Finance and Insurance Seminar WS 2017/2018
Tuesday, 12:15-13:30 in the Faculty Lounge, Juridicum, Adenauerallee 24-42, 53113 Bonn
January 30, 2018: Michela Altieri (VU Amsterdam)
“Debt Boundaries Matter: Evidence From the Subsidiary Debt”
I exploit the introduction of an accounting reform in the US to investigate whether the presence of subsidiary debt affects the cost of borrowing of conglomerates. The accounting reform forces some firms to restate from standalone firms (declaring one segment unit) to conglomerates (declaring multiple segment units). I find that restating conglomerates suffer a 16% increase in the bond spread if they do not incorporate some debt on their segment units as separate legal entities, or subsidiaries. The effect is concentrated on firms with a high dispersion in the growth opportunities in the pre-reform period. This is consistent with the hypothesis that subsidiary prevents managers of low-growth divisions to capture part of the surplus of high-growth divisions when divisions differ in resource potential.
January 24, 2018: Giorgia Barboni (Princeton University)
'' Knowing what’s good for you: Can a repayment flexibility option in microfinance contracts improve repayment rates and business outcomes?''
Repayment flexibility in microfinance contracts can enable clients to undertake higher return projects that have more irregular payment streams. But there is the risk of increased default due to time-inconsistent or excessively risky borrower behavior. How severe is this default risk and can it be mitigated simply by using contract price as a screening mechanism? To examine this we implement a randomized experiment with microfinance borrowers in Uttar Pradesh, India. In treated branches, borrowers select between the standard, rigid contract and a more expensive flexible contract. In control branches, customers are only offered the standard rigid contract. Clients in treated branches have higher repayment rates than control branches. We also find higher business sales in treatment compared to control group. Selection is an important mechanism – in treated branches, time-consistent and more financially disciplined borrowers are significantly more likely to opt for the flexible repayment schedule.
January 23, 2018: Olivier Darmouni (Columbia University)
"Information and Coordination in Credit Markets" (with Andrew Sutherland)
This paper estimates the effect of information sharing on lenders coordination using micro-data from a credit bureau. We embed a regression framework into a canonical model with dispersed information and show how to distinguish coordination from co-movement. Exploiting the staggered entry of lenders into the bureau, we find that, upon entry, lenders adjust their maturity towards what others are offering. This effect is robust to the inclusion of borrower-time and lender-time fixed effects. This coordination aspect of information sharing is not driven by run-like behavior of lenders. Instead, spillovers across borrowers seem to be at play: terms offered to a borrower are influenced by what others received, not simply by its previous credit record.
January 16, 2018: Christopher Hols (University of Bonn)
"The net interest margin and the branch network"
The low interest rate environment has depressed banks’ interest earnings in many western countries. This paper tests whether banks decrease their branching network following a reduction in the net interest margin. We use the abandonment of regulation Q as a regulatory induced funding shock that allowed but not forced banks to pay interest on demand deposits for the first time since 1933. For some banks, the funding shock was more severe as they financed their business to a lager degree with demand deposits, while other banks did so to a much lesser extent. Our results suggest that banks relying more on demand deposits decrease the amount of branches they operate with by around 10%. Further, those banks become less risky even through reducing their geographical expansion. This is achieved by decreasing the number of branches and the amount of new loans in areas with lower income. Our results shed light on the effect of the low interest rate environment on the bank branching network and banks soundness.
January 9, 2018: Marcin Kacperczyk (Imperial College London, Business School)
"Market Power and Price Informativeness"
The asset ownership structure in financial markets worldwide has been changing rapidly over the last few decades. Institutional investors, both active and passive, own a larger fraction of assets and the distribution of the ownership is more concentrated. We develop a general equilibrium portfolio-choice model with endogenous information acquisition and market power. We show that, in the cross section, an increase in active (passive) institutional ownership in- creases (decreases) price informativeness, and an increase in concentration of ownership leads to lower informativeness. In contrast to the cross-sectional results, the policy experiments of changing ownership structure indicate a non- monotonic relationship between the levels of ownership and price informative- ness. Further, we show that increasing the passive share of the market prompts active investors to adopt learning strategies that exacerbate the reduction in aggregate price informativeness. We conclude that any policy targeting ownership structure should factor in its effects on welfare through price informativeness.
