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Almost ten years after the European Commission action plan on building a capital markets union (CMU) and despite incremental progress, e.g. in the form of the EU Listing Act, the picture looks dire. Stock exchanges, securities markets, and supervisory authorities remain largely national, and, in many cases, European companies have decided to exclusively list overseas. Notwithstanding the economic and financial benefits of market integration, CMU has become a geopolitical necessity. A unified capital market can bolster resilience, strategic autonomy, and economic sovereignty, reduce dependence on external funding, and may foster economic cooperation between member states.
The reason for the persistent stand-still in Europe’s CMU development is not so much the conflict between market- and state-based integration, but rather the hesitancy of national regulatory and supervisory bodies to relinquish powers. If EU member states wanted to get real about CMU (as they say, and as they should), they need to openly accept the loss of sovereignty that follows from a true unified capital market. Building on economic as well as historical evidence, the paper offers viable proposals on how to design competent institutions within the current European framework.
This note outlines the case for speedy capital market integration and for the adoption of a common regulatory framework and single supervisory authority from a political economy perspective. We also show the alternative case for harmonization and centralization via regulatory competition, elaborating how competition between EU jurisdictions by way of full mutual recognition may lead to a (cost-)efficient and standardized legal framework for capital markets. Lastly, the note addresses the political economy conflict that underpins the implementation of both models for integrating capital markets. We point out that, in both cases, national authorities experience a loss of legislative and jurisdictional competence at the national level. We predict that any plan to foster a stronger capital market union, following an institution based or a market-based strategy, will face opposition from powerful national stakeholders.
The SVB case is a wake-up call for Europe’s regulators as it demonstrates the destructive power of a bank-run: it undermines the role of loss absorbing capital, elbowing governments to bailout affected banks. Many types of bank management weaknesses, like excessive duration risk, may raise concerns of bank losses – but to serve as a run-trigger, there needs to be a large enough group of bank depositors that fails to be fully covered by a deposit insurance scheme. Latent run-risk is the root cause of inefficient liquidations, and we argue that a run on SVB assets could have been avoided altogether by a more thoughtful deposit insurance scheme, sharply distinguishing between loss absorbing capital (equity plus bail-in debt) and other liabilities which are deemed not to be bail-inable, namely demand deposits. These evidence-based insights have direct implications for Europe’s banking regulation, suggesting a minimum and a maximum for a banks’ loss absorption capacity.
Um eine grüne Transformation der Volkswirtschaft zu erreichen, werden Finanzmärkte und die mit ihnen verbundenen Banken eine wichtige Rolle einnehmen müssen. Aber allein vermögen Banken und Kapitalmärkte wenig, wenn sie nicht im Kontext einer klugen, politischen Rahmensetzung und einer transparenten Erfassung der verursachten Schäden auf Unternehmensebene gesehen werden. Diese drei Pfeiler stellen bildlich den tragenden Unterbau für eine Brücke hin zu einer klimaneutralen Wirt-schaftsverfassung dar. Ihr Zusammenwirken ist eine Voraussetzung dafür, dass die Finanzwirtschaft die benötigten Finanzmittel für die grüne Transformation bereitstellen kann.
Climate risk has become a major concern for financial institutions and financial markets. Yet, climate policy is still in its infancy and contributes to increased uncertainty. For example, the lack of a sufficiently high carbon price and the variety of definitions for green activities lower the value of existing and new capital, and complicate risk management. This column argues that it would be welfare-enhancing if policy changes were to follow a predictable longer-term path. Accordingly, the authors suggest a role for financial regulation in the transition.
To ensure the credibility of market discipline induced by bail-in, neither retail investors nor peer banks should appear prominently among the investor base of banks’ loss absorbing capital. Empirical evidence on bank-level data provided by the German Federal Financial Supervisory Authority raises a few red flags. Our list of policy recommendations encompasses disclosure policy, data sharing among supervisors, information transparency on holdings of bail-inable debt for all stakeholders, threshold values, and a well-defined upper limit for any bail-in activity. This document was provided by the Economic Governance Support Unit at the request of the ECON Committee.
This briefing paper describes and evaluates the law and economics of institution(al) protection schemes. Throughout our analysis, we use Europe’s largest such scheme, that of German savings banks, as paradigm. We find strengths and weaknesses: Strong network-internal monitoring and early warning seems to be an important contributor to IPS network success. Similarly, the geographical quasi-cartel encourages banks to build a strong client base, including SME, in all regions. Third, the growth of the IPS member institutions may have benefitted from the strictly unlimited protection offered, in terms of euro amounts per account holder. The counterweighing weaknesses encompass the conditionality of the protection pledge and the underinvestment risk it entails, sometimes referred to as blackmailing the government, as well as the limited diversification potential of the deposit insurance within the network, and the near-incompatibility of the IPS model with the provisions of the BRRD, particularly relating to bail-in and resolution. Consequently, we suggest, as policy guidance, to treat large IPS networks similar to large banking groups, and put them as such under the direct supervision of the ECB within the SSM. Moreover, we suggest strengthening the seriousness of a deposit insurance that offers unlimited protection. Finally, to improve financial stability, we suggest embedding the IPS model into a multi-tier deposit re-insurance scheme, with a national and a European layer. This document was provided by the Economic Governance Support Unit at the request of the ECON Committee.
The great financial crisis and the euro area crisis led to a substantial reform of financial safety nets across Europe and – critically – to the introduction of supranational elements. Specifically, a supranational supervisor was established for the euro area, with discrete arrangements for supervisory competences and tasks depending on the systemic relevance of supervised credit institutions. A resolution mechanism was created to allow the frictionless resolution of large financial institutions. This resolution mechanism has been now complemented with a funding instrument.
While much more progress has been achieved than most observers could imagine 12 years ago, the banking union remains unfinished with important gaps and deficiencies. The experience over the past years, especially in the area of crisis management and resolution, has provided impetus for reform discussions, as reflected most lately in the Eurogroup statement of 16 June 2022.
This Policy Insight looks primarily at the current and the desired state of the banking union project. The key underlying question, and the focus here, is the level of ambition and how it is matched with effective legal and regulatory tools. Specifically, two questions will structure the discussions:
What would be a reasonable definition and rationale for a ‘complete’ banking union? And what legal reforms would be required to achieve it?
Banking union is a case of a new remit of EU-level policy that so far has been established on the basis of long pre-existing treaty stipulations, namely, Article 127(6) TFEU (for banking supervision) and Article 114 TFEU (for crisis management and deposit insurance). Could its completion be similarly carried out through secondary law? Or would a more comprehensive overhaul of the legal architecture be required to ensure legal certainty and legitimacy?
This policy note summarizes our assessment of financial sanctions against Russia. We see an increase in sanctions severity starting from (1) the widely discussed SWIFT exclusions, followed by (2) blocking of correspondent banking relationships with Russian banks, including the Central Bank, alongside secondary sanctions, and (3) a full blacklisting of the ‘real’ export-import flows underlying the financial transactions. We assess option (1) as being less impactful than often believed yet sending a strong signal of EU unity; option (2) as an effective way to isolate the Russian banking system, particularly if secondary sanctions are in place, to avoid workarounds. Option (3) represents possibly the most effective way to apply economic and financial pressure, interrupting trade relationships.
