Default Option, Risk-Aversion and Household Borrowing Behaviour

Assuming a risk-neutral bank and assuming household utility to be exponential, we show how under information symmetry the covariance of income and loan repayments may explain higher household borrowings than in the case without default option. Under ex post information asymmetry and positive control costs, the result is less clear-cut. We also make evident that in a situation in which a household without default option would neither borrow nor save, the existence of a default option makes household borrowing behaviour unpredictable.Consumption, exponential utility, certainty equivalent, households, default option, borrowing, risk, risk aversion, risk management

The Store-of-Value-Function of Money as a Component of Household Risk Management

We analyse how money as a store of value affects the decisions of a representative household under diversifiable and non-diversifiable risks. given that the central bank successfully stabilizes the rate of inflation at a low level. Assuming exponential utility allows us to derive an explicit relationship between optimal money holdings, the household's desire to tilt, smooth and stabilize consumption as well as minimize portfolio risk. In this context we also show how the correlation between stochastic labour income and stock returns impact the store-of-value function of money. Finally we prove that the store-of-value benefits of money holdings continue to hold even if we take riskless alternatives into account.Money demand, consumption, CRRA, CARA, exponential utility, households, risk, risk management

Problems of Evaluating Small Firms’ Quality as a Reason for Unfavourable Loan Conditions

The article substantiates the hypothesis that the profitability of small firms is above all determined by qualitative variables. In this respect a low standardization of goods and even more importantly, the high significance of governance structures play a crucial role rendering the quality of the firm’s human capital, the flexibility of its machinery but also externalities of business networks, an appropriate integration of the family into business affairs as examples of qualitative information which also bear a high degree of privacy. Whereas the literature suggests relational contracts as a way how qualitative and private information can be credibly conveyed to the lender, it is shown that even in the German housebank-dominated financial system borrower- lender relationships of the kind recommended by the literature are hardly to be found. Rather, German banks, too, respond to information gaps with unfavourable loan conditions. As an alternative specialized information intermediation is briefly discussed.Small firms financing, rationing, information

Default Option, Risk-Aversion and Household Borrowing Behaviour

Assuming a risk-neutral bank and assuming household utility to be exponential, we show how under information symmetry the covariance of income and loan repayments may explain higher household borrowings than in the case without default option. Under ex post information asymmetry and positive control costs, the result is less clear-cut. We also make evident that in a situation in which a household without default option would neither borrow nor save, the existence of a default option makes household borrowing behaviour unpredictable

International Similarities of Bank Lending Practices and Varieties of Insolvency Laws: a Comparative Analysis of France and Germany

Economic theory conjectures complementarities between the ranking of creditors in formal insolvency proceedings and the use of collateral in bank loan contracts as well as the existence of relational compared to arms length lending. In this paper we seek evidence for these hypotheses taking France and Germany as examples which differ significantly concerning the ranking of in particular secured creditors. On closer scrutiny of empirical studies as well as statistical information we can neither confirm that a high priority for se-cured lenders explains an excessive use of collateral in bank loans nor that a priority for inside collateral promotes relational lending. Regarding relational lending we point to variables lying outside the insolvency law, like culture and history

The Store-of-Value-Function of Money as a Component of Household Risk Management

We analyse how money as a store of value affects the decisions of a representative household under diversifiable and non-diversifiable risks. given that the central bank successfully stabilizes the rate of inflation at a low level. Assuming exponential utility allows us to derive an explicit relationship between optimal money holdings, the household's desire to tilt, smooth and stabilize consumption as well as minimize portfolio risk. In this context we also show how the correlation between stochastic labour income and stock returns impact the store-of-value function of money. Finally we prove that the store-of-value benefits of money holdings continue to hold even if we take riskless alternatives into account

Adjustment in EMU: Is Convergence Assured?

Using a modified version of the model presented by Belke and Gros (2007), we analyze the stability of adjustment in a currency union. Using econometric estimates for parameter values we check the stability conditions for the 11 original EMU countries and Greece. We found significant instability in the model for a large number of countries. We then simulate the adjustment process for some empirically observed parameter values and find that even for countries with relatively smooth adjustment, the adjustment to a price shock in EMU might take several decades. Keywords: EMU, convergence, stability.EMU, convergence, stability, inflation

Genesis and Persistence of Trust in Banks

Against the background of the ongoing financial crisis the question of the genesis and persistence of trust in banks plays an important role not only for the prevention of bank runs and, related to this, for the regulation of banks, but also with respect to the perspective of customer loyalty of private investors towards their housebanks. Moreover, addressing issues of trust in banks will contribute to a better understanding of how private investors cope with the uncertainties and complexities prevailing in financial markets and will thus enrich the theory of decision-making. In every type of financial system trust has an important role. Due to the high and ever growing complexity of financial systems institutional trust meanwhile plays a more important role than personal trust. A set of institutions facilitate trust-building or trust-guarding and sometimes even trust-granting functions. Trust allows the trustor to transform fundamental uncertainty into risk. From an empirical point of view trust in banks has emerged over time as a process in which trust-guarding and trust-granting institutions played a crucial role. So it is no surprise that in a bank based financial system like Germany private households are still entrusting their money to banks today even after the financial crisis. However, since the late 1980s the institutional framework of the financial market and the governance of corporations have changed dramatically. Actors have common experiences and rely on similar sources of information and institutional knowledge and are also exposed to similar discursive models. This contributes to a social normalization or habituation of the perception of risk. We conclude that such normalization – in the sense of a conventionalization – also greatly influences the economic decision-making behavior of private households. We argue that the bank-oriented ‘conservative’ investment decisions of German savers are due to a ‘cultural embedded framework of logics of actions’ and are based on ‘intergenerational inheritance’. The understanding of the embeddedness of economic actors in different cultures such as private households and the emergence of diverse institutional settings in a historic process enables us to understand from a micro-perspective their investment behavior in different economic systems

Adjustment in EMU: Is Convergence Assured?

Using a modified version of the model presented by Belke and Gros (2007), we analyze the stability of adjustment in a currency union. Using econometric estimates for parameter values we check the stability conditions for the 11 original EMU countries and Greece. We found significant instability in the model for a large number of countries. We then simulate the adjustment process for some empirically observed parameter values and find that even for countries with relatively smooth adjustment, the adjustment to a price shock in EMU might take several decades

Information deficits and credit supply

SIGLEAvailable from Bibliothek des Instituts fuer Weltwirtschaft, ZBW, Duesternbrook Weg 120, D-24105 Kiel W 488 (92) / FIZ - Fachinformationszzentrum Karlsruhe / TIB - Technische InformationsbibliothekDEGerman