December 19, 2017: Antonis Kotidis (Uni Bonn & Bank of England)
"Macroprudential Policy and Repo Market Intermediation"
This paper studies the impact of the leverage ratio on dealer-client repo intermediation. We exploit a new and unique transaction-level dataset capturing the near-universe of Sterling Money Market trading in combination with a regulatory change in the UK affecting the leverage ratio. We find that dealer banks active in the Sterling Money Market and subject to the regulatory change offered lower rates and reduced the repo size to their smaller clients compared to dealer banks not affected by the change. Large clients and clients with a strong lending relationship were not affected. The adjustments occurred in both short and long-term repo. These results hold when controlling for dealer-time, client-time and dealer-client fixed effects. Overall, this paper shows that the leverage ratio impairs repo intermediation for small banks and non-bank financial institutions.
December 12, 2017: Nicola Limodio (Bocconi University)
"Bank Deposits and Liquidity Regulation: Evidence from Ethiopia"
The regulation of bank liquidity can create a commitment device on repaying depositors in bad states, if deposit insurance is absent. A theoretical model shows that liquidity regulation can: 1) stimulate a deposit inflow, moderating the limited liability inefficiency; 2) promote lending and branching, if deposit growth exceeds the intermediation margin decline. Our empirical test exploits an unexpected policy change, which fostered the liquid assets of Ethiopian banks by 25% in 2011. Exploiting the cross-sectional heterogeneity in bank size and bank-level databases, we find an increase in deposits, loans and branches, with no decline in profits.
December 5, 2017: Oliver Rehbein (IWH)
“Flooded through the back door: Firm-level effects of banks' lending shifts”
This paper investigates whether banks, especially those with little regulatory capital, transmit unexpected regional shocks via the banking system to otherwise unaffected firms. I identify banks exposed to a large-scale 2013 flood disaster in Germany via their customer relationships and then connect these banks to firms located in non-flooded regions. Such exclusively indirectly disaster-exposed firms thus experience an exogenous funding shock, as their banks shift lending towards disaster areas. As a result, these firms experience a drop in investment and fixed assets by 10-15\%, compared to firms in the same non-flood region without a connection to a disaster-exposed bank. Importantly, banks with low capital ratios propagate the disaster shock significantly more. Firms connected to badly capitalized banks experience a significantly higher reduction in investment, employment and fixed assets. This finding underscores the importance of bank capital for the resilience of financial systems, even for absorbing smaller, real-economic shocks.
November 21, 2017: Yulian Mitkov (University of Bonn)
„Bailouts, Bail-ins and Banking Crises“
We study the interaction between a government's bailout policy during a banking crisis and individual banks' willingness to impose losses on (or "bail in") their investors. Banks in our model hold risky assets and are able to write complete, state-contingent contracts with investors. In the constrained e cient allocation, banks experiencing a loss immediately bail in their investors and this bail-in removes any incentive for investors to run on the bank. In a competitive equilibrium, however, banks may not enact a bail-in if they anticipate being bailed out. In some cases, the decision not to bail in investors provokes a bank run, creating further distortions and leading to even larger bailouts. We ask what macroprudential policies are useful when bailouts crowd out bail-ins.
November 14, 2017: Toni Ahnert (Bank of Canada and Finance Theory Group)
"Intermediaries as Safety Providers" (with Enrico Perotti, University of Amsterdam and CEPR)
Preferences for safety can explain the stable portfolio share of safe assets that is hard to explain with transaction needs or liquidity insurance. We propose a model of investor preferences around a reference point and heterogeneous self-insurance options. Intermediaries carve safe claims out of risky investment backed by enough loss-absorbing claims. While delegation of risk choices creates a conflict among investors, intermediaries can resolve it by issuing safe demandable debt, since the option to withdraw upon demand implements a safe payoff in all states. As safety needs increase, intermediaries expand the supply of safe claims, leading to more investment and liquidation in risky states. When competition is imperfect or the risk-absorption capacity is low, the safety premium also increases.