Essays on banks, government debt, and cross-border spillovers of risks and regulation

Die globale Finanzkrise in den Jahren 2008-2009 und die anschließende europäische Staats-schuldenkrise legten schwerwiegende Ansteckungseffekte zwischen dem Ausfallrisiko von Staaten und Banken offen. Ein wichtiger Ansteckungskanal waren die hohen Bestände von Banken an heimischen Staatsanleihen. Daher werden in der Dissertation im Rahmen von drei empirischen Studien (davon zwei in Ko-Autorenschaft) die Anreize von Banken, in (heimische) Staatsanleihen zu investieren und deren Rolle bei der Risikoübertragung von Staaten auf das Finanzsystem untersucht. Vor dem Hintergrund integrierter Finanzmärkte und global tätiger Banken betrachtet eine vierte Studie (in Ko-Autorenschaft) die grenzüberschreitenden Auswir-kungen von Regulierungsmaßnahmen. Die erste Studie zeigt, dass deutsche Banken bei der Investition in Staatsanleihen erst seit der Insolvenz von Lehman Brothers auf Änderungen im makroökonomischen Umfeld und auf Risi-kofaktoren reagieren. Seit dem Ausbruch der Staatsschuldenkrise geht ein höherer Bestand an riskanten Staatsanleihen auch mit einer Erhöhung des Ausfallrisikos der Bank einher. Die zweite Studie beleuchtet die Entscheidung von deutschen Banken Anleihen des heimischen Bundeslandes zu halten und untersucht, ob politische Einflussnahme ein Faktor in der Portfo-lioallokation von Banken im Landesbesitz (d.h. Förderbanken und Landesbanken) sein könnte. In einer dritten Studie wird die Rolle des Versicherungssektors bei der Übertragung von Staa-tenrisiken mit in den Blick genommen. Die Übertragung von Ausfallrisiken eines Staates auf die heimischen Versicherer ist ähnlich groß wie für Banken, aber erheblich größer als für nicht-finanzielle Unternehmen. Die vierte Studie untersucht die Auswirkungen von Regulierungsänderungen im Ausland auf die internationale und heimische Kreditvergabe von deutschen Banken. Die Ergebnisse zeigen unter anderem, dass deutsche Banken ihr Kreditwachstum in Deutschland erhöhen, wenn im Ausland die Regulierung strenger wird

On the exposure of insurance companies to sovereign risk − portfolio investments and market forces 1

A sovereign debt crisis can have significant knock-on effects in the financial markets and put financial stability at risk. This paper focuses on the transmission of sovereign risk to insurance companies as some of the largest institutional investors in the sovereign bond market. We use a firm level panel dataset that covers large insurance companies, banks and non-financial firms from nine countries over the time period from 1 January 2008 to 1 May 2013. We find significant and robust transmission effects from sovereign risk to domestic insurers. The impact on insurers is not significantly different from that on banks but larger than for non-financial firms. We find that systemically important insurers are more closely linked to the domestic sovereign. Based on European data, we show that risks in sovereign bond portfolios are an important driver of insurer risk, which is not reflected in current insurance regulation (incl. Solvency II in Europe)

Banks and Sovereign Risk: A Granular View

We identify the determinants of all German banks' sovereign debt exposures between 2005 and 2013 and test for the implications of these exposures for bank risk. Larger, more capital market affine, and less capitalised banks hold more sovereign bonds. Around 15% of all German banks never hold sovereign bonds during the sample period. The sensitivity of sovereign bond holdings by banks to eurozone membership and inflation increased significantly since the collapse of Lehman Brothers. Since the outbreak of the sovereign debt crisis, banks prefer sovereigns with lower debt ratios and lower bond yields. Finally, we find that riskiness of government bond holdings affects bank risk only since 2010.This confirms the existence of a nexus between government debt and bank risk

