Sustainable Architecture for Finance in Europe (SAFE)
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Der Koalitionsvertrag 2021 sieht eine generationengerechte Absicherung des Rentenniveaus durch eine teilweise aus Haushaltsmitteln finanzierte Kapitaldeckung vor. Um dieses Ziel zu verwirklichen, wird hier die Einführung einer Generationenrente ab Geburt vorgeschlagen. Dabei wird aus Haushaltsmitteln ein Betrag von € 5.000 für jedes Neugeborene nach Grundsätzen des professionellen Anlagemanagements am globalen Kapitalmarkt angelegt. Konzeptionell soll sich diese Generationenrente am Modell der Basisrente(§10 Abs. 1 Nr. 2 b EStG) orientieren, d.h. die akkumulierten Gelder sind weder beleihbar, vererbbar noch übertragbar und können frühestens ab Alter 63 zugunsten einer lebenslangen Monatsrente verwendet werden. Unsere Berechnungen zeigen, dass durch die hier vorgeschlagene Generationenrente unabhängig vom Verlauf der individuellen Erwerbsbiographie, Altersarmut für die vom demographischen Wandel besonders betroffenen zukünftigen Generationen vermieden wird.
The reuse of collateral can support the efficient allocation of safe assets in the financial system. Exploiting a novel dataset, we show that banks substantially increase their reuse of sovereign bonds in response to scarcity induced by Eurosystem asset purchases. While repo rates react little to purchase-induced scarcity when reuse is low, they become increasingly sensitive at high levels of reuse. An elevated reuse rate is also associated with more failures to deliver and a higher volatility of repo rates in the cross-section of bonds. Our results highlight the trade-off between shock absorption and shock amplification effects of collateral reuse.
Common ownership and the (non-)transparency of institutional shareholdings: an EU-US comparison
(2022)
This paper compares the extent of common ownership in the US and the EU stock markets, with a particular focus on differences in the ap- plicable ownership transparency requirements. Most empirical research on common ownership to date has focused on US issuers, largely relying on ownership data obtained from institutional investors’ 13F filings. This type of data is generally not available for EU issuers. Absent 13F filings, researchers have to use ownership records sourced from mutual funds’ periodic reports and blockholder disclosures. Constructing a “reduced dataset” that seeks to capture only ownership information available for both EU and US issuers, I demonstrate that the “extra” ownership information introduced by 13F filings is substantial. However, even when taking differences in the transparency situation into due account, common ownership among listed EU firms is much less pronounced than among listed US firms by any measure. This is true even if the analysis is limited to non-controlled firms.
Peer effects can lead to better financial outcomes or help propagate financial mistakes across social networks. Using unique data on peer relationships and portfolio composition, we show considerable overlap in investment portfolios when an investor recommends their brokerage to a peer. We argue that this is strong evidence of peer effects and show that peer effects lead to better portfolio quality. Peers become more likely to invest in funds when their recommenders also invest, improving portfolio diversification compared to the average investor and various placebo counterfactuals. Our evidence suggests that social networks can provide good advice in settings where individuals are personally connected.
Cryptocurrencies provide a unique opportunity to identify how derivatives impact spot markets. They are fully fungible, trade across multiple spot exchanges at different prices, and futures contracts were selectively introduced on bitcoin (BTC) exchange rates against the USD in December 2017. Following the futures introduction, we find a significantly greater increase in cross-exchange price synchronicity for BTC--USD relative to other exchange rate pairs, as demonstrated by an increase in price correlations and a reduction in arbitrage opportunities and volatility. We also find support for an increase in price efficiency, market quality, and liquidity. The evidence suggests that futures contracts allowed investors to circumvent trading frictions associated with short sale constraints, arbitrage risk associated with block confirmation time, and market segmentation. Overall, our analysis supports the view that the introduction of BTC--USD futures was beneficial to the bitcoin spot market by making the underlying prices more informative.
he ECB is independent, but it is also accountable to the European parliament (EP). Yet, how the EP has held the ECB accountable has largely been overlooked. This paper starts addressing this gap by providing descriptive statistics of three accountability modalities. The paper highlights three findings. First, topics of accountability have changed. Climate-related accountability has increased quickly and dramatically since 2017. Second, if the relationship between price stability and climate change remains an object of conflict among MEPs, a majority within the EP has emerged to put pressure for the ECB to take a more active stance against climate change, precisely on behalf of its price stability mandate. Third, MEPs engage with the climate topic in very specific ways. There is a gender divide between the climate and the price stability topics. Women engage more actively with climate-related topics. While the Greens heavily dominate the climate topic, parties from the Right dominate the topic of Price stability. Finally, MEPs adopt a more united strategy and a particularly low confrontational tone in their climate-related interventions.
