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The so-called Troika, consisting of the EU-Commission, the European Central Bank (ECB) and the International Monetary Fund (IMF), was supposed to support the member states of the euro area which had been hit hard by a sovereign debt crisis. For that purpose, economic adjustment programs were drafted and monitored in order to prevent the break-up of the euro area and sovereign defaults. The cooperation of these institutions, which was born out of necessity, has been partly successful, but has also created persistent problems. With the further increase of public debt, especially in France and Italy, the danger of a renewed crisis in the euro area was growing. The European Stability Mechanism (ESM) together with the European Commission will replace the Troika in the future, following decisions of the EU Summit of December 2018. It shall play the role of a European Monetary Fund in the event of a crisis. The IMF, on the other side, will no longer play an active role in solving sovereign debt crises in the euro area. The current course is, however, inadequate to tackle the core problems of the euro zone and to avoid future crises, which are mainly structural in nature and due to escalating public debt and lack of international competitiveness of some member countries. The current Corona crisis will aggravate the institutional problems. It has led to a common European fiscal response ("Next Generation EU"). This rescue and recovery program will not be financed by ESM resources and will not be monitored by the ESM. One important novelty of this package is that it involves the issuance of substantial common European debt.
Der Einsatz von Künstliche Intelligenz (KI) – Technologien eröffnet viele Chancen, birgt aber auch viele Risiken – insbesondere in der Finanzbranche. Dieses Whitepaper gibt einen Überblick über den aktuellen Stand der Anwendung und Regulierung von KI-Technologien in der Finanzbranche, und diskutiert Chancen und Risiken von KI. KI findet in der Finanzbranche zahlreiche Anwendungsgebiete. Dazu gehören Chatbots, intelligente Assistenten für Kunden, automatischer Hochfrequenzhandel, automatisierte Betrugserkennung, Überwachung der Compliance, Gesichtserkennungssoftware zur Kundenidentifikation u. v. m. Auch Finanzaufsichtsbehörden setzen zunehmend KI-Anwendungen ein, um große und komplexe Datenmengen (Big Data) automatisiert und skalierbar auf Muster zu untersuchen und ihren Aufsichtspflichten nachzukommen.
Die Regulierung von KI in der Finanzbranche ist ein Balanceakt. Auf der einen Seite gibt es eine Notwendigkeit Flexibilität zu gewährleisten, um Innovationen nicht einzudämmen und im internationalen Wettbewerb nicht abgehängt zu werden. Strenge Auflagen können in diesem Zusammenhang als Barriere für die erfolgreiche Weiter-)Entwicklung von KI-Applikationen in der Finanzbranche wirken. Auf der anderen Seite müssen Persönlichkeitsrechte geschützt und Entscheidungsprozesse nachvollziehbar bleiben. Die fehlende Erklärbarkeit und Interpretierbarkeit von KI-Modellen entsteht in erster Linie durch Intransparenz bei einem Großteil heutiger KI-Anwendungen, bei welchen zwar die Natur der Ein- und Ausgaben beobachtbar und verständlich ist, nicht jedoch die genauen Verarbeitungsschritte dazwischen (Blackbox Prinzip).
Dieses Spannungsfeld zeigt sich auch im aktuellen regulatorischen Ansatz verschiedener Behörden. So werden einerseits die positiven Seiten von KI betont, wie Effizienz- und Effektivitätsgewinne sowie Rentabilitäts- und Qualitätssteigerungen (Bundesregierung, 2019) oder neue Methoden der Gefahrenanalyse in der Finanzmarktregulierung (BaFin, 2018a). Andererseits, wird darauf verwiesen, dass durch KI getroffene Entscheidungen immer von Menschen verantwortet werden müssen (EU Art. 22 DSGVO) und demokratische Rahmenbedingungen des Rechtsstaats zu wahren seien (FinTechRat, 2017).
Für die Zukunft sehen wir die Notwendigkeit internationale Regularien prinzipienbasiert, vereinheitlicht und technologieneutral weiterzuentwickeln, ohne dabei die Entwicklung neuer KIbasierter Geschäftsmodelle zu bremsen. Im globalen Wettstreit sollte Europa bei der Regulierung des KI-Einsatzes eine Vorreiterrolle einnehmen und damit seine demokratischen Werte der digitalen Freiheit, Selbstbestimmung und das Recht auf Information weltweit exportieren. Förderprogramme sollten einen stärkeren Fokus auf die Entwicklung nachhaltiger und verantwortungsvoller KI in Banken legen. Dazu zählt insbesondere die (Weiter-)Entwicklung breit einsetzbarer Methoden, die es erlauben, menschen-interpretierbare Erklärungen für erzeugte Ausgaben bereitzustellen und Problemen wie dem Blackbox Prinzip entgegenzuwirken.
Aus Sicht der Unternehmen in der Finanzbranche könnte eine Kooperation mit BigTech-Unternehmen sinnvoll sein, um gemeinsam das Potential der Technologie bestmöglich ausschöpfen zu können. Nützlich wäre auch ein gemeinsames semantisches Metadatenmodell zur Beschreibung der in der Finanzbranche anfallenden Daten. In Zukunft könnten künstliche Intelligenzen Daten aus sozialen Netzwerken berücksichtigen oder Smart Contracts aushandeln. Eine der größten Herausforderungen der Zukunft wird das Anwerben geeigneten Personals darstellen.
Despite the increasing use of cashless payment instruments, the notion that cash loses importance over time can be unambiguously refuted. In contrast, the authors show that cash demand increased steeply over the past 30 years. This is not only true on a global scale, but also for the most important currencies in advanced countries (USD, EUR, CHF, GBP and JPY). In this paper, they focus especially on the role of different crises (technological crises, financial market crises, natural disasters) and analyse the demand for small and large banknote denominations since the 1990s in an international perspective. It is evident that cash demand always increases in times of crises, independent of the nature of the crisis itself. However, largely unaffected from crises we observe a trend increase in global cash aligned with a shift from transaction balances towards more hoarding, especially in the form of large denomination banknotes.
Although the elderly are more vulnerable to COVID-19, the empirical evidence suggests that they do not behave more cautiously in the pandemic than younger individuals. This theoretical model argues that some individuals might not comply with the COVID-19 measures to reassure themselves that they are not vulnerable, and that the incentives for such self-signaling can be stronger for the elderly. The results suggest that communication strategies emphasizing the dangers of COVID-19 could backfire and reduce compliance among the elderly.
We study risk taking in a panel of subjects in Wuhan, China - before, during the COVID-19 crisis, and after the country reopened. Subjects in our sample traveled for semester break in January, generating variation in exposure to the virus and quarantine in Wuhan. Higher exposure leads subjects to reduce planned risk taking, risky investments, and optimism. Our findings help unify existing studies by showing that aggregate shocks affect general preferences for risk and economic expectations, while heterogeneity in experience further affect risk taking through beliefs about individuals’ own outcomes such as luck and sense of control.
JEL Classification: G50, G51, G11, D14, G41
The authors embed human capital-based endogenous growth into a New-Keynesian model with search and matching frictions in the labor market and skill obsolescence from long-term unemployment. The model can account for key features of the Great Recession: a decline in productivity growth, the relative stability of inflation despite a pronounced fall in output (the "missing disinflation puzzle"), and a permanent gap between output and the pre-crisis trend output.
In the model, lower aggregate demand raises unemployment and the training costs associated with skill obsolescence. Lower employment hinders learning-by-doing, which slows down human capital accumulation, feeding back into even fewer vacancies than justified by the demand shock alone. These feedback channels mitigate the disinflationary effect of the demand shock while amplifying its contractionary effect on output. The temporary growth slowdown translates into output hysteresis (permanently lower output and labor productivity).
Occasionally binding constraints have become an important part of economic modelling, especially since western central banks see themselves (again) constraint by the so-called zero lower bound (ZLB) of the nominal interest rate. A binding ZLB constraint poses a major problem for a quantitative-structural analysis: Linear solution methods do no work in the presence of a non-linearity such as the ZLB and existing alternatives tend to be computationally demanding. The urge to study macroeconomic questions related to the Great Recession and the Covid-19 crisis in a quantitative-structural framework requires algorithms that are not only accurate, but that are also robust, fast, and computationally efficient.