This paper discusses policy implications of a potential surge in NPLs due to COVID-19. The study provides an empirical assessment of potential scenarios and draws lessons from previous crises for effective NPL treatment. The paper highlights the importance of early and realistic assessment of loan losses to avoid adverse incentives for banks. Secondary loan markets would help in this process and further facilitate bank resolution as laid down in the BRRD, which should be uphold even in extreme scenarios.
We raise some critical points against a naïve interpretation of “green finance” products and strategies. These critical insights are the background against which we take a closer look at instruments and policies that might allow green finance to become more impactful. In particular, we focus on the role of a taxonomy and investor activism. We also describe the interaction of government policies with green finance practice – an aspect, which has been mostly neglected in policy debates but needs to be taken into account. Finally, the special case of green government bonds is discussed.
We raise some critical points against a naïve interpretation of “green finance” products and strategies. These critical insights are the background against which we take a closer look at instruments and policies that might allow green finance to become more impactful. In particular, we focus on the role of a taxonomy and investor activism. We also describe the interaction of government policies with green finance practice – an aspect, which has been mostly neglected in policy debates but needs to be taken into account. Finally, the special case of green government bonds is discussed.
With the second wave of the Covid-19 pandemic in full swing, banks face a challenging environment. They will need to address disappointing results and adverse balance sheet restatements, the intensity of which depends on the evolution of the euro area economies. At the same time, vulnerable banks reinforce real economy deficiencies. The contribution of this paper is to provide a comparative assessment of the various policy responses to address a looming banking crisis. Such a crisis will fully materialize when non-performing assets drag down banks simultaneously, raising the specter of a full-blown systemic crisis. The policy responses available range from forbearance, recapitalization (with public or private resources), asset separation (bad banks, at national or EU level), to debt conversion schemes. We evaluate these responses according to a set of five criteria that define the efficacy of each. These responses are not mutually exclusive, in practice, as they have never been. They may also go hand in hand with other restructuring initiatives, including potential consolidation in the banking sector. Although we do not make a specific recommendation, we provide a framework for policymakers to guide them in their decision making.
In this paper we put forward a legal argument in favour of granting more independence to BaFin, the German securities market supervisor. Following the Wirecard scandal, our reform proposal aims at strengthening the impartiality and credibility of the German supervisor and, as a consequence, at restoring capital market integrity. In order to achieve the necessary degree of democratic legitimacy for giving BaFin more independence and disassociating it from the Ministry of Finance, the paper sets out the necessary steps for a legal reform that creates accountability of BaFin vis-à-vis the Parliament, subjecting it to strict disclosure and reporting obligations.
Non-standard errors
(2021)
In statistics, samples are drawn from a population in a data-generating process (DGP). Standard errors measure the uncertainty in sample estimates of population parameters. In science, evidence is generated to test hypotheses in an evidence-generating process (EGP). We claim that EGP variation across researchers adds uncertainty: non-standard errors. To study them, we let 164 teams test six hypotheses on the same sample. We find that non-standard errors are sizeable, on par with standard errors. Their size (i) co-varies only weakly with team merits, reproducibility, or peer rating, (ii) declines significantly after peer-feedback, and (iii) is underestimated by participants.
The paper discusses the policy implications of the Wirecard scandal. The study finds that all lines of defense against corporate fraud, including internal control systems, external audits, the oversight bodies for financial reporting and auditing and the market supervisor, contributed to the scandal and are in need of reform. To ensure market integrity and investor protection in the future, the authors make eight suggestions for the market and institutional oversight architecture in Germany and in Europe.
Zur Reform der Einlagensicherung: Elemente einer anreizkompatiblen Europäischen Rückversicherung
(2020)
Bankeinlagen bis 100.000 Euro sind de jure überall im Euroraum gleichermaßen vor Verlusten geschützt. De facto hängt der Wert dieser gesetzlichen Haftungszusage unter anderem von der Ausstattung des nationalen Sicherungsfonds und der relativen Größe des Bankensektors in einer Volkswirtschaft ab. Um die Homogenität des Einlagenschutzes zu gewährleisten und die Bankenunion zu vollenden, bedarf es einer einheitlichen europäischen Einlagensicherung. Die bestehende implizite Risikoteilung im Euroraum ist ordnungspolitisch nicht wünschenswert. Ferner kann eine explizite und glaubwürdige Zweitsicherung Fehlanreize zur Übernahme exzessiver Risiken verhindern, bevor es zum Schadensfall kommt. Daher plädiert dieser Beitrag für ein zweistufiges, streng subsidiär organisiertes Rückversicherungsmodell: Nationale Erstversicherungen würden einen festgeschriebenen Teil, die europäische Rückversicherung nachrangig den Rest der Deckungssumme besichern. Die Rückversicherung gewährt diese Liquiditätshilfen in Form von Kassenkrediten. Weil die Haftung auf nationaler Ebene verbleibt, werden Risiken geteilt aber nicht vergemeinschaftet. Marktgerechte Prämien müssen nicht nur das individuelle Risikogewicht einer Bank sondern auch länderspezifische Risikofaktoren berücksichtigen. Zuletzt braucht der Rückversicherer umfangreiche Aufsichtsrechte, um die Zahlungsfähigkeit der Erstversicherer mit Hinblick auf die nationalen Haftungspflichten jederzeit sicherzustellen.
The European Commission is trying to reboot the CMU project: The High-Level Forum on Capital Markets Union – a group of 28 selected experts from industry, academia and civil society – is expected to submit policy recommendations by the end of May 2020 which will feed into the Commission’s new CMU agenda. This contribution is largely based on a letter to the High-Level Forum that gives feedback on the Interim Report published in February. There, we introduce a comprehensive approach to distinguish, from a functional finance perspective, between the ‘game changers’ and what is nice to have. We highlight the importance of common and consistent supervisory practices across Member States and recommend building up a European Securities and Exchange Commission (E-SEC) according to the American model.
The Wirecard scandal is a wake-up call alerting German politics to the importance of securities market integrity. The role of market supervision is to ensure the smooth functioning of capital markets and their integrity, creating trust among and acceptance by investors locally and globally. The existing patchwork of national supervisory practice in Europe is under discussion today, in the wake of Brexit that will end the role of London as a de-facto lead supervisor in stock and bond markets. A fundamental overhaul of a fragmented securities markets supervisory regime in Europe would offer the potential to lead to the establishment of an independent European Single Market Supervisor (ESMS). Endowed with strong enforcement powers, and supported by the existing national agencies, the ESMS would be entrusted with ensuring a uniform market standard as to transparency and other issues of market integrity across Europe. This would not rule out maintaining a variety of market organization structures at the national level. The ESMS would need executive powers in the world of markets (i.e. securities and trading), much like the SSM in the world of banking. To fill this new role, ESMS would have to be established as a new, independent institution, including an enormously scaled up staff if compared, e.g., to ESMA.