Moral suasion in regional government bond markets

In the context of the German regional government bond market, this paper studies the hypothesis that governments use moral suasion to persuade home government-owned banks to hold more home government debt. The empirical approach makes use of German banks' ownership structure, heterogeneity in the states' fiscal strength and detailed bank-level panel data on German banks' state bond portfolio on the security- and bank-level for the time period Q4:2005-Q2:2014. Results show that home state-owned banks hold a significantly higher amount of home state bonds than other home banks when fiscal fundamentals of the home state are weak. Banks located in other German states hold fewer state bonds in these situations. These findings are in line with moral suasion by state governments and are robust against controlling for observed and unobserved alternative incentives for banks' (home) state bond holdings such as risk-shifting by banks, lending opportunities or information asymmetries

International banking and cross-border effects of regulation: Lessons from Germany

We analyze the inward and outward transmission of regulatory changes through German banks' (international) loan portfolio. Overall, our results provide evidence for international spillovers of prudential instruments, these spillovers are however quite heterogeneous between types of banks and can only be observed for some instruments. For instance, foreign banks located in Germany reduce their loan growth to the German economy in response to a tightening of sector-specific capital buffers, local reserve requirements and loan to value ratios in their home country. Furthermore, from the point of view of foreign countries, tightening reserve requirements was effective in reducing lending inflows from German banks. Finally, we find that business and financial cycles matter for lending decisions

On the exposure of insurance companies to sovereign risk: Portfolio investments and market forces

A sovereign debt crisis can have significant knock-on effects in the financial markets and put financial stability at risk. This paper focuses on the transmission of sovereign risk to insurance companies as some of the largest institutional investors in the sovereign bond market. We use a firm level panel dataset that covers large insurance companies, banks and non-financial firms from nine countries in the time period January 1st 2008 to May 1st 2013. We find significant and robust transmission effects from sovereign risk to domestic insurers. The impact on insurers is larger than for non-financial firms and slightly smaller than for banks. We find that systemically important insurers were more closely linked to the domestic sovereign. Based on European data, we show that risks in sovereign bond portfolios are an important driver of insurer risk, which is not reflected in current insurance regulation (incl. upcoming Solvency II in Europe)

Banks and sovereign risk: A granular view

In this paper, we use detailed data on the sovereign debt holdings of all German banks to analyse the determinants of sovereign debt exposures and the implications of sovereign exposures for bank risk. Our main findings are as follows. First, sovereign bond holdings are heterogeneous across banks. Larger, weakly capitalised banks and banks with a small depositor base hold more sovereign bonds. Around 31% of all German banks hold no sovereign bonds at all. Second, the sensitivity of banks to macroeconomic factors increased significantly in the post-Lehman period. Banks hold more bonds from euro area countries, from low-inflation countries, and from countries with high sovereign bond yields. Third, there has been no marked impact of sovereign bond holdings on bank risk. This result could indicate the widespread absence of marking-to-market for sovereign bond holdings at the onset of the sovereign debt crisis in Europe

Climate transition risk stress test for the German financial system

This paper presents the methodology applied in the Deutsche Bundesbank's climate transition stress test for the German financial system, see Deutsche Bundesbank (2023). It discusses the construction of the transition scenarios underlying the analysis, including a long-run orderly scenario and a more disruptive short-term carbon price shock. Furthermore, the document shows the methodology for translating scenario impacts onto the asset level, which includes the consideration of firm-level carbon emission data where available. Finally, the impacts on the balance sheets of German banks, funds and insurers are discussed

On the exposure of insurance companies to sovereign risk - portfolio investments and market forces On the exposure of insurance companies to sovereign risk -portfolio investments and market forces 1