A particularly important application where efficient and fast methods for occasionally binding constraints (OBCs) are needed is the Bayesian estimation of macroeconomic models. This paper shows that a linear dynamic rational expectations system with OBCs, depending on the expected duration of the constraint, can be represented in closed form. Combined with a set of simple equilibrium conditions, this can be exploited to avoid matrix inversions and simulations at runtime for signifcant gains in computational speed.
Central banks sometimes evaluate their own policies. To assess the inherent conflict of interest, the authors compare the research findings of central bank researchers and academic economists regarding the macroeconomic effects of quantitative easing (QE). They find that central bank papers report larger effects of QE on output and inflation. Central bankers are also more likely to report significant effects of QE on output and to use more positive language in the abstract. Central bankers who report larger QE effects on output experience more favorable career outcomes. A survey of central banks reveals substantial involvement of bank management in research production.
Empirical estimates of equilibrium real interest rates are so far mostly limited to advanced economies, since no statistical procedure suitable for a large set of countries is available. This is surprising, as equilibrium rates have strong policy implications in emerging markets and developing economies as well; current estimates of the global equilibrium rate rely on only a few countries; and estimates for a more diverse set of countries can improve understanding of the drivers. The authors propose a model and estimation strategy that decompose ex ante real interest rates into a permanent and transitory component even with short samples and high volatility. This is done with an unobserved component local level stochastic volatility model, which is used to estimate equilibrium rates for 50 countries with Bayesian methods.
Equilibrium rates were lower in emerging markets and developing economies than in advanced economies in the 1980s, similar in the 1990s, and have been higher since 2000. In line with economic integration and rising global capital markets, synchronization has been rising over time and is higher among advanced economies. Equilibrium rates of countries with stronger trade linkages and similar demographic and economic trends are more synchronized.
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.
Following the financial crash and the subsequent recession, European policymakers have undertaken major reforms regarding the European Economic and Monetary Union (EMU). Yet, the success rate is mixed. Several reform proposals have either completely failed due to opposition forces or are still pending, sometimes for years. This article provides an overview of reforms in four major policy fields: financial stabilisation, economic governance, fiscal solidarity, and cooperative dissolution. Building on the conceptual foundation of policy analysis, it distinguishes between policy outputs and outcomes. Policy output refers to legislation being adopted or agreement on treaty changes, while policy outcomes depict the result from the implementation process.
This policy white paper shows, using data on European Commission (EC) lobby meetings, that financial institutions and finance trade associations have substantial access to EC policymakers. While lobbying could transfer policy-relevant information and expertise to policymakers, it could also result in the capture of policymakers by the industry, which could harm consumers and taxpayers. How could policymakers prevent regulatory capture, but retain the benefits of the sector expertise in policy decisions? Awareness of regulatory capture by policymakers is one of the most important remedies. This paper provides an overview of the origins of the regulatory capture theory and recent academic evidence. The paper shows that regulatory capture could emerge in a variety of institutions and policy areas but is not ubiquitous and depends on the incentives of policymakers and the policy environment. Subsequently, the paper discusses various measures to prevent regulatory capture, such as more transparency, diverse expert groups, and cooling-off periods.
Fiscal policies and household consumption during the COVID-19 pandemic: a review of early evidence
(2020)
We review early evidence on how household consumption behavior has evolved over the pandemic and how different groups of households have responded to fiscal stimulus programs. Due to the scarcity of evidence for Europe, our review focuses on evidence from the US. Notwithstanding the institutional and demographic differences, we highlight generalizable findings and challenges to the design of stimulus policies from the pandemic. In conclusion, we identify several open issues for dis cussion.
OTC discount
(2020)
We document a sizable OTC discount in the interdealer market for German sovereign bonds where exchange and over-the-counter trading coexist: the vastmajority of OTC prices are favorable with respect to exchange quotes. This is a challenge for theories of OTC markets centered around search frictions but consistent with models of hybrid markets based on information frictions. We show empiricallythat proxies for both frictions determine variation in the discount, which is largely passed on to customers. Dealers trade on the exchange for immediacy and via brokers for opacity and anonymity, highlighting the complementary roles played by the di↵erent protocols.
We relate time-varying aggregate ambiguity (V-VSTOXX) to individual investor trading. We use the trading records of more than 100,000 individual investors from a large German online brokerage from March 2010 to December 2015. We find that an increase in ambiguity is associated with increased investor activity. It also leads to a reduction in risk-taking which does not reverse over the following days. When ambiguity is high, the effect of sentiment looms larger. Survey evidence reveals that ambiguity averse investors are more prone to ambiguity shocks. Our results are robust to alternative survey-, newspaper- or market-based ambiguity measures.
Supranational rules, national discretion: increasing versus inflating regulatory bank capital?
(2020)
We study how higher capital requirements introduced at the supranational level affect the regulatory capital of banks across countries. Using the 2011 EBA capital exercise as a quasi-natural experiment, we find that treated banks exploit discretion in the calculation of regulatory capital to inflate their capital ratios without a commensurate increase in their book equity and without a reduction in bank risk. Regulatory capital inflation is more pronounced in countries where credit supply is expected to tighten, suggesting that national authorities forbear their domestic banks to meet supranational requirements, with a focus on short-term economic considerations.
In diesem Beitrag wird ein Vorschlag vorgestellt, wie es trotz langfristiger Niedrigzinsen möglich ist, die vor 18 Jahren eingeführte Riester-Rente so umzugestalten, dass alle Beteiligten davon profitieren. Wird die Mindestauszahlung am Ende der Vertragslaufzeit nur für die Eigenbeiträge, nicht aber für die staatlichen Zulagen garantiert, können deutlich höhere Renditen erzielt werden. Unter dem Strich haben dann nicht nur Privatleute mehr Geld aus ihrer Altersvorsorge, sondern der Staat wird mehr Steuern einnehmen und die Anbieter haben mehr Spielraum für bedarfsgerechte Produktgestaltung.
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.
Banks are not immune from COVID-19. The economic downturn may drive some banks to the point of non-viability (PONV). If so, is the resolution regime in the Euro-area ready to respond? No, for banks may not have the right amount of the right kind of liabilities to make bail-in work. That could lead to a banking crisis. The Euro area can avoid this risk, by arranging now for a recap later. This would plug the gap between what the failing bank has and what it would need to make bail-in work. To do so, banks would pay – possibly via the contributions they make to the Single Resolution Fund – a commitment fee to a European backstop authority for a mandatory, system-wide note issuance facility. This would compel each bank, as it approached or reached the PONV, to issue to the backstop, and the backstop to purchase from the bank, the obligations the failing bank needs in order to make bail-in work. Such obligations would take the form of “senior-most” non-preferred debt, and bail-in would stop with such debt. That would allow the SRB to use the bail-in tool to resolve the failed bank, reopen it and run it under a solvent wind-down strategy. That protects counterparties and customers and ensures the continuity of critical economic functions. It also keeps investors at risk and promotes market discipline. Above all, it preserves financial stability.
Inflation ist ein Konstrukt. Sie wird von unterschiedlichen Akteuren unterschiedlich wahrgenommen. Zum Teil passiert dies, weil Warenkörbe differieren, zum Teil weil Erwartungen unterschiedlich gebildet werden. Dieser Beitrag diskutiert die Heterogenität der Inflation und ihrer Wahrnehmung und was dies für die Zielgröße der Zentralbankpolitik bedeutet.
The paper compares provision of public infrastructure via public-private partnerships (PPPs) with provision under government management. Due to soft budget constraints of government management, PPPs exert more effort and therefore have a cost advantage in building infrastructure. At the same time, hard budget constraints for PPPs introduce a bankruptcy risk and bankruptcy costs. Consequently, if bankruptcy costs are high, PPPs may be less efficient than public management, although this does not result from PPPs’ higher interest costs.
We develop a novel empirical approach to identify the effectiveness of policies against a pandemic. The essence of our approach is the insight that epidemic dynamics are best tracked over stages, rather than over time. We use a normalization procedure that makes the pre-policy paths of the epidemic identical across regions. The procedure uncovers regional variation in the stage of the epidemic at the time of policy implementation. This variation delivers clean identification of the policy effect based on the epidemic path of a leading region that serves as a counterfactual for other regions. We apply our method to evaluate the effectiveness of the nationwide stay-home policy enacted in Spain against the Covid-19 pandemic. We find that the policy saved 15.9% of lives relative to the number of deaths that would have occurred had it not been for the policy intervention. Its effectiveness evolves with the epidemic and is larger when implemented at earlier stages.
