Slippery slopes of stress: ordered failure events in German banking

Outright bank failures without prior indication of financial instability are very rare. Supervisory authorities monitor banks constantly. Thus, they usually obtain early warning signals that precede ultimate failure and, in fact, banks can be regarded as troubled to varying degrees before outright closure. But to our knowledge virtually all studies that predict bank failures neglect the ordinal nature of bank distress. Exploiting the distress database of the Deutsche Bundesbank we distinguish four different distress events that banks experience. Only the worst entails a bank to exit the market. Weaker orders of distress are, first, compulsory notifications of the authorities about potential problems, second, corrective actions such as warnings and hearings and, third, actions by banking pillar's insurance schemes. Since the four categories of hazard functions are not proportional, we specify a generalized ordered logit model to estimate the respective probabilities of distress simultaneously. Our model estimates each set of probabilities with high accuracy and confirms, first, the necessity to account for different kinds of distress events and, second, the violation of the proportional odds assumption implicit in most limited dependent analyses of bank failure. --Bank,failure,distress,generalized ordered logit

Income diversification in the German banking industry

In the last few years it has been possible to observe decreasing interest margins for German universal banks. At the same time, institutions increasingly moved part of their business from interest to fee-earning activities. This study analyzes the determinants of non-interest income and its impact on financial performance and the risk profile of German banks between 1995 and 2007. We find empirical evidence that for all German universal banks risk-adjusted returns on equity and total assets are positively affected by higher fee income activities. Additionally, for commercial banks we show that a strong engagement in fee-generating activities goes along with higher risk. In order to analyze possible cross-subsidization effects between interest and fee business we also examine how banks' expansion in fee-based services has affected their interest margin. For savings and commercial banks we find that institutions with a strong focus on fee business charge lower interest margins when credit risk is controlled. --Income diversification,interest income,fee income,interest margin,two-stage least squares estimator

Monetary policy and bank distress: an integrated micro-macro approach

Evidence on the interdependency between monetary policy and the state of the banking system is scarce. We suggest an integrated micro-macro approach with two core virtues. First, we measure the probability of bank distress directly at the bank level. Second, we integrate a microeconomic hazard model for bank distress and a standard macroeconomic model. The advantage of this approach is to incorporate micro information, to allow for non-linearities and to permit general feedback effects between bank distress and the real economy. We base the analysis on German bank and macro data between 1995 and 2004. Our results confirm the existence of a relationship between monetary policy and bank distress. A monetary contraction increases the mean probability of distress. This effect disappears when neglecting micro effects, underlining the crucial importance of the former. Distress responses are economically most significant for weak distress events and at times when capitalization is low. --Stress testing,bank distress,monetary policy

Dirofilaria immitis in the Wild Canids of Illinois

The heartworm, Dirofilaria immitis, is widespread in dogs in North America and has been reported in wild canids in many states. This is a report of this parasite in hearts removed from coyote, red fox and gray fox carcasses collected in Illinois. A total of 415 coyotes had a significantly higher infection rate (23.6%) than 225 red foxes (3.6%) and 99 gray foxes (3.0%). Infection rates in red foxes and coyotes were significantly higher in or near the Wabash Border Natural Division along the eastern side of the state, suggesting a relationship between infection rates and this region. The mean number of worms in coyotes (8.1), red foxes (6.8) and gray foxes (1.3) did not differ significantly. Coyotes supported a maximum of 52 worms; red foxes, 21 worms; and gray foxes, 2 worms. An exponential decrease in the number of infected coyotes was noted as worm loads increased; 56.5% of 85 infections consisted of one to four worms, while only 16.5% of the infections had 15 or more worms. The percentage of the coyote sample with the potential to provide microfilariae to vectors (13.1%), based on the presence of both male and female worms, was significantly greater than the same parameter for both red foxes (1.3%) and gray foxes (1.0%)

Determinants for using visible reserves in German banks: an empirical study

The German Commercial Code (HGB) allows banks to build visible reserves for general banking risks according to section 340g HGB. These GBR reserves may, in addition to their risk provisioning function, be used to enhance capital endowment, for internal financing, signaling or earnings management purposes. We analyze financial statements of German banks for the period from 1995 through 2007 to reveal specific patterns in the use of GBR reserves. Our empirical investigation is based on a large, unbalanced panel of German banks including 32,023 bank-year observations. We see an increase in the use of GBR reserves over time. Furthermore, we can say that GBR reserves are primarily used by large banks, banks with comparatively low regulatory capital endowment, as well as those with lower risks. Furthermore, GBR reserves are used by fairly profitable banks, those reporting according to international financial reporting standards in addition to HGB, and banks which are not thrifts or cooperative banks. Finally, we find that banks which make use of hidden reserves according to section 340f HGB also tend to hold GBR reserves. We explain our findings with regulatory factors and existing information asymmetries as well as banks' size and ownership structure. --Bank regulation,informational asymmetries,risk provisioning,visible reserves,hidden reserves

Der geschichtliche Werdegang des zahnärztlichen Universitäts-Institutes Carolinum von 1960 bis 1986 unter besonderer Berücksichtigung der Bauentwicklung