Veronika Grimm, Lukas Nöh, and Volker Wieland assess the possible development of government interest expenditures as a share of GDP for Germany, France, Italy and Spain. Until 2021, these and other member states could anticipate a further reduction of interest expenditure in the future. This outlook has changed considerably with the recent surge in inflation and government bond rates. Nevertheless, under reasonable assumptions current yield curves still imply that interest expenditure relative to GDP can be stabilized at the current level. The authors also review the implications of a further upward shift in the yield curves of 1 or 2 percentage points. These implications suggest significant medium-term risks for highly indebted member states with interest expenditure approaching or exceeding levels last observed on the eve of the euro area debt crisis. In light of these risks, governments of euro area member states should take substantive action to achieve a sustained decline in debt-to-GDP ratios towards safer levels. They bear the responsibility for making sure that government finances can weather the higher interest rates which are required to achieve price stability in the euro area.
Central banks have faced a succession of crises over the past years as well as a number of structural factors such as a transition to a greener economy, demographic developments, digitalisation and possibly increased onshoring. These suggest that the future inflation environment will be different from the one we know. Thus uncertainty about important macroeconomic variables and, in particular, inflation dynamics will likely remain high.
Global consensus is growing on the contribution that corporations and finance must make towards the net-zero transition in line with the Paris Agreement goals. However, most efforts in legislative instruments as well as shareholder or stakeholder initiatives have ultimately focused on public companies.
This article argues that such a focus falls short of providing a comprehensive approach to the problem of climate change. In doing so, it examines the contribution of private companies to climate change, the relevance of climate risks for them, as well as the phenomenon of brown-spinning (ie, the practice of public companies selling their highly polluting assets to private companies). We show that one cannot afford to ignore private companies in the net-zero transition and climate change adaptation. Yet, private companies lack several disciplining mechanisms that are available to public companies, such as institutional investor engagement, certain corporate governance arrangements, and transparency through regular disclosure obligations. At this stage, only some generic regulatory instruments such as carbon pricing and environmental regulation apply to them.
The article closes with a discussion of the main policy implications. Primarily, we discuss and evaluate the recent push to extend climate-related disclosure requirements to private companies. These disclosures would not only help investors by addressing information asymmetry, but also serve a wide group of stakeholders and thus aim at promoting a transition to a greener economy.
The authors study the impact of dissent in the ECB‘s Governing Council on uncertainty surrounding households‘ inflation expectations. They conduct a randomized controlled trial using the Bundesbank Online Panel Households. Participants are provided with alternative information treatments concerning the vote in the Council, e.g. unanimity and dissent, and are asked to submit probabilistic inflation expectations. The results show that the vote is informative.
Households revise their subjective inflation forecast after receiving information about the vote. Dissenting votes cause a wider individual distribution of future inflation. Hence, dissent increases households‘ uncertainty about inflation. This effect is statistically significant once the authors allow for the interaction between the treatments and individual characteristics of respondents.
The results are robust with respect to alternative measures of forecast uncertainty and hold for different model specifications. The findings suggest that providing information about dissenting votes without additional information about the nature of dissent is detrimental to coordinating household expectations.
The transition to a sustainable economy currently involves a fundamental transformation of our capital markets. Lawmakers, in an attempt to overcome this challenge, frequently seek to prescribe and regulate how firms may address environmental, social, and governance (ESG) concerns by formulating conduct standards. Deviating from this conceptual starting point, the present paper makes the case for another path towards achieving greater sustainability in capital markets, namely through the empowerment of investors.
This trust in the market itself is grounded in various recent developments both on the supply side and the demand side of financial markets, and also in the increasing tendency of institutional investors to engage in common ownership. The need to build coalitions among different types of asset managers or institutional investors, and to convince fellow investors of a given initiative, can then act as an in-built filter helping to overcome the pursuit of idiosyncratic motives and supporting only those campaigns that are seconded by a majority of investors. In particular, institutionalized investor platforms have emerged over recent years as a force for investor empowerment, serving to coordinate investor campaigns and to share the costs of engagement.