This Policy Letter presents a proposal for designing a program of government assistance for firms hurt by the Coronavirus crisis in the European Union (EU). In our recent Policy Letter 81, we introduced a new, equity-type instrument, a cash-against-tax surcharge scheme, bundled across firms and countries in a European Pandemic Equity Fund (EPEF). The present Policy Letter 84 focuses on the principles and conditions relevant for the operationalization of a EPEF. Our proposal has several desirable features. It: a) offers better risk sharing opportunities, augmenting the resilience of businesses and EU economies; b) is need-based, thereby contributing to an effective use of resources; c) builds on conditions and credible controls, addressing adverse selection and moral hazard; d) is accessible to smaller and medium-sized firms, the backbone of Europe’s economy; e) applies Europe-wide uniform eligibility criteria, strengthening support among member states; f) is a scheme of limited duration, reducing (perceived) government interference in businesses; g) creates a template for a growth-oriented public policy, aligning public and private sector interests; and h) builds on the existing institutional infrastructure and requires minimal legislative adjustments.
This policy letter adds to the current discussion on how to design a program of government assistance for firms hurt by the Coronavirus crisis. While not pretending to provide a cure-all proposal, the advocated scheme could help to bring funding to firms, even small firms, quickly, without increasing their leverage and default risk. The plan combines outright cash transfers to firms with a temporary, elevated corporate profit tax at the firm level as a form of conditional payback. The implied equity-like payment structure has positive risk-sharing features for firms, without impinging on ownership structures. The proposal has to be implemented at the pan-European level to strengthen Euro area resilience.
The spreading of the Covid-19 virus causes a reduction in economic activity worldwide and may lead to new risks to financial stability. The authors draw attention to the urgency of the targeted mitigation strategies on the European level and suggest taking coordinated action on the fiscal side to provide liquidity to affected firms in the corporate sector. Otherwise, virus-related cashflow interruptions could lead to a new full-blown banking crisis. Monetary policy measures are unlikely to mitigate cash liquidity shortages at the level of individual firms. Coordinated action at European level is decisive to prevent markets from losing confidence in the resilience of banks, particularly in countries with limited fiscal capacity. In contrast to the euro crisis of 2011, the cause of the current crisis does not lie in the financial markets; therefore, the risk of moral hazard for banks or states is low.
Nach der 2008 startenden Finanzmarktkrise sind Maßnahmen zur Regulierung und Stabilisierung der Finanzmärkte in das Zentrum der politischen und der gesellschaftlichen Aufmerksamkeit gerückt. Insbesondere die hohen fiskalischen Kosten der Staaten zur Stützung ihrer Bankensysteme sowie die volkswirtschaftlichen Kosten infolge des Einbruchs des Wirtschaftswachstums in den Jahren nach der Insolvenz der US Investmentbank Lehman Brothers hatten einen globalen Konsens über die Notwendigkeit neuer Regulierungsmaßnahmen zur Folge. Im Ergebnis wurden das internationale Regulierungswerk Basel III sowie weitere nationale Maßnahmen zur Stabilisierung des Finanzsektors neu konzipiert und in Europa im Wege einer in nationales Recht umzusetzenden Richtlinie (die Capital Require-ments Directive IV - CRD IV) sowie einer Verordnung (die Capital Requirements Regulation CRR, welche unmittelbar geltendes Recht darstellt) eingeführt.
Vor diesem Hintergrund analysiert das vorliegende interdisziplinäre Gutachten die Auswirkungen der Regulierungsmaßnahmen, die zwischen 2008 bis zu Beginn des Jahres 2018 umgesetzt wurden auf dem deutschen Finanzsektor.
In this paper we argue that the own findings of the SSM THEMATIC REVIEW ON PROFITABILITY AND BUSINESS MODEL and the academic literature on bank profitability do not provide support for the business model approach of supervisory guidance. We discuss in the paper several reasons why the regulator should stay away from intervening in management practices. We conclude that by taking the role of a coach instead of a referee, the supervisor generates a hazard for financial stability.
In this exploratory article, we consider the future of Deutsche Bank and Commerzbank and develop a new approach to the topic: instead of a merger of DB and CB we propose to consider a partial merger of the IT and related back office functions in order to create the basis for an Open Banking platform in Germany. Such a platform would act as a cross-institutional infrastructure company in which the participating banks develop a common data and IT platform (while respecting the data protection regulations). Significant parts of the transaction processes would be pooled by the institutions and executed by the Open Banking platform. Moreover, the institutions remain legally independent and compete with each other at the level of products and services that are developed and produced using just this common data and IT platform – “national champions” would not be created.
But such an “Open Banking Platform” could become even the nucleus of a European Banking platform that could be competitive with existing global data platforms from the USA and China which are already offering financial services and are likely to expand their offerings in the foreseeable future. The proposed model of an open data platform for banks prevents the emergence of national champions and supports the main goal of the banking union: creation of a financial system, in which single banks can be resolved without provoking a systemic crisis and forcing taxpayers to finance bailouts.
Recently, Fuest and Sinn (2018) have demanded a change of rules for the Eurozone’s Target 2 payment system, claiming it would violate the Statutes of the European System of Central Banks and of the European Central Bank. The authors present a stylized model based on a set of macro-economic assumptions, and show that Target 2 may lead to loss sharing among national central banks (NCBs), thus violating the no risk-sharing requirement laid out by the Eurosystem Statutes.
In this note, I present an augmented model that incorporates essential features of the micro- and macroprudential regulatory and supervisory regime that today is hard-wired into Europe’s banking system. The model shows that the original no-risk-sharing principle is not necessarily violated during a financial crisis of a member state. Moreover, it shows that under a banking union regime, financial crisis asset value losses at or below the 99.9th percentile are borne by private investors, not by taxpayers, and particularly not by central banks.
Therefore, policy conclusions from the micro-founded model differ significantly from those suggested by Fuest and Sinn (2018).