This paper studies a household’s optimal demand for a reverse mortgage. These contracts allow homeowners to tap their home equity to finance consumption needs. In stylized frameworks, we show that the decision to enter a reverse mortgage is mainly driven by the dierential between the aggregate appreciation of the house price and principal limiting factor on the one hand and the funding costs of a household on the other hand. We also study a rich life-cycle model that can explain the low demand for reverse mortgages as observed in US data. In this model, we analyze the optimal response of a household that is confronted with a health shock or financial disaster. If an agent suers from an unexpected health shock, she reduces the risky portfolio share and is more likely to enter a reverse mortgage. On the other hand, if there is a large drop in the stock market, she keeps the risky portfolio share almost constant by buying additional shares of stock. Besides, the probability to take out a reverse mortgage is hardly aected.
The ruling of the German Federal Constitutional Court and its call for conducting and communicating proportionality assessments regarding monetary policy have been the subject of some controversy. However, it can also be understood as a way to strengthen the de-facto independence of the European Central Bank. The authors shows how a regular proportionality check could be integrated in the ECB’s strategy that is currently undergoing a systematic review. In particular, they propose to include quantitative benchmarks for policy rates and the central bank balance sheet. Deviations from such benchmarks can have benefits in terms of the intended path for inflation while involving costs in terms of risks and side effects that need to be balanced. Practical applications to the euro area are provided
In this paper we adapt the Hamiltonian Monte Carlo (HMC) estimator to DSGE models, a method presently used in various fields due to its superior sampling and diagnostic properties. We implement it into a state-of-theart, freely available high-performance software package, STAN. We estimate a small scale textbook New-Keynesian model and the Smets-Wouters model using US data. Our results and sampling diagnostics confirm the parameter estimates available in existing literature. In addition, we find bimodality in the Smets-Wouters model even if we estimate the model using the original tight priors. Finally, we combine the HMC framework with the Sequential Monte Carlo (SMC) algorithm to create a powerful tool which permits the estimation of DSGE models with ill-behaved posterior densities.
This paper studies the link between bank recapitalization and welfare in a dynamic production economy. The model features financial frictions because banks benefit of a cost advantage at monitoring firms and face costly equity issuance. The competitive equilibrium outcome is inefficient because agents do not internalize the effects banks’ capitalization over the allocation of capital, its price and, in turn, firms investments. It follows, individual recapitalizations are sub-optimal and bailout policies may benefit social welfare in the long-run. Bailouts improve capital allocation in states where aggregate banks are poorly capitalized, therefore enhancing their market valuation, fostering investments, and stabilizing the economy recovery path.
Market fragmentation and technological advances increasing the speed of trading altered the functioning and stability of global equity limit order markets. Taking market resiliency as an indicator of market quality, we investigate how resilient are trading venues in a high-frequency environment with cross-venue fragmented order flow. Employing a Hawkes process methodology on high-frequency data for FTSE 100 stocks on LSE, a traditional exchange, and on Chi-X, an alternative venue, we find that when liquidity becomes scarce Chi-X is a less resilient venue than LSE with variations existing across stocks and time. In comparison with LSE, Chi-X has more, longer, and severer liquidity shocks. Whereas the vast majority of liquidity droughts on both venues disappear within less than one minute, the recovery is not lasting, as liquidity shocks spiral over the time dimension. Over half of the shocks on both venues are caused by spiralling. Liquidity shocks tend to spiral more on Chi-X than on LSE for large stocks suggesting that the liquidity supply on Chi-X is thinner than on LSE. Finally, a significant amount of liquidity shocks spill over cross-venue providing supporting evidence for the competition for order flow between LSE and Chi-X.
Using a structural life-cycle model, we quantify the long-term impact of school closures during the Corona crisis on children affected at different ages and coming from households with different parental characteristics. In the model, public investment through schooling is combined with parental time and resource investments in the production of child human capital at different stages in the children's development process. We quantitatively characterize both the long-term earnings consequences on children from a Covid-19 induced loss of schooling, as well as the associated welfare losses. Due to self-productivity in the human capital production function, skill attainment at a younger stage of the life cycle raises skill attainment at later stages, and thus younger children are hurt more by the school closures than older children. We find that parental reactions reduce the negative impact of the school closures, but do not fully offset it. The negative impact of the crisis on children's welfare is especially severe for those with parents with low educational attainment and low assets. The school closures themselves are primarily responsible for the negative impact of the Covid-19 shock on the long-run welfare of the children, with the pandemic-induced income shock to parents playing a secondary role.
Predictability and the cross-section of expected returns: a challenge for asset pricing models
(2020)
Many modern macro finance models imply that excess returns on arbitrary assets are predictable via the price-dividend ratio and the variance risk premium of the aggregate stock market. We propose a simple empirical test for the ability of such a model to explain the cross-section of expected returns by sorting stocks based on the sensitivity of expected returns to these quantities. Models with only one uncertainty-related state variable, like the habit model or the long-run risks model, cannot pass this test. However, even extensions with more state variables mostly fail. We derive criteria models have to satisfy to produce expected return patterns in line with the data and discuss various examples.
The possibility to investigate the impact of news on stock prices has observed a strong evolution thanks to the recent use of natural language processing (NLP) in finance and economics. In this paper, we investigate COVID-19 news, elaborated with the ”Natural Language Toolkit” that uses machine learning models to extract the news’ sentiment. We consider the period from January till June 2020 and analyze 203,886 online articles that deal with the pandemic and that were published on three platforms: MarketWatch.com, Reuters.com and NYtimes.com. Our findings show that there is a significant and positive relationship between sentiment score and market returns. This result indicates that an increase (decrease) in the sentiment score implies a rise in positive (negative) news and corresponds to positive (negative) market returns. We also find that the variance of the sentiments and the volume of the news sources for Reuters and MarketWatch, respectively, are negatively associated to market returns indicating that an increase of the uncertainty of the sentiment and an increase in the arrival of news have an adverse impact on the stock market.
Using experimental data from a comprehensive field study, we explore the causal effects of algorithmic discrimination on economic efficiency and social welfare. We harness economic, game-theoretic, and state-of-the-art machine learning concepts allowing us to overcome the central challenge of missing counterfactuals, which generally impedes assessing economic downstream consequences of algorithmic discrimination. This way, we are able to precisely quantify downstream efficiency and welfare ramifications, which provides us a unique opportunity to assess whether the introduction of an AI system is actually desirable. Our results highlight that AI systems’ capabilities in enhancing welfare critically depends on the degree of inherent algorithmic biases. While an unbiased system in our setting outperforms humans and creates substantial welfare gains, the positive impact steadily decreases and ultimately reverses the more biased an AI system becomes. We show that this relation is particularly concerning in selective-labels environments, i.e., settings where outcomes are only observed if decision-makers take a particular action so that the data is selectively labeled, because commonly used technical performance metrics like the precision measure are prone to be deceptive. Finally, our results depict that continued learning, by creating feedback loops, can remedy algorithmic discrimination and associated negative effects over time.
In this paper we adopt the Hamiltonian Monte Carlo (HMC) estimator for DSGE models by implementing it into a state-of-the-art, freely available high-performance software package. We estimate a small scale textbook New-Keynesian model and the Smets-Wouters model on US data. Our results and sampling diagnostics confirm the parameter estimates available in existing literature. In addition we combine the HMC framework with the Sequential Monte Carlo (SMC) algorithm which permits the estimation of DSGE models with ill-behaved posterior densities.
Incentivized experiments in which individuals receive monetary rewards according to the outcomes of their decisions are regarded as the gold standard for preference elicitation in experimental economics. These task-related real payments are considered necessary to reveal subjects' "true preferences". Using a systematic, large-sample approach with three subject pools of private investors, professional investors, and students, we test the effect of task-related monetary incentives on risk preferences elicited in four standard experimental tasks. We find no systematic differences in behavior between subjects in the incentivized and non-incentivized regimes. We discuss implications for academic research and for applications in the field.
Discussions regarding the planned European Deposit Insurance Scheme (EDIS), the missing third pillar of the European Banking Union, have been ongoing since the Commission published its initial legisla-tive proposal in 2015. A breakthrough in negotiations has yet to be achieved. The gridlock on EDIS is most commonly attributed to moral hazard concerns over insufficient risk reduction harboured on the side of northern member states, particularly Germany, due to the weak state of some other member states’ banking sectors. While moral hazard based on uneven risk reduction is helpful for explaining divergent member-state preferences on the scope of necessary risk reduction, this does not explain preferences on the institutional design of EDIS. In this paper, we argue that contrary to persistent differences on necessary risk reduction, preferences regarding the institutional design of EDIS have become more closely aligned. We analyse how preferences on EDIS developed in the key member states of Germany, France, and Italy. In all sampled countries, we find path-dependent benefits con-nected to the current design of national Deposit Guarantee Schemes (DGS) that shifted preferences of the banking sector or significant subsectors in favour of retaining national DGSs. Overall, given that a compromise on risk-reduction can be accomplished, we argue that current preferences in these key member states provide an opportunity to implement EDIS in the form of a reinsurance system that maintains national DGSs in combination with a supranational fund.
We employ a representative sample of 80,972 Italian firms to forecast the drop in profits and the equity shortfall triggered by the COVID-19 lockdown. A 3-month lockdown generates an aggregate yearly drop in profits of about 10% of GDP, and 17% of sample firms, which employ 8.8% of the sample’s employees, become financially distressed. Distress is more frequent for small and medium-sized enterprises, for firms with high pre-COVID-19 leverage, and for firms belonging to the Manufacturing and Wholesale Trading sectors. Listed companies are less likely to enter distress, whereas the correlation between distress rates and family firm ownership is unclear.
(JEL G01, G32, G33)
We analyze the ESG rating criteria used by prominent agencies and show that there is a lack of a commonality in the definition of ESG (i) characteristics, (ii) attributes and (iii) standards in defining E, S and G components. We provide evidence that heterogeneity in rating criteria can lead agencies to have opposite opinions on the same evaluated companies and that agreement across those providers is substantially low. Those alternative definitions of ESG also a↵ect sustainable investments leading to the identification of di↵erent investment universes and consequently to the creation of di↵erent benchmarks. This implies that in the asset management industry it is extremely dicult to measure the ability of a fund manager if financial performances are strongly conditioned by the chosen ESG benchmark. Finally, we find that the disagreement in the scores provided by the rating agencies disperses the e↵ect of preferences of ESG investors on asset prices, to the point that even when there is agreement, it has no impact on financial performances.
Die durch das Zweite Corona-Steuerhilfegesetz erfolgte Ausweitung des Verlustrücktrags ist dem Grunde nach ein hochgradig geeignetes und insbesondere breitenwirksames Mittel zur Stützung der Konjunktur. Das vorliegende Policy White Paper legt dar, dass allerdings Art und Umfang der gewählten Ausweitung unzureichend sind. Hierzu analysieren die Verfasser, wie sich die Ausweitung auf Unternehmen unterschiedlicher Größe und Rechtsform auswirkt. Auf Basis dieser Analyse zei-gen sie sodann, dass gemessen an den verfolgten konjunkturpolitischen Zielen es geboten gewesen wäre und weiterhin geboten ist, den Verlustrücktrag auf die Gewerbesteuer zu erstrecken.
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.
Accounting for financial stability: Bank disclosure and loss recognition in the financial crisis
(2020)
This paper examines banks’ disclosures and loss recognition in the financial crisis and identifies several core issues for the link between accounting and financial stability. Our analysis suggests that, going into the financial crisis, banks’ disclosures about relevant risk exposures were relatively sparse. Such disclosures came later after major concerns about banks’ exposures had arisen in markets. Similarly, the recognition of loan losses was relatively slow and delayed relative to prevailing market expectations. Among the possible explanations for this evidence, our analysis suggests that banks’ reporting incentives played a key role, which has important implications for bank supervision and the new expected loss model for loan accounting. We also provide evidence that shielding regulatory capital from accounting losses through prudential filters can dampen banks’ incentives for corrective actions. Overall, our analysis reveals several important challenges if accounting and financial reporting are to contribute to financial stability.
Using a nonlinear Bayesian likelihood approach that fully accounts for the zero lower bound on nominal interest rates, the authors analyze US post-crisis business cycle dynamics and provide reference parameter estimates. They find that neither the inclusion of financial frictions nor that of household heterogeneity improve the empirical fit of the standard model, or its ability to provide a joint explanation for the post-2007 dynamics. Associated financial shocks mis-predict an increase in consumption. The common practice of omitting the ZLB period in the estimation severely distorts the analysis of the more recent economic dynamics.
Do current levels of bank capital in Europe suffice to support a swift recovery from the COVID-19 crisis? Recent research shows that a well-capitalized banking sector is a major factor driving the speed and breadth of recoveries from economic downturns. In particular, loan supply is negatively affected by low levels of capital. We estimate a capital shortfall in European banks of up to 600 billion euro in a severe scenario, and around 143 billion euro in a moderate scenario. We propose a precautionary recapitalization on the European level that puts the European Stability Mechanism (ESM) center stage. This proposal would cut through the sovereign-bank nexus, safeguard financial stability, and position the Eurozone for a quick recovery from the pandemic.
This article provides a proposal to use IMF Article VIII, Section 2 (b) to establish a binding mechanism on private creditors for a sovereign debt standstill. The proposal builds on the original idea by Whitney Deveboise (1984). Using arguments brought forward by confidential IMF staff papers (1988, 1996) and the IMF General Counsel (1988), this paper shows how an authoritative interpretation of Article VIII, Section 2 (b) can provide protection from litigation to countries at risk of debt distress.
The envisaged mechanism presents several advantages over recent proposals for a binding standstill mechanism, such as the International Developing Country Debt Authority (IDCDA) by UNCTAD and a Central Credit Facility (CFF) by the Bolton Committee. First, this approach would not require the creation of new intergovernmental mechanisms or facilities. Second, the activation of the standstill mechanism can be set in motion by any IMF member country and does not require a modification of its Articles of Agreement. Third, debtor countries acting in good faith under an IMF program would be protected from aggressive litigation strategies from holdout creditors in numerous jurisdictions, including the US and the UK. Fourth, courts in key jurisdictions would avoid becoming overburdened by a cascade of sovereign debt litigation covering creditors and debtors across the globe. Fifth, private creditors would receive uniform treatment and ensure intercreditor equality. Sixth and last, the mechanism would provide additional safeguards to protect emergency multilateral financing provided to tackle Covid-19.
Using a novel experimental design, I test how the exposure to information about a group’s relative performance causally affects the members’ level of identification and thereby their propensity to harm affiliates of comparison groups. I find that both, being informed about a high and poor relative performance of the ingroup similarly fosters identification. Stronger ingroup identification creates increased hostility against the group of comparison. In cases where participants learn about poor relative performance, there appears to be a direct level effect additionally elevating hostile discrimination. My findings shed light on a specific channel through which social media may contribute to intergroup fragmentation and polarization.
Did the Federal Reserves’ Quantitative Easing (QE) in the aftermath of the financial crisis have macroeconomic effects? To answer this question, the authors estimate a large-scale DSGE model over the sample from 1998 to 2020, including data of the Fed’s balance sheet. The authors allow for QE to affect the economy via multiple channels that arise from several financial frictions. Their nonlinear Bayesian likelihood approach fully accounts for the zero lower bound on nominal interest rates. They find that between 2009 to 2015, QE increased output by about 1.2 percent. This reflects a net increase in investment of nearly 9 percent, that was accompanied by a 0.7 percent drop in aggregate consumption. Both, government bond and capital asset purchases were effective in improving financing conditions. Especially capital asset purchases significantly facilitated new investment and increased the production capacity. Against the backdrop of a fall in consumption, supply side effects dominated which led to a mild disinflationary effect of about 0.25 percent annually.
