Finance and Insurance Seminar WS 2016/2017

Tuesday, 12:15-13:15 in the Faculty Lounge, Juridicum, Adenauerallee 24-42, 53113 Bonn


Februar 2, 2017
16:00 Faculty Lounge, Juridicum
Special Talk Finance
Orkun Saka, City Univ. London , Cass Business School: “Domestic Banks as Lightning Rods? Home Bias during Eurozone Crisis”

Abstract: Governments and domestic banks in Europe have attracted criticism due to heightening inclination of banks to hold more local sovereign debt in the midst of the crisis, which has been interpreted as an evidence of financial repression or moral suasion. By using a novel dataset on bank-level exposures of sovereign and private debt covering the entire Eurozone crisis, I first confirm that sovereign debt has been reallocated from foreign to domestic banks at the peak of the crisis. Furthermore, this reallocation has been especially visible for banks as opposed to other domestic private agents and cannot be explained by the risk-shifting tendency of the banks located in troubled countries. However, in contrast with the previous literature focusing only on sovereign debt, I show that banks’ private sector exposures have (at least) equally suffered from a rising home bias. Finally, I present a direct information channel and demonstrate that foreign banks - free from moral suasion - located in informationally-closer territories have relatively increased their exposures to crisis-countries.


Februar 1, 2017
12:00 Faculty Lounge, Juridicum
Special Talk Finance
Eva Schliephake, Harvard Univ. and Univ. Bonn: “Unique Equilibrium in Market-Triggered Contingent Capital”

Abstract: We show that multiple equilibria in market-triggered contingent capital can largely be ruled out if a bank’s asset value is not common knowledge. Financial intermediation theory lends support to the argument that a bank’s assets are opaque and therefore not common knowledge. In a global games setup we show that private uncertainty about the true asset value of a bank secures a unique equilibrium, when multiple equilibria would exist otherwise. Our results open up the possibility for market-triggered contingent capital that does not abide to the ”no value transfer” restriction.


Januar 30, 2017
16:00 Faculty Lounge, Juridicum
Special Talk Finance
Cornelius Schmidt, Norwegian School of Economics, European Commission: “The Causal Impact of Distance on Bank Lending”

Abstract: We exploit exogenous shocks to the distance between corporate borrowers and banks to analyze the role of distance in commercial bank lending. We find that a reduction in travel time due to improved infrastructure increases the likelihood of initiating a new borrowing relationship, evidence that closer distance creates a surplus from lower transaction costs. In existing lending relationships, however, banks capture a fraction of this surplus by increasing interest rates. Larger changes in distance are associated with stronger eff ects and banks with higher market power capture a larger fraction of the surplus.


Januar 25, 2017
10:00 Faculty Lounge, Juridicum
Special Talk Finance
Yuliyan Mitkov, Rutgers Univ.New Jersey: “Inequality and Financial Fragility”

Abstract: I study how the distribution of wealth influences the government’s response to a banking crisis and the fragility of the financial system. When the wealth distribution is unequal, the government’s bailout policy during a systemic crisis will be shaped in part by distributional concerns. In particular, government guarantees of deposits will tend to be credible for relatively poor investors, but may not be credible for wealthier investors. As a result, wealthier investors will have a stronger incentive to panic and, in equilibrium, the institutions in which they invest are more likely to experience a run and receive a bailout. Thus, without political frictions and under a government that is both benevolent and utilitarian, bailouts will tend to benefit wealthy investors at the expense of the general public. Rising inequality can strengthen this pattern. In some cases, more progressive taxation reduces financial fragility and can even raise equilibrium welfare for all agents.


January 24, 2017
Hans Degryse
, KU Leuven: "To Ask or Not To Ask? Collateral versus Screening in Lending Relationships" (joint with Artashes Karapetyanz and Sudipto Karmakar)

Abstract: Using a comprehensive database on loan contracts, we study the impact of bank-firm  relationships on collateral requirements both at the beginning of the relationship and over  time, in good and in bad times. First, we document that when a borrower is loyal and has a long relationship potential, the bank is more likely to off er unsecured loans at the beginning of the relationship. At the same time, collateral requirements go down over the course of the relationship. Second, by studying the impact of an unexpected mandatory increase in risk-weighted capital requirements in 2011-12, we fi nd that a ffected banks engaged in safer, more collateralized lending, but less so for borrowers with long relationship potential, both at the beginning as well as over the course of the relationship. The results suggest that relationship banks are important for alleviating credit access, especially for young, collateral-constraint businesses.


Januar 18, 2017
12:00 Faculty Lounge, Juridicum
Special Talk Finance
Vahid Saadi, Goethe Univ. of Frankfurt and IWH: “Mortgage Supply and the US Housing Boom: TheRole of the Community Reinvestment Act”

Abstract: This paper studies the role of the Community Reinvestment Act (CRA) in the recent US housing boom-bust cycle. Using a difference-in-differences matching estimation, I find that the enhancement of CRAenforcement in 1998 caused a 7.7 percentage points increase in annual growth rate of mortgage lending byCRA-regulated banks to CRA-eligible census tracts relative to a group of similar-income CRA-ineligiblecensus tracts within the same state. Financial institutions which are not subject to the CRA, however, donot show any change in their mortgage supply between these two types of census tracts after 1998. I takeadvantage of this exogenous shift in mortgage supply within an instrumental variable framework toidentify the causal effect of mortgage supply on housing prices. I find that every 1 percentage point higherannual growth rate of mortgage supply leads to 0.3 percentage points higher annual growth rate of housingprices. Reduced form regressions show that CRA-eligible neighborhoods experienced higher house pricegrowth during the boom and sharper decline during the bust period. I use placebo tests to confirm that thiseffect is in fact channeled through the shift in mortgage supply by CRA-regulated banks and not byunobserved demand factors. Furthermore, my results indicate that CRA-induced mortgages went toborrowers with lower FICO scores, carried higher interest rates, and encountered more frequentdelinquencies.