In diesem explorativen Beitrag machen wir uns Gedanken über die Zukunft von Deutscher Bank und Commerzbank und entwickeln einen neuen Zugang zu dem Thema: Statt einer Fusion von DB und CB schlagen wir eine Teilfusion nur der Datenzentren vor – es entsteht auf diese Weise die Grundlage für eine Open Banking Plattform als „utility“, also als Betrieb im Eigentum der Nutzer, an der perspektivisch weitere Finanzinstitute teilnehmen können. Die über die Daten kooperierenden Institute bleiben mit Blick auf Produkte und Dienstleistungen unverändert Konkurrenten – „national champions“ entstehen auf diese Weise nicht. Aber es wird damit in Europa die Basis für einen erfolgversprechenden Wettbewerb mit den großen Datenplattformen aus USA und China (Facebook, Amazon, Alipay) gelegt, die früher oder später in den Finanzmarkt eindringen werden. Das von uns vorgeschlagene Modell einer offenen Datenplattform für Banken verhindert das Entstehen von „national champions“ und schützt damit auch das Kernanliegen der Bankenunion: Die Schaffung eines Finanzsystems, dessen Banken jede für sich ausscheiden können ohne eine systemische Krise auszulösen, und ohne den Steuerzahler zu einer Rettungsaktion zu zwingen
Über Scheinriesen: Was TARGET-Salden tatsächlich bedeuten : eine finanzökonomische Überprüfung
(2018)
Der TARGET-Saldo der Bundesbank beläuft sich gegenwärtig auf knapp 1 Billion Euro. Kritikern zufolge birgt dieser Umstand hohe Lasten und Risiken für den deutschen Steuerzahler und zeigt, dass Deutschland zu einem „Selbstbedienungsladen“ im Eurosystem geworden sei. Vor diesem Hintergrund erörtert das Papier im Detail, wie TARGET-Salden überhaupt entstehen und was sie finanzökonomisch bedeuten. Die wirtschaftspolitische Analyse kommt zu dem Schluss, dass - anders als von den Kritikern behauptet- unter den Bedingungen einer Währungsunion im Normalbetrieb - TARGET-Salden lediglich Verrechnungssalden ohne weitere Implikationen sind, die aber nützliche Informationen über ökonomisch tieferliegende, regionale Verschiebungen geben können. Unter dem Extremszenario eines Zerfalls der Währungsunion können TARGET-Salden zwar als offene Positionen interpretiert werden, deren spätere Erfüllung würde aber ähnlich dem Brexit von komplizierten politischen Verhandlungen abhängen, sodass über die Werthaltigkeit allenfalls spekuliert werden kann. Sollte man das Extremszenario für bedeutend halten, und politisches Handeln fordern, erscheinen zwei Lösungen sinnvoll. Beide Vorschläge führen zu einer institutionellen Stärkung der Eurozone: i) die Einführung einer Tilgungspraxis, wie sie im US-amerikanischen Fedwire-System angewandt wird. Dabei handelt es sich um eine rein fiktive Tilgung in Form einer Umbuchung auf einem gemeinsamen (Offenmarkt-)Konto bei der EZB; ii) die Bündelung aller monetären Aktivitäten bei der EZB, sodass eine regionale Abgrenzung von Zahlungsvorgängen entfällt (und damit die TARGET-Salden verschwinden), weil alle Banken in direkter Beziehung zu ein und derselben Zentralbank stehen und der Zahlungsverkehr direkt zwischen den beteiligten Banken stattfindet.
The publication of the Liikanen Group's final report in October 2012 was surrounded by high expectations regarding the implementation of the reform plans through the proposed measures that reacted to the financial and sovereign debt crises. The recommendations mainly focused on introducing a mild version of banking separation and the creation of the preconditions for bail-in measures. In this article, we present an overview of the regulatory reforms, to which the financial sector has been subject over the past years in accordance with the concepts laid out in the Liikanen Report. It becomes clear from our assessment that more specific steps have yet to be taken before the agenda is accomplished. In particular, bail-in rules must be implemented more consistently. Beyond the question of the required minimum, the authors develop the notion of a maximum amount of liabilities subject to bail-in. The combination of both components leads to a three-layer structure of bank capital: a bail-in tranche, a deposit-insured bailout tranche, and an intermediate run-endangered mezzanine tranche. The size and treatment of the latter must be put to a political debate that weighs the costs and benefits of a further increase in financial stability beyond that achieved through loss-bearing of the bail-in tranche.
The Capital Markets Union-project of the European Commission aims for an increase of marketbased debt financing of small and medium-sized enterprises (SMEs), complementing bank lending. In this essay we argue that rather than focussing on pure non-bank lending, a reasonable mix of bankand market-based financing should be considered. Banks are said to have a comparative advantage in critical lending functions such as credit screening, debtor monitoring and debt renegotiation. All forms of lending require a persistent skin-in-the-game of critical players in order to be effective. The regulator should insist on full disclosure of skin-in-the-game, thereby improving capital allocation and reducing systemic risks.
This paper applies the theory of structured finance to the regulation of asset backed securities. We find the current regulation in Europe (Article 405 of the CRR) and the US (Section D of Dodd-Frank Act) to be severely flawed with respect to its key intention: the imposition of a strict loss retention requirement. While nominal retention is always 5%, the true level of loss retention varies across available retention options between zero loss retention and full loss retention at the extreme ends. Based on a standard model of structured finance transactions, we propose a new risk retention metric RM measuring the level of an issuer’s skin-in-the-game. The new metric could help to achieve a better implementation of CRR/CRD-IV and DFA, by making disclosure of the RM-number compulsory for all ABS transactions. There are also implications for the operation of rating agencies. On a general level, the RM metric will be instrumental in achieving simplicity and transparency in securitizations (STS).
In this paper we propose a way forward towards increased financial resilience in times of growing disagreement concerning open borders, free trade and global regulatory standards. In light of these concerns, financial resilience remains a highly valued policy objective. We wish to contribute by suggesting an agenda of concrete, do-able steps supporting an enhanced level of resilience, combined with a deeper understanding of its relevance in the public domain.
First, remove inconsistencies across regulatory rules and territorial regimes, and ensure their credibility concerning implementation. Second, discourage the use of financial regulatory standards as means of international competition. Third, give more weight to pedagogically explaining the established regulatory standards in public, to strengthen their societal backing.
According to the Bank Recovery and Resolution Directive (BRRD), introduced as a lesson from the recent financial crisis, the losses a failing bank incurred should generally be borne by its investors. Before a minimum bail-in has occurred, government money can only be injected in emergency cas-es to remedy a serious disturbance in the economy and to preserve financial stability. This policy letter argues that in case of the Italian Bank Monte dei Paschi di Siena (MPS), which the Italian gov-ernment currently plans to bail out, a resolution would most likely not cause such a systemic event. A bailout contrary to the existing rules will lead to a mispricing of bank capital and retard the re-structuring of the European banking sector, the authors write. They appeal to the European Central Bank, the Systemic Risk Board and the EU Commission to follow the rules as the test-case MPS will have a direct impact on the credibility of the new BRRD regime and the responsible institutions.
This note discusses the basic economics of central clearing for derivatives and the need for a proper regulation, supervision and resolution of central counterparty clearing houses (CCPs). New regulation in the U.S. and in Europe renders the involvement of a central counterparty mandatory for standardized OTC derivatives’ trading and sets higher capital and collateral requirements for non-centrally cleared derivatives.
From a macrofinance perspective, CCPs provide a trade-off between reduced contagion risk in the financial industry and the creation of a significant systemic risk. However, so far, regulation and supervision of CCPs is very fragmented, limited and ignores two important aspects: the risk of consolidation of CCPs on the one side and the competition among CCPs on the other side. i) As the economies of scale of CCP operations in risk and cost reduction can be large, they provide an argument in favor of consolidation, leading at the extreme to a monopoly CCP that poses the ultimate default risk – a systemic risk for the entire financial sector. As a systemic risk event requires a government bailout, there is a public policy issue here. ii) As long as no monopoly CCP exists, there is competition for market share among existing CCPs. Such competition may undermine the stability of the entire financial system because it induces “predatory margining”: a reduction of margin requirements to increase market share.
The policy lesson from our consideration emphasizes the importance of a single authority supervising all competing CCPs as well as of a specific regulation and resolution framework for CCPs. Our general recommendations can be applied to the current situation in Europe, and the proposed merger between Deutsche Börse and London Stock Exchange.