TEIL I Die Bauentwicklung des Zahnärztlichen Universitäts-Institutes in Frankfurt am Main von 1960 bis zur Fertigstellung des Erweiterungsbaus im Jahr 1973 ( bearbeitet von: Thomas Kick ) Die vorliegende Arbeit reiht sich ein in die Gesamtdarstellung der Geschichte des Zahnärztlichen Universitäts- Institutes in Frankfurt am Main. In der Dissertation von Bald-Duch wird ein geschichtlicher Überblick von der Gründung der Heilanstalt Carolinum im Jahre 1890 bis zum Tode von Otto Loos am 1. April 1936 gegeben, die Arbeit von Roeloffs-Nuthmann umfasst die Darstellung des historischen Werdegangs des Zahnärztlichen Institutes in Frankfurt am Main während der nationalsozialistischen Herrschaft und der Nachkriegsjahre bis hin zum Zentrum für Zahn-, Mund- und Kieferheilkunde Carolinum. Diese Dissertation vervollständigt die Dokumentation der Entwicklung des Zahnärztlichen Universitäts-Institutes Carolinum für die Jahre 1960 bis 1986, wobei der Schwerpunkt der Darstellung auf die Bauentwicklung und dabei insbesondere auf die Planung und Errichtung des Neubaus des Zentrums der Zahn-, Mund- und Kiefer- heilkunde Carolinum gelegt wurde. Zu Beginn der sechziger Jahre wurden Verhandlungen zur Übernahme der Städtischen Universitätskliniken und der angeschlossenen Institute in Frankfurt am Main durch das Land Hessen aufgenommen. Davon betroffen war auch das Zahnärztliche Universitäts-Institut Carolinum, das in die Verwaltung der Universität übergehen sollte. Professor Flesch-Thebesius als Vorsitzender des Vorstandes der Freiherr Carl von Rothschil

The importance of qualitative risk assessment in banking supervision before and during the crisis

Banking supervision requires regular inspection and assessment of financial institutions. In Germany this task is carried out by the central bank ('Deutsche Bundesbank, BBK') in cooperation with the Federal Financial Supervisory Authority ('Bundesanstalt für Finanzdienstleistungsaufsicht, BaFin'). In accordance with the Basel II approach, quantitative and qualitative information is used. It is still an open question whether supervisors provide information, based on on-site inspections, which is not known from the numbers already, or simply duplicate the quantitative information, or even overrule it by their impressions gained through visits. In our analysis we use a unique dataset on financial institutions' risk profiles, i.e. the banking supervisors' risk assessment. Methodologically, we apply a partial proportional odds model to explain the supervisor's ordinal grading by a purely quantitative CAMEL covariate vector, which is standard in many bank rating models, and we also include the bank inspector's qualitative risk assessment into the model. We find that not only the quantitative CAMEL vector is clearly important for the final supervisory risk assessment; it is, indeed, also qualitative information on a bank's internal governance, ICAAP, interest rate risk, and other qualitative risk components that plays an equally important role. Moreover, we find evidence that supervisors have become more conservative in their final judgement at the beginning of the financial crisis, i.e. the supervisory assessment seems to be more forward-looking than the mere numbers. This result underpins the importance of bank-individual on-site risk assessments. --Bank rating,banking supervision,generalized ordered logit

Bank liquidity creation and risk taking during distress

Liquidity creation is one of banks' raisons d'être. But what happens to liquidity creation and risk taking when a bank is identified as distressed by regulatory bodies and subjected to regulatory interventions and/or receives capital injections? What are the long-run effects of such interventions? To address these questions, we exploit a unique dataset of German universal banks for the period 1999 - 2008. Our main findings are as follows. First, regulatory interventions and capital injections are followed by lower levels of liquidity creation. The probability of a decline in liquidity creation increases to up to around 50 percent when such actions are taken. Second, bank risk taking decreases in the aftermath of regulatory interventions and capital injections. Third, while banks' liquidity creation market shares decline over the five years following such disciplinary measures, they also reduce their risk exposure over this period to become safer banks. --Liquidity creation,bank distress,regulatory interventions,capital injections

Changes in the Cost of Bank Equity and the Supply of Bank Credit

This paper shows that both bank balance sheet composition and credit supply significantly respond to a decrease in the relative cost of bank equity. To do so, we exploit the staggered introduction of tax reforms in Europe from 2000 to 2012 as exogenous sources of changes in the cost of equity. We investigate the effect on credit supply using loan level data in a country where firms are not affected by these reforms, and where foreign banks affected by the reforms are lending actively: Germany. We find that the relative decrease in the cost of equity leads banks to rely more on equity financing and to increase lending to firms, while decreasing security and interbank asset holdings. Overall, our paper shows that taxation can be an effective tool to monitor bank leverage and credit supply

Are banks using hidden reserves to beat earnings benchmarks? Evidence from Germany

Section 340f of the German Commercial Code allows banks to provision against the special risks inherent to the banking business by building hidden reserves. Beyond risk provisioning, these reserves are implicitly accepted as an earnings management device. By analyzing financial statements of German banks for the period 1995 through 2009, we see these hidden reserves being used to (1) avoid a negative net income, (2) avoid a drop in net income compared to the previous year, (3) avoid a shortfall in net income compared to a peer group, and (4) reduce the variability of banks' net income over time. We (5) find a diminished relevance of avoiding a drop in net income as well as a shortfall relative to the peer group during the financial crisis. Finally, we are (6) unable to confirm any differences in the relevance of hidden reserves for earnings management between listed and non-listed banks. --Earnings management,Income smoothing,Hidden reserves,Prospect theory,Financial institution