ESG engagement has the potential to become a very powerful driver towards a more sustainability-oriented future. Indeed, I show that investor-led sustainability has many advantages compared to a more prescriptive, regulatory approach where legislatures are in the driver’s seat. For example, a focus on investor-led priorities would follow a more flexible and dynamic pattern rather than complying with inflexible pre-defined criteria. Moreover, investor-promoted assessments are not likely to impair welfare creation in the same way as ill-defined legal standards; they will also not trigger regulatory arbitrage and would avoid deadlock situations in corporate decision-making. Any regulatory activity should then be limited to a facilitative and supportive role.
This paper studies the interactions between corporate law and VC exits by acquisitions, an increasingly common source of VC-related litigation. We find that transactions by VC funds under liquidity pressure are characterized by (i) a substantially lower sale price; (ii) a greater probability of industry outsiders as acquirers; (iii) a positive abnormal return for acquirers. These features indicate the existence of fire sales, which satisfy VCs' liquidation preferences but hurt common shareholders, leaving board members with conflicting fiduciary duties and litigation risks. Exploiting an important court ruling that establishes the board’s fiduciary duties to common shareholders as a priority, we find that after the ruling maturing VCs become less likely to exit by fire sales and they distribute cash to their investors less timely. However, VCs experience more difficult fundraising ex-ante, highlighting the potential cost of a common-favoring regime. Overall the evidence has important implications for optimal fiduciary duty design in VC-backed start-ups.
We estimate the cost of cultural biases in high-stake economic decisions by comparing agents’ peer-to-peer lending choices with those the same agents make under the assistance of an automated robo-advisor. We first confirm substantial in-group vs. out-group and stereotypical discrimination, which are stronger for lenders who reside where historical cultural biases are higher. We then exploit our unique setting to document that cultural biases are costly: agents face 8% higher default rates on favored-group borrowers when unassisted. The returns they earn on favored groups increase by 7.3 percentage points when assisted. The high riskiness of the marginal borrowers from favorite groups largely explains the bad performance of culturally-biased choices. Because varying economic incentives do not reduce agents’ biases, inaccurate statistical discrimination—unconscious biased beliefs about borrowers’ quality—can explain our results better than taste-based discrimination.
Trust between parties should drive contract design: if parties were suspicious about each others’ reaction to unplanned events, they might agree to pay higher costs of negotiation ex ante to complete contracts. Using a unique sample of U.S. consulting contracts and a negative shock to trust between shareholders/managers (principals) and consultants (agents) staggered across space and over time, we find that lower trust increases contract completeness. Not only the complexity but also the verifiable states of the world covered by contracts increase after trust drops. The results hold for several novel text-analysis-based measures of contract completeness and do not arise in falsification tests. At the clause level, we find that non-compete agreements, confidentiality, indemnification, and termination rules are the most likely clauses added to contracts after a negative shock to trust and these additions are not driven by new boilerplate contract templates. These clauses are those whose presence should be sensitive to the mutual trust between principals and agents.
Large technology firms («BigTechs») increasingly extend their influence in finance, primarily taking over market shares in payment services. A further expansion of their businesses into the territory of cryptocurrencies could entail new and unprecedented risks for the future, namely for financial stability, competition in the private sector and monetary policy. When creating a regulatory toolbox to address these risks, financial regulatory, antitrust, and platform-specific solutions should be closely intertwined in order to fully absorb all the potential threats and to take account of the complex risks these platform companies bear. This policy letter evaluates the solutions lately proposed by the European Commission, with specific focus on the upcoming regulation of Markets in crypto-assets (MiCA), but also the Digital Markets Act (DMA) and Digital services act (DSA), against the background of cryptocurrencies issued by BigTechs and sheds light on financial regulatory, competition and monetary law issues coming along with the possible designs of these cryptocurrencies.
