decreased by 46% compared to a control group. This suggests that firms invest in tax havens not only for their low tax rates but also for the secrecy they offer.
Most recent regulations establish that resolution of global banking groups shall be done according to bail-in procedures and following a Single Point of Entry (SPE) as opposed to a Multiple Point of Entry (MPE) approach. The latter requires parent holding of global groups to put up front the equity capital needed to absorb losses possibly emerging in foreign subsidiaries-branches. No model rationalized so far such resolution regime. We build a model of optimal design of resolution regimes and compare three regimes: SPE with cooperative authorities, SPE with non-cooperative authorities and MPE (ring-fencing). We find that the costs for bondholders of bail-inable instruments is generally higher under noncooperative regimes and ring-fencing. We also find that in those cases banks have ex ante incentives to reduce their exposure in foreign assets. We also examine recent case studies that help us rationalize the model results.
We present a network model of the interbank market in which optimizing risk averse banks lend to each other and invest in non-liquid assets. Market clearing takes place through a tâtonnement process which yields the equilibrium price, while traded quantities are determined by means of a matching algorithm. We compare three alternative matching algorithms: maximum entropy, closest matching and random matching. Contagion occurs through liquidity hoarding, interbank interlinkages and fire sale externalities. The resulting network configurations exhibits a core-periphery structure, dis-assortative behavior and low clustering coefficient. We measure systemic importance by means of network centrality and input-output metrics and the contribution of systemic risk by means of Shapley values. Within this framework we analyze the effects of prudential policies on the stability/efficiency trade-off. Liquidity requirements unequivocally decrease systemic risk but at the cost of lower efficiency (measured by aggregate investment in non-liquid assets); equity requirements tend to reduce risk (hence increase stability) without reducing significantly overall investment.
Based on a sample of university students, we provide field and laboratory evidence that a small scale training intervention has a both statistically and economically significant effect on subjective and objective assessments of financial knowledge. We also show that for a large part of students whose self-assessed financial knowledge has improved we do not find an increase in their actual skills.
We set up and solve a rich life-cycle model of household decisions involving consumption of both perishable goods and housing services, stochastic and unspanned labor income, stochastic house prices, home renting and owning, stock investments, and portfolio constraints. The model features habit formation for housing consumption, which leads to optimal decisions closer in line with empirical observations. Our model can explain (i) that stock investments are low or zero for many young agents and then gradually increasing over life, (ii) that the housing expenditure share is age- and wealth-dependent, (iii) that perishable consumption is more sensitive to wealth and income shocks than housing consumption, and (iv) that non-housing consumption is hump-shaped over life.
This paper investigates whether exchanging the Social Security delayed retirement credit, currently paid as an increase in lifetime annuity benefits, for a lump sum would induce later claiming and additional work. We show that people would voluntarily claim about half a year later if the lump sum were paid for claiming any time after the Early Retirement Age, and about two-thirds of a year later if the lump sum were paid only for those claiming after their Full Retirement Age. Overall, people will work one-third to one-half of the additional months, compared to the status quo. Those who would currently claim at the youngest ages are likely to be most responsive to the offer of a lump sum benefit.
This paper studies a two-country production economy with complete and frictionless financial markets and international trade of final goods in which competition in R&D leads to endogenous new firm creation and economic growth. Current monopolists ("incumbents") and potential new firms ("entrants") compete in developing patents domestically. I find that this induces negative spillover in consumption, i.e. home country's consumption decreases in response to positive productivity shocks in the foreign country. Second, there is positive spillover in R&D expenditures, i.e. home country's R&D expenditures increase in response to positive foreign productivity shocks, which is consistent with empirical evidence on international technology diffusion. Furthermore, the stylized fact in international macroeconomics that the cross-country correlation of consumption growth is significantly lower than the one of output growth is explained by the model. Fourth, net exports are negatively correlated with output as in the data. Fifth, the model matches the high comovement of the risk-free rates and stock returns across countries. Finally, the model produces a positive value premium.
Projected demographic changes in industrialized and developing countries vary in extent and timing but will reduce the share of the population in working age everywhere. Conventional wisdom suggests that this will increase capital intensity with falling rates of return to capital and increasing wages. This decreases welfare for middle aged asset rich households. This paper takes the perspective of the three demographically oldest European nations — France, Germany and Italy — to address three important adjustment channels to dampen these detrimental effects of aging in these countries: investing abroad, endogenous human capital formation and increasing the retirement age. Our quantitative finding is that endogenous human capital formation in combination with an increase in the retirement age has strong implications for economic aggregates and welfare, in particular in the open economy. These adjustments reduce the maximum welfare losses of demographic change for households alive in 2010 by about 2.2 percentage points in terms of a consumption equivalent variation.
