The European Commission has published a Green Paper outlining possible measures to create a singl... more The European Commission has published a Green Paper outlining possible measures to create a single market for capital in Europe. Our comments on the Commission's capital markets union project use the functional finance approach as a starting point. Policy decisions, according to the functional finance perspective, should be essentially neutral (agnostic) in terms of institutions (level playing field). Our main angle, from which we assess proposals for the capital markets union agenda, are information asymmetries and the agency problems (screening, monitoring) which arise as a result. Within this perspective, we make a number of more specific proposals.
We raise some critical points against a naïve interpretation of “green finance” products and stra... more We raise some critical points against a naïve interpretation of “green finance” products and strategies. These critical insights are the background against which we take a closer look at instruments and policies that might allow green finance to become more impactful. In particular, we focus on the role of a taxonomy and investor activism. We also describe the interaction of government policies with green finance practice – an aspect, which has been mostly neglected in policy debates but needs to be taken into account. Finally, the special case of green government bonds is discussed.
The Center for Financial Studies is a nonprofit research organization, supported by an associatio... more The Center for Financial Studies is a nonprofit research organization, supported by an association of more than 120 banks, insurance companies, industrial corporations and public institutions. Established in 1968 and closely affiliated with the University of Frankfurt, it provides a strong link between the financial community and academia. The CFS Working Paper Series presents the result of scientific research on selected topics in the field of money, banking and finance. The authors were either participants in the Center´s Research Fellow Program or members of one of the Center´s Research Projects. If you would like to know more about the Center for Financial Studies, please let us know of your interest.
The Center for Financial Studies is a nonprofit research organization, supported by an associatio... more The Center for Financial Studies is a nonprofit research organization, supported by an association of more than 120 banks, insurance companies, industrial corporations and public institutions. Established in 1968 and closely affiliated with the University of Frankfurt, it provides a strong link between the financial community and academia. The CFS Working Paper Series presents the result of scientific research on selected topics in the field of money, banking and finance. The authors were either participants in the Center´s Research Fellow Program or members of one of the Center´s Research Projects. If you would like to know more about the Center for Financial Studies, please let us know of your interest.
This paper provides a systematic analysis of individual attitudes towards ambiguity, based on lab... more This paper provides a systematic analysis of individual attitudes towards ambiguity, based on laboratory experiments. The design of the analysis captures different degrees of ambiguity in various settings, and it allows to disentangle attitudes towards risk and attitudes towards ambiguity. In addition to individual attitudes, the experiments also elicit expectations about other participants’ attitudes, allowing us to relate own behavior to expectations about others. New measures are introduced for both, the degree of ambiguity in a situation and ambiguity aversion. Ambiguity is embedded in standard utility theory and a parameter of ambiguity aversion is estimated and contrasted to the parameter of risk aversion. The analysis provides a test of theoretical models of ambiguity aversion. The main findings are that ambiguity aversion on average is much more pronounced than human aversion against risk and that it is very different across individuals. Moreover, while most theoretical work...
This note discusses the basic economics of central clearing for derivatives and the need for a pr... more This note discusses the basic economics of central clearing for derivatives and the need for a proper regulation, supervision and resolution of central counterparty clearing houses (CCPs). New regulation in the U.S. and in Europe renders the involvement of a central counterparty mandatory for standardized OTC derivatives’ trading and sets higher capital and collateral requirements for non-centrally cleared derivatives. From a macrofinance perspective, CCPs provide a trade-off between reduced contagion risk in the financial industry and the creation of a significant systemic risk. However, so far, regulation and supervision of CCPs is very fragmented, limited and ignores two important aspects: the risk of consolidation of CCPs on the one side and the competition among CCPs on the other side. i) As the economies of scale of CCP operations in risk and cost reduction can be large, they provide an argument in favor of consolidation, leading at the extreme to a monopoly CCP that poses the...
This note discusses the basic economics of central clearing for derivatives and the need for a pr... more This note discusses the basic economics of central clearing for derivatives and the need for a proper regulation, supervision and resolution of central counterparty clearing houses (CCPs). New regulation in the U.S. and in Europe renders the involvement of a central counterparty mandatory for standardized OTC derivatives' trading and sets higher capital and collateral requirements for non-centrally cleared derivatives. From a macrofinance perspective, CCPs provide a trade-off between reduced contagion risk in the financial industry and the creation of a significant systemic risk. However, so far, regulation and supervision of CCPs is very fragmented, limited and ignores two important aspects: the risk of consolidation of CCPs on the one side and the competition among CCPs on the other side. i) As the economies of scale of CCP operations in risk and cost reduction can be large, they provide an argument in favor of consolidation, leading at the extreme to a monopoly CCP that poses...
Some of the most widely expressed myths about the German financial system are concerned with the ... more Some of the most widely expressed myths about the German financial system are concerned with the close ties and intensive interaction between banks and firms, often described as Hausbank relationships. Links between banks and firms include direct shareholdings, board representation, and proxy voting and are particularly significant for corporate governance. Allegedly, these relationships promote investment and improve the performance of firms. Furthermore, German universal banks are believed to play a special role as large and informed monitoring investors (shareholders). However, for the very same reasons, German universal banks are frequently accused of abusing their influence on firms by exploiting rents and sustaining the entrenchment of firms against efficient transfers of firm control. In this paper, we review recent empirical evidence regarding the special role of banks for the corporate governance of German firms. We differentiate between large exchangelisted firms and small...
The target balances generate discