Cross-border interbank networks, banking risk and contagion

Available online 19 February 2015Recent events have highlighted the role of cross-border linkages between banking systems in transmitting local developments across national borders. This paper analyzes whether international linkages in interbank markets affect the stability of interconnected banking systems and channel financial distress within a network consisting of banking systems of the main advanced countries for the period 1994–2012. Methodologically, I use a spatial modeling approach to test for spillovers in cross-border interbank markets. The results suggest that foreign exposures in banking play a significant role in channeling banking risk: I find that countries that are linked through foreign borrowing or lending positions to more stable banking systems abroad are significantly affected by positive spillover effects. From a policy point of view, this implies that in stable times, linkages in the banking system can be beneficial, while they have to be taken with caution in times of financial turmoil affecting the whole system.Is based on author's EUI PhD thesis, 201

Essays on financial stability and regulation in integrated markets

Defence date: 23 April 2014Examining Board: Professor Elena Carletti, Bocconi University and European University Institute (Supervisor) Professor Massimiliano Marcellino, Bocconi University and European University Institute Professor Martin Brown, Swiss Institute of Banking & Finance, University of St. Gallen Professor Claudia M. Buch, Halle Institute for Economic Research - IWH.Financial stability is an as valuable as fragile good. Given recent experiences, it seems understandable that a lot of resources are spent on financial supervision and regulation. However, as financial crisis history would tell, enhancing financial stability in a sustainable and long-lasting way is an ambitious objective. This holds the more so in financially integrated markets. This thesis investigates the implications of financiallyintegrated markets for financial stability and analyzes the effectiveness of oneimplemented regulatory instrument. In the first chapter, which is derived from joint work with Manuel Buchholz, we start from the observation that with the onset of the eurozone sovereign debt crisis, credit risk spreads have diverged. Nevertheless, our results reveal a high degree of co-movements in sovereign credit risk, especially for eurozone countries during thesovereign debt crisis. By investigating the causes behind this pattern of co-movements,we find strong evidence for both fundamentals and non-fundamentals based contagion.Similarities in economic fundamentals, cross-country linkages in banking and commonmarket sentiment play a significant role. In the second chapter, which is based on joint work with Claudia Buch and Björn Hilberg, we analyze the effects of the German bank levy implemented in 2011. The objective of the levy is to make banks internalize their contributions to systemic risk and generate rescue funds for future financial crises financed by the banking sector. We document that, first, the revenue raised through the bank levy has been small. Second, the bulk of the payments have been contributed by large commercial banks and head institutes of savings banks and credit unions. Third, only for those banks that are affected most by the levy, there is evidence for a decline in loans, higher lending rates, and lower deposit rates. In the third chapter, I assess the effect of the network structure in international interbank markets on banking stability. Cross-border linkages in the global banking network have increased to a large extent over recent decades. This raises the question which role these interconnections play for systemic stability and the transmission of shocks. My main finding is that countries which are linked through foreign borrowing or lending positions to more stable banking systems abroad are significantly affected by positive spillover effects. Hence, bilateral cross-border linkages between banking systems, and the network they span, affect financial stability.-- Sovereign credit risk co-movements in the Eurozone : simple interdependence or contagion? -- Taxing banks : an evaluation of the German bank levy -- Cross-border interbank networks, banking risk and contagio

Understanding climate activism: Who participates in climate marches such as “Fridays for Future” and what can we learn from it?

Young people are marching around the globe to ask for measures against climate change and to protect the environment. Using novel survey data, we ask who participates in such powerful movements and what can be learned from our findings. The survey was conducted in German and is based on answers from more than 600 participants. We find that survey respondents are less likely to participate in climate marches like “Fridays for Future” in case they trust more in (large) corporations suggesting a link between trust and climate activism. We also ask whether worries about climate change or attitudes towards more environmentally friendly behavior match their participation frequency in climate marches. Results reveal that respondents being more worried about climate change or the environment tend to participate more often in marches addressing these concerns. Similarly, participation in climate marches correlates positively with acting environmentally sustainable. Hence, our findings might be relevant for corporations in case they want to keep the support of young customers participating in climate marches

Sovereign credit risk co-movements in the Eurozone : simple interdependence or contagion?

First published: 14 December 2016We investigate credit risk co-movements and contagion in the sovereign debt markets of 17 industrialized countries during the period 2008–2012. We use dynamic conditional correlations of sovereign credit default swap spreads to detect contagion. This approach allows us to separate contagion channels from the determinants of simple interdependence. The results show that, first, sovereign credit risk co-moves considerably, particularly among eurozone countries and during the sovereign debt crisis. Second, contagion varies across time and countries. Third, similarities in economic fundamentals, cross-country linkages in banking and common market sentiment constitute the main channels of contagion.Is based on author's EUI PhD thesis, 201

Financial Linkages and Sectoral Business Cycle Synchronization: Evidence from Europe

We analyze whether financial integration leads to converging or diverging business cycles using a dynamic spatial model. Our model allows for contemporaneous spillovers of shocks to GDP growth between countries that are financially integrated and delivers a scalar measure of the spillover intensity at each point in time. For a financial network of ten European countries from 1996 to 2017, we find that the spillover effects are positive on average and much larger during periods of financial stress, pointing towards stronger business cycle synchronization. Dismantling GDP growth into value added growth of ten major industries, we observe that spillover intensities vary significantly. The findings are robust to a variety of alternative model specifications

Firm-specific forecast errors and asymmetric investment propensity

This paper analyzes how firm-specific forecast errors derived from survey data of German manufacturing firms over 2007–2011 relate to firms' investment propensity. Our findings reveal that asymmetries arise depending on the size and direction of the forecast error. The investment propensity declines if the realized situation is worse than expected. However, firms do not adjust investment if the realized situation is better than expected suggesting that the uncertainty component of the forecast error counteracts good surprises of unexpectedly favorable business conditions. This asymmetric mechanism can be one explanation behind slow recovery following crises

A Note of Caution on Quantifying Banks' Recapitalization Effects

Unconventional monetary policy measures like asset purchase programs aim to reduce certain securities' yield and alter financial institutions' investment behavior. These measures increase the institutions' market value of securities and add to their equity positions. We show that the extent of this recapitalization effect crucially depends on the securities' accounting and valuation methods, country-level regulation, and maturity structure. We argue that future research needs to consider these factors when quantifying banks' recapitalization effects and consequent changes in banks' lending decisions to the real sector