In the aftermath of the global financial crisis, both resolution planning, i.e. contingency planning by both regulated institutions and public authorities in order to prepare their actions in financial crisis, and concepts for structural bank reform have been identified as possible solutions to ending “Too Big To Fail” and foster market discipline among bank owners, bank managers and investors in bank debt. Both concepts thus complement the global quest for reliable procedures and tools for bank resolution that would minimise systemic implications once large and complex financial institutions have reached the stage of insolvency. Given the complex task of orchestrating swift and effective resolution actions, especially with regard to cross-border banking groups and financial conglomerates, planning ahead in good times has since been widely recognised as crucial for enhancing resolvability. At least part of the impediments to resolution will be found in organisational, financial and legal complexity that has evolved in banks and groups over time. To remove these impediments, interference with existing corporate and group structures is all but inevitable. However, in both international standard setting and at the European Union level, issues related to resolution planning (within the context of bank resolution reform) and structural banking reforms to date have been discussed rather separately. This lack of consistency is questionable, given the obvious need to reconcile both approaches in order to facilitate effective implementation and enforcement especially with regard to large, complex banking groups. Based on an analysis both of the Bank Recovery and Resolution Directive and the SRM Regulation, this paper explores how these problems could be dealt with within the context of the European Banking Union.
Europe's debt crisis casts doubt on the effectiveness of fiscal austerity in highly-integrated economies. Closed-economy models overestimate its effectiveness, because they underestimate tax-base elasticities and ignore cross-country tax externalities. In contrast, we study tax responses to debt shocks in a two-country model with endogenous utilization that captures those externalities and matches the capital-tax-base elasticity. Quantitative results show that unilateral capital tax hikes cannot restore fiscal solvency in Europe, and have large negative (positive) effects at "home" ("abroad"). Restoring solvency via either Nash competition or Cooperation reduces (increases) capital (labor) taxes significantly, and leaves countries with larger debt shocks preferring autarky.
After the Global Financial Crisis a controversial rush to fiscal austerity followed in many countries. Yet research on the effects of austerity on macroeconomic aggregates was and still is unsettled, mired by the difficulty of identifying multipliers from observational data. This paper reconciles seemingly disparate estimates of multipliers within a unified and state-contingent framework. We achieve identification of causal effects with new propensity-score based methods for time series data. Using this novel approach, we show that austerity is always a drag on growth, and especially so in depressed economies: a one percent of GDP fiscal consolidation translates into 4 percent lower real GDP after five years when implemented in the slump rather than the boom. We illustrate our findings with a counterfactual evaluation of the impact of the U.K. government’s shift to austerity policies in 2010 on subsequent growth.
Austerity
(2014)
We shed light on the function, properties and optimal size of austerity using the standard sovereign model augmented to include incomplete information about credit risk. Austerity is defined as the shortfall of consumption from the level desired by a country and supported by its repayment capacity. We find that austerity serves as a tool for securing a more favorable loan package; that it is associated with over-investment even when investment does not create collateral; and that low risk borrowers may favor more to less severe austerity. These findings imply that the amount of fresh funds obtained by a sovereign is not a reliable measure of austerity suffered; and that austerity may actually be associated with higher growth. Our analysis accommodates costly signalling for gaining credibility and also assigns a novel role to spending multipliers in the determination of optimal austerity.
Does austerity pay off?
(2014)
Policy makers often implement austerity measures when the sustainability of public finances is in doubt and, hence, sovereign yield spreads are high. Is austerity successful in bringing about a reduction in yield spreads? We employ a new panel data set which contains sovereign yield spreads for 31 emerging and advanced economies and estimate the effects of cuts of government consumption on yield spreads and economic activity. The conditions under which austerity takes place are crucial. During times of fiscal stress, spreads rise in response to the spending cuts, at least in the short-run. In contrast, austerity pays off, if conditions are more benign.
In this paper, we investigate how the introduction of complex, model-based capital regulation affected credit risk of financial institutions. Model-based regulation was meant to enhance the stability of the financial sector by making capital charges more sensitive to risk. Exploiting the staggered introduction of the model-based approach in Germany and the richness of our loan-level data set, we show that (1) internal risk estimates employed for regulatory purposes systematically underpredict actual default rates by 0.5 to 1 percentage points; (2) both default rates and loss rates are higher for loans that were originated under the model-based approach, while corresponding risk-weights are significantly lower; and (3) interest rates are higher for loans originated under the model-based approach, suggesting that banks were aware of the higher risk associated with these loans and priced them accordingly. Further, we document that large banks benefited from the reform as they experienced a reduction in capital charges and consequently expanded their lending at the expense of smaller banks that did not introduce the model-based approach. Counter to the stated objectives, the introduction of complex regulation adversely affected the credit risk of financial institutions. Overall, our results highlight the pitfalls of complex regulation and suggest that simpler rules may increase the efficacy of financial regulation.
We show that the correct experiment to evaluate the effects of a fiscal adjustment is the simulation of a multi year fiscal plan rather than of individual fiscal shocks. Simulation of fiscal plans adopted by 16 OECD countries over a 30-year period supports the hypothesis that the effects of consolidations depend on their design. Fiscal adjustments based upon spending cuts are much less costly, in terms of output losses, than tax-based ones and have especially low output costs when they consist of permanent rather than stop and go changes in taxes and spending. The difference between tax-based and spending-based adjustments appears not to be explained by accompanying policies, including monetary policy. It is mainly due to the different response of business confidence and private investment.
The recent financial crisis highlighted the limits of the "originate to distribute" model of banking, but its nexus with the macroeconomy remains unexplored. I build a business cycle model with banks engaging in credit risk transfer (CRT) under informational externalities. Markets for CRT provide liquidity insurance to banks, but the emergence of a pooling equilibrium can also impair the banks’ monitoring incentives. In normal times and in face of standard macro shocks the insurance benefits of CRT prevail and the business cycle is stabilized. In face of financial/liquidity shocks the extent of informational asymmetries is larger and the business cycle is amplified. The macro model with CRT can also reproduce well a number of macro and banking statistics over the period of rapid growth of this banks’ business model.
On 23 July 2014, the U.S. Securities and Exchange Commission (SEC) passed the “Money Market Reform: Amendments to Form PF ,” designed to prevent investor runs on money market mutual funds such as those experienced in institutional prime funds following the bankruptcy of Lehman Brothers. The present article evaluates the reform choices in the U.S. and draws conclusions for the proposed EU regulation of money market funds.
Can a tightening of the bank resolution regime lead to more prudent bank behavior? This policy paper reviews arguments for why this could be the case and presents evidence linking changes in bank resolution regimes with bank risk-taking. The authors find that the tightening of bank resolution in the U.S. (i.e., the introduction of the Orderly Liquidation Authority) significantly decreased overall risk-taking of the most affected banks. This effect, however, does not hold for the largest and most systemically important banks – too-big-to-fail seems to be unresolved. Building on the insights from the U.S. experience, the authors derive principles for effective resolution regimes and evaluate the emerging resolution regime for Europe.
Da Public Private Partnerships (PPPs) nicht den Beschränkungen der deutschen Schuldenbremse unterliegen, können diese der Politik als Mittel dienen, Lasten in die Zukunft zu verschieben, ohne dabei den Verschuldungsgrad zu erhöhen. Der vorliegende Beitrag beschreibt Vor- und Nachteile von PPP-Konstrukten im Rahmen der öffentlichen Auftragsvergabe. Alfons Weichenrieder argumentiert, dass bei der Wahl von PPP-Instrumenten die Effizienz der Bereitstellung von öffentlicher Infrastruktur und Dienstleistungen im Vordergrund stehen sollte. Die Budgetregeln könnten so angepasst werden, dass das Motiv der Schuldenverschleierung nicht vordergründig die Wahl von PPP-Konstrukten bestimmt.
Das Financial Stability Board (FSB) schlägt zur Lösung des "too big to fail"-Problems einen neuen Risikokapital-Puffer für global tätige systemrelevante Banken vor. Die Kennzahl „Total Loss Absorbing Capacity“ (TLAC), setzt sich zusammen aus hartem Kernkapital und verlustabsorbierendem Fremdkapital. Das verlustabsorbierende, also bail-in-fähige Fremdkapital soll vor anderen Positionen der Passivseite einer Bank in einer Krisensituation vorrangig haften oder aber in Eigenkapital umgewandelt werden. Jan Krahnen argumentiert, dass es für eine glaubhafte Verringerung des "too big to fail"-Problems auf die Anforderungen an das verlustabsorbierende Fremdkapital ankommt. Dass die Aufsicht die Halter von Bail-in Anleihen im Verlustfall tatsächlich einem Bail-in unterzieht ist vor allem nur dann glaubwürdig, wennn andere Banken nicht die Halter solcher Anleihen sind.
A recent proposal by the Financial Stability Board (FSB) suggests a new risk capital buffer for globally operating systemically important financial institutions. The suggested metric, “Total Loss Absorbing Capacity“ (TLAC), is composed of Tier-1 capital and loss absorbing debt. In a crisis situation, “bail-in-able” debt is to be written down or converted into equity. Jan Krahnen argues that the credibility of bail-in, in the case of systemically important financial institutions, hinges crucially on the design of TLAC and the requirements that will be placed on loss absorbing “bail-in-able” debt.The fear of direct systemic consequences through bail-in could be overcome, if a holding ban were placed on the “bail-in-bonds” of financial institutions. The holding ban would stipulate that these bonds cannot be held by other institutions within the banking sector.
There has been a considerable debate about whether disaster models can rationalize the equity premium puzzle. This is because empirically disasters are not single extreme events, but long-lasting periods in which moderate negative consumption growth realizations cluster. Our paper proposes a novel way to explain this stylized fact. By allowing for consumption drops that can spark an economic crisis, we introduce a new economic channel that combines long-run and short-run risk. First, we document that our model can match consumption data of several countries. Second, it generates a large equity risk premium even if consumption drops are of moderate size.
We analyze the implications of the structure of a network for asset prices in a general equilibrium model. Networks are represented via self- and mutually exciting jump processes, and the representative agent has Epstein-Zin preferences. Our approach provides a exible and tractable unifying foundation for asset pricing in networks. The model endogenously generates results in accordance with, e.g., the robust-yetfragile feature of financial networks shown in Acemoglu, Ozdaglar, and Tahbaz-Salehi (2014) and the positive centrality premium documented in Ahern (2013). We also show that models with simpler preference assumptions cannot generate all these findings simultaneously.
The European Central Bank (ECB) has finalized its comprehensive assessment of the solvency of the largest banks in the euro area and on October 26 disclosed the results of this assessment. In the present paper, Acharya and Steffen compare the outcomes of the ECB's assessment to their own benchmark stress tests conducted for 39 publically listed financial institutions that are also included in the ECB's regulatory review. The authors identify a negative correlation between their benchmark estimates for capital shortfalls and the regulatory capital shortfall, but a positive correlation between their benchmark estimates for losses under stress both in the banking book and in the trading book. They conclude that the regulatory stress test outcomes are potentially heavily affected by discretion of national regulators in measuring what is capital, and especially the use of risk-weighted assets in calculating the prudential capital requirement.
Robustness, validity, and significance of the ECB's asset quality review and stress test exercise
(2014)
As we are moving toward a eurozone banking union, the European Central Bank (ECB) is going to take over the regulatory oversight of 128 banks in November 2014. To that end, the ECB conducted a comprehensive assessment of these banks, which included an asset quality review (AQR) and a stress test. The fundamental question is how accurately will the financial condition of these banks have been assessed by the ECB when it commences its regulatory oversight? And, can the comprehensive assessment lead to a full repair of banks’ balance sheets so that the ECB takes over financially sound banks and is the necessary regulation in place to facilitate this? Overall, the evidence presented in this paper based on the design of the comprehensive assessment as well as own stress test exercises suggest that the ECB’s assessment might not comprehensively deal with the problems in the financial sector and risks may remain that will pose substantial threats to financial stability in the eurozone.
On average, "young" people underestimate whereas "old" people overestimate their chances to survive into the future. We adopt a Bayesian learning model of ambiguous survival beliefs which replicates these patterns. The model is embedded within a non-expected utility model of life-cycle consumption and saving. Our analysis shows that agents with ambiguous survival beliefs (i) save less than originally planned, (ii) exhibit undersaving at younger ages, and (iii) hold larger amounts of assets in old age than their rational expectations counterparts who correctly assess their survival probabilities. Our ambiguity-driven model therefore simultaneously accounts for three important empirical findings on household saving behavior.
This paper investigates extensions of the method of endogenous gridpoints (ENDGM) introduced by Carroll (2006) to higher dimensions with more than one continuous endogenous state variable. We compare three different categories of algorithms: (i) the conventional method with exogenous grids (EXOGM), (ii) the pure method of endogenous gridpoints (ENDGM) and (iii) a hybrid method (HYBGM). ENDGM comes along with Delaunay interpolation on irregular grids. Comparison of methods is done by evaluating speed and accuracy. We find that HYBGM and ENDGM both dominate EXOGM. In an infinite horizon model, ENDGM also always dominates HYBGM. In a finite horizon model, the choice between HYBGM and ENDGM depends on the number of gridpoints in each dimension. With less than 150 gridpoints in each dimension ENDGM is faster than HYBGM, and vice versa. For a standard choice of 25 to 50 gridpoints in each dimension, ENDGM is 1.4 to 1.7 times faster than HYBGM in the finite horizon version and 2.4 to 2.5 times faster in the infinite horizon version of the model.
When markets are incomplete, social security can partially insure against idiosyncratic and aggregate risks. We incorporate both risks into an analytically tractable model with two overlapping generations and demonstrate that they interact over the life-cycle. The interactions appear even though the two risks are orthogonal and they amplify the welfare consequences of introducing social security. On the one hand, the interactions increase the welfare benefits from insurance. On the other hand, they can in- or decrease the welfare costs from crowding out of capital formation. This ambiguous effect on crowding out means that the net effect of these two channels is positive, hence the interactions of risks increase the total welfare benefits of social security.
We outline a procedure for consistent estimation of marginal and joint default risk in the euro area financial system. We interpret the latter risk as the intrinsic financial system fragility and derive several systemic fragility indicators for euro area banks and sovereigns, based on CDS prices. Our analysis documents that although the fragility of the euro area banking system had started to deteriorate before Lehman Brothers' file for bankruptcy, investors did not expect the crisis to affect euro area sovereigns' solvency until September 2008. Since then, and especially after November 2009, joint sovereign default risk has outpaced the rise of systemic risk within the banking system.
We outline a procedure for consistent estimation of marginal and joint default risk in the euro area financial system. We interpret the latter risk as the intrinsic financial system fragility and derive several systemic fragility indicators for euro area banks and sovereigns, based on CDS prices. Our analysis documents that although the fragility of the euro area banking system had started to deteriorate before Lehman Brothers' file for bankruptcy, investors did not expect the crisis to affect euro area sovereigns' solvency until September 2008. Since then, and especially after November 2009, joint sovereign default risk has outpaced the rise of systemic risk within the banking system.
We examine the relationship between household wealth and self-control. Although self-control has been linked to consumption and financial behavior, its measurement remains an open issue. We employ a definition of self-control failure that follows literature in psychology, suggesting that three factors can render self-control defective: lack of planning, lack of monitoring, and lack of commitment to pre-set plans. Our measure combines those three ingredients and can be computed using a standard representative survey. We find that self-control failure is strongly associated with different household net wealth measures and with self-assessed financial distress.
How special are they? - Targeting systemic risk by regulating shadow banking : (October 5, 2014)
(2014)
This essay argues that at least some of the financial stability concerns associated with shadow banking can be addressed by an approach to financial regulation that imports its functional foundations more vigorously into the interpretation and implementation of existing rules. It shows that the general policy goals of prudential banking regulation remain constant over time despite dramatic transformations in the financial and technological landscape. Moreover, these overarching policy goals also legitimize intervention in the shadow banking sector. On these grounds, this essay encourages a more normative construction of available rules that potentially limits both the scope for regulatory arbitrage and the need for ever more rapid updates and a constant increase in the complexity of the regulatory framework. By tying the regulatory treatment of financial innovation closely to existing prudential rules and their underlying policy rationales, the proposed approach potentially ends the socially wasteful race between hare and tortoise that signifies the relation between regulators and a highly dynamic industry. In doing so it does not generally hamper market participants’ efficient discoveries where disintermediation proves socially beneficial. Instead, it only weeds-out rent-seeking circumventions of existing rules and standards.
Previous research has documented strong peer effects in risk taking, but little is known about how such social influences affect market outcomes. The consequences of social interactions are hard to isolate in financial data, and theoretically it is not clear whether peer effects should increase or decrease risk sharing. We design an experimental asset market with multiple risky assets and study how exogenous variation in real-time information about the portfolios of peer group members affects aggregate and individual risk taking. We find that peer information ameliorates under-diversification that occurs in a market without such information. One reason is that peer information increases risk aversion and induces a concern for relative income position that may reduce or amplify risk taking, depending on whether the context highlights the most or least successful trader. Thus, contrary to conventional wisdom, we show that social interactions may help to reduce earnings volatility in financial markets, and we discuss implications for institutional design.
This paper contrasts the recent European initiatives on regulating corporate groups with alternative approaches to the phenomenon. In doing so it pays particular regard to the German codified law on corporate groups as the polar opposite to the piecemeal approach favored by E.U. legislation.
It finds that the European Commission’s proposal to submit (significant) related party transactions to enhanced transparency, outside fairness review, and ex ante shareholder approval is both flawed in its design and based on contestable assumptions on informed voting of institutional investors. In particular, the contemplated exemption for transactions with wholly owned subsidiaries allows controlling shareholders to circumvent the rule extensively. Moreover, vesting voting rights with (institutional) investors will not lead to the informed assessment that is hoped for, because these investors will rationally abstain from active monitoring and rely on proxy advisory firms instead whose competency to analyze non-routine significant related party transactions is questionable.
The paper further delineates that the proposed recognition of an overriding interest of the group requires strong counterbalances to adequately protect minority shareholders and creditors. Hence, if the Commission choses to go down this route it might end up with a comprehensive regulation that is akin to the unpopular Ninth Company Law Directive in spirit, though not in content. The latter prediction is corroborated by the pertinent parts of the proposal for a European Model Company Act.
Research results confirm the existence of various forms of international tax planning by multinational firms. Prominent examples for firms employing tax avoidance strategies are Amazon, Google and Starbucks. Increasing availability of administrative data for Europe has enabled researchers to study behavioural responses of European multinationals to taxation. The present paper summarizes what we can learn from these recent studies in general and about German multinationals in particular.
Im Schatten der Lowflation
(2014)
Im Jahr 2013 betrug der Anstieg des harmonisierten Konsumentenpreisindex im Euroraum 1,4 %. Vor dem Hintergrund der Niedrigzinspolitik der EZB überrascht diese Entwicklung. Alfons Weichenrieder erläutert wie der starke strukturelle Anpassungsbedarf in den meisten Euroländern von höheren Inflationsunterschieden profitieren könnte. Er weist auf die Gefahren einer längeren Niedrigzinsphase für Banken, Lebensversicherung und die Reduzierung der Staatsschulden hin. Da die traditionellen geldpolitischen Mittel weitgehend ausgereizt sind, wird die quantitative Lockerung als Instrument zur Bekämpfung einer Deflation nicht mehr ausgeschlossen. Im Falle eines Ankaufprogrammes wird es auf einen glaubwürdigem Regelrahmen ankommen.
Der Entwurf eines Lebensversicherungsreformgesetz der Bundesregierung vom 04.06.2014 adressiert die Folgen der derzeitigen Niedrigzinsphase für Lebensversicherungunternehmen und Lebensversicherte. Helmut Gründl kommentiert die vorgeschlagene Regelung zu den Bewertungsreserven, die Regelung zur Ausschüttungssperre sowie die Regelung zum Höchstzillmersatz. Der Beitrag konzentriert sich auf die Auswirkungen der Vorschläge auf die Renditeerwartungen des Kollektivs der Versicherungsnehmer sowie auf die Anreize potentieller Eigenkapitalgeber, sich an Versicherungsunternehmen zu beteiligen.
Als geladener Sachverständiger argumentierte Martin Götz bei der öffentlichen Anhörung des Finanzausschusses des Deutschen Bundestags und in seiner vorliegenden Stellungnahme, dass durch die zügige Umsetzung der Richtlinie 2014/59/EU die Selbstregulierung von Kreditinstituten und Wertpapierfirmen weiter gestärkt wird und das aufsichtsrechtliche Instrumentarium um marktorientierte Mechanismen ausgebaut wird. Er erwartet, dass das Umsetzungsgesetz die Finanzstabilität in Deutschland fördert. Positiv sei insbesondere die Ausgestaltung der Möglichkeit einer verpflichtenden Gläubigerbeteiligung („Bail-in“) im Rahmen der Abwicklung, da der Bail-in nicht nur Fragen der Privathaftung im Abwicklungsfall klärt, sondern auch gute Anreize zur Selbstregulierung von Kreditinstituten setzt. Den Verzicht auf die Umsetzung der in der Abwicklungsrichtlinie enthaltenen staatlichen Stabilisierungsmöglichkeiten bewertet er als positiv und sieht darin einen wichtigen Baustein zur Förderung der Selbstregulierung von Finanzinstituten. Die Verlängerung der Laufzeit des Finanzmarktstabilisierungsfonds sei problematisch, da die explizite Möglichkeit einer staatlichen Hilfe dem Anreiz zur Selbstregulierung von Finanzinstituten entgegensteht.
Stellungnahme zum Entwurf eines Gesetzes zur Umsetzung der Richtlinie 2014/59/EU (BRRD-Umsetzungsgesetz) der Bundesregierung vom 22.09.2014
Der Gesetzentwurf der Bundesregierung zur Umsetzung der EU-Richtlinie 2014/59/EU zur Festlegung eines Rahmens für die Sanierung und Abwicklung von Kreditinstituten und Wertpapierfirmen (“BRRD-Umsetzungsgesetz“) berührt auch die Frage der institutionellen Struktur für die Zuständigkeit für Bankenaufsicht und Geldpolitik. Es gibt gewichtige Gründe dafür, auf lange Sicht die Geldpolitik von der Bankenaufsicht und möglichen Bankenabwicklungs- und -restrukturierungsfragen institutionell zu trennen. Bei einer Trennung ist zu beachten, dass alle Institutionen für ihre jeweiligen Mandate gleichberechtigt auf erstklassige Daten über die Kapitalmärkte und die Transaktionen und Bilanzen der Banken zugreifen müssen. Ein Y-Modell, in dem zwei voneinander unabhängige Institutionen auf eine gemeinsame Datenbasis aufsetzen, kann im deutschen Kontext erreicht werden, indem die Bundesbank und die Bafin in einer Institution zusammengeführt werden, wobei sowohl die Aufsicht wie auch die Geldpolitik als Anstalt in der Anstalt (AIDA) geführt werden. Im Rahmen dieser „doppelten AIDA“-Lösung können beide Anstalten gleichberechtigt auf eine Datenbasis zugreifen. Die Daten werden im Rahmen der Mandate von Geldpolitik und Aufsicht wie bisher bundesweit erhoben. Die Entwicklung und spätere Einführung des Y-Modells („doppelte AIDA“) würde auch einen Modellcharakter für die noch zu führende Debatte um eine sinnvolle Institutionenstruktur für Europa haben.
SAFE Professor Michalis Haliassos was a member of the National Council for Research and Technology (ESET) established by the Government of Greece for the period 2010-2013. The council, consisting of eleven scientists from a range of disciplines, has now published their communiqué "National Strategic Framework for Research and Innovation 2014 -2020".
To promote the advancement of research, technology and innovation in Greece, the strategic plan proposed by the authors seeks to identify areas of existing research strength and excellence that can be further advanced to become engines for progress and growth in Greece, as well as flaws inherent to the present system. The authors stress the need to address current constraints to growth, which include the declining education system; the confusion and weaknesses of R&D governance and management; the discontinuities and inefficiencies of resource allocation and investment; the lack of adaptation to clearly-defined national priorities; and the inadequate opportunities and funding for high-quality research and development to flourish. They stress the need for prioritisation and efficient allocation; stability of the policy frame; predictability of planning; provision of opportunity; recognition of excellence; and responsiveness to current and future needs.
Die Anpassung der EU-Richtlinie über Märkte für Finanzinstrumente (MiFID II) und die Einführung einer begleitenden Verordnung (MiFIR) im Jahr 2014 werden erhebliche Auswirkungen auf die Finanzmärkte in Europa haben und zu einer grundlegenden Neuordnung der Finanzmarktstrukturen führen. Ausgehend von einer Diskussion der Zielerreichung der ursprünglichen Richtlinie (MiFID I) aus dem Jahr 2004 werden im vorliegenden Artikel die Zielsetzungen und Maßnahmen der Neuregelung beleuchtet. Wesentliche Elemente im Hinblick auf Marktstrukturen und den Wertpapierhandel sind die Einführung einer neuen Handelsplatzkategorie, des organisierten Handelssystems („Organised Trading Facility“; OTF), sowie die Ausweitung der bislang für Aktien geltenden Transparenzvorschriften auf weitere Finanzinstrumente. Zudem werden eine Handelsverpflichtung für Aktien und Derivate sowie eine Clearingpflicht für Derivate, die auf geregelten Märkten gehandelt werden, neu eingeführt. Schließlich werden der algorithmische Handel und der Hochfrequenzhandel auf europäischer Ebene reguliert, wobei die Regelungen weitgehend dem 2013 eingeführten deutschen Hochfrequenzhandelsgesetz angelehnt sind. Im Ausblick wird zunächst der weitere Prozess der Regulierung skizziert (insbesondere die sog. Level II-Maßnahmen). Abschließend werden mögliche Auswirkungen von MiFID II und MiFIR auf die Marktstruktur und den Wertpapierhandel aufgezeigt.
This essay reviews a cornerstone of the European Banking Union project, the resolution of systemically important banks. The focus is on the inherent conflict between a possible intervention by resolution authorities, conditional on a crisis situation, and effective prevention prior to a crisis. Moreover, the paper discusses the rules for bail-in debt and conversion rules for different layers of debt. Finally, some organizational requirements to achieve effective resolution results will be analyzed.
We propose a novel approach on how to estimate systemic risk and identify its key determinants. For US financial companies with publicly traded equity options, we extract option-implied value-at-risks and measure the spillover effects between individual company value-at-risks and the option-implied value-at-risk of a financial index. First, we study the spillover effect of increasing company risks on the financial sector. Second, we analyze which companies are mostly affected if the tail risk of the financial sector increases. Key metrics such as size, leverage, market-to-book ratio and earnings have a significant influence on the systemic risk profiles of financial institutions.
Low interest rates are becoming a threat to the stability of the life insurance industry, especially in countries such as Germany, where products with relatively high guaranteed returns sold in the past still represent a prominent share of the total portfolio. This contribution aims to assess and quantify the effects of the current low interest rate phase on the balance sheet of a representative German life insurer, given the current asset allocation and the outstanding liabilities. To do so, we generate a stochastic term structure of interest rates as well as stock market returns to simulate investment returns of a stylized life insurance business portfolio in a multi-period setting. Based on empirically calibrated parameters, we can observe the evolution of the life insurers' balance sheet over time with a special focus on their solvency situation. To account for different scenarios and in order to check the robustness of our findings, we calibrate different capital market settings and different initial situations of capital endowment. Our results suggest that a prolonged period of low interest rates would markedly affect the solvency situation of life insurers, leading to relatively high cumulative probability of default for less capitalized companies.
This paper analyzes how on-the-job search (OJS) by an agent impacts the moral hazard problem in a repeated principal-agent relationship. OJS is found to constitute a source of agency costs because efficient search incentives require that the agent receives all gains from trade. Further, the optimal incentive contract with OJS matches the design of empirically observed compensation contracts more accurately than models that ignore OJS. In particular, the optimal contract entails excessive performance pay plus efficiency wages. Efficiency wages reduce the opportunity costs of work effort and hence serve as a complement to bonuses. Thus, the model offers a novel explanation for the use of efficiency wages. When allowing for renegotiation, the model generates wage and turnover dynamics that are consistent with empirical evidence. I argue that the model contributes to explaining the concomitant rise in the use of performance pay and in competition for high-skill workers during the last three decades.
We study consumption-portfolio and asset pricing frameworks with recursive preferences and unspanned risk. We show that in both cases, portfolio choice and asset pricing, the value function of the investor/ representative agent can be characterized by a specific semilinear partial differential equation. To date, the solution to this equation has mostly been approximated by Campbell-Shiller techniques, without addressing general issues of existence and uniqueness. We develop a novel approach that rigorously constructs the solution by a fixed point argument. We prove that under regularity conditions a solution exists and establish a fast and accurate numerical method to solve consumption-portfolio and asset pricing problems with recursive preferences and unspanned risk. Our setting is not restricted to affine asset price dynamics. Numerical examples illustrate our approach.
We build on previous work on operational performance evaluation of private equity portfolio companies as we are able to at least partially decrypt the black box consisting of restructuring tools these investors use and the corresponding impact on their portfolio companies. Beyond answering whether private equity improves operating efficiency we figure out which of the typical restructuring tools drive operating efficiency. Using a set of over 300 international leveraged buyout transactions in the last thirty years we find that while there is vast improvement in operational efficiency these gains vary considerably. Our top performing transactions are subject to strong equity incentives, frequent asset restructuring and tight control by the investor. Furthermore, investors experience has a positive and financial leverage a negative influence on operational performance.
Homestead exemptions to personal bankruptcy allow households to retain their home equity up to a limit determined at the state level. Households that may experience bankruptcy thus have an incentive to bias their portfolios towards home equity. Using US household data from the Survey of Income and Program Participation for the period 1996-2006, we find that especially households with low net worth maintain a larger share of their wealth as home equity if a larger homestead exemption applies. This home equity bias is also more pronounced if the household head is in poor health, increasing the chance of bankruptcy on account of unpaid medical bills. The bias is further stronger for households with mortgage finance, shorter house tenures, and younger household heads, which taken together reflect households that face more financial uncertainty.
Using fiscal reaction functions for 3a panel of actual euro-area countries the paper investigates whether euro membership has reduced the responsiveness of countries to increases in the level of inherited debt compared to the period prior to succession to the euro. While we find some evidence for such a loss in prudence, the results are not robust to changes in the specification, as for example an exclusion of Greece from the panel. This suggests that the current debt problems may result to a large extent from pre-existing debt levels prior to entry or from a larger need for fiscal prudence in a common currency, while an adverse change in the fiscal reaction functions for most countries does not apply.