This paper uses historical monthly temperature level data for a panel of 114 countries to identify the effects of within year temperature level variability on productivity growth in five different macro regions, i.e., (1) Africa, (2) Asia, (3) Europe, (4) North America and (5) South America. We find two primary results. First, higher intra-annual temperature variability reduces (increases) productivity in Europe and North America (Asia). Second, higher intra-annual temperature variability has no significant effects on productivity in Africa and South America. Additional empirical tests indicate also the following: (1) rising intra-annual temperature variability reduces productivity (even thought less significantly)in both tropical and non-tropical regions, (2) inter-annual temperature variability reduces (increases) productivity in North America (Europe) and (3) winter and summer inter-annual temperature variability generates a drop in productivity in both Europe and North America. Taken together, these findings indicate that temperature variability shocks tend to have stronger adverse economic effects among richer economies. In a production economy featuring long-run productivity and temperature volatility shocks, we quantify these negative impacts and find welfare losses of 2.9% (1%) in Europe (North America).
Energy efficiency represents one of the key planned actions aiming at reducing greenhouse emissions and the consumption of fossil fuel to mitigate the impact of climate change. In this paper, we investigate the relationship between energy efficiency and the borrower’s solvency risk in the Italian market. Specifically, we analyze a residential mortgage portfolio of four financial institutions which includes about 70,000 loans matched with the energy performance certificate of the associated buildings. Our findings show that there is a negative relationship between a building’s energy efficiency and the owner’s probability of default. Findings survive after we account for dwelling, household, mortgage, market control variables, and regional and year fixed effect. Additionally, a ROC analysis shows that there is an improvement in the estimation of the mortgage default probability when the energy efficiency characteristic is included as a risk predictor in the model.
We investigate what statistical properties drive risk-taking in a large set of observational panel data on online poker games (n=4,450,585). Each observation refers to a choice between a safe 'insurance' option and a binary lottery of winning or losing the game. Our setting offers a real-world choice situation with substantial incentives where probability distributions are simple, transparent, and known to the individuals. We find that individuals reveal a strong and robust preference for skewness. The effect of skewness is most pronounced among experienced and losing players but remains highly significant for winning players, in contrast to the variance effect.
The sixth sanction package of the European Union in the context of the aggression against Ukraine excludes Sberbank, the largest Russian bank, from the SWIFT network. The increasing use of SWIFT as a tool for sanctions stimulates the rollout of alternative payment information systems by the governments of Russia and China. This policy white paper informs about the alternatives at hand, as well as their advantages and disadvantages. Careful reflection about these issues is particularly important, given the call for an “Economic Article 5” tabled for the next NATO meeting. Finally, the white paper highlights the need for institutional reforms, if policymakers decide to return SWIFT to the status of a global public good after the war.
Sehen sich Banken mit Engpässen auf einem Finanzierungsmarkt konfrontiert, weichen sie auf andere Finanzierungsquellen aus, was den Wettbewerb verschärft: Banken, die nicht direkt vom eigentlichen Finanzierungsengpass betroffen sind, können ebenso davon erfasst werden, was sich stark auf die Realwirtschaft auswirkt.
Are sanctions sustainable?
(2022)
Sind Sanktionen nachhaltig?
(2022)
This work uses financial markets connected by arbitrage relations to investigate the dynamics of price and liquidity discovery, which refer to the cross-instrument forecasting power for prices and liquidity, respectively. Specifically, we seek to understand the linkage between the cheapest to deliver bond and closest futures pairs by using high-frequency data on European governments obligations and derivatives. We split the 2019-2021 sample into three subperiods to appreciate changes in the liquidity discovery induced by the COVID-19 pandemic. Within a cointegration model, we find that price discovery occurs on the futures market, and document strong empirical support for liquidity spillovers both from the futures to the cash market as well as from the cash to the futures market.
The present paper proposes an overview of the existing literature covering several aspects related to environmental, social, and governance (ESG) factors. Specifically, we consider studies describing and evaluating ESG methodologies and those studying the impact of ESG on credit risk, debt and equity costs, or sovereign bonds. We further expand the topic of ESG research by including the strand of the literature focusing on the impact of climate change on financial stability, thus allowing us to also consider the most recent research on the impact of climate change on portfolio management.
We investigate the link between Big Five personality traits and the marginal propensity to consume (MPC) for users of a German financial account aggregator app. We use 1,700 survey responses and transaction data of 56,000 app users to assess whether Big Five personality traits help explain MPC heterogeneity. We find that extraversion corresponds to an increase in consumption whereas agreeableness and neuroticism correspond to a decrease in consumption. We test this with trust and risk preferences and find that risk indicates more explanatory power in consumption response than the Big Five. Our findings help policy makers target individuals more efficiently.
