Family and gender still matter: the heterogeneity of returns to education in Germany

Using information on family background, we estimate returns to education, allowing for the heterogeneity of returns. In order to control for the unobserved heterogeneity shared by family members, we construct a siblings sample and employ family fixed-effects and family correlated random-effects models. Our main result is that family background still matters despite the substantial political efforts to equalize educational opportunities in Germany. Persons with less-educated parents earn lower wages, but have higher returns to education. This supports the view that persons from less-educated backgrounds still face higher marginal costs in the educational system. The same interplay between the wage level and marginal returns is found for the effect of gender and cohort. --Returns to education,siblings analysis,heterogeneity of returns

The Role of Liquidity and Implicit Guarantees in the German Twin Crisis of 1931

Using monthly balance-sheet data of all major German credit banks, we analyze deposit with-drawals and bank failures in the German banking and currency crisis of 1931. We find that de-posit withdrawals were driven by the run on the currency, but were also related to banks’ liquidity positions; that branch banks were no more stable than unit banks; and that large banks were privileged, being bailed out and receiving preferential access to the discount window. These findings underline the importance of liquidity and implicit guarantees in twin crises, while they question the benefits of branching in such crises.Twin crises, liquidity, implicit guarantees, “too big to fail”

Banks without Parachutes - Competitive Effects of Government Bail-out Policies

Lecture on the first SFB/TR 15 meeting, Gummersbach, July, 18 - 20, 2004The explicit or implicit protection of banks through government bail-out policies is a universal phenomenon. We analyze the competitive effects of such policies in two models with different degrees of transparency in the banking sector. Our main result is that the bail-out policy unambiguously leads to higher risk-taking at those banks that do not enjoy a bail-out guarantee. The reason is that the prospect of a bail-out induces the rotected bank to expand, thereby intensifying competition in the deposit market and depressing other banks’ margins. In contrast, the effects on the protected bank’s risk taking and on welfare depend on the transparency of the banking sector

Public Ownership of Banks and Economic Growth – The Role of Heterogeneity

In an influential paper, La Porta, Lopez-De-Silanes and Shleifer (2002) argued that public ownership of banks is associated with lower GDP growth. We show that this relationship does not hold for all countries, but depends on a country’s financial development and political institutions. Public ownership is harmful only if a country has low financial development and low institutional quality. The negative impact of public ownership on growth fades quickly as the financial and political system develops. In highly developed countries, we find no or even positive effects. Policy conclusions for individual countries are likely to be misleading if such heterogeneity is ignored.Public banks, economic growth, financial development, quality of governance, political institutions

Bank Size and Risk-Taking under Basel II

We analyze the relationship between bank size and risk-taking under the New Basel Capital Accord. Using a model with imperfect competition and moral hazard, we show that the introduction of an internal ratings based (IRB) approach improves upon flat capital requirements if the approach is applied uniformly across banks and if the costs of implementation are not too high. However, the banks’ right to choose between the standardized and the IRB approaches under Basel II gives larger banks a competitive advantage and, due to fiercer competition, pushes smaller banks to take higher risks. This may even lead to higher aggregate risk-taking.Basel II; IRB approach; bank competition; capital requirements; SME financing

Credit Risk Transfer and Bank Competition

We present a banking model with imperfect competition in which borrowers’ access to credit is improved when banks are able to transfer credit risks. However, the market for credit risk transfer (CRT) works smoothly only if the quality of loans is public information. If the quality of loans is private information, banks have an incentive to grant unprofitable loans in order to transfer them to other parties, leading to an increase in aggregate risk. Nevertheless, the introduction of CRT generally increases welfare in our setup. However, under private information, higher competition induces an expansion of loans to unprofitable firms, which in the limit offsets the welfare gains from CRT completely.access to credit, bank competition, credit derivatives, Credit risk transfer, public and private information

Banks without Parachutes -- Competitive Effects of Government Bail-out Policies

The explicit or implicit protection of banks through government bail-out policies is a universal phenomenon. We analyze the competitive effects of such policies in two models with different degrees of transparency in the banking sector. Our main result is that the bail-out policy unambiguously leads to higher risk-taking at those banks that do not enjoy a bail-out guarantee. The reason is that the prospect of a bail-out induces the protected bank to expand, thereby intensifying competition in the deposit market and depressing other banks' margins. In contrast, the effects on the protected bank's risk-taking and on welfare depend on the transparency of the banking sector.

Bank Size and Risk-Taking under Basel II

This paper discusses the relationship between bank size and risk-taking under Pillar I of the New Basel Capital Accord. Using a model with imperfect competition and moral hazard, we find that small banks (and hence small borrowers) may profit from the introduction of an internal ratings based (IRB) approach if this approach is applied uniformly across banks. However, the banks’ right to choose between the standardized and the IRB approaches unambiguously hurts small banks, and pushes them towards higher risk-taking due to fiercer competition. This may even lead to higher aggregate risk in the economy.Basel II, IRB approach, bank competition, capital requirements, SME financing

Banks without Parachutes – Competitive Effects of Government Bail-out Policies

The explicit or implicit protection of banks through government bail-out policies is a universal phenomenon. We analyze the competitive effects of such policies in two models with different degrees of transparency in the banking sector. Our main result is that the bail-out policy unambiguously leads to higher risk-taking at those banks that do not enjoy a bail-out guarantee. The reason is that the prospect of a bail-out induces the protected bank to expand, thereby intensifying competition in the deposit market and depressing other banks’ margins. In contrast, the effects on the protected bank’s risk-taking and on welfare depend on the transparency of the banking sector.Government bail-out, banking competition, transparency, “too big to fail”, financial stability

License Auctions and Market Structure

We analyze the interplay between license auctions and market structure in a model with several incumbents and several potential entrants. The focus is on the competitiveness induced by the number of auctioned licenses. Moreover, we study how the auction format affects the incentives for explicit or tacit collusion among incumbents. A crucial role is played by the relation between the number of incumbents and the number of licenses. If the number of incumbents is greater than the number of new licenses, we show that auctioning more licenses need not result in greater competitiveness. If the number of licenses exceeds the number of incumbents, we display plausible conditions under which all incumbents get a license. Finally, we suggest a positive role for some auction formats in which the number of licenses is endogenously determined at the auction. We illustrate some results with examples drawn from European license auctions for 3G mobile telephony.