Trust in policy makers fluctuates signi
cantly over the cycle and affects the transmission mechanism. Despite this it is absent from the literature. We build a monetary model embedding trust cycles; the latter emerge as an equilibrium phenomenon of a game-theoretic interaction between atomistic agents and the monetary authority. Trust affects agents' stochastic discount factors, namely the price of future risk, and through this it interacts with the monetary transmission mechanism. Using data from the Eurobarometer surveys, we analyze the link between trust and the transmission mechanism of macro and monetary shocks: Empirical results are in line with theoretical ones.
This paper presents a theory that explains why it is beneficial for banks to engage in circular lending activities on the interbank market. Using a simple network structure, it shows that if there is a non-zero bailout probability, banks can significantly increase the expected repayment of uninsured creditors by entering into cyclical liabilities on the interbank market before investing in loan portfolios. Therefore, banks are better able to attract funds from uninsured creditors. Our results show that implicit government guarantees incentivize banks to have large interbank exposures, to be highly interconnected, and to invest in highly correlated, risky portfolios. This can serve as an explanation for the observed high interconnectedness between banks and their investment behavior in the run-up to the subprime mortgage crisis.
We document and study international differences in both ownership and holdings of stocks, private businesses, homes, and mortgages among households aged fifty or more in thirteen countries, using new and comparable survey data. We employ counterfactual techniques to decompose observed differences across the Atlantic, within the US, and within Europe into those arising from differences in population characteristics and differences in economic environments. We then correlate the latter differences to country-level indicators. Ownership across the range of the assets considered tends to be more widespread among US households. We document that shortly prior to the current crisis, US households tended to invest larger amounts in stocks and smaller ones in homes, and to have larger mortgages in older age, even controlling for characteristics. This is consistent with the high prevalence of negative equity associated with the current crisis. More generally, we find that differences in household characteristics often play a small role, while differences in economic environments tend to explain most of the observed differences in ownership rates and in amounts held. The latter differences are much more pronounced among European countries than among US regions, suggesting further potential for harmonization of policies and institutions.
Regulation of investor access to financial products is often based on product familiarity indicated by previous use. The underlying premise that lack of familiarity with a product class causes unwarranted participation is difficult to test. This paper uses household-level data from the ‘experiment’ of German reunification that (exogenously) offered to East Germans access to capitalist products (exogenously) unfamiliar to them. We compare the evolution of post-unification participation of former East and West Germans in financial products, controlling for relevant household characteristics. We vary familiarity differentials by considering (i) both unfamiliar ‘capitalist’ products (stocks, bonds, and consumer credit) and ones available in the East (savings accounts and life insurance); and (ii) cohorts with different exposure to capitalism. We find that East Germans participated immediately in unfamiliar risky securities, at rates comparable to West Germans of similar characteristics. They phased out disproportionate participation in previously familiar assets as familiarity with capitalist products grew. They were more likely to use consumer debt, partly to catch up with richer new peers. We find no signs of abrupt participation drops that could suggest mistakes or regret related to lack of familiarity.
In this paper we investigate the implications of providing loan officers with a compensation structure that rewards loan volume and penalizes poor performance versus a fixed wage unrelated to performance. We study detailed transaction information for more than 45,000 loans issued by 240 loan officers of a large commercial bank in Europe. We examine the three main activities that loan officers perform: monitoring, originating, and screening. We find that when the performance of their portfolio deteriorates, loan officers increase their effort to monitor existing borrowers, reduce loan origination, and approve a higher fraction of loan applications. These loans, however, are of above-average quality. Consistent with the theoretical literature on multitasking in incomplete contracts, we show that loan officers neglect activities that are not directly rewarded under the contract, but are in the interest of the bank. In addition, while the response by loan officers constitutes a rational response to a time allocation problem, their reaction to incentives appears myopic in other dimensions.
Wir halten das bisher in Deutschland und anderen Ländern praktizierte Krisenmanagement für ordnungspolitisch inakzeptabel. Die aktuelle Notlage 2007 und 2008, verbunden mit einem enormen Überraschungsmoment, ließ möglicherweise keine andere Wahl, als die betroffenen Banken unbürokratisch zu retten - aber nun ist es Zeit, grundlegende Lehren aus den Rettungsaktionen zu ziehen.
In this study prepared for the ECON Committee of the European Parliament, Gellings, Jungbluth and Langenbucher present a graphic overview on core legislation in the area of economic and financial services in Europe. The mapping overview can serve as background for further deliberations. The study covers legislation in force, proposals and other relevant provisions in fourteen policy areas, i.e. banking, securities markets and investment firms, market infrastructure, insurance and occupational pensions, payment services, consumer protection in financial services, the European System of Financial Supervision, European Monetary Union, Euro bills and Coins and statistics, competition, taxation, commerce and company law, accounting and auditing.
This paper contributes to the ongoing debate on the relationship between austerity measures and economic growth. We propose a general equilibrium model where (i) agents have recursive preferences; (ii) economic growth is endogenously driven by investments in R&D; (iii) the government is committed to a zero-deficit policy and finances public expenditures by means of a combination of labor taxes and R&D taxes. We find that austerity measures that rely on reducing resources available to the R&D sector depress economic growth both in the short- and long-run. High debt EU members are currently implementing austerity measures based on higher taxes and/or lower investments in the R&D sector. This casts some doubts on the real ability of these countries to grow over the next years.