Institutions, contracts, and regulation of housing financing

The real estate market and, more specifically, the housing market is one of the most important markets of an economy. It impacts public health, influences social relations and crime, triggers others sector growth, and thus affects the prosperity of an economy. The close interconnectedness between economic sectors creates mutual dependencies and spillover effects from one market to another. Due to this, a stable and resistant housing market is in common public, economic, and political interest. The prediction of the development of the housing market, however, is highly challenging as it displays several individual features. One is its high capital intensity. What drives housing investment is sustainable access to housing financing. As sufficient funding is a precondition for acquiring residential property, mortgage lending institutions play a decisive role in the housing market. They enable home seekers to become homeowners and, at the same time, decide by whom and when a residential property can be bought. Furthermore, they influence housing prices. By either granting loans or rejecting applicants and conducting other business, the demand for dwellings is influenced which affects prices. This was clearly evidenced by the latest financial crisis. A second special feature of the housing market is its distinct heterogeneity. From various perspectives, housing is, above all, particularly individual. Dwellings must meet individual circumstances, habits, and preferences. Furthermore, they need to fit into geographical or political circumstances. To meet these individual needs, some financial systems are quite diverse, consisting of manifold types of financial intermediaries that offer several products to finance a residential property. Others are rather uniform, characterized mainly by privately organized institutions, focused on common banking business. This dissertation investigates the impact of different types of financial institutions, financial contracts, and financial regulation on the housing market. The first part investigates whether various lending practices of different types of financial institutions affect housing market cycles differently. We develop a heterogeneous agent-based model that mimics a real-world housing market, consisting of potential home buyers and sellers who trade residential property. Financial intermediaries finance residential property and, therefore, mainly determine whether housing investment can be realized. We create a heterogeneous financial market with special emphasis on two institutional bank types: conventional banks (CBs) and building and loan associations (BLs). Especially in Germany and continental Europe, both serve the mortgage lending market while BLs constitute a peculiar but essential real estate financier. In our research, BLs represent an example of specialized financial intermediaries. Contrasting the mortgage granting decisions of the two bank types that arise out of varying business models and specialized institutional regulations, we find that CBs exercise procyclic mortgage lending that exacerbates prevailing up- or downturns in the housing market. Using BLs core product, contractual saving for housing (CSH), they put less emphasis on collateral values. Instead, they use information out of relationship lending which leads to less pronounced market cycles and more stable housing prices. Computational experiments reveal that a heterogeneous financial market, consisting of both CBs and BLs creates the most stable housing market and, at the same time, provides homeownership for a larger share of the economy. As the first part of the dissertation suggests a diversified financial market with differing institutional features and heterogeneous product landscapes to stabilize the housing market and diminish the risk of crises, the second part extends the research scope to embrace regulatory environments. I introduce an extended heterogeneous agent-based model of a housing and a financial market to assess whether it is reasonable to impose homogenous regulatory requirements for heterogeneous financial institutions out of the perspective of housing, capital, and financial market stability. In addition to the real estate market, where potential buyers and sellers can trade dwellings, I model a capital market on which banks can trade a standardized share portfolio that depicts alternative investment opportunities for financial institutions. If banks engage in risky business which is either to finance housing investments or trading shares, Basel III requires them to hold a specified amount of equity. Banks business activities are thus restricted by the prevailing capital adequacy requirements (CAR). Via computational experiments, I introduce a heterogeneous regulation in terms of different levels of CAR for a special type of financial intermediary, BLs, while CAR for CBs are held fixed. The results provide evidence that imposing CAR on banks is effective in increasing market stability and the resilience of the banking sector. The obligation to meet CAR restricts risky business activities and increases banks loss absorbency capacity. However, stability is not only a monotonic function of capital. Elevating CAR for BLs worsens stability measures and banking soundness. The study reveals that the institutional type of BLs and their special regulation imposes a risk-mitigating and stabilizing effect on the housing, the capital, and the financial market which can be intensified if CAR are aligned to their individual business model. These findings advocate in favor of heterogeneous CAR that shape market structures and create most stable market conditions. The third part of this dissertation investigates a special component of the current regulatory requirements of Basel III, the countercyclical capital buffer (CCyB). The macroprudential tool strives to counteract the issue of procyclicality of the previous regulatory rules. Conducting computational experiments in an artificial market setting, we examine the macroeconomic performance of the CCyB by evaluating the dynamics of key stability indicators of the housing and the financial market. Under four different scenarios, an undisturbed market, a financial shock scenario, a positive housing demand shock scenario, and in times of a housing bubble, we test whether the macroprudential tool meets its regulatory goals. Doing this, we find that, in general, the CCyB performs well in stabilizing the housing and the financial market in all of the tested market settings. It is not able, however, to prevent any of the simulated crises to occur. Furthermore, its effectiveness depends on the magnitude of the shock and on how much buffer has been built up by banks in the previous periods. A CCyB introduced at the wrong time might even affect market conditions procyclically. As the introduction of a CCyB is currently discussed in different countries, this study contributes to current regulatory issues and provides valuable insights. With its three parts, this dissertation provides new insights into the relationship between financial and housing markets. Incorporating the special features of the housing market, it reveals the merits of a diversified financial market and the existence of specialized financial institutions and heterogeneous financial products. Furthermore, the results argue in favor of a heterogeneous regulation. Additionally, it provides information about the effectiveness of a currently discussed regulatory component, the CCyB. Hereby, this dissertation contributes to existing literature and has important implications for the design of financial markets and regulatory capital requirements in order to stabilize one of the most important markets of an economy, the housing market.Der Immobilienmarkt, im Speziellen der Markt für Wohnimmobilien, zählt zu den bedeutendsten Märkten einer Volkswirtschaft. Durch zahlreiche Interdependenzen zu angrenzenden Marktsegmenten prägt er gesellschaftliche Belange wie soziale Beziehungen und Kriminalität, beeinträchtigt die öffentliche Gesundheit und beeinflusst den volkswirtschaftlichen Wohlstand. Die enge Verflechtung zwischen Wirtschaftssektoren führt zu gegenseitigen Abhängigkeiten und Spillover-Effekten. Ein stabiler und widerstandsfähiger Wohnungsmarkt liegt daher in einem gemeinsamen öffentlichen, wirtschaftlichen und politischen Interesse. Eine Einschätzung der Marktentwicklung für Wohnimmobilien wird durch dessen spezielle Charakteristika jedoch erheblich erschwert. Eine dieser Besonderheiten ist dessen beträchtliche Kapitalintensität. Voraussetzung für den Erwerb von Wohneigentum ist der Zugang zu Finanzmärkten und die Bereitstellung von adäquaten Finanzierungsprodukten. Durch diese Abhängigkeit kommt den Finanzintermediären eine zentrale Rolle am Immobilienmarkt zu. Sie ermöglichen potentiellen Immobilienanwärtern den Erwerb von Wohneigentum und beeinflussen durch diverse Kreditvergabeprozesse von wem und wann eine Immobilie erworben werden kann. Durch individuell ausgerichtete Geschäftsmodelle prägen Banken zudem die Nachfrage, die wiederum die Preise beeinflusst. Besonders evident wurde dies in der letzten Finanz- und Wirtschaftskrise. Ein weiteres Charakteristikum des Immobilienmarktes ist dessen ausgeprägte Heterogenität. Aus diversen Gesichtspunkten ist Wohneigentum vor allem eines: individuell. Es muss persönlichen Belangen, Gewohnheiten und Präferenzen entsprechen und zudem geographische und politische Umstände erfüllen. Um diesen Gegebenheiten nachzukommen, unterscheiden sich Finanzsysteme in institutioneller sowie produktspezifischer Konstitution. Während einige Finanzsysteme dieser Welt relativ heterogen ausgestaltet sind und der Nachfrage nach Immobilienfinanzierung mit diversen Institutionsformen und Produkten begegnen, zeichnen sich andere durch eher homogene, meist privatwirtschaftlich organisierte und auf das klassische Bankgeschäft fokussierte Institutionslandschaften aus. Diese Dissertation untersucht die Auswirkungen verschiedener Arten von Finanzinstitutionen, Finanzierungsprodukten und bankenregulatorischer Vorgaben auf den Immobilienmarkt. Im Rahmen dessen erörtert die erste Studie der Arbeit, den Einfluss unterschiedlicher Finanzinstitutionen auf die Stabilität des Immobilienmarktes. Am Beispiel zweier Arten von Banken, Universalbanken (CBs) und Bausparkassen (BLs), wird analysiert, wie die individuellen Kreditvergabepraktiken der Finanzintermediäre Immobilienmarktzyklen beeinflussen. Die Bausparkasse dient in der vorliegenden Arbeit als Repräsentant eines Spezialfinanzintermediärs, dessen Geschäftsmodell primär auf die Finanzierung wohnwirtschaftlicher Zwecke ausgerichtet ist. Zur Erörterung der Forschungsfrage entwickeln wir ein heterogenes Agentenmodell, das die Rahmenbedingungen eines realen Immobilienmarktes besitzt. Potentielle