January 17, 2017
Sebastian Gryglewicz
, Erasmus University Rotterdam: "Growth Options, Incentives, and Pay-for-Performance: Theory and Evidence"

Abstract: When firm value is non-linear in manager effort, pay-for-performance, measured as the sensitivity of manager compensation to firm value, is not a sufficient statistic for the strength of managerial incentives.  To demonstrate this effect, we characterize the optimal contract between an investor and a risk-averse manager in the presence of a lumpy investment option.  In our model, increasing the size of the growth option can decrease pay-performance sensitivity despite always increasing managerial effort and incentives.  Low pay-performance sensitivity is consistent with higher effort and incentives because increasing the size of the growth opportunity increases the sensitivity of firm value to managerial effort. We document new empirical evidence consistent with our model.  In a within firm analysis, a one standard deviation increase in Market-to-Book, a proxy for the presence of growth options, is associated with a roughly 6.5% decrease in Jensen's (1990) pay-performance sensitivity, as measured by dollar changes in manager wealth to dollar changes in firm value.


Januar 11, 2017
11:00 Faculty Lounge, Juridicum
Special Talk Finance
Daniel Streitz, Humboldt Univ. Berlin: “Managerial Biases and Debt Contract Design:TheCase of Syndicated Loans”

Abstract: We examine whether managerial biases such as overconfidence impact the use of performance-pricingprovisions in loan contracts (PSD). Managers with biased views may issue PSD because they consider thisform of debt to be mispriced. Our evidence shows that managers with behavioral biases are more likely toissue rate-increasing PSD than regular debt. They choose PSD with steeper performance-pricing schedulesthan rational managers. We reject the possibility that biased managers have positive inside informationand use PSD for signaling. Finally, firms run by biased managers appear to benefit less from PSD ex postthan firms run by rational managers.


December 20, 2016
Markus Pelger
, Stanford University: "Estimating Latent Asset-Pricing Factors" (joint with Martin Lettau)

Abstract: We develop an estimator for latent factors in a large-dimensional panel of financial data that can explain expected excess returns. Statistical factor analysis based on Principal Component Analysis (PCA) has problems identifying factors with a small variance that are important for asset pricing. Our estimator searches for factors with a high Sharpe-ratio that can explain both the expected return and covariance structure. We derive the statistical properties of the new estimator based and show that our estimator can find asset-pricing factors, which cannot be detected with PCA, even if a large amount of data is available. Applying the approach to portfolio and stock data we find factors with Sharpe-ratios more than twice as large as those based on conventional PCA. Our factors accommodate a large set of anomalies better than notable four- and five-factor alternative models.


December 06, 2016
Zacharias Sautner, Frankfurt School of Finance & Management:"The Retention Effects of Unvested Equity: Evidence from Accelerated Option Vesting"

Please note: This is a LawEcon Workshop, which is jointly organized by the Graduate School of Economics, the Law Faculty and the Max-Planck-Institute for Research on Collective Goods taking place. The workshop meets on Tuesdays 18:00 at Juridicum, Room 0.017

Abstract: We document that firms can effectively retain executives by granting deferred equity pay. We show this by analyzing a unique regulatory change (FAS 123-R) that prompted 720 firms to suddenly eliminate stock option vesting periods. This allowed CEOs to keep an additional $1.5 million in equity when departing the firm, and we find that voluntary CEO departure rates subsequently rose from 6% to 19%. Our identification strategy exploits FAS 123-R's almost-random timing, which was staggered by firms' fiscal year ends. Firms that experienced departures suffered negative stock price reactions, and responded by increasing compensation for remaining and newly hired executives.


November 21, 2016
Markus Brunnermeier
, Princeton University: "The Euro and the Battle of ideas"

Please note: This is a Joint Seminar of the Economics Departments in Bonn & Cologne taking place in Lecture Hall F on Monday, November 21


November 15, 2016
Rajkamal Iyer, MIT Sloan School of Management: "The Run for Safety: Financial Fragility and Deposit Insurance"

Abstract: We study a run on uninsured deposits in Danish banks triggered by a reform that limited deposit insurance coverage. Using a unique dataset with information about all individual accounts in Danish banks, we show that the reform caused a 50% decrease in deposits above the insurance limit in non-systemic banks, but a much smaller decrease in systemic banks which experienced less withdrawals from uninsured accounts, but also more openings of new uninsured accounts. Our results highlight the significant risks from a differential reallocation of uninsured deposits across banks and, in turn, the need for high insurance limits during a crisis.


November 8, 2016
Farzad Saidi
, Stockholm School of Economics: “Life Below Zero: Bank Lending Under Negative Policy Rates”

Abstract: This paper studies the transmission of negative monetary-policy rates via the lending behavior of banks. Unlike for positive rates, the transmission of negative rates depends on banks' funding structure. High-deposit banks take on more risk and lend less than low-deposit banks. Part of the risk taking comes in the form of new syndicated loans to risky firms without such loans previously, and it is limited to poorly-capitalized banks. Safe borrowers switch from high-deposit to low-deposit banks. The new risky borrowers appear financially constrained, and use the new funding to invest. For identification, we rely on a difference-in-differences approach. Banks with different reliance on deposit funding experience a different pass-through of negative policy rates. To isolate borrowers from interest-rate changes, we use lenders located in a different currency zone. A placebo at the time when policy rates fall -- but are still positive -- shows no effect. The results point to distributional consequences of negative policy rates with potential risks to financial stability.


October 18, 2016
, University of Bonn: