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Reint Gropp
- 10 July 2014
- WORKING PAPER SERIES - No. 1687Details
- Abstract
- We employ a unique identification strategy linking survey data on household consumption expenditure to bank-level data to estimate the effects of bank financial distress on consumer credit and consumption expenditures. We show that households whose banks were more exposed to funding shocks report lower levels of non-mortgage liabilities. This, however, does not result in lower levels of consumption. Households compensate by drawing down liquid assets to smooth consumption in the face of a temporary adverse lending supply shock. The results contrast with recent evidence on the real effects of finance on firms' investment and employment decisions.
- JEL Code
- E21 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Consumption, Saving, Wealth
E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy
G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
G01 : Financial Economics→General→Financial Crises
- 12 June 2013
- WORKING PAPER SERIES - No. 1555Details
- Abstract
- This paper empirically examines the role of soft information in the competitive interaction between relationship and transaction banks. Soft information can be interpreted as a private signal about the quality of a firm that is observable to a relationship bank, but not to a transaction bank. We show that borrowers self-select to relationship banks depending on whether their privately observed soft information is positive or negative. Competition affects the investment in learning the private signal from firms by relationship banks and transaction banks asymmetrically. Relationship banks invest more; transaction banks invest less in soft information, exacerbating the selection effect. Finally, we show that firms where soft information was important in the lending decision were no more likely to default compared to firms where only financial information was used.
- JEL Code
- G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation
G32 : Financial Economics→Corporate Finance and Governance→Financing Policy, Financial Risk and Risk Management, Capital and Ownership Structure, Value of Firms, Goodwill
- 2 May 2011
- WORKING PAPER SERIES - No. 1337Details
- Abstract
- Homestead exemptions to personal bankruptcy allow households to retain their home equity up to a limit determined at the state level. Households that may experience bankruptcy thus have an incentive to bias their portfolios towards home equity. Using US household data from the Survey of Income and Program Participation for the period 1996-2006, we find that especially households with low net worth maintain a larger share of their wealth as home equity if a larger homestead exemption applies. This home equity bias is also more pronounced if the household head is in poor health, increasing the chance of bankruptcy on account of unpaid medical bills. The bias is further stronger for households with mortgage finance, shorter house tenures, and younger household heads, which taken together reflect households that face more financial uncertainty.
- JEL Code
- G11 : Financial Economics→General Financial Markets→Portfolio Choice, Investment Decisions
K35 : Law and Economics→Other Substantive Areas of Law→Personal Bankruptcy Law
R21 : Urban, Rural, Regional, Real Estate, and Transportation Economics→Household Analysis→Housing Demand
- 2 December 2010
- WORKING PAPER SERIES - No. 1272Details
- Abstract
- In 2001, government guarantees for savings banks in Germany were removed following a law suit. We use this natural experiment to examine the effect of government guarantees on bank risk taking, using a large data set of matched bank/borrower information. The results suggest that banks whose government guarantee was removed reduced credit risk by cutting off the riskiest borrowers from credit. At the same time, the banks also increased interest rates on their remaining borrowers. The effects are economically large: the Z-Score of average borrowers increased by 7.5% and the average loan size declined by 17.2%. Remaining borrowers paid 46 basis points higher interest rates, despite their higher quality. Using a difference-in-differences approach we show that the effect is larger for banks that ex ante benefited more from the guarantee and that none of these effects are present in a control group of German banks to whom the guarantee was not applicable. Furthermore, savings banks adjusted their liabilities away from risk-sensitive debt instruments after the removal of the guarantee, while we do not observe this for the control group. We also document in an event study that yield spreads of savings banks’ bonds increased significantly right after the announcement of the decision to remove guarantees, while the yield spread of a sample of bonds issued by the control group remained unchanged. The results suggest that public guarantees may be associated with substantial moral hazard effects.
- JEL Code
- G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation
G32 : Financial Economics→Corporate Finance and Governance→Financing Policy, Financial Risk and Risk Management, Capital and Ownership Structure, Value of Firms, Goodwill
- 30 September 2009
- WORKING PAPER SERIES - No. 1096Details
- Abstract
- The paper shows that mispriced deposit insurance and capital regulation were of second order importance in determining the capital structure of large U.S. and European banks during 1991 to 2004. Instead, standard cross-sectional determinants of non-financial firms’ leverage carry over to banks, except for banks whose capital ratio is close to the regulatory minimum. Consistent with a reduced role of deposit insurance, we document a shift in banks’ liability structure away from deposits towards non-deposit liabilities. We find that unobserved time-invariant bank fixed effects are ultimately the most important determinant of banks’ capital structures and that banks’ leverage converges to bank specific, time invariant targets.
