Universitätspublikationen
Refine
Year of publication
- 2019 (141) (remove)
Document Type
- Working Paper (72)
- Part of Periodical (55)
- Article (7)
- Book (2)
- Contribution to a Periodical (2)
- Doctoral Thesis (2)
- Preprint (1)
Has Fulltext
- yes (141)
Is part of the Bibliography
- no (141)
Keywords
- Financial Institutions (18)
- ECB (16)
- Capital Markets Union (14)
- Banking Union (9)
- Monetary Policy (8)
- Climate Change (6)
- Cryptocurrency (6)
- Financial Markets (6)
- Sustainable Finance (6)
- TARGET (6)
Institute
- Wirtschaftswissenschaften (141) (remove)
German proposal for a common European deposit insurance, new rules for investment firms and covered bonds, and new EU legal framework on Sustainable Finance: a selection of financial regulatory developments from this month.
Recently, Fuest and Sinn (2018) have demanded a change of rules for the Eurozone’s Target 2 payment system, claiming it would violate the Statutes of the European System of Central Banks and of the European Central Bank. The authors present a stylized model based on a set of macro-economic assumptions, and show that Target 2 may lead to loss sharing among national central banks (NCBs), thus violating the no risk-sharing requirement laid out by the Eurosystem Statutes.
In this note, I present an augmented model that incorporates essential features of the micro- and macroprudential regulatory and supervisory regime that today is hard-wired into Europe’s banking system. The model shows that the original no-risk-sharing principle is not necessarily violated during a financial crisis of a member state. Moreover, it shows that under a banking union regime, financial crisis asset value losses at or below the 99.9th percentile are borne by private investors, not by taxpayers, and particularly not by central banks.
Therefore, policy conclusions from the micro-founded model differ significantly from those suggested by Fuest and Sinn (2018).
This paper sheds light on the life insurance sector’s liquidity risk exposure. Life insurers are important long-term investors on financial markets. Due to their long-term investment horizon they cannot quickly adapt to changes in macroeconomic conditions. Rising interest rates in particular can expose life insurers to run-like situations, since a slow interest rate passthrough incentivizes policyholders to terminate insurance policies and invest the proceeds at relatively high market interest rates. We develop and empirically calibrate a granular model of policyholder behavior and life insurance cash flows to quantify insurers’ liquidity risk exposure stemming from policy terminations. Our model predicts that a sharp interest rate rise by 4.5pp within two years would force life insurers to liquidate 12% of their initial assets. While the associated fire sale costs are small under reasonable assumptions, policy terminations plausibly erase 30% of life insurers’ capital due to mark-to-market accounting. Our analysis reveals a mechanism by which monetary policy tightening increases liquidity risk exposure of non-bank financial intermediaries with long-term assets.
This paper studies insurance demand for individuals with limited financial literacy. We propose uncertainty about insurance payouts, resulting from contract complexity, as a novel channel that affects decision-making of financially illiterate individuals. Then, a trade-off between second-order (risk aversion) and third-order (prudence) risk preferences drives insurance demand. Sufficiently prudent individuals raise insurance demand upon an increase in contract complexity, while the effect is reversed for less prudent individuals. We characterize competitive market equilibria that feature complex contracts since firms face costs to reduce complexity. Based on the equilibrium analysis, we propose a monetary measure for the welfare cost of financial illiteracy and show that it is mainly driven by individuals’ risk aversion. Finally, we discuss implications for regulation and consumer protection.
Decisions under ambiguity depend on both the belief regarding possible scenarios and the attitude towards ambiguity. This paper exclusively investigates the belief formation and belief updating process under ambiguity, using laboratory experiments. The results show that half of the subjects tend to adopt a simple heuristic strategy when updating beliefs, while the other half seems to partially adopt the Bayesian updates. We recover beliefs, represented by distributions of the priors/posteriors. The recoverable initial priors mostly follow a uniform distribution. We also find that subjects on average demonstrate slight pessimism in an ambiguous environment.
There is substantial disagreement about the consequences of the Tax Cuts and Jobs Act (TCJA) of 2017, which constitutes the most extensive tax reform in the United States in more than 30 years. Using a large-scale two-country dynamic general equilibrium model with nominal rigidities, we find that the TCJA increases GDP by about 2% in the medium-run and by about 2.5% in the long-run. The shortrun impact depends crucially on the degree and costs of variable capital utilization, with GDP effects ranging from 1 to 3%. At the same time, the TCJA does not pay for itself. In our analysis, the reform decreases tax revenues and raises the debt-to-GDP ratio by about 15 percentage points in the medium-run until 2025. We show that combining the TCJA with spending cuts can dampen the increase in government indebtedness without reducing its expansionary effect.