Angesichts des kürzlich von der Bundesregierung verabschiedeten Konjunkturpakets, stellen sich die Autoren des Policy Letters die Frage, ob und inwieweit die angekündigte Mehrwertsteuersenkung sowie der Kinderbonus zur substantiellen Ankurbelung des Binnenkonsums führt. Aus den für das Haushaltskrisenbarometer erhobenen Daten zu Einkommensänderungen sowie Einkommens- und Kündigungserwartungen, können die Ökonomen keine zu erwartende Schwächung der Binnennachfrage ableiten. Der überwiegende Teil der deutschen Wohnbevölkerung scheint kurzfristig nicht davon auszugehen, finanzielle Einbußen aufgrund der Pandemie zu erleiden. Die Erwartungen hinsichtlich der künftigen Einkommensentwicklung haben sich gar über die letzten vier Umfragewellen graduell verbessert. Ferner kann dargelegt werden, dass weder die Konsum- noch die Sparneigung durch die Corona-Krise zum gegenwärtigen Zeitpunkt langfristig stark beeinflusst wird. So geben derzeit lediglich 10 Prozent der Befragten an, größere Anschaffungen angesichts der Pandemie vollständig gestrichen zu haben. Anfang April 2020 lag dieser Wert noch bei 16 Prozent. Die Befragten berichteten in 71 Prozent der Fälle ihre Konsumpläne und in 78 Prozent der Fälle ihre Sparverhalten nicht geändert zu haben. Im Lichte dieser Ergebnisse lassen sich Maßnahmen, die auf eine unspezifische Stimulierung der Binnennachfrage abzielen, nicht substantiell begründen und rechtfertigen.
Mit einem um die Behandlungskapazität des Gesundheitssystems erweiterten epidemiologischen SIRD-Modell werden Mechanismen und Dynamik einer Virusepidemie wie Corona anhand von stilisierten politischen Reaktionsmustern (Ignore, Shutdown, Ignore-Shutdown-Relax) simuliert. Ferner werden aus dem Modell Lehren für die statistische Analyse von Corona gezogen, wie die Aussagekraft publizierter Verdopplungszeiten und Reproduktionszahlen. Die Dunkelziffer unbestätigter Fälle und die im Epidemieverlauf variable Genauigkeit von medizinischen Infektionstests werden diskutiert. Zur Messung der medizinischen Kosten von Corona sowie für regionale und internationale Vergleiche wird ein Schadensindex der verlorenen Lebenszeit vorgeschlagen. Zuletzt geht die Arbeit kurz auf die ökonomischen Kosten von Corona in Deutschland ein.
This Policy White Paper assesses several main elements of ECB’s upcoming review of its monetary policy strategy, announced in January 2020. Four aspects of the review are discussed in detail: i) ECB’s definition of price stability and the arguments for and against inflation targeting; ii) the scope of ECB’s objectives, considering financial stability, employment and the sustainability of the environment; iii) an update of ECB’s economic and monetary analyses to assess the risks to price stability; iv) the ECB’s communication practice. Furthermore, an overview of the ECB’s monetary policy strategy and its last evaluation in 2003 is given.
Consuming dividends
(2020)
This paper studies why investors buy dividend-paying assets and how they time their consumption accordingly. We combine administrative bank data linking customers’ consumption transactions and income to detailed portfolio data and survey responses on financial behavior. We find that private consumption is excessively sensitive to dividend income. Investors across wealth, income, and age distributions increase spending precisely around days of dividend receipt. Importantly, the consumption response is driven by financially prudent investors who select dividend portfolios, anticipate dividend income, and plan consumption accordingly. Our results contribute to the literature on a dividend clientele and provide evidence of ‘planned’ excess sensitivity.
We survey a representative sample of US households to study how exposure to the COVID-19 stock market crash a↵ects expectations and planned behavior. Wealth shocks are associated with upward adjustments of expectations about retirement age, desired working hours, and household debt, but have only small e↵ects on expected spending. We provide correlational and experimental evidence that beliefs about the duration of the stock market recovery shape households’ expectations about their own wealth and their planned investment decisions and labor market activity. Our findings shed light on the implications of household exposure to stock market crashes for expectation formation.
This working paper suggests to analyse agencification as a double process of institutional and policy centralisation. To that end, it develops a categorisation of agencies that incorporates these two dimensions. More specifically, it is argued that mixed outcomes where the levels of institutional and policy centralisation diverge can be expected to be the rule rather than the exception, in line with the hybrid nature of EU agencies as inbetweeners. Moreover, the fiduciary setting hits important legal constraints given the limits to delegation in the EU context. Against this backdrop a process whereby institutional centralisation develops incrementally and remains limited, yet is accompanied by a process of substantial policy centralisation, appears as the most promising path for EU agencification. A fiduciary setting, where a strong agency enjoys a high degree of independence and operates in a centralised policy space, by contrast, should be the exception. The comparative study of the process of agencification in the energy and banking sector is insightful in the light of these expectations. The incremental nature of institutional change in energy exemplifies the usual path of agencification, which is conducive to a weak agency operating in a relatively centralised policy space. Agencification in banking, by contrast, has led to a rather unusual outcome where the strong agency model combines with a fragmented policy context.
This Policy Letter outlines a pandemic insurance solution through a pandemic-related “Insurance Linked Bond”. It would be originated by governments, with a principal amount to cover significant costs resulting from a pandemic. These bonds, which would be traded on a secondary market, generate a risk-adequate return for private and institutional investors that is financed through the insurance premiums paid by the public domain. In case of a pre-defined pandemic trigger event, the principal of the bond becomes available for the originating governments to cover pandemic-related costs. Through this approach, governments can insure themselves against future pandemic-related risks, while funding comes primarily from private and institutional investors.
This paper summarizes key elements of the German Federal Constitutional Court’s decision on the European Central Bank’s Public Sector Asset Purchase Programme. It briefly explains how it is possible for the German Court to disagree with the ruling of the Court of Justice of the European Union. Finally, it makes suggestions concerning a practical way forward for the Governing Council of the ECB in light of these developments.
Cryptocurrencies have received growing attention from individuals, the media, and regulators. However, little is known about the investors whom these financial instruments attract. Using administrative data, we describe the investment behavior of individuals who invest in cryptocurrencies with structured retail products. We find that cryptocurrency investors are active traders, prone to investment biases, and hold risky portfolios. In line with attention effects and anticipatory utility, we find that the average cryptocurrency investor substantially increases log-in and trading activity after his or her first cryptocurrency purchase. Our results document which investors are more likely to adopt new financial products and help inform regulators about investors' vulnerability to cryptocurrency investments.
We show that FED policy announcements lead to a significant increase in international comovements in the cross-section of equity and in particular sovereign CDS markets. The relaxation of unconventionary monetary policies is felt strongly by emerging markets, and by countries that are open to the trading of goods and flows, even in the presence of floating exchange rates. It also impacts closed economies whose currencies are pegged to the dollar. This evidence is consistent with recent theories of a global financial cycle and the pricing of a FED’s put. In contrast, ECB announcements hardly affect comovements, even in the Eurozone.
Das Working Paper bietet die zusammenfassende Stellungnahme von Prof. Volker Wieland zum Ankaufprogramm der Europäischen Zentralbank für Anleihen des öffentlichen Sektors (Public Sector Purchase Programme, PSPP) am Bundesverfassungsgericht am 30.07.2019. Dabei liegt der Schwerpunkt auf der Frage der Einordnung des PSPP als monetäre, geldpolitische Maßnahme und der Verhältnismäßigkeit des Programms und seiner Umsetzung. Ebenfalls wird kurz auf die weiteren Fragen zur Umsetzung, insbesondere Ankündigung, Begrenzung und Abstand zum Primärmarkt für Staatsanleihen eingegangen.
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.
We study how the Eurosystem Collateral Framework for corporate bonds helps the European Central Bank (ECB) fulfill its policy mandate. Using the ECBs eligibility list, we identify the first inclusion date of both bonds and issuers. We find that due to the increased supply and demand for pledgeable collateral following eligibility, (i) securities lending market trading activity increases, (ii) eligible bonds have lower yields, and (iii) the liquidity of newly-issued bonds declines, whereas the liquidity of older bonds is unaffected/improves. Corporate bond lending relaxes the constraint of limited collateral supply, thereby making the market more cohesive and complete. Following eligibility, bond-issuing firms reduce bank debt and expand corporate bond issuance, thus increasing overall debt size and extending maturity.
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.