- JEL Code
- G32 : Financial Economics→Corporate Finance and Governance→Financing Policy, Financial Risk and Risk Management, Capital and Ownership Structure, Value of Firms, Goodwill
G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
- 23 May 2007
- WORKING PAPER SERIES - No. 753Details
- Abstract
- Using a unique data set on trade credit defaults among French firms, we investigate whether and how trade credit is used to relax financial constraints. We show that firms that face idiosyncratic liquidity shocks are more likely to default on trade credit, especially when the shocks are unexpected, firms have little liquidity, are likely to be credit constrained or are close to their debt capacity. We estimate that credit constrained firms pass more than one fourth of the liquidity shocks they face on to their suppliers down the trade credit chain. The evidence is consistent with the idea that firms provide liquidity insurance to each other and that this mechanism is able to alleviate the consequences of credit constraints. In addition, we show that the chain of defaults stops when it reaches firms that are large, liquid, and have access to financial markets. This suggests that liquidity is allocated from large firms with access to outside finance to small, credit constrained firms through trade credit chains.
- JEL Code
- G30 : Financial Economics→Corporate Finance and Governance→General
D92 : Microeconomics→Intertemporal Choice→Intertemporal Firm Choice, Investment, Capacity, and Financing
G20 : Financial Economics→Financial Institutions and Services→General
- 16 January 2007
- WORKING PAPER SERIES - No. 714Details
- Abstract
- This paper investigates the dynamics of the pass-through between market interest rates and bank interest rates in the euro area as a function of cyclical and structural differences in the financial system. We find that overall the speed of adjustment for loans is significantly faster than for deposits, and that the pass-through is especially sluggish for demand deposits and savings deposits. Bank soundness, credit risk and interest rate risk are found to exert a significant influence on the speed of pass through. We also find evidence of faster (slower) pass-through for loans (deposits) if the change in monetary policy was up (down). Overall, we find that competition among banks and competition from financial markets result in a faster bank interest rate pass-through. Finally, we find some evidence that financial innovation speeds up the pass-through for those market segments that are most directly affected by these innovations.
- JEL Code
- E43 : Macroeconomics and Monetary Economics→Money and Interest Rates→Interest Rates: Determination, Term Structure, and Effects
G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
- 30 October 2006
- WORKING PAPER SERIES - No. 686Details
- Abstract
- We propose a new approach to measuring the effect of unobservable private information or beliefs on volatility. Using high-frequency intraday data, we estimate the volatility effect of a well identified shock on the volatility of the stock returns of large European banks as a function of the quality of available public information about the banks. We hypothesise that, as the publicly available information becomes stale, volatility effects and its persistence should increase, as the private information (beliefs) of investors becomes more important. We find strong support for this idea in the data. We argue that the results have implications for debate surrounding the opacity of banks and the transparency requirements that may be imposed on banks under Pillar III of the New Basel Accord.
- JEL Code
- G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
G14 : Financial Economics→General Financial Markets→Information and Market Efficiency, Event Studies, Insider Trading
- 27 July 2006
- WORKING PAPER SERIES - No. 662Details
- Abstract
- This paper analyses cross-border contagion in a sample of European banks from January 1994 to January 2003. We use a multinomial logit model to estimate the number of banks in a given country that experience a large shock on the same day ("coexceedances") as a function of variables measuring common shocks and lagged coexceedances in other countries. Large shocks are measured by the bottom 95th percentile of the distribution of the daily percentage change in the distance to default of the bank. We find evidence in favour of significant cross-border contagion. We also find some evidence that since the introduction of the euro cross-border contagion may have increased. The results seem to be very robust to changes in the specification.
- JEL Code
- G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
F36 : International Economics→International Finance→Financial Aspects of Economic Integration
G15 : Financial Economics→General Financial Markets→International Financial Markets
- 11 February 2004
- WORKING PAPER SERIES - No. 302Details
- Abstract
- The paper analyses the relationship between deposit insurance, debt-holder monitoring, and risk taking. In a stylised banking model we show that deposit insurance may reduce moral hazard, if deposit insurance credibly leaves out non-deposit creditors. Testing the model using EU bank level data yields evidence consistent with the model, suggesting that explicit deposit insurance may serve as a commitment device to limit the safety net and permit monitoring by uninsured subordinated debt holders. We further find that credible limits to the safety net reduce risk taking of smaller banks with low charter values and sizeable subordinated debt shares only. However, we also find that the introduction of explicit deposit insurance tends to increase the share of insured deposits in banks' liabilities.
- JEL Code
- G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation
- 23 December 2003
- WORKING PAPER SERIES - No. 297Details
- Abstract
- This paper uses the co-incidence of extreme shocks to banks' risk to examine within country and across country contagion among large EU banks. Banks' risk is measured by the first difference of weekly distances to default and abnormal returns. Using Monte Carlo simulations, the paper examines whether the observed frequency of large shocks experienced by two or more banks simultaneously is consistent with the assumption of a multivariate normal or a student t distribution. Further, the paper proposes a simple metric, which is used to identify contagion from one bank to another and identify "systemically important" banks in the EU.
