Five Essays on Bank Regulation

The story of the financial crisis of 2007-08 is also a story of bank regulation. Commentators from academia and policy institutions have identified an inappropriate regulation of banks and capital markets as one of the main factors that contributed to the transformation of the U.S. subprime crisis into the global financial crisis with all its devastating consequences. Clearly, the regulation of banks and capital markets is one of the most important issues in today's post-crisis world. The present work contains five essays that contribute to the literature on bank regulation. The first three chapters deal with the effects of model-based, risk-weighted capital regulation as specified in the Basel II / Basel III regulatory framework. In Chapter 4, we examine how political factors affect bailout decisions in the German savings bank sector. Chapter 5 uses a panel of 26 countries and investigates how the removal of entry barriers for foreign banks affects economic outcomes, and how it interacts with the efficiency of the domestic banking sector at the time of liberalization

Superdiffusivity for Brownian motion in a Poissonian potential with long range correlation II: upper bound on the volume exponent

This paper continues a study on trajectories of Brownian Motion in a field of soft trap whose radius distribution is unbounded. We show here for both point-to-point and point-to-plane model the volume exponent (the exponent associated to transversal fluctuation of the trajectories) is strictly less than one and give an explicit upper bound that depends on the parameters of the problem. In some specific cases, this upper bound matches the lower bound proved in the first part of this work and we get the exact value of the volume exponent.Comment: 28 page 4 figures, to appear in AIH

Pro-Cyclical Capital Regulation and Lending

We combine particular institutional features of the stepwise introduction of asset risk-specific capital charges by German banks with the event of the Lehman shock to test the theory of pro-cyclicality of capital regulation and to quantify the magnitude of this regulation on firms’ access to lending. The Lehman shock resulted in an increase of credit risk during the implementation period of the internal ratings-based (IRB) approach to capital regulation. At this point, banks introducing IRB had transferred only a portion of their loan portfolios to the new approach. Exploiting the variation of the regulatory approach within IRB banks and the fact that many firms borrow from several IRB banks at the same time allows us to systematically control for both bank-level and firm-level heterogeneity. Loans to the same firm decline by about 3.5 percent more when the loan is part of an IRB portfolio as compared with a portfolio using the traditional regulatory approach. Since banks tend to reduce especially large IRB credit exposures during the recession, firms relying on IRB loans experience an even stronger reduction in aggregate borrowing (5 to 10 percent larger) as compared with firms relying on loans under the traditional approach. Our findings have important implications for the design of capital regulation (i.e., Basel III)

Pro-Cyclical Capital Regulation and Lending

We combine particular institutional features of the stepwise introduction of asset risk-specific capital charges by German banks with the event of the Lehman shock to test the theory of pro-cyclicality of capital regulation and to quantify the magnitude of this regulation on firms’ access to lending. The Lehman shock resulted in an increase of credit risk during the implementation period of the internal ratings-based (IRB) approach to capital regulation. At this point, banks introducing IRB had transferred only a portion of their loan portfolios to the new approach. Exploiting the variation of the regulatory approach within IRB banks and the fact that many firms borrow from several IRB banks at the same time allows us to systematically control for both bank-level and firm-level heterogeneity. Loans to the same firm decline by about 3.5 percent more when the loan is part of an IRB portfolio as compared with a portfolio using the traditional regulatory approach. Since banks tend to reduce especially large IRB credit exposures during the recession, firms relying on IRB loans experience an even stronger reduction in aggregate borrowing (5 to 10 percent larger) as compared with firms relying on loans under the traditional approach. Our findings have important implications for the design of capital regulation (i.e., Basel III)

Moderate altitude but not additional endurance training increases markers of oxidative stress in exhaled breath condensate

Oxidative stress occurs at altitude, and physical exertion might enhance this stress. In the present study, we investigated the combined effects of exercise and moderate altitude on redox balance in ten endurance exercising biathletes, and five sedentary volunteers during a 6-week-stay at 2,800m. As a marker for oxidative stress, hydrogen peroxide (H2O2) was analyzed by the biosensor measuring system Ecocheck™, and 8-iso prostaglandin F2α (8-iso PGF2α) was determined by enzyme immunoassay in exhaled breath condensate (EBC). To determine the whole blood antioxidative capacity, we measured reduced glutathione (GSH) enzymatically using Ellman's reagent. Exercising athletes and sedentary volunteers showed increased levels of oxidative markers at moderate altitude, contrary to our expectations; there was no difference between both groups. Therefore, all subjects' data were pooled to examine the oxidative stress response exclusively due to altitude exposure. H2O2 levels increased at altitude and remained elevated for 3days after returning to sea level (p≤0.05). On the other hand, 8-iso PGF2α levels showed a tendency to increase at altitude, but declined immediately after returning to sea level (p≤0.001). Hypoxic exposure during the first day at altitude resulted in elevated GSH levels (p≤0.05), that decreased during prolonged sojourn at altitude (p≤0.001). In conclusion, a stay at moderate altitude for up to 6weeks increases markers of oxidative stress in EBC independent of additional endurance training. Notably, this oxidative stress is still detectable 3days upon return to sea leve