The case for corona bonds
(2020)
Corona bonds are feasible and important to preserve the European project. We set out a number of principles that might serve as a blueprint for the European institutions. Importantly, Corona bonds could be issued through a new public law entity and include all the safeguards required for the protection of the fundamental values of the EU. This proposal is pragmatic in the sense that it facilitates the choice European leaders have to make now; necessary to secure the resilience of the European Union. The political risks are significantly higher now than in 2010. The gargantuan challenge of tackling the combined impact of climate change, migration, digitalization, geopolitical shifts, and the spread of autocracy, requires leadership and joint action by the Council and the Eurogroup.
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.
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.
Capital in the corona crisis
(2020)
Die Coronakrise und die Eindämmungspolitik der Nationalstaaten hat gravierende wirtschaftliche Folgen. Nicht alle EU-Mitgliedsstaaten sind in gleicher Weise gewappnet und manche werden derzeit heftiger von der Coronakrise getroffen als andere. Eine Möglichkeit, europäische Solidarität zu organisieren, ist die Ausgabe von Gemeinschaftsanleihen, so genannter Corona-Bonds. Dieser Beitrag diskutiert das Für und Wider der Corona-Bonds und ihrer Alternativen: Weder Gemeinschaftsanleihen noch eine Ausweitung des EZB-Engagements sollten das Mittel der Wahl sein. Wir plädieren vielmehr für direkte, auf europäischer Ebene koordinierte Transferzahlungen an bedürftige Mitgliedsstaaten.
The coronavirus has led to a human tragedy, but it need not end up in an economic catastrophe.
In Southern Europe there are signs of a silver lining: the growth rate of the total number of deaths attributed to the coronavirus has been decreasing for weeks in Italy and Spain.
While the effect of the connement measures aim at limiting the spread of the virus is at best uncertain, the economic and social costs of a prolonged lockdown are much less ambiguous and potentially huge. Importantly, these costs can be very unequally distributed.
We argue that it is therefore time to start thinking about how to gradually unlock these countries, and we make some suggestions along this line starting with large-scale testing and continuous re-testing as the most useful pre-condition.
We extend the canonical income process with persistent and transitory risk to shock distributions with left-skewness and excess kurtosis, to which we refer as higher- order risk. We estimate our extended income process by GMM for household data from the United States. We find countercyclical variance and procyclical skewness of persistent shocks. All shock distributions are highly leptokurtic. The existing tax and transfer system reduces dispersion and left-skewness of shocks. We then show that in a standard incomplete-markets life-cycle model, first, higher-order risk has sizable welfare implications, which depend crucially on risk attitudes of households; second, higher-order risk matters quantitatively for the welfare costs of cyclical idiosyncratic risk; third, higher-order risk has non-trivial implications for the degree of self-insurance against both transitory and persistent shocks.
We report the results of a longitudinal intervention with students across five universities in China designed to reduce online consumer debt. Our research design allocates individuals to either a financial literacy treatment, a self-control training program, or a zero-touch control group. Financial education interventions improve test scores on general financial literacy but only marginally affect future online borrowing. Our self-control treatment features detailed tracking of spending and borrowing activity with a third-party app and introspection about individuals' consumption with a counselor. These sessions reduce future online borrowing, delinquency charges, and borrowing for entertainment reasons - and are driven by the male subjects in the sample. Our results suggest that self-regulation can affect financial behavior in e-commerce platforms.
We use data from a German online brokerage and a survey to show that retail investors sharply reduce risk-taking in response to nearby firm bankruptcies, which are not pre- dictive of returns. The effects on trading are spatially highly concentrated, immediate and not persistent. They seem to operate through more pessimistic expected returns and increased risk aversion and do not reflect wealth effects or changes in background risks. Investors learn about bankruptcies through immediate coverage in local newspapers. Our findings suggest that non-informative local experiences that make downside risks of stock investment more salient contribute to idiosyncratic short-term fluctuations in trading.
This paper studies the impact of financial sector size and leverage on business cycles and risk-free rates dynamics. We model a general equilibrium productive economy where financial intermediaries provide costly risk mitigation to households by pooling the idiosyncratic risks of their investment activities. We find that leverage amplifies variations of intermediaries’ relative size, but may also mitigate the business cycle. Moreover, it makes risk-free rates pro-cyclical. Households benefit the most when the financial sector is neither too small, thus avoiding high consumption fluctuations and costly mitigation, nor too big, so that fewer resources are lost after intermediation costs.
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.
We show that High Frequency Traders (HFTs) are not beneficial to the stock market during flash crashes. They actually consume liquidity when it is most needed, even when they are rewarded by the exchange to provide immediacy. The behavior of HFTs exacerbate the transient price impact, unrelated to fundamentals, typically observed during a flash crash. Slow traders provide liquidity instead of HFTs, taking advantage of the discounted price. We thus uncover a trade-o↵ between the greater liquidity and efficiency provided by HFTs in normal times, and the disruptive consequences of their trading activity during distressed times.
This paper presents causal evidence of the effects of boardroom networks on firm value. We exploit exogenous variation in network centrality arising from a ban on interlocking directorates of Italian financial and insurance companies. We leverage this shock to show that firms that become more central in the network as a result of the shock experience positive abnormal returns around the announcement date. We find that information dissemination plays a central role: results are driven by firms that have higher idiosyncratic volatility, low analyst coverage, and more uncertainty surrounding their earnings forecasts. We also find that firms benefit more from boardroom centrality when they are more central in the input-output network, as this reinforces information complementarities, or when they are less central in the cross-ownership network, as well as when they suffer from low profitability and low growth opportunities. Network centrality also results in higher compensation for board directors.
Using an original dataset on professional networks of directors sitting on the boards of large US corporations, we examine how personal relationships are used by firms to improve job match quality in the high-skill segment of the labor market. Analyzing explicit social connection data between new hires and recruiters, we are able to test predictions of well established job referral models. We find that referred executive directors have a fifteen percent longer tenure than their non-referred counterparts. Referred executive directors also tend to be similar to their referrers on multiple dimensions, giving support to network homophily hypotheses.
We study whether and how time preferences change over the life cycle, exploiting representative long-term panel data. We estimate the age patterns of discount rates from age 25 to 80. In order to identify age effects, we have to disentangle them from cohort and period factors. We address this identification problem by estimating individual fixed effects models, where we substitute period effects with determinants of time preferences that depend on calendar years. We find that discount rates decrease with age and the decline is remarkably linear over the life cycle.
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.
Discussions about the banking union have restarted. Its success so far is limited: national banking sectors are still overwhelmingly exposed to their own countries’ economies, cross border banking has not increased and capital and liquidity remain locked within national boundaries. The policy letter highlights that the current debate, centered on sovereign exposures and deposit insurance, misses critical underlying problems in the supervision and resolution frameworks. The ECB supervisors’ efforts to facilitate cross-border banking have been hampered by national ringfencing. The resolution framework is not up to its task: limited powers of the SRB, prohibitive access conditions and limited size of the Single Resolution Fund limit its effectiveness. A lack of a coherent European framework for insolvency unlevels the regulatory field and creates incentives to bypass European rules. The new Commission and European Parliament, with the new ECB leadership, provide a unique opportunity to address these shortcomings and make the banking union work.
The term structure of interest rates is crucial for the transmission of monetary policy to financial markets and the macroeconomy. Disentangling the impact of monetary policy on the components of interest rates, expected short rates and term premia, is essential to understanding this channel. To accomplish this, we provide a quantitative structural model with endogenous, time-varying term premia that are consistent with empirical findings. News about future policy, in contrast to unexpected policy shocks, has quantitatively significant effects on term premia along the entire term structure. This provides a plausible explanation for partly contradictory estimates in the empirical literature.
We design, field and exploit survey data from a representative sample of the French population to examine whether informative social interactions enter householdsístockholding decisions. Respondents report perceptions about their circle of peers with whom they interact about Önancial matters, their social circle and the population. We provide evidence for the presence of an information channel through which social interactions ináuence perceptions and expectations about stock returns, and financial behavior. We also find evidence of mindless imitation of peers in the outer social circle, but this does not permeate as many layers of financial behavior as informative social interactions do.