Käufer und Verkäufer handeln Immobilienbesitz. Die beiden Finanzintermediäre finanzieren Wohneigentum und bestimmen somit wesentlich, ob und von wem Immobilien erworben werden können. Die Kreditvergabepraktiken der beiden Bankarten sind dabei an den jeweiligen Geschäftsmodellen und institutionsspezifischen Regularien ausgerichtet. Während CBs ihre Kreditentscheidung hauptsächlich auf vergangenheitsorientierte und erwartungswertgetriebene Besicherungswerte der Immobilien stützen, beziehen BLs endogen erworbene Informationen aus institutionsspezifischen Produktarten, wie dem Bausparvertrag, in die Entscheidungsfindung ein. Experimentelle Simulationen zeigen, dass CBs prozyklische Kreditvergabe betreiben und damit bestehende Auf- oder Abschwungphasen auf Immobilienmärkten verschärfen. Die Kreditvergabepraktiken und die individuelle Regulierung der BLs wirken hingegen stabilisierend auf Immobilienmarktzyklen. Die stabilsten Marktbedingungen sind jedoch bei heterogenen Finanzmärkten anzutreffen, bei denen sowohl CBs als auch BLs Wohneigentum finanzieren. Gleichzeitig fördert eine solche Marktkonstellation die Transaktions- und Wohneigentumsrate innerhalb einer Bevölkerung. Nachdem die Resultate des ersten Teils der Dissertation für einen diversifizierten Finanzmarkt mit unterschiedlichen Institutionsformen und heterogenen Produktlandschaften sprechen, um die Stabilität des Immobilienmarktes zu erhöhen und die Krisenresistenz zu stärken, erweitert der zweite Teil der Arbeit den Forschungsbereich auf das regulatorische Umfeld. In einem erweiterten heterogenen Agentenmodell eines Immobilien-, Kapital-, und Finanzmarktes wird untersucht, ob homogene regulatorische Vorschriften für sich unterscheidende Arten von Finanzinstitutionen dazu in der Lage sind, die maximale Stabilität der modellierten Märkte zu gewährleisten. Innerhalb des Modells unterliegen Banken entsprechend der Realität den eigenkapitalregulatorischen Vorschriften nach Basel III. Sowohl bei der Finanzierung von Immobilien als auch bei der Investition in alternative Kapitalanlagen sind Banken dazu verpflichtet eine der Risikoklasse angemessene Höhe an Eigenkapital vorzuhalten. Mittels computertechnischer Simulationen werden den stabilisierenden Institutionen der BLs variierende Eigenkapitalanforderungen auferlegt, während die der CBs konstant den derzeitigen Regularien entsprechen. Anhand diverser Stabilitätsindikatoren wird deutlich, dass die Eigenkapitalanforderungen nach Basel III die Markstabilität und die Widerstandsfähigkeit des Bankensektors nachhaltig erhöhen. Die regulatorische Komponente beschränkt riskante Geschäftsaktivitäten und erhöht gleichzeitig die Absorptionsfähigkeit von Verlusten. Gleichwohl ergibt sich aus den Experimenten, dass die Stabilität von Immobilien- und Finanzmärkten erhöht werden kann, wenn BLs niedrigeren eigenkapitalregulatorischen Vorschriften unterliegen. Die Institutionsform der BLs und ihre individuelle Regulatorik haben einen risikomindernden und stabilisierenden Effekt auf den Immobilien-, Kapital und Finanzmarkt. Diese positiven Effekte können erhöht werden, indem eigenkapitalregulatorische Anforderungen verringert und damit an die individuellen Geschäftspraktiken der BLs angepasst werden. Diese Erkenntnisse sprechen für eine heterogene Regulierungslandschaft innerhalb heterogener Finanzsysteme. Der dritte Teil dieser Dissertation untersucht eine spezielle Komponente der aktuellen regulatorischen Anforderungen nach Basel III, den antizyklischen Kapitalpuffer (CCyB). Ziel dieser makroprudenziellen regulatorischen Maßnahme ist es, der Prozyklizität der bestehenden Regulierung entgegenzuwirken. Anhand diverser Stabilitätsindikatoren des Wohnungs- und Finanzmarkts evaluiert diese Studie inwiefern dies unter vier unterschiedlichen Marktbedingungen gelingt: in einem virtuellen, ungestörten Marktumfeld, in Zeiten eines exogenen Zinsschocks, bei Auftreten eines positiven Nachfrageschocks auf dem Immobilienmarkt sowie während einer Immobilienblase. Die Stabilitätsindikatoren lassen darauf schließen, dass es dem CCyB in allen Marktszenarien gelingt, Immobilienmarktzyklen zu glätten und die Finanzmarktstabilität zu erhöhen. Gleichwohl gelingt es ihm nicht, eine der evaluierten Krisenszenarien zu verhindern. Darüber hinaus hängt seine stabilisierende Wirkung vom Ausmaß des vorherrschenden Schocks sowie von der Höhe zuvor gebildeter Kapitalreserven ab. Eine Einführung der regulatorischen Maßnahme in ungeeigneten Marktphasen kann die Marktbedingungen prozyklisch beeinflussen und damit das eigentliche Ziel des CCyB konterkarieren. Diese Dissertation liefert mit ihren drei individuellen Studien neue Erkenntnisse über die Beziehung und die Interdependenzen zwischen Finanz- und Wohnimmobilienmärkten. Unter Einbezug spezieller Charakteristika des Immobilienmarktes dokumentieren die Resultate die Vorzüge eines diversifizierten Finanzmarktes und die Existenz spezialisierter Finanzinstitute sowie heterogener Finanzprodukte. Im Weiteren deuten sie auf das Erfordernis einer heterogenen Regulierungspraxis hin und geben Aufschluss über die Wirksamkeit einer derzeit diskutierten Regulierungskomponente, dem CCyB. Damit leistet diese Dissertationen einen Beitrag zur bestehenden Literatur und liefert wichtige Erkenntnisse für die Gestaltung von Finanzmärkten und regulatorischen Kapitalanforderungen, um die Stabilität einer der wichtigsten Märkte einer Volkswirtschaft zu erhöhen: den Markt für Wohnimmobilien

Essays on credit contagion and shocks in banking

fi=vertaisarvioitu|en=peerReviewed

Business cycles, interest rates and market volatility : estimation and forecasting using DSGE macroeconomic models under partial information

Even long before the recent financial and economic crisis of 2007/2008 economists were more than aware of the insufficiencies and a lack of realism in macroeconomic modelling and model calibration methods, including those with DSGE methods and models, and spelled the need for further enhancements. The issues this research started addressing even before the 2008 crisis imposed demand for improvements, was use of single, fully informed rational agents in those modes. Consequently, the first part of this research project was aiming to improve the DSGE econometric methods by introducing novel solution for DSGE models with imperfect, partial information about the current values of deep variables and shocks, and apply this solution to imperfectly informed multiple agents with their different, inner-rationality models. Along these lines, this research also shows that DSGE models can be extended and suited to both, fitting and estimation of long-term yield curve, and to estimating with rich data sets by extending further its inner-mechanism. In the aftermath of the 2008 crises, which struck at the beginning of this research project, and the subsequent, extensive criticism of DSGE models, this research analyses the alternative causes of the crisis. It then focuses on identifying its possible causes, such as yet unknown debt accelerator mechanism and the related, probable model miss-specifications, rational inattention, and as well, a role of institutional policies in both the development of the crisis and its resolution. And finally, in a response to many of the critiques of the, usually monetary policy oriented DSGE models, this research project provides another set of novel extensions to such models, aiming to bring more of Keynesian characteristics suited to a more active, endogenous fiscal policy deemed needed in the aftermath of the crisis. This project, henceforth, extends the NK-Neo-Classical synthesis monetary DSGE models with a novel, endogenous, counter-cyclical fiscal policy rule driven by news and unemployment changes. It then also shows overall benefits of the resulting, mutually active, monetary-fiscal policy for both capital utilisation and overall economic stability

