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This paper starts out by pointing out the challenges and weaknesses which the German banking systems faces according to the prevailing views among national and international observers. These challenges include a generalproblem of profitability and, possibly as its main reason, the strong role of public banks. These concerns raise the questions whether the facts support this assessment of a general profitability problem and whether there are reasons to expect a fundamental or structural transformation of the German banking system. The paper contains four sections. The first one presents the evidence concerning the profitability problem in a comparative, international perspective. The second section presents information about the so-called three-pillar system of German banking. What might be surprising in this context is that the group of pub lic banks is not only the largest segment of the German banking system, but that the primary savings banks also are its financially most successful part. The German banking system is highly fragmented. This fact suggests to discuss past, present and possible future consolidations in the banking system in the third section. The authors provide evidence to the effect that within- group consolidation has been going on at a rapid pace in the public and the cooperative banking groups in recent years and that this development has not yet come to an end, while within-group consolidation among the large private banks, consolidation across group boundaries at a national level and cross-border or international consolidation has so far only happened at a limited scale, and do not appear to gain momentum in the near future. In the last section, the authors develop their explanation for the fact that large-scale and cross border consolidation has so far not materialized to any great extent. Drawing on the concept of complementarity, they argue that it would be difficult to expect these kinds of mergers and acquisitions happening within a financial system which is itself surprisingly stable, or, as one cal also call it, resistant to change.
In a series of recent papers, Mark Roe and Lucian Bebchuk have developed further the concept of path dependence, combined it with concepts of evolution and used it to challenge the wide-spread view that the corporate governance systems of the major advanced economies are likely to converge towards the economically best system at a rapid pace. The present paper shares this skepticism, but adds several aspects which strengthen the point made by Roe and Bebchuk. The present paper argues that it is important for the topic under discussion to distinguish clearly between two arguments which can explain path dependence. One of them is based on the role of adjustment costs, and the other one uses concepts borrowed from evolutionary biology. Making this distinction is important because the two concepts of path dependence have different implications for the issue of rapid convergence to the best system. In addition, we introduce a formal concept of complementarity and demonstrate that national corporate governance systems are usefully regarded as – possibly consistent – systems of complementary elements. Complementarity is a reason for path dependence which supports the socio-biological argument. The dynamic properties of systems composed of complementary elements are such that a rapid convergence towards a universally best corporate governance systems is not likely to happen. We then proceed by showing for the case of corporate governance systems shaped by complementarity, that there even is the possibility of a convergence towards a common system which is economically inferior. And in the specific case of European integration, "inefficient convergence" of corporate governance systems is a possible future course of events. First version December 1998, this version March 2000.
Major differences between national financial systems might make a common monetary policy difficult. As within Europe, Germany and the United Kingdom differ most with respect to their financial systems, the present paper addresses its topic under the assumption that the United Kingdom is already a part of EMU. Employing a comprehensive concept of a financial system, the author shows that there are indeed profound differences between the national financial systems of Germany and the United Kingdom. But he argues that these differences are not likely to create great problems for a common monetary policy. In the context of the present paper, one important difference between the two financial systems refers to the structure of the respective financial sector and, as a consequence, to the strength with which a given monetary policy impulse set by the central bank is passed on to the financial sector. The other important difference refers to the typical relationship between the banks and the business sector in each country which determines to what extent the financial sectors and especially the banks pass on pressure exerted on them by a monetary policy authority to their clients in their national business sector. In Germany, the central bank has a stronger influence on the financial sector than in England, while, for systemic reasons, German banks tend to soften monetary policy pressures on their customers more than British banks do. As far as the transmission of a restrictive monetary policy of the ECB to the real economy is concerned, these two differences tend to offset each other. This is good news for the advocates of a monetary union as it eases the task of the ECB when it comes to determining the strength of its monetary policy measures.