Environmental Risk Factors for Chronic Pancreatitis and Pancreatic Cancer

Chronic pancreatitis has long been thought to be mainly associated with immoderate alcohol consumption. The observation that only ∼10% of heavy drinkers develop chronic pancreatitis not only suggests that other environmental factors, such as tobacco smoke, are potent additional risk factors, but also that the genetic component of pancreatitis is more common than previously presumed. Either disease-causing or protective traits have been indentified for mutations in different trypsinogen genes, the gene for the trypsin inhibitor SPINK1, chymotrypsinogen C, and the cystic fibrosis transmembane conductance regulator (CFTR). Other factors that have been proposed to contribute to pancreatitis are obesity, diets high in animal protein and fat, as well as antioxidant deficiencies. For the development of pancreatic cancer, preexisting chronic pancreatitis, more prominently hereditary pancreatitis, is a risk factor. The data on environmental risk factors for pancreatic cancer are, with the notable exception of tobacco smoke, either sparse, unconfirmed or controversial. Obesity appears to increase the risk of pancreatic cancer in the West but not in Japan. Diets high in processed or red meat, diets low in fruits and vegetables, phytochemicals such as lycopene and flavonols, have been proposed and refuted as risk or protective factors in different trials. The best established and single most important risk factor for cancer as well as pancreatitis and the one to clearly avoid is tobacco smoke

Comparing different early warning systems: Results from a horse race competition among members of the Macro-prudential Research Network

Over the recent decades researchers in academia and central banks have developed early warning systems (EWS) designed to warn policy makers of potential future economic and financial crises. These EWS are based on diverse approaches and empirical models. In this paper we compare the performance of nine distinct models for predicting banking crises resulting from the work of the Macroprudential Research Network (MaRs) initiated by the European System of Central Banks. In order to ensure comparability, all models use the same database of crises created by MaRs and comparable sets of potential early warning indicators. We evaluate the models’ relative usefulness by comparing the ratios of false alarms and missed crises and discuss implications for pratical use and future research. We find that multivariate models, in their many appearances, have great potential added value over simple signalling models. One of the main policy recommendations coming from this exercise is that policy makers can benefit from taking a broad methodological approach when they develop models to set macro-prudential instruments

Comparing different early warning systems: Results from a horse race competition among members of the Macro-prudential Research Network

Over the recent decades researchers in academia and central banks have developed early warning systems (EWS) designed to warn policy makers of potential future economic and financial crises. These EWS are based on diverse approaches and empirical models. In this paper we compare the performance of nine distinct models for predicting banking crises resulting from the work of the Macroprudential Research Network (MaRs) initiated by the European System of Central Banks. In order to ensure comparability, all models use the same database of crises created by MaRs and comparable sets of potential early warning indicators. We evaluate the models’ relative usefulness by comparing the ratios of false alarms and missed crises and discuss implications for pratical use and future research. We find that multivariate models, in their many appearances, have great potential added value over simple signalling models. One of the main policy recommendations coming from this exercise is that policy makers can benefit from taking a broad methodological approach when they develop models to set macro-prudential instruments

Comparing different early warning systems: Results from a horse race competition among members of the Macro-prudential Research Network

Over the recent decades researchers in academia and central banks have developed early warning systems (EWS) designed to warn policy makers of potential future economic and financial crises. These EWS are based on diverse approaches and empirical models. In this paper we compare the performance of nine distinct models for predicting banking crises resulting from the work of the Macroprudential Research Network (MaRs) initiated by the European System of Central Banks. In order to ensure comparability, all models use the same database of crises created by MaRs and comparable sets of potential early warning indicators. We evaluate the models’ relative usefulness by comparing the ratios of false alarms and missed crises and discuss implications for pratical use and future research. We find that multivariate models, in their many appearances, have great potential added value over simple signalling models. One of the main policy recommendations coming from this exercise is that policy makers can benefit from taking a broad methodological approach when they develop models to set macro-prudential instruments