Systemic banking crises and bank capitalization - Evidence from the UK

Systemic Banking Crises and Bank Capitalization - Evidence from the U

A systems theoretical approach for anti-money laundering informed by a case study in a Greek financial institution: Self-reference, AML, its systematic constitution and technological consequences.

This dissertation constitutes a systems theoretical analysis of Anti-Money Laundering that dismisses the projected ideals of holism and delves into the core of Systems Theory (ST) in the tradition of second-order cybernetics. This theoretical approach of ST is appropriated in order to describe the domain of Anti-Money Laundering (AML) as a system in itself and at the same time examine the consequences that technology comes to play within the system of AML. While the contemporary phenomenon of AML has been reduced mostly into a set of technological consequences from profiling technologies (technologies that attempt within financial institutions to model and simulate money-laundering behaviour for the generation of suspicious transactions), this dissertation takes a different approach. Instead of focusing at profiling technologies that are believed to be the core technological artefacts that influence AML within financial institutions, this dissertation examines a variety of information systems and their interplay and describes through empirical findings the multitude of interactions that are technologically supported and that construct a much more complex picture of dealing with AML and thereby influencing how money-laundering is perceived. The empirical findings supporting the theoretical treatise come from a longitudinal case study of a Greek financial institution where a systematic examination takes place regarding a variety of information systems that may affect AML within the bank. Beyond isolated interferences of information systems to AML, their interrelations are further examined in order to reflect on the emergent complexity that often distorts cause-and-effect AML manipulations. The theoretical contributions put forward, constitute a systems theoretical application and an expansion of technological/systemic interferences, while the practical contributions to AML cover broader systems-theoretical reflections on the domain, technological integration within financial institutions for targeting ML, feedback relations between financial institutions and Financial Intelligence Units, as well as the systemic consequences for the newly implemented risk-based approach

Bank procyclicality and output: Issues and policies

The recent global financial crisis has highlighted the importance of the procyclicality of the financial sector. The procyclicality has transformed banks from mitigation mechanisms to amplifiers of changes in economic activity, potentially affecting financial stability and economic growth. The causes of procyclicality can be attributed to market imperfections and deviations from the efficient market hypothesis, while other factors including the Basel-type regulations, accounting standards and leverage have exacerbated it. Several suggestions have been forwarded to attenuate procyclicality, in the form of rules and discretion. They are presented here according to the factors they aim to alleviate. Some of the suggestions have been adopted under the Basel III framework, which explicitly addresses the procyclicality issue

Bank procyclicality and output: Issues and policies

The recent global financial crisis has highlighted the importance of the procyclicality of the financial sector. The procyclicality has transformed banks from mitigation mechanisms to amplifiers of changes in economic activity, potentially affecting financial stability and economic growth. The causes of procyclicality can be attributed to market imperfections and deviations from the efficient market hypothesis, while other factors including the Basel-type regulations, accounting standards and leverage have exacerbated it. Several suggestions have been forwarded to attenuate procyclicality, in the form of rules and discretion. They are presented here according to the factors they aim to alleviate. Some of the suggestions have been adopted under the Basel III framework, which explicitly addresses the procyclicality issue

Proceedings of the Salford Postgraduate Annual Research Conference (SPARC) 2011

These proceedings bring together a selection of papers from the 2011 Salford Postgraduate Annual Research Conference(SPARC). It includes papers from PhD students in the arts and social sciences, business, computing, science and engineering, education, environment, built environment and health sciences. Contributions from Salford researchers are published here alongside papers from students at the Universities of Anglia Ruskin, Birmingham City, Chester,De Montfort, Exeter, Leeds, Liverpool, Liverpool John Moores and Manchester