Paper Presented at the Conference on Workable Corporate Governance: Cross-Border Perspectives held in Paris, March 17-19, 1997 To appear in: A. Pezard/J.-M. Thiveaud: Workable Corporate Governance: Cross-Border Perspectives, Montchrestien, Paris 1997. The paper discusses the role of various constituencies in the corporate governance of a corporation from the perspective of incomplete contracts. A strict shareholder value orientation in the sense of a rule that at any time firm decisions should be made strictly in the interest of the present shareholders would make it difficult for the firm to establish long-term relationships as the potential partners would have to fear that, at a later stage of the co-operation, the shareholders or a management acting only on their behalf could exploit them because of the inevitable incompleteness of long-term contracts. One way of mitigating these problems is to put in place a corporate governance system which gives some active role to the other stakeholders or constituencies, or which makes their interests a well-defined element of the objective function of the firm. A commitment not to follow a policy of strict shareholder value maximization ex post can be efficient ex ante. Such a system would clearly differ from what is advocated by proponents of a "stakeholder approach", as it would limit the rights of the other constituencies to those which would have been agreed upon in a constitutional contract concluded between them and the founder of the firm at the time when long-term contracts are first established.
Asset-backed securitization (ABS) has become a viable and increasingly attractive risk management and refinancing method either as a standalone form of structured finance or as securitized debt in Collateralized Debt Obligations (CDO). However, the absence of industry standardization has prevented rising investment demand from translating into market liquidity comparable to traditional fixed income instruments, in all but a few selected market segments. Particularly low financial transparency and complex security designs inhibits profound analysis of secondary market pricing and how it relates to established forms of external finance. This paper represents the first attempt to measure the intertemporal, bivariate causal relationship between matched price series of equity and ABS issued by the same entity. In a two-dimensional linear system of simultaneous equations we investigate the short-term dynamics and long-term consistency of daily secondary market data from the U.K. Sterling ABS/MBS market and exchange traded shares between 1998 and 2004 with and without the presence of cointegration. Our causality framework delivers compelling empirical support for a strong co-movement between matched price series of ABS-equity pairs, where ABS markets seem to contribute more to price discovery over the long run. Controlling for cointegration, risk-free interest and average market risk of corporate debt hardly alters our results. However, once we qualify the magnitude and direction of price discovery on various security characteristics, such as the ABS asset class, we find that ABS-equity pairs with large-scale CMBS/RMBS and credit card/student loan ABS reveal stronger lead-lag relationships and joint price dynamics than whole business ABS. JEL Classifications: G10, G12, G24
Although the commoditisation of illiquid asset exposures through securitisation facilitates the disciplining effect of capital markets on the risk management, private information about securitised debt as well as complex transaction structures could possibly impair the fair market valuation. In a simple issue design model without intermediaries we maximise issuer proceeds over a positive measure of issue quality, where a direct revelation mechanism (DRM) by profitable informed investors engages endogenous price discovery through auction-style allocation preference as a continuous function of perceived issue quality. We derive an optimal allocation schedule for maximum issuer payoffs under different pricing regimes if asymmetric information requires underpricing. In particular, we study how the incidence of uninformed investors at varying levels of valuation uncertainty and their function of clearing the market effects profitable informed investment. We find that the issuer optimises own payoffs at each valuation irrespective of the applicable pricing mechanism by awarding informed investors the lowest possible allocation (and attendant underpricing) that still guarantees profitable informed investment. Under uniform pricing the composition of the investor pool ensures that informed investors appropriate higher profit than uninformed types. Any reservation utility by issuers lowers the probability of information disclosure by informed investors and the scope of issuers to curtail profitable informed investment. JEL Classifications: D82, G12, G14, G23
Asset securitisation as a risk management and funding tool : what does it hold in store for SMES?