In the wake of the recent financial crisis, significant regulatory actions have been taken aimed at limiting risks emanating from trading in bank business models. Prominent reform proposals are the Volcker Rule in the U.S., the Vickers Report in the UK, and, based on the Liikanen proposal, the Barnier proposal in the EU. A major element of these reforms is to separate “classical” commercial banking activities from securities trading activities, notably from proprietary trading. While the reforms are at different stages of implementation, there is a strong ongoing discussion on what possible economic consequences are to be expected. The goal of this paper is to look at the alternative approaches of these reform proposals and to assess their likely consequences for bank business models, risk-taking and financial stability. Our conclusions can be summarized as follows: First, the focus on a prohibition of only proprietary trading, as envisaged in the current EU proposal, is inadequate. It does not necessarily reduce risk-taking and it likely crowds out desired trading activities, thereby negatively affecting financial stability. Second, there is potentially a better solution to limit excessive trading risk at banks in terms of potential welfare consequences: Trading separation into legally distinct or ring-fenced entities within the existing banking organizations. This kind of separation limits cross-subsidies between banking and proprietary trading and diminishes contagion risk, while still allowing for synergies across banking, non-proprietary trading and proprietary trading.
The eurozone remains in a deep, largely macro-economic crisis. A robust global economy and falling oil prices have supported Europe’s economy for some time, but by now it is clear that the eurozone will only be able to pull itself out of this crisis by means of more decisive action. One response, the recent easing of monetary policy by the European Central Bank (ECB), has, for the most part, been sharply and one-sidedly criticised in Germany. Monetary policy inaction seems to be the preferred option of many in Germany.
The authors discuss the following question: What would happen if the ECB failed to respond to the excessively low inflation and the weak economy? And what economic policy would be suitable under the current circumstances, if not monetary policy?
In the wake of the recent financial crisis, significant regulatory actions have been taken aimed at limiting risks emanating from banks’ trading activities. The goal of this paper is to look at the alternative reforms in the US, the UK and the EU, specifically with respect to the role of proprietary trading. Our conclusions can be summarized as follows: First, the focus on a prohibition of proprietary trading, as reflected in the Volcker Rule in the US and in the current proposal of the European Commission (Barnier proposal), is inadequate. It does not necessarily reduce risk-taking and it is likely to crowd out desired trading activities, thereby possibly affecting financial stability negatively. Second, trading separation into legally distinct or ring-fenced entities within the existing banking organizations, as suggested under the Vickers Report for the UK and the Liikanen proposal for the EU, is a more effective solution. Separation limits cross-subsidies between banking and proprietary trading and diminishes contagion risk, while still allowing for synergies and risk management across banking, non-proprietary trading and proprietary trading.
Von Februar bis Juni 2015 hat die Europäische Zentralbank (EZB) die Notfall-Liquiditätshilfen (emergency liquidity assistance, ELA) für griechische Banken von 50 auf etwa 90 Milliarden Euro ausgeweitet. Dies hat zu einer Diskussion unter Wissenschaftlern, Politikern und Praktikern geführt, ob diese Liquiditätshilfen rechtmäßig sind. Es wurde der Vorwurf erhoben, die EZB trage bewusst zu einer Konkursverschleppung der bereits insolventen griechischen Banken bei.
Wir nehmen diesen Vorwurf zum Anlass, die Grundsätze des ELA-Programms genauer zu betrachten und die Frage zu diskutieren, ob das Programm in der aktuellen Situation rechtmäßig war. Zunächst beschreiben wir hierfür aus finanzwirtschaftlicher Perspektive die komplexe Beziehung zwischen der Europäischen Union, der EZB und den griechischen Banken. Dabei gehen wir insbesondere auf die wirtschaftspolitischen Grundsätze einer Währungsunion mit einer unvollständigen Fiskalunion (oder Haushaltskonsolidierung) ein. Vor diesem Hintergrund analysieren wir dann die Entscheidung der EZB, weiterhin Liquiditätshilfen an griechische Banken bereitzustellen. Wir kommen zu dem Ergebnis, dass das Vorgehen der EZB nicht als Konkursverschleppung zu bezeichnen ist.
The European Central Bank (ECB) increased the emergency liquidity assistance (ELA) for Greek banks from €50 billion in February 2015 to approximately €90 billion in June 2015. Its actions were accompanied by a discussion among academics, politicians and practitioners regarding the legitimacy of the ELA. Some have even accused the ECB of deliberately delaying the bankruptcy filing of already insolvent Greek banks.
We take the claim regarding insolvency delay as an opportunity to highlight the underlying economics of the ELA program and discuss its legitimacy in the current situation. We start by characterizing the complex interrelationship of the European Union, the ECB and the Greek banks through the lens of financial economics, with a particular focus on the political economy of a monetary union with incomplete fiscal union (or fiscal consolidation). Combining these two issues, we examine the decision of the ECB to continue the provision of ELA to Greek banks. Our conclusions, drawn from the analysis, do not support the claim that the ECB’s actions are consistent with a delayed filing for insolvency.
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.
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.
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.
This paper makes a conceptual contribution to the effect of monetary policy on financial stability. We develop a microfounded network model with endogenous network formation to analyze the impact of central banks' monetary policy interventions on systemic risk. Banks choose their portfolio, including their borrowing and lending decisions on the interbank market, to maximize profit subject to regulatory constraints in an asset-liability framework. Systemic risk arises in the form of multiple bank defaults driven by common shock exposure on asset markets, direct contagion via the interbank market, and firesale spirals. The central bank injects or withdraws liquidity on the interbank markets to achieve its desired interest rate target. A tension arises between the beneficial effects of stabilized interest rates and increased loan volume and the detrimental effects of higher risk taking incentives. We find that central bank supply of liquidity quite generally increases systemic risk.
This paper makes a conceptual contribution to the effect of monetary policy on financial stability. We develop a microfounded network model with endogenous network formation to analyze the impact of central banks' monetary policy interventions on systemic risk. Banks choose their portfolio, including their borrowing and lending decisions on the interbank market, to maximize profit subject to regulatory constraints in an asset-liability framework. Systemic risk arises in the form of multiple bank defaults driven by common shock exposure on asset markets, direct contagion via the interbank market, and firesale spirals. The central bank injects or withdraws liquidity on the interbank markets to achieve its desired interest rate target. A tension arises between the beneficial effects of stabilized interest rates and increased loan volume and the detrimental effects of higher risk taking incentives. We find that central bank supply of liquidity quite generally increases systemic risk.
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.
On November 8, 2013, several members of the British House of Lords’ Subcommittee A conducted a hearing at the ECB in Frankfurt, Germany, on “Genuine Economic and Monetary Union and its Implications for the UK”. Professors Otmar Issing and Jan Pieter Krahnen were called as expert witnesses.
The testimony began with a general discussion on the elements considered necessary for a functioning internal market. Do economic union and monetary union require a fiscal union or even a political union, beyond the elements of the banking union currently being prepared? In this context, also the critique of the German current account surplus and the international expectations that Germany stimulate internal demand to support growth in crisis countries, were discussed.