This briefing paper describes and evaluates the law and economics of institution(al) protection schemes. Throughout our analysis, we use Europe’s largest such scheme, that of German savings banks, as paradigm. We find strengths and weaknesses: Strong network-internal monitoring and early warning seems to be an important contributor to IPS network success. Similarly, the geographical quasi-cartel encourages banks to build a strong client base, including SME, in all regions. Third, the growth of the IPS member institutions may have benefitted from the strictly unlimited protection offered, in terms of euro amounts per account holder. The counterweighing weaknesses encompass the conditionality of the protection pledge and the underinvestment risk it entails, sometimes referred to as blackmailing the government, as well as the limited diversification potential of the deposit insurance within the network, and the near-incompatibility of the IPS model with the provisions of the BRRD, particularly relating to bail-in and resolution. Consequently, we suggest, as policy guidance, to treat large IPS networks similar to large banking groups, and put them as such under the direct supervision of the ECB within the SSM. Moreover, we suggest strengthening the seriousness of a deposit insurance that offers unlimited protection. Finally, to improve financial stability, we suggest embedding the IPS model into a multi-tier deposit re-insurance scheme, with a national and a European layer. This document was provided by the Economic Governance Support Unit at the request of the ECON Committee.
SAFE Update April 2022
(2022)
Households regularly fail to make optimal financial decisions. But what are the underlying reasons for this? Using two conceptually distinct measures of time inconsistency based on bank account transaction data and behavioral measurement experiments, we show that the excessive use of bank account overdrafts is linked to time inconsistency. By contrast, there is no correlation between a survey-based measure of financial literacy and overdraft usage. Our results indicate that consumer education and information may not suffice to overcome mistakes in households’ financial decision-making. Rather, behaviorally motivated interventions targeting specific biases in decision-making should also be considered as effective policy tools.
This policy letter collects elementary economic statistics and provides a very basic look on Russian public finances (i) to inform the reader’s opinion on a possible planning process behind the war against Ukraine and (ii) to discuss prospects of an energy embargo and its capability to affect the stability of the Russian economy.
Agencies around the world are in the process of developing taxonomies and standards for sustainable (or ESG) investment products. A key assumption in our model is that of non-consequentialist private investors (households) who derive a "warm glow" decisional utility when purchasing an investment product that is labelled as sustainable. We ask when such labelling is socially beneficial even when the socialplanner can impose a minimum standard on investment and production. In a model of financial constraints (Holmström and Tirole 1997), which we close to include consumer surplus, we also determine the optimal labelling threshold and show how its stringency is affected by determinants such as the prevalence of warm-glow investor preferences, the presence of social network effects, or the relevance of financial constraints at the industry level.
This paper examines optimal enviromental policy when external financing is costly for firms. We introduce emission externalities and industry equilibrium in the Holmström and Tirole (1997) model of corporate finance. While a cap-and- trading system optimally governs both firms` abatement activities (internal emission margin) and industry size (external emission margin) when firms have sufficient internal funds, external financing constraints introduce a wedge between these two objectives. When a sector is financially constrained in the aggregate, the optimal cap is strictly above the Pigouvian benchmark and emission allowances should be allocated below market prices. When a sector is not financially constrained in the aggregate, a cap that is below the Pigiouvian benchmark optimally shifts market share to less polluting firms and, moreover, there should be no "grandfathering" of emission allowances. With financial constraints and heterogeneity across firms or sectors, a uniform policy, such as a single cap-and-trade system, is typically not optimal.
We study liquidity provision by competitive high-frequency trading firms (HFTs) in a dynamic trading model with private information. Liquidity providers face adverse selection risk from trading with privately informed investors and from trading with other HFTs that engage in latency arbitrage upon public information. The impact of the two different sources of risk depends on the details of the market design. We determine equilibrium transaction costs in continuous limit order book (CLOB) markets and under frequent batch auctions (FBA). In the absence of informed trading, FBA dominates CLOB just as in Budish et al. (2015). Surprisingly, this result does no longer hold with privately informed investors. We show that FBA allows liquidity providers to charge markups and earn profits – even under risk neutrality and perfect competition. A slight variation of the FBA design removes the inefficiency by allowing traders to submit orders conditional on auction excess demand.