(2005)
The following chapter critically surveys the attendant benefits and drawbacks of asset securitisation on both financial institutions and firms. It also elicits salient lessons to be learned about the securitisation of SME-related obligations from a cursory review of SME securitisation in Germany as a foray of asset securitisation in a bank-centred financial system paired with a strong presence of SMEs in industrial production. JEL Classification: D81, G15, M20
As a sign of ambivalence in the regulatory definition of capital adequacy for credit risk and the quest for more efficient refinancing sources collateral loan obligations (CLOs) have become a prominent securitisation mechanism. This paper presents a loss-based asset pricing model for the valuation of constituent tranches within a CLO-style security design. The model specifically examines how tranche subordination translates securitised credit risk into investment risk of issued tranches as beneficial interests on a designated loan pool typically underlying a CLO transaction. We obtain a tranchespecific term structure from an intensity-based simulation of defaults under both robust statistical analysis and extreme value theory (EVT). Loss sharing between issuers and investors according to a simplified subordination mechanism allows issuers to decompose securitised credit risk exposures into a collection of default sensitive debt securities with divergent risk profiles and expected investor returns. Our estimation results suggest a dichotomous effect of loss cascading, with the default term structure of the most junior tranche of CLO transactions (“first loss position”) being distinctly different from that of the remaining, more senior “investor tranches”. The first loss position carries large expected loss (with high investor return) and low leverage, whereas all other tranches mainly suffer from loss volatility (unexpected loss). These findings might explain why issuers retain the most junior tranche as credit enhancement to attenuate asymmetric information between issuers and investors. At the same time, the issuer discretion in the configuration of loss subordination within particular security design might give rise to implicit investment risk in senior tranches in the event of systemic shocks. JEL Classifications: C15, C22, D82, F34, G13, G18, G20
Asset-backed securitisation (ABS) is an asset funding technique that involves the issuance of structured claims on the cash flow performance of a designated pool of underlying receivables. Efficient risk management and asset allocation in this growing segment of fixed income markets requires both investors and issuers to thoroughly understand the longitudinal properties of spread prices. We present a multi-factor GARCH process in order to model the heteroskedasticity of secondary market spreads for valuation and forecasting purposes. In particular, accounting for the variance of errors is instrumental in deriving more accurate estimators of time-varying forecast confidence intervals. On the basis of CDO, MBS and Pfandbrief transactions as the most important asset classes of off-balance sheet and on-balance sheet securitisation in Europe we find that expected spread changes for these asset classes tends to be level stationary with model estimates indicating asymmetric mean reversion. Furthermore, spread volatility (conditional variance) is found to follow an asymmetric stochastic process contingent on the value of past residuals. This ABS spread behaviour implies negative investor sentiment during cyclical downturns, which is likely to escape stationary approximation the longer this market situation lasts.
Efficient systems for the securities transaction industry : a framework for the European Union
(2003)
This paper provides a framework for the securities transaction industry in the EU to understand the functions performed, the institutions involved and the parameters concerned that shape market and ownership structure. Of particular interest are microeconomic incentives of the industry players that can be in contradiction to social welfare. We evaluate the three functions and the strategic parameters - the boundary decision, the communication standard employed and the governance implemented - along the lines of three efficiency concepts. By structuring the main factors that influence these concepts and by describing the underlying trade-offs among them, we provide insight into a highly complex industry. Applying our framework, the paper describes and analyzes three consistent systems for the securities transaction industry. We point out that one of the systems, denoted as 'contestable monopolies', demonstrates a superior overall efficiency while it might be the most sensitive in terms of configuration accuracy and thus difficult to achieve and sustain.
Despite a lot of re-structuring and many innovations in recent years, the securities transaction industry in the European Union is still a highly inefficient and inconsistently configured system for cross-border transactions. This paper analyzes the functions performed, the institutions involved and the parameters concerned that shape market and ownership structure in the industry. Of particular interest are microeconomic incentives of the main players that can be in contradiction to social welfare. We develop a framework and analyze three consistent systems for the securities transaction industry in the EU that offer superior efficiency than the current, inefficient arrangement. Some policy advice is given to select the 'best' system for the Single European Financial Market.
In recent years stock exchanges have been increasingly diversifying their operations into related business areas such as derivatives trading, post-trading services and software sales. This trend can be observed most notably among profit-oriented trading venues. While the pursuit for diversification is likely to be driven by the attractiveness of these investment opportunities, it is yet an open question whether certain integration activities are also efficient, both from a social welfare and from the exchanges' perspective. Academic contributions so far analyzed different business models primarily from the social welfare perspective, whereas there is only little literature considering their impact on the exchange itself. By employing a panel data set of 28 stock exchanges for the years 1999-2003 we seek to shed light on this topic by comparing the factor productivity of exchanges with different business models. Our findings suggest three conclusions: (1) Integration activity comes at the cost of increased operational complexity which in some cases outweigh the potential synergies between related activities and therefore leads to technical inefficiencies and lower productivity growth. (2) We find no evidence that vertical integration is more efficient and productive than other business models. This finding could contribute to the ongoing discussion about the merits of vertical integration from a social welfare perspective. (3) The existence of a strong in-house IT-competence seems to be beneficial to overcome.