With regard to the monetary union, the members of the subcommittee asked for an assessment of how European nations and the banking industry would have fared in the banking crisis that followed the Lehman collapse, had there not been a common currency. Given the important role that the ECB has played in the course of the crisis management, the members further asked for an evaluation of the OMT-program of the ECB and also if the monetary union is in need of common debt instruments, in order to provide the ECB with the possibility of buying EU liabilities, comparable to the Fed buying US Treasury bonds. Finally, the dual role of the ECB for monetary policy and banking supervision was an issue touched on by several questions.
This paper provides a systematic analysis of individual attitudes towards ambiguity, based on laboratory experiments. The design of the analysis allows to capture individual behavior across various levels of ambiguity, ranging from low to high. Attitudes towards risk and attitudes towards ambiguity are disentangled, providing pure measures of ambiguity aversion. Ambiguity aversion is captured in several ways, i.e. as a discount factor net of a risk premium, and as an estimated parameter in a generalized utility function. We find that ambiguity aversion varies across individuals, and with the level of ambiguity, being most prominent for intermediate levels. Around one third of subjects show no aversion, one third show maximum aversion, and one third show intermediate levels of ambiguity aversion, while there is almost no ambiguity seeking. While most theoretical work on ambiguity builds on maxmin expected utility, our results provide evidence that MEU does not adequately capture individual attitudes towards ambiguity for the majority of individuals. Instead, our results support models that allow for intermediate levels of ambiguity aversion. Moreover, we find risk aversion to be statistically unrelated to ambiguity aversion on average. Taken together, the results support the view that ambiguity is an important and distinct argument in decision making under uncertainty.
Fünf Jahre nach Beginn der Banken- und Staatsschuldenkrise („Finanzkrise“) kämpfen wir weiterhin mit den elementaren Problemen: Bei Märkten und Marktteilnehmern fehlt es an Stabilität und Vertrauen. Viele Banken stehen immer noch nicht auf eigenen Füßen und nehmen die ihnen in Europa traditionell zukommende zentrale Rolle für Wachstum und Entwicklung nicht wahr. Den guten Absichten, auf die sich die großen politischen Mächte während der ersten G-20 Treffen 2008 und 2009 verständigt hatten, ist eine Reihe von sinnvollen Ideen und Konzepten gefolgt. Die Voraussetzungen für einen grundlegenden reformerischen Erfolg sind somit gegeben – doch nun muss die Umsetzung folgen. Dazu bedarf es mutiger Entscheidungen. Im Jahr 2014 muss die europäische Politik gleich mehrere Weichen stellen. Der Bundesregierung kommt dabei die Schlüsselrolle zu. Sie muss den Mut haben zu radikaler Ordnungspolitik!
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.
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.
We develop a dynamic network model whose links are governed by banks' optmizing decisions and by an endogenous tâtonnement market adjustment. Banks in our model can default and engage in firesales: risk is transmitted through direct and cascading counterparty defaults as well as through indirect pecuniary externalities triggered by firesales. We use the model to assess the evolution of the network configuration under various prudential policy regimes, to measure banks' contribution to systemic risk (through Shapley values) in response to shocks and to analyze the effects of systemic risk charges. We complement the analysis by introducing the possibility of central bank liquidity provision.
This paper summarizes the key proposals of the report by the Liikanen Commission. It starts with an explanation of a crisis narrative underlying the Report and its proposals. The proposals aim for a revitalization of market discipline in financial markets. The two main structural proposals of the Liikanen Report are: first, for large banks, the separation of the trading business from other parts of the banking business (the "Separation Proposal"), and the mandatory issuing of subordinated bank debt thought to be liable (the strict "Bail-in Proposal"). The credibility of this commitment to private liability is achieved by strict holding restrictions. The anticipated consequences of the introduction of these structural regulations for the financial industry and markets are addressed in a concluding part.
This note proposes a new set-up for the fund backing the Single Resolution Mechanism (SRM). The proposed fund is a Multi-Tier Resolution Fund (MTRF), restricting the joint and several supranational liability to a limited range of losses, bounded by national liability at the upper and the lower end. The layers are, in ascending order: a national fund (first losses), a European fund (second losses), the national budget (third losses), the ESM (fourth losses, as a backup for sovereigns). The system works like a reinsurance scheme, providing clear limits to European-level joint liability, and therefore confining moral hazard. At the same time, it allows for some degree of risk sharing, which is important for financial stability if shocks to the financial system are exogenous (e.g., of a supranational macroeconomic nature). The text has four parts. Section A describes the operation of the Multi-Tier Resolution Fund, assuming the fund capital to be fully paid-in (“Steady State“). Section B deals with the build-up phase of the fund capital (“Build up“). Section C discusses how the proposal deals with the apparent incentive conflicts. The final Section D summarizes open questions which need further thought (“Open Questions“).
Ausgehend von einer Erläuterung der Kriseninterpretation (crisis narrative), wie sie in dem Bericht der Liikanen-Kommission zugrunde liegt, werden die nach Ansicht des Verfassers zentralen Vorschläge des Kommissionsberichts ausgewählt, vorgestellt und in den größeren Rahmen einer erneuerten Ordnungspolitik für die Finanzmärkte Europas eingeordnet. Die mit den Vorschlägen eng zusammenhängenden Reformelemente der Bankenunion werden in diesem Text bewusst ausgeklammert. Die beiden zentralen Strukturvorschläge des Liikanen-Berichts betreffen die Abspaltung der Handelsgeschäfte von dem Universalbankengeschäft für große, internationale Banken (der Trennbankenvorschlag), sowie die verpflichtende Emission nachrangigen, glaubwürdig haftenden Fremdkapitals (der strenge Bail-in Vorschlag). Glaubwürdigkeit der Haftungszusage wird durch strenge Halterestriktionen erreicht. Vorhersehbare Folgerungen einer Einführung dieser Strukturregeln für die Finanzindustrie und -märkte werden in einem abschließenden Teil angesprochen.
In der dritten Veranstaltung der „Gesprächsreihe zu Strukturreformen im europäischen Bankensektor“ diskutierten Professor Dr. Jan Krahnen und Dr. Theodor Weimer die Auswirkungen von Regulierung auf Bankverhalten und Wettbewerb, insbesondere im Hinblick auf die Vorschläge der Liikanen-Kommission. Weimer verwies auf die volkswirtschaftlichen Kosten einer zu strengen Bankenregulierung, u.a. negative Auswirkungen auf die Kreditvergabe. Weimer warnte auch davor, dass man in Europa, und gerade in Deutschland, strenger reguliere als in anderen Ländern. Krahnen erklärte, man habe durch die Liikanen-Vorschläge vor allem das Problem des systemischen Risikos im Bankensektor adressieren wollen. Außerdem sei es ein Ziel der Kommission gewesen, Banken so zu regulieren, dass der Steuerzahler im Krisenfall nicht länger für die Risiken der Banken haften müsse. Es sei notwendig, den Bankensektor zu reformieren, damit Banken abgewickelt werden könnten, auch wenn diese untereinander vernetzt sind.