- JEL Code
- G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
F36 : International Economics→International Finance→Financial Aspects of Economic Integration
G15 : Financial Economics→General Financial Markets→International Financial Markets
- 1 June 2002
- WORKING PAPER SERIES - No. 150Details
- Abstract
- We analyse the ability of the distance-to-default and bond spreads to signal bank fragility. We show that both indicators are complete and unbiased and that spreads are non-linear in the probability of bank default. We empirically test these properties in a sample of EU banks. We find leading properties for both indicators. The distance-to-default exhibits lead times of 6 to 18 months. Spreads have signal value close to default only, in line with the theory. We also find that implicit safety nets weaken the predictive power of spreads. Further, the results suggest complementarity between both indicators, reducing type I errors. We also examine the interaction of the indicators with other bank information.
- JEL Code
- G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
G12 : Financial Economics→General Financial Markets→Asset Pricing, Trading Volume, Bond Interest Rates
- 1 August 2001
- WORKING PAPER SERIES - No. 76Details
- Abstract
- The recent consultative papers by the Basel Committee suggest an explicit role for external rating agencies in the assessment of the credit risk of banks' assets. In this context, an assessment of the information contained in credit ratings is important. We address this issue via an event study of rating change announcements by leading international rating agencies, focussing on a sample of European banks. We find no evidence of announcement effects on bond prices. We are largely able to exclude lack of liquidity as an explanation for this puzzling result and suggest some alternatives, such as 'too-big-to-fail.' For equity prices, we find strong effects of unexpected ratings changes and confirm prior evidence that stock prices may react very differently to ratings downgrades, depending on the underlying reason. Overall, our results suggest that ratings agencies may perform a useful role in summarising and obtaining non-public information on banks, at least for stockholders.
- JEL Code
- G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
G14 : Financial Economics→General Financial Markets→Information and Market Efficiency, Event Studies, Insider Trading
G18 : Financial Economics→General Financial Markets→Government Policy and Regulation
- 1 July 2001
- WORKING PAPER SERIES - No. 72Details
- Abstract
- The recent wave of mergers in the euro area raises the question, whether the increase in concentration has at least in part offset the increase in competition in European banking through deregulation. We test this question by estimating a simple Cournot model of bank pricing. We construct country and product specific measures of bank concentration and find that for loans and demand deposits, increasing concentration may have resulted in less competitive pricing by banks, whereas for savings and time deposits, the model is rejected, suggesting increases in contestability and/ or efficiency in these markets. These findings are robust across a wide variety of econometric specifications. Finally, the paper discusses some implications for tests of the effect of concentration on monetary policy transmission
- JEL Code
- L13 : Industrial Organization→Market Structure, Firm Strategy, and Market Performance→Oligopoly and Other Imperfect Markets
G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
B4 : History of Economic Thought, Methodology, and Heterodox Approaches→Economic Methodology
- 1 March 2001
- WORKING PAPER SERIES - No. 47Details
- Abstract
- The paper analyses the relationship between deposit insurance, debt-holder monitoring, charter values and risk taking. Utilising cross-sectional and time series variation in the existence of deposit insurance schemes in the EU, we find that the establishment of explicit deposit insurance significantly reduces the risk taking of banks. This finding stands in contrast to most of the previous empirical literature. It supports the hypothesis that in the absence of deposit insurance, European banking systems have been characterised by strong implicit insurance operating through the expectation of public intervention at times of distress. We also test further hypotheses regarding the interaction between deposit insurance and monitoring, charter values and 'too-big-to-fail.' We find that smaller banks and banks with lower charter values and more subordinated debt reduce risk taking more after the introduction of explicit deposit insurance, which supports 'too-big-to-fail', monitoring by debt holders and the moral hazard reducing effect of charter values.
- JEL Code
- G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation
- 1 September 2000
- WORKING PAPER SERIES - No. 31Details
- Abstract
- This paper analyzes the link between Foreign Direct Investment (FDI), corporate taxation, and corporate tax revenues. We find strong evidence that FDI in (out) flows are affected by tax regimes in the host (home) countries and FDI flows in turn affect the corporate tax base. Simulations of EU harmonization (isolating the revenue effect of FDI on the tax base from direct effects through the rate harmonization) suggest that high (low) tax countries would gain (lose) revenue from harmonization; these effects may be substantial. Our results also suggest that EU tax harmonization would significantly affect the net FDI position of some countries.
- JEL Code
- H25 : Public Economics→Taxation, Subsidies, and Revenue→Business Taxes and Subsidies
H87 : Public Economics→Miscellaneous Issues→International Fiscal Issues, International Public Goods
F21 : International Economics→International Factor Movements and International Business→International Investment, Long-Term Capital Movements
F42 : International Economics→Macroeconomic Aspects of International Trade and Finance→International Policy Coordination and Transmission
F47 : International Economics→Macroeconomic Aspects of International Trade and Finance→Forecasting and Simulation: Models and Applications