Reproduction permitted only if source is stated. ISBN Non-technical summary Research Question In the course of the European sovereign debt crisis, sovereign risk has become one of the biggest threats to financial stability. We focus on the vulnerabilities of the insurance sector and investigate the following questions: Is domestic sovereign risk transmitted to insurers' default risk? Are insurers affected differently by sovereign risk than other sectors of the economy (i.e. banks and non-financial firms)? What drives the link between sovereigns and insurers? Contribution Despite the importance of insurance companies as financial markets participants, research on risk spillovers between sovereigns and the financial system have usually sidestepped the insurance sector. In our paper, we aim at contributing to a better understanding of transmission of sovereign risk to the insurance sector. Moreover, this is the first paper to empirically investigate the role of sovereign bond holdings in this context as well as alternative channels of risk transmission. Results and Policy Implications We find that domestic sovereign risk significantly increases insurer risk as perceived by markets. While this risk transmission is slightly smaller than for banks, it is substantially larger than for non-financial companies. We find that the difference to non-financial firms is due to insurers' large sovereign bond portfolios. These investments play a major role in risk transmission domestically as well as internationally through foreign sovereign exposures. Moreover, we document a bias towards domestic sovereign bonds and increasing concentration in European insurers' sovereign portfolios. The link to domestic sovereigns was stronger for those insurers that are classified as systemically important by the Financial Stability Board. Overall, our results suggest that risks arising on the asset side of insurers' balance sheets deserve greater attention. Market expectations of insurer default risk depend on the riskiness of the sovereign debt portfolio of the insurer. However, in many cases, insurance regulation, including the new Solvency II regulation in the EU, exempts domestic government bonds from the calculation of the solvency capital requirement. Nichttechnische Zusammenfassung Fragestellung Ergebnisse und Politikimplikationen Unsere BUNDESBANK DISCUSSION PAPER NO 34/2015 On the exposure of insurance companies to sovereign risk -portfolio investments and market forces 1 Robert Düllᵃ, Felix Königᵇ, Jana Ohlsᵃ Abstract A sovereign debt crisis can have significant knock-on effects in the financial markets and put financial stability at risk. This paper focuses on the transmission of sovereign risk to insurance companies as some of the largest institutional investors in the sovereign bond market. We use a firm level panel dataset that covers large insurance companies, banks and non-financial firms from nine countries in the time period January 1 st 2008 to May 1 st 2013. We find significant and robust transmission effects from sovereign risk to domestic insurers. The impact on insurers is larger than for non-financial firms and slightly smaller than for banks. We find that systemically important insurers were more closely linked to the domestic sovereign. Based on European data, we show that risks in sovereign bond portfolios are an important driver of insurer risk, which is not reflected in current insurance regulation (incl. upcoming Solvency II in Europe)

Sensitivity analysis of climate-related transition risks in the German financial sector

Climate-related risks arising from the transition to a low-carbon economy may expose potential vulnerabilities in the financial system. In this article, we develop and describe a set of tools for analysing these risks and apply them to the German financial system. The use of longterm, consistent climate scenarios that have been developed as part of the joint work of the Network for Greening the Financial System (NGFS) allows the effects of the transition to be modelled and then mapped to the financial system. We use a comprehensive dataset in terms of the financial intermediaries and financial instruments reviewed, and demonstrate that the aggregated potential portfolio losses from an unexpected change in climate policy are within the low to medium single-digit percentage range for individual financial sectors. Individual financial intermediaries are more severely affected by transition risks. Uncertainty about the current expectations of market participants leads to results that may deviate by up to 40% from the potential portfolio losses calculated.Klimabezogene Risiken aus der Transition zu einem CO2-armen Wirtschaftssystem können potentielle Verwundbarkeiten des Finanzsystems offenlegen. Wir entwickeln und beschreiben in diesem Artikel ein Instrumentarium zur Analyse dieser Risiken und wenden es auf das deutsche Finanzsystem an. Die Verwendung langfristiger, konsistenter Klimaszenarien, die im Rahmen der gemeinsamen Arbeiten des Network for Greening the Financial System (NGFS) entstanden sind, erlauben die Modellierung der Auswirkungen der Transition und die anschließende Abbildung in das Finanzsystem. Wir nutzen eine umfassende Datenbasis hinsichtlich der einbezogenen Finanzintermediäre und -instrumente und zeigen, dass sich die potentiellen Portfolioverluste aus einem unerwarteten Klimapolitikwechsel im Aggregat für die einzelnen Finanzsektoren im geringen bis mittleren einstelligen Prozentbereich bewegen. Einzelne Finanzintermediäre sind dabei stärker von Transitionsrisiken betroffen. Die Unsicherheit über die aktuellen Erwartungen der Marktakteure führt zu Ergebnissen, welche von den abgeleiteten potentiellen Portfolioverlusten um bis zu 40 % abweichen können