Gesprächsreihe zu Strukturreformen im europäischen
Bankensektor : Zukunft der Universalbanken
(2013)
In der zweiten Veranstaltung der „Gesprächsreihe zu Strukturreformen im europäischen Bankensektor“ diskutierten Professor Dr. Jan Pieter Krahnen und Dr. Michael Kemmer die Zukunft der Universalbanken. Anlass war der Vorschlag der Liikanen-Kommission, dass Finanzinstitute einen Teil ihres Investmentbankings, den Eigenhandel und das Market-Making, ab einer bestimmten Größenordnung ausgliedern sollen.
Gesprächsreihe zu Strukturreformen im Europäischen Bankensektor: Managementvergütung im Bankensektor
(2013)
In der ersten Veranstaltung der „Gesprächsreihe zu Strukturreformen im europäischen Bankensektor“ diskutierten Professor Dr. Jan Krahnen und Dr. Thomas Mayer den im Liikanen-Bericht enthaltenen Vorschlag zur Managervergütung im Bankensektor. Der Vorschlag baut auf einem der Kernvorschläge der Liikanen-Kommission auf, nach dem Finanzinstitute gehalten sein sollen, einen Teil ihres Fremdkapitals so zu strukturieren, dass, bei Schieflage des Finanzinstituts, eine Inhaftungnahme der Gläubiger dieses Fremdkapitals möglich wird. Um dies zu erreichen, empfiehlt die Liikanen-Kommission für alle Banken, dass diese einen festgelegten Prozentsatz ihres Kapitals als „Bail-in Anleihen“ begeben müssen. Der Vorschlag zur Managervergütung sieht vor Bail-in Anleihen für die leistungsorientierte und anreizorientierte Entlohnung von Managern einzusetzen, um Anreize zu geben, die Risikopolitik des Unternehmens so zu verankern, dass auch längerfristig keine exorbitanten Risiken auftreten.
Am 6. Februar 2013 hat die Bundesregierung den "Entwurf eines Gesetzes zur Abschirmung von Risiken und zur Planung der Sanierung und Abwicklung von Kreditinstituten und Finanzgruppen” veröffentlicht. Artikel 2 des Gesetzesentwurfs sieht vor bei systemrelevanten Finanzinstitutionen das Einlagen- und Kreditgeschäft vom Handelsgeschäft abzutrennen. Die Zielsetzung des Gesetzentwurfs, Kapitalkosten wieder in direkte Abhängigkeit des Risikos von Geschäftsfeldern zu setzen und eine Abwicklung zu erleichtern, die ohne den Einsatz von Steuermitteln gelingen kann, ist begrüßenswert. In seiner derzeitigen Ausgestaltung läuft der Gesetzesentwurf jedoch Gefahr, zwar symbolträchtig zu sein, aber in der Zielerreichung hinsichtlich Stabilität des Finanzmarktes und Schutz von Einlegern und Steuerzahlern hinter den Erwartungen zurückzubleiben.
In this note, a new concept for a European deposit guarantee scheme is proposed, which takes account of the strong political reservations against a mutualization of the liability for bank deposits. The three-stage model for deposit insurance outlined in the text builds on existing national deposit guarantee schemes, offering loss compensation on a European level and at the same time preventing excessive risk and moral hazard taking by individual banks.
This policy letter provides an overview of the strengths, weaknesses, risks and opportunities of the upcoming comprehensive risk assessment, a euro area-wide evaluation of bank balance sheets and business models. If carried out properly, the 2014 comprehensive assessment will lead the euro area into a new era of banking supervision. Policy makers in euro area countries are now under severe pressure to define a credible backstop framework for banks. This framework, as the author argues, needs to be a broad, quasi-European system of mutually reinforcing backstops.
This paper analyzes the risk properties of typical asset-backed securities (ABS), like CDOs or MBS, relying on a model with both macroeconomic and idiosyncratic components. The examined properties include expected loss, loss given default, and macro factor dependencies. Using a two-dimensional loss decomposition as a new metric, the risk properties of individual ABS tranches can directly be compared to those of corporate bonds, within and across rating classes. By applying Monte Carlo Simulation, we find that the risk properties of ABS differ significantly and systematically from those of straight bonds with the same rating. In particular, loss given default, the sensitivities to macroeconomic risk, and model risk differ greatly between instruments. Our findings have implications for understanding the credit crisis and for policy making. On an economic level, our analysis suggests a new explanation for the observed rating inflation in structured finance markets during the pre-crisis period 2004-2007. On a policy level, our findings call for a termination of the 'one-size-fits-all' approach to the rating methodology for fixed income instruments, requiring an own rating methodology for structured finance instruments. JEL Classification: G21, G28 Keywords: credit risk, risk transfer, systematic risk
Risk transfer with CDOs
(2008)
Modern bank management comprises both classical lending business and transfer of asset risk to capital markets through securitization. Sound knowledge of the risks involved in securitization transactions is a prerequisite for solid risk management. This paper aims to resolve a part of the opaqueness surrounding credit-risk allocation to tranches that represent claims of different seniority on a reference portfolio. In particular, this paper analyzes the allocation of credit risk to different tranches of a CDO transaction when the underlying asset returns are driven by a common macro factor and an idiosyncratic component. Junior and senior tranches are found to be nearly orthogonal, motivating a search for the where about of systematic risk in CDO transactions. We propose a metric for capturing the allocation of systematic risk to tranches. First, in contrast to a widely-held claim, we show that (extreme) tail risk in standard CDO transactions is held by all tranches. While junior tranches take on all types of systematic risk, senior tranches take on almost no non-tail risk. This is in stark contrast to an untranched bond portfolio of the same rating quality, which on average suffers substantial losses for all realizations of the macro factor. Second, given tranching, a shock to the risk of the underlying asset portfolio (e.g. a rise in asset correlation or in mean portfolio loss) has the strongest impact, in relative terms, on the exposure of senior tranche CDO-investors. Our findings can be used to explain major stylized facts observed in credit markets.
This paper makes an attempt to present the economics of credit securitisation in a non-technical way, starting from the description and the analysis of a typical securitisation transaction. The paper sketches a theoretical explanation for why tranching, or nonproportional risk sharing, which is at the heart of securitisation transactions, may allow commercial banks to maximize their shareholder value. However, the analysis makes also clear that the conditions under which credit securitisation enhances welfare, are fairly restrictive, and require not only an active role of the banking supervisory authorities, but also a price tag on the implicit insurance currently provided by the lender of last resort.
Multiple lenders and corporate distress: evidence on debt restructuring : [Version Juli 2002]
(2002)
In the recent theoretical literature on lending risk, the common pool problem in multi-bank relationships has been analyzed extensively. In this paper we address this topic empirically, relying on a unique panel data set that includes detailed credit-fie information on distressed lending relationships in Germany. In particular, it includes information on bank pools, a legal institution aimed at coordinating lender interests in borrower distress. We find that the existence of small bank pools increases the probability of workout success and that coordination costs are positively related to pool size. We identify major determinants of pool formation, in particular the distribution of lending shares among banks, the number of banks, and the severity of the distress shock to the borrower.
