Hidden gems and borrowers with dirty little secrets: investment in soft information, borrower self-selection and competition

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

Global wealth disparities drive adherence to COVID-safe pathways in head and neck cancer surgery

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Systemic risk: Time-lags and persistence

Common systemic risk measures focus on the instantaneous occurrence of triggering and systemic events. However, systemic events may also occur with a time-lag to the triggering event. To study this contagion period and the resulting persistence of institutions' systemic risk we develop and employ the Conditional Shortfall Probability (CoSP), which is the likelihood that a systemic market event occurs with a specific time-lag to the triggering event. Based on CoSP we propose two aggregate systemic risk measures, namely the Aggregate Excess CoSP and the CoSP-weighted time-lag, that reflect the systemic risk aggregated over time and average time-lag of an institution's triggering event, respectively. Our empirical results show that 15% of the financial companies in our sample are significantly systemically important with respect to the financial sector, while 27% of the financial companies are significantly systemically important with respect to the American non-financial sector. Still, the aggregate systemic risk of systemically important institutions is larger with respect to the financial market than with respect to non-financial markets. Moreover, the aggregate systemic risk of insurance companies is similar to the systemic risk of banks, while insurers are also exposed to the largest aggregate systemic risk among the financial sector.Gängige systemische Risikomaße konzentrieren sich auf das unmittelbare Eintreten auslösender und systemischer Ereignisse. Systemische Ereignisse können jedoch auch zeitversetzt zum auslösenden Ereignis auftreten. Um diesen Ansteckungszeitraum und das daraus resultierende Fortbestehen des systemischen Risikos von Institutionen zu untersuchen, entwickeln und verwenden wir die Conditional Shortfall Probability (CoSP), die die Wahrscheinlichkeit darstellt, dass ein systemisches Marktereignis mit einer bestimmten Zeitverzögerung zum auslösenden Ereignis eintritt. Basierend auf CoSP schlagen wir zwei aggregierte Systemrisikomaße vor, nämlich den Aggregate Excess CoSP und die CoSP-gewichtete Zeitverzögerung, die das über die Zeit aggregierte Systemrisiko bzw. die durchschnittliche Zeitverzögerung des auslösenden Ereignisses eines Instituts widerspiegeln. Unsere empirischen Ergebnisse zeigen, dass 15 % der Finanzunternehmen in unserer Stichprobe im Hinblick auf den Finanzsektor von erheblicher systemischer Bedeutung sind, während 27 % der Finanzunternehmen im Hinblick auf den amerikanischen Nichtfinanzsektor von erheblicher systemischer Bedeutung sind. Dennoch ist das aggregierte Systemrisiko systemrelevanter Institutionen in Bezug auf den Finanzmarkt größer als in Bezug auf Nicht-Finanzmärkte. Darüber hinaus ähnelt das aggregierte Systemrisiko von Versicherungsunternehmen dem Systemrisiko von Banken, während Versicherer auch dem größten aggregierten Systemrisiko im Finanzsektor ausgesetzt sind

Rising interest rates and liquidity risk in the life insurance sector

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

Life insurance convexity

Life insurers massively sell savings contracts with surrender options which allow policyholders to withdraw a guaranteed amount before maturity. These options move toward the money when interest rates rise. Using data on German life insurers, we estimate that a 1 percentage point increase in interest rates raises surrender rates by 17 basis points. We quantify the resulting liquidity risk in a calibrated model of surrender decisions and insurance cash flows. Simulations predict that surrender options can force insurers to sell up to 3% of their assets, depressing asset prices by 90 basis points. The effect is amplified by the duration of insurers' investments, and its impact on the term structure of interest rates depends on life insurers' investment strategy.Lebensversicherer verkaufen in großem Umfang Sparverträge mit Rückkaufoptionen, die es den Versicherungsnehmern ermöglichen, vor Fälligkeit einen garantierten Betrag abzuheben. Diese Optionen bewegen sich in Richtung Geld, wenn die Zinsen steigen. Anhand der Daten deutscher Lebensversicherer schätzen wir, dass eine Erhöhung der Zinssätze um einen Prozentpunkt die Rückkaufsquote um 17 Basispunkte erhöht. Das daraus resultierende Liquiditätsrisiko quantifizieren wir in einem kalibrierten Modell aus Rückkaufentscheidungen und Versicherungs-Cashflows. Simulationen gehen davon aus, dass Rückkaufoptionen Versicherer dazu zwingen können, bis zu 3 % ihrer Vermögenswerte zu verkaufen, was zu einem Rückgang der Vermögenspreise um 90 Basispunkte führt. Der Effekt wird durch die Anlagedauer der Versicherer verstärkt und sein Einfluss auf die Zinsstrukturkurve hängt von der Anlagestrategie der Lebensversicherer ab

Life insurance convexity

Life insurers sell savings contracts with surrender options, which allow policyholders to prematurely receive guaranteed surrender values. These surrender options move toward the money when interest rates rise. Hence, higher interest rates raise surrender rates, as we document empirically by exploiting plausibly exogenous variation in monetary policy. Using a calibrated model, we then estimate that surrender options would force insurers to sell up to 2% of their investments during an enduring interest rate rise of 25 bps per year. We show that these fire sales are fueled by surrender value guarantees and insurers’ long-term investments

"And lead us not into temptation": presentation formats and the choice of risky alternatives

This paper uses laboratory experiments to provide a systematic analysis of how di↵erent presentation formats a↵ect individuals’ investment decisions. The results indicate that the type of presentation as well as personal characteristics influence both, the consistency of decisions and the riskiness of investment choices. However, while personal characteristics have a larger impact on consistency, the chosen risk level is determined more by framing e↵ects. On the level of personal characteristics, participants’ decisions show that better financial literacy and a better understanding of the presentation format enhance consistency and thus decision quality. Moreover, female participants on average make less consistent decisions and tend to prefer less risky alternatives. On the level of framing dimensions, subjects choose riskier investments when possible outcomes are shown in absolute values rather than rates of return and when the loss potential is less obvious. In particular, reducing the emphasis on downside risk and upside potential simultaneously leads to a substantial increase in risk taking

An incentive-compatible experiment on probabilistic insurance and implications for an insurer‘s solvency level

This paper is the first to conduct an incentive-compatible experiment using real monetary payoffs to test the hypothesis of probabilistic insurance which states that willingness to pay for insurance decreases sharply in the presence of even small default probabilities as compared to a risk-free insurance contract. In our experiment, 181 participants state their willingness to pay for insurance contracts with different levels of default risk. We find that the willingness to pay sharply decreases with increasing default risk. Our results hence strongly support the hypothesis of probabilistic insurance. Furthermore, we study the impact of customer reaction to default risk on an insurer’s optimal solvency level using our experimentally obtained data on insurance demand. We show that an insurer should choose to be default-free rather than having even a very small default probability. This risk strategy is also optimal when assuming substantial transaction costs for risk management activities undertaken to achieve the maximum solvency level