Abundant studies show that individuals often struggle and frequently fail to form a correct perception of how much they are worth in terms of income or net wealth, both in absolute terms and relative to others. The authors find that wealth misperception arises even in a frictionless environment. They show that this wealth misperception is related to low cognitive abilities and inattention, and that subjects who misperceive wealth have a greater tendency to borrow and spend out of gains. A standard optimal consumption choice model, enriched with a rational but inattentive agent à la Gabaix aligns the key experimental findings.
This paper provides an overview of how to use "big data" for economic research. We investigate the performance and ease of use of different Spark applications running on a distributed file system to enable the handling and analysis of data sets which were previously not usable due to their size. More specifically, we explain how to use Spark to (i) explore big data sets which exceed retail grade computers memory size and (ii) run typical econometric tasks including microeconometric, panel data and time series regression models which are prohibitively expensive to evaluate on stand-alone machines. By bridging the gap between the abstract concept of Spark and ready-to-use examples which can easily be altered to suite the researchers need, we provide economists and social scientists more generally with the theory and practice to handle the ever growing datasets available. The ease of reproducing the examples in this paper makes this guide a useful reference for researchers with a limited background in data handling and distributed computing.
We introduce Implied Volatility Duration (IVD) as a new measure for the timing of uncertainty resolution, with a high IVD corresponding to late resolution. Portfolio sorts on a large cross-section of stocks indicate that investors demand on average about seven percent return per year as a compensation for a late resolution of uncertainty. In a general equilibrium model, we show that `late' stocks can only have higher expected returns than `early' stocks if the investor exhibits a preference for early resolution of uncertainty. Our empirical analysis thus provides a purely market-based assessment of the timing preferences of the marginal investor.
Many Americans claim Social Security benefits early, though this leaves them with lower benefits throughout retirement. We build a lifecycle model that closely tracks claiming patterns under current rules, and we use it to predict claiming delays if, by delaying benefits, people received a lump sum instead of an annuity. We predict that current early claimers would defer claiming by a year given actuarially fair lump sums, and the predictions conform with respondents’ answers to a strategic survey about the lump sum. In other words, such a reform could provide an avenue for encouraging delayed retirement without benefit cuts or tax increases. Moreover, many people would still defer claiming even for smaller lump sums.
A common prediction of macroeconomic models of credit market frictions is that the tightness of financial constraints is countercyclical. As a result, theory implies a negative collateralizability premium; that is, capital that can be used as collateral to relax financial constraints provides insurance against aggregate shocks and commands a lower risk compensation compared with non-collateralizable assets. We show that a longshort portfolio constructed using a novel measure of asset collateralizability generates an average excess return of around 8% per year. We develop a general equilibrium model with heterogeneous firms and financial constraints to quantitatively account for the collateralizability premium.
Implications of money-back guarantees for individual retirement accounts: protection then and now
(2019)
In the wake of the financial crisis and continued volatility in international capital markets, there is growing interest in mechanisms that can protect people against retirement account volatility. This paper explores the consequences for savers’ wellbeing of implementing market-based retirement account guarantees, using a life cycle consumption and portfolio choice model where investors have access to stocks, bonds, and tax-qualified retirement accounts. We evaluate the case of German Riester plans adopted in 2002, an individual retirement account produce that includes embedded mandatory money-back guarantees. These guarantees influenced participant consumption, saving, and investment behavior in the higher interest rate environment of that era, and they have even larger impacts in a low-return world such as the present. Importantly, we conclude that abandoning these guarantees could enhance old-age consumption for over 80% of retirees, particularly lower earners, without harming consumption during the accumulation phase. Our results are of general interest for other countries implementing default investment options in individual retirement accounts, such as the U.S. 401(k) defined contribution plans and the Pan European Pension Product (PEPP) recently launched by the European Parliament.
We investigate the default probability, recovery rates and loss distribution of a portfolio of securitised loans granted to Italian small and medium enterprises (SMEs). To this end, we use loan level data information provided by the European DataWarehouse platform and employ a logistic regression to estimate the company default probability. We include loan-level default probabilities and recovery rates to estimate the loss distribution of the underlying assets. We find that bank securitised loans are less risky, compared to the average bank lending to small and medium enterprises.
In this paper, we investigate the relation between buildings' energy efficiency and the probability of mortgage default. To this end, we construct a novel panel dataset by combining Dutch loan-level mortgage information with provisional building energy ratings that are calculated by the Netherlands Enterprise Agency. By employing the Logistic regression and the extended Cox model, we find that buildings' energy efficiency is associated with lower likelihood of mortgage default. The results hold for a battery of robustness checks. Additional findings indicate that credit risk varies with the degree of energy efficiency.
The use of contractual engineering to create channels of credit intermediation outside of the realm of banking regulation has been a recurring activity in Western financial systems over the last 50 years. After the financial crisis of 2007 and 2008, this phenomenon, at that time commonly referred to as ‘shadow banking’, evoked a large-scale regulatory backlash, including several specific regulatory constraints being placed on non-bank financial institutions (NBFI). This paper proposes a different avenue for regulators to keep regulatory arbitrage under control and preserve sufficient space for efficient financial innovation. Rather than engaging in the proverbial race between hare and hedgehog that is emerging with increasingly specific regulation of particular contractual arrangements, this paper argues for a normative approach to supervision. We outline this approach in detail by showing that regulators should primarily analyse the allocation of tail risk inherent in the respective contractual arrangements. Our paper proposes to assign regulatory burdens equivalent to prudential banking regulation, in case these arrangements become only viable through indirect or direct access to an (ad hoc) public backstop. In order to make the pivotal assessment, regulators will need information about recent contractual innovations and their risk-allocating characteristics. According to the scholarship on regulatory networks serving as communities of interpretation, we suggest in particular how regulators should structure their relationships with semi-public gatekeepers such as lawyers, auditors and consultants to keep abreast of the real-world implications of evolving transactional structures. This paper then uses the rise of credit funds as a non-bank entities economically engaged in credit intermediation to apply this normative framework, pointing to recent contractual innovations that call for more regulatory scrutiny in a multipolar regulatory dialogue.
Facebook’s proposal to create a global digital currency, Libra, has generated a wide discussion about its potential benefits and drawbacks. This note contributes to this discussion and, first, characterizes similarities and dissimilarities of Libra’s building blocks with existing institutions. Second, the note discusses open questions about Libra which arise from this characterization and, third, potential future developments and their policy implications. A central issue is that Libra raises considerable questions about its role in and impact on the international monetary and financial system that should be addressed before policymakers and regulators give Libra the green light.
Completing banking union
(2019)
To complete banking union, there should be a single European deposit insurance scheme (EDIS) alongside the single supervisor and the single resolution authority. This would ensure uniformity across the Eurozone and facilitate the removal of barriers to the mobility of liquidity and capital within the single market. That in turn would promote efficiency in the banking sector and in the economy at large — just at the time that the EU needs to boost growth in order to remain competitive with the US and China.
The EDIS promise to promptly reimburse insured deposits at a failed bank in the Eurozone should be unconditional. But who will stand behind that commitment? Who is the “E” in EDIS? Is its promise credible, even in a crisis? If a deposit guarantee scheme fails to deliver what people expect, panic would very likely erupt. Instead of strengthening financial stability, deposit insurance could destroy it.
Yet this is the risk that current proposals pose. They create the impression that there will be a single deposit guarantee scheme. There will not. Instead, there will be a complex set of liquidity and reinsurance arrangements among Member State schemes.
These defects need to be remedied. To do so, we propose creating a European Deposit Insurance Corporation (EDIC) alongside national schemes. For banks that meet EDIC’s strict entry criteria and decide to become members, EDIC will promise to reimburse promptly — in the event the member bank fails — 100 cents on the euro in euro for each euro of insured deposits, regardless of the Eurozone Member State in which the bank is headquartered.
In effect, the single deposit guarantee scheme would be created via migration to EDIC rather than mutualisation of existing schemes. This would increase the mobility of capital and liquidity and lead to a convergence of interest rates across the Eurozone. That in turn will improve the effectiveness of monetary policy, foster integration and promote growth.
We uncover a new channel for spillovers of funding dry-ups. The 2016 US money market fund (MMF) reform exogenously reduced unsecured MMF funding for some banks. We use novel data to trace those banks to a platform for corporate deposit funding. We show that intensified competition for corporate deposits spilled the funding squeeze over to other banks with no MMF exposure. These banks paid more for deposits, and their pool of funding providers deteriorated. Moreover, their lending volumes and margins declined, and their stocks underperformed. Our results suggest that banks' competitiveness in funding markets affect their competitiveness in lending markets.