Academic contributions on the demutualization of stock exchanges so far have been predominantly devoted to social welfare issues, whereas there is scarce empirical literature referring to the impact of a governance change on the exchange itself. While there is consensus that the case for demutualization is predominantly driven by the need to improve the exchange's competitiveness in a changing business environment, it remains unclear how different governance regimes actually affect stock exchange performance. Some authors propose that a public listing is the best suited governance arrangement to improve an exchange's competitiveness. By employing a panel data set of 28 stock exchanges for the years 1999-2003 we seek to shed light on this topic by comparing the efficiency and productivity of exchanges with differing governance arrangements. For this purpose we calculate in a first step individual efficiency and productivity values via DEA. In a second step we regress the derived values against variables that - amongst others - map the institutional arrangement of the exchanges in order to determine efficiency and productivity differences between (1) mutuals (2) demutualized but customer-owned exchanges and (3) publicly listed and thus at least partly outsider-owned exchanges. We find evidence that demutualized exchanges exhibit higher technical efficiency than mutuals. However, they perform relatively poor as far as productivity growth is concerned. Furthermore, we find no evidence that publicly listed exchanges possess higher efficiency and productivity values than demutualized exchanges with a customer-dominated structure. We conclude that the merits of outside ownership lie possibly in other areas such as solving conflicts of interest between too heterogeneous members.
This paper studies a setting in which a risk averse agent must be motivated to work on two tasks: he (1) evaluates a new project and, if adopted, (2) manages it. While a performance measure which is informative of an agent´s action is typically valuable because it can be used to improve the risk sharing of the contract, this is not necessarily the case in this two-task setting. I provide a sufficient condition under which a performance measure that is informative of the second task is worthless for contracting despite the agent being risk averse. This shows that information content is a necessary but not a sufficient condition for a performance measure to be valuable.
It is widely believed that the ideal board in corporations is composed almost entirely of independent (outside) directors. In contrast, this paper shows that some lack of board independence can be in the interest of shareholders. This follows because a lack of board independence serves as a substitute for commitment. Boards that are dependent on the incumbent CEO adopt a less aggressive CEO replacement rule than independent boards. While this behavior is inefficient ex post, it has positive ex ante incentive effects. The model suggests that independent boards (dependent boards) are most valuable to shareholders if the problem of providing appropriate incentives to the CEO is weak (severe).
This paper is focused on the coordination of order and production policy between buyers and suppliers in supply chains. When a buyer and a supplier of an item work independently, the buyer will place orders based on his economic order quantity (EOQ). However, the buyer s EOQ may not lead to an optimal policy for the supplier. It can be shown that a cooperative batching policy can reduce total cost significantly. Should the buyer have the more powerful position to enforce his EOQ on the supplier, then no incentive exists for him to deviate from his EOQ in order to choose a cooperative batching policy. To provide an incentive to order in quantities suitable to the supplier, the supplier could offer a side payment. One critical assumption made throughout in the literature dealing with incentive schemes to influence buyer s ordering policy is that the supplier has complete information regarding buyer s cost structure. However, this assumption is far from realistic. As a consequence, the buyer has no incentive to report truthfully on his cost structure. Moreover there is an incentive to overstate the total relevant cost in order to obtain as high a side payment as possible. This paper provides a bargaining model with asymmetric information about the buyer s cost structure assuming that the buyer has the bargaining power to enforce his EOQ on the supplier in case of a break-down in negotiations. An algorithm for the determination of an optimal set of contracts which are specifically designed for different cost structures of the buyer, assumed by the supplier, will be presented. This algorithm was implemented in a software application, that supports the supplier in determining the optimal set of contracts.
This study analyses the labour market effects of fixed-term contracts (FTCs) in West Germany by microeconometric methods using individual and establishment level data. In the first part of the study the role of FTCs in firms’ labour demand is analysed. An econometric investigation of the firms’ reasons for using FTCs focussing on the identification of the link between dismissal protection for permanent contract workers and the firms’ use of FTCs is presented. Furthermore, a descriptive analysis of the role of FTCs in worker and job flows at the firm level is provided. The second part of the study evaluates the short-run effects of being employed on an FTC on working conditions and wages using a large cross-sectional dataset of employees. The final part of the study analyses whether taking up an FTC increases the (permanent contract) employment opportunities in the long-run (stepping stone effect) and whether FTCs affect job finding behaviour of unemployed job searchers. Firstly, an econometric unemployment duration analysis distinguishing between both types of contracts as destination states is performed. Secondly, the effects of entering into FTCs from unemployment on future (permanent contract) employment opportunities are evaluated attempting to account for the sequential decision problem of job searchers.