This paper analyses the role of collateral in loan contracting when companies are financed by multiple bank lenders and relationship lending can be present. We conjecture and empirically validate that relationship lenders, who enjoy an informational advantage over arm’s-length banks, are more senior to strengthen their bargaining power in future renegotiation if borrower’s face financial distress. This deters costly conflicts between lenders and fosters workout decisions by the best informed party. Consistent with our conjecture, we find that relationship lender in general have a higher probability to be collateralized, and a higher degree of collateralization (i.e. seniority). Furthermore, we show that seniority and the status of relationship lending increases the likelihood that a bank invests in a risky workout of distressed borrowers. Both findings support the view that collateral is a strategic instrument intended to influence the bargaining position of banks. Our result further suggest that seniority and relationship lending are complementary to each other. JEL Classification: G21
We analyse the coordination problem in multi-creditor relationships empirically, relying on a unique panel data set that contains detailed credit-file information on distressed lending relationships in Germany, including information on creditor pools, a legal institution aiming at coordinating lender interests in borrower distress. We report three major findings. First, the existence of creditor pools increases the probability of workout success. Second, the results are consistent with coordination costs being positively related to pool size. Third, major determinants of pool formation are found to be the number of banks, the distribution of lending shares, and the severity of the distress shock.
Collateral, default risk, and relationship lending : an empirical study on financial contracting
(2000)
This paper provides further insights into the nature of relationship lending by analyzing the link between relationship lending, borrower quality and collateral as a key variable in loan contract design. We used a unique data set based on the examination of credit files of five leading German banks, thus relying on information actually used in the process of bank credit decision-making and contract design. In particular, bank internal borrower ratings serve to evaluate borrower quality, and the bank's own assessment of its housebank status serves to identify information-intensive relationships. Additionally, we used data on workout activities for borrowers facing financial distress. We found no significant correlation between ex ante borrower quality and the incidence or degree of collateralization. Our results indicate that the use of collateral in loan contract design is mainly driven by aspects of relationship lending and renegotiations. We found that relationship lenders or housebanks do require more collateral from their debtors, thereby increasing the borrower's lock-in and strengthening the banks' bargaining power in future renegotiation situations. This result is strongly supported by our analysis of the correlation between ex post risk, collateral and relationship lending since housebanks do more frequently engage in workout activities for distressed borrowers, and collateralization increases workout probability. First version: March 12, 1999
Seit zwanzig Jahren befaßt sich die Finanzmarktforschung einerseits mit Fragen der Bewertung und des Managements von Finanztiteln auf effizienten Kapitalmärkten und mit Fragen der Managementkontrolle auf unvollkommenen Märkten. Der folgende selektive Überblick konzentriert sich auf zentrale Aspekte der Theorie und Empirie der Managementkontrolle bei asymmetrischer Information. Ziel ist die Auseinandersetzung mit der unlängst vorgetragenen These zu den Mythen der Unternehmenskontrolle (Martin Hellwig 1997). Der aktuelle Überblick wird entwickelt vor dem Hintergrund der Gutenberg’schen Position eines eigenständigen Unternehmensinteresses, losgelöst von den Interessen der shareholder oder anderer stakeholder. Diese Position von Gutenberg verbindet sich im dritten Band der „Grundlagen der BWL: Die Finanzen“ von 1969 mit der Forderung nach Einhaltung eines sog. finanziellen Gleichgewichts. Erst in jüngster Zeit werden auch kapitalmarkttheoretisch fundierte Modelle entwickelt, die auch Raum bieten für eine Autonomie des Managements gegenüber dessen stakeholders.
Der vorliegende Beitrag führt eine detaillierte empirische Untersuchung über die Rolle der amtlichen Kursmakler an der Frankfurter Wertpapierbörse durch. Der verwendete Datensatz erlaubt eine Analyse des Einflusses der Maklertätigkeit auf Liquidität und Volatilität sowie eine Beurteilung der Profitabilität der Eigengeschäfte.
Die Beteiligung der Makler am Präsenzhandel ist erheblich. Ihre Eigengeschäfte machen über 20% des Handelsvolumens zu gerechneten Kursen und über 40% des Handelsvolumens im variablen Handel aus. Für letzteren wird zudem dokumentiert, daß die Tätigkeit der Makler zu einer deutlichen Reduktion der Geld-Brief-Spannen beiträgt. Die letztendlich gezahlte effektive Spanne beträgt im Durchschnitt weniger als ein Drittel der Spanne, die sich aus dem Orderbuch ergibt.
Für den Handel zu gerechneten Kursen wird gezeigt, daß die Preisfeststellung durch die Makler zu einer Verringerung der Volatilität führt. Eine Beurteilung des Einflusses der Makler auf die Volatilität im fortlaufenden Handel scheitert daran, daß das hierfür teilweise verwendete Maß, die Stabilisierungsrate, nach unserer Einschätzung keine aussagekräftigen Resultate liefert.
Die Makler erzielten während unseres Untersuchungszeitraums im Durchschnitt keinen Gewinn aus ihren Eigengeschäften. Eine Zerlegung der Gewinne in zwei Komponenten zeigt, daß positive Spannengewinne im Aggregat nicht für entstehende Positionierungsverluste kompensieren können.
Insgesamt zeigt unsere Untersuchung, daß die Kursmakler an den deutschen Wertpapierbörsen einen Beitrag zur Sicherung der Marktqualität leisten. Die Konsequenzen dieser Resultate für die Organisation des Aktienhandels in Deutschland werden diskutiert.
This paper provides a detailed empirical analysis of the call auction procedure on the German stock exchanges. The auction is conducted by the Makler whose position resembles that of a NYSE specialist. We use a dataset which contains information about all individual orders for a sample of stocks traded on the Frankfurt Stock Exchange (FSE). This sample allows us to calculate the cost of transacting in a call market and compare them to the costs of transacting in a continuous market. We find that transaction costs for small transactions in the call market are lower than the quoted spread in the order book of the continuous market whereas transaction costs for large transactions are higher than the spread in the continuous market.
We further address the question whether active participation of the Makler is advantageous. On the one hand he may accomodate order imbalances, increase the liquidity of the market and stabilize prices. On the other hand, the discretion in price setting gives him an incentive to manipulate prices. This may increase return volatility. Our dataset identifies the trades the Maklers make for their own accounts. We eliminate these trades and determine the price that would have obtained without their participation. Comparing this hypothetical price series to the actual transaction prices, we find that Makler participation tends to reduce return volatility. A further analysis shows that the actual prices are much closer to the surrounding prices of the continuous trading session than the hypothetical prices that would have obtained without Makler participation. These results indicate that the Maklers provide a valuable service to the market. We further calculate the profits associated with the positions taken by the Maklers and find that, on average, they do not earn profits on the positions they take. Their compensation is thus restricted to the commissions they receive.
Insider trading and portfolio structure in experimental asset markets with a long lived asset
(1997)
We report results of a series of nine market experiments with asymmetric information and a fundamental value process that is more "realistic" than those in previous experiments. Both a call market institution and a continuous double auction mechanism are employed. We find considerable pricing inefficiencies that are only partially exploited by insiders. The magnitude of insider gains is analyzed separately for each experiment. We find support for the hypothesis that the continuous double auction leads to more efficient outcomes. Finally, we present evidence of an endowment effect: the initial portfolio structure influences the final asset holdings of experimental subjects.