We study nominal wage rigidity in the Netherlands using administrative data, which has three key features: (1) high-frequency (monthly), (2) high-quality (administrative records), and (3) high coverage (the universe of workers and the universe of firms). We find wage rigidity patterns in the data that are similar to wage behavior documented for other European countries. In particular we find that the hazard function has two spikes, one at 12 months and another one at 24 months and wage changes have time and state dependency components. As a novel and important piece of evidence we also uncover substantial heterogeneity in the frequency of wage changes due to explicit terms of the labor contract. In particular, contracts featuring flexible hours, such as on-call contracts, exhibit a higher probability of a change in the contract wage compared to fixed hour contracts. Once we split the sample based on contract characteristics, we also find that the response of wage changes to the time and state component is heterogeneous across different type of contracts - with relatively more downward adjustments in flexible-hour contract wages in response to aggregate unemployment.
The paper analyses the linkages from financial developments to public finances. It maps and discusses the transmission channels to fiscal variables. These channels include asset prices, financing conditions, balance sheets of banks, non-banks and central banks and international linkages. The study argues that the fiscal effects via each and all these channels can be very serious in magnitude and can put the sustainability of public finances at risk. However, there is an only limited in-depth analysis of these channels and risks.
Depressed demand and supply
(2019)
We investigate the implications of experienced-based learning on consumption-saving and labor supply, two fundamental decisions in business cycle models. Using the Dutch Household Survey, we find that individuals who have experienced higher national unemployment rates over their lifetime save more, borrow less, and work less, after controlling for aggregate shocks, income, wealth, and demographics. Possibly explaining these behavioral responses, these individuals find it more important to save for retirement and to cover unexpected expenses, are more worried about losing their job, and dislike their job more. These results have implications for business cycle models and stabilization policies.
In early July 2019, Christian Sewing, the CEO of Deutsche Bank, proclaimed a fundamental shift of the bank’s strategy after finally obtaining the approval of the Supervisory Board, which the management seems to have requested for quite some time. The essential point of the reorientation is a deep cut into the bank’s investment banking activities. At the same time, those parts of the bank’s activity portfolio that had been the mainstay of Deutsche Bank’s business 20 to 25 years ago, in particular lending to large and mid-sized German and European corporate clients, shall be strengthened in spite of a simultaneous reduction of the bank’s staff by 18,000 FTEs over the next three years.
The bank’s CEO, who has only been in office since about one year, was reported to have called this shift of strategy a “return to the roots of Deutsche Bank” at the press conference at which it was announced, without, however, making it clear to which roots he was referring: those of some 40 years ago, when Deutsche Bank was essentially a Germany-focused commercial bank, or even those from the late 19th century, when the bank had been founded with the mission to become an international bank with a strong capital market-orientation. In any event, the press was impressed and keeps repeating these words, that deserve to be taken seriously and irrespective of their vagueness may be justified. If it were successfully implemented, this change of strategy would indeed be fundamental and imply undoing what Deutsche Bank’s former management teams had aspired to do in the last 20 or 25 years.
The newly announced strategy shift raises two questions. Can it be successful, and what does it mean for the bank itself and its shareholders, for its staff and for its clients? And what does it imply for the German financial system? This note focuses on the latter question. What makes it interesting is the fact that the last fundamental change of Deutsche Bank’s strategy of two decades ago, which aimed at transforming Deutsche Bank from a Germany-centered commercial bank into a leading international investment bank, had a profound – and in my view clearly negative - effect on the entire German financial system.
Die Europäische Zentral Bank hat am 6. Juni 2019 beschlossen, die Nullzinspolitik bis Mitte 2020 beizubehalten, obwohl mit dieser das Inflationsziel von 2% seit Jahren, in Japan seit Jahrzehnten, verfehlt wird. Nach dem Neo-Fisher-Effekt sollte, gegeben dieses Ziel, der Zins nicht gesenkt, sondern gehoben werden, weil die Inflationsrate der Differenz von Nominal- und langfristig stabilem Realzins entspricht. Zwar senken rasche Zinserhöhungen Nachfrage und Preise, aber daraus folgt nicht notwendig, dass niedrige Zinsen die Nachfrage anregen. Gemäß neueren Untersuchungen werden langsam durchgeführte Zinserhöhungen bei rationalen Erwartungen dagegen das Preisniveau heben. Der Aufsatz untersucht die begleitenden Verteilungswirkungen und stützt die These mit Überlegungen aus dem 19. Jahrhundert, wonach die gestiegenen Preise durch die Erhöhung der Zinskosten erklärt werden können.
The financial crisis of 2007-08 has stressed the importance of a sound financial system. Unlike other studies weighing the pros and cons of market versus bank-based systems, this paper investigates whether the main elements of the German financial system can be regarded as complementary and consistent. This assessment refers to the idea that there is a potential for positive interaction between different elements in the system that is actually used to make it more valuable to economy and society and more robust to crises. It is shown that the old German bank-based system, where the risk of long-term lending by large private commercial banks was limited by the membership in supervisory boards and strong personal ties between all stakeholders, was a consistent system of well-adjusted complementary elements. After reunification, a hybrid system has emerged where, on the one hand, public savings banks and cooperative banks maintain their role as lenders, but on the other, large private banks have withdrawn from their former dominant role in financing and corporate governance. It is argued that this transition to stronger capital-market and, accordingly, shareholder value orientations has occurred at the expense of consistency.
This paper aspires to provide an overview of the issue of diversity of banking and financial systems and its development over time from a positive and a normative perspective. In other word: how different are banks within a given country and how much do banking systems and entire financial systems differ between countries and regions, and do in-country diversity and between-country diversity change over time, as one would be inclined to expect as a consequence of globalization and increasingly global standards of regulation?
As the first part of this paper shows, the general answer to these questions is that there is still today a surprisingly high level of diversity in finance. This raises the two questions addressed in the second part of the paper: How can the persistence of diversity be explained, and how can it be assessed? In contrast to prevailing views, the author argues that persistent diversity should be regarded as valuable in a context in which there is no clear answer to the question of which structures of banking and financial systems are optimal from an economic perspective
It has been documented that vertical customer-supplier links between industries are the basis for strong cross-sectional stock return predictability (Menzly and Ozbas (2010)). We show that robust predictability also arises from horizontal links between industries, i.e., from the fact that industries are competitors or offer products, which are substitutes for each other. These horizontally linked industries exhibit positively correlated fundamentals. The signal derived from this type of connectedness is the basis for significant alpha in sorted portfolio strategies, and informed investors take the related information into account when they form their portfolios. We thus provide evidence of return predictability based on a new type of economic links between industries not captured in previous studies.
In the course of the crisis, the European System of Central Banks (ESCB) has acted several times to support the EU Member States and banking systems in financial distress by purchasing debt instruments: Covered Bonds Programmes (CBP), Securities Market Programmes (SMP), Long Term Refinancing Operations (LTRO), and Targeted Long Term Refinancing Operations (TLTRO), followed by the Outright Monetary Transactions (OMT) and then the Extended Asset Purchase Programmes (EAPP) – colloquially labelled as Quantitative Easing (QE).
Initially, the support measures of the ESCB might have to be judged as monetary policy but the selectivity of OMT and – even more – SMP in conjunction with the transfer of risks to the ESCB speak against it.
Using a novel regulatory dataset of fully identified derivatives transactions, this paper provides the first comprehensive analysis of the structure of the euro area interest rate swap (IRS) market after the start of the mandatory clearing obligation. Our dataset contains 1.7 million bilateral IRS transactions of banks and non-banks. Our key results are as follows:
1) The euro area IRS market is highly standardised and concentrated around the group of the G16 Dealers but also around a significant group of core “intermediaries"(and major CCPs).
2) Banks are active in all segments of the IRS euro market, whereas non-banks are often specialised.
3) When using relative net exposures as a proxy for the “flow of risk" in the IRS market, we find that risk absorption takes place in the core as well as the periphery of the network but in absolute terms the risk absorption is largely at the core.
4) Among the Basel III capital and liquidity ratios, the leverage ratio plays a key role in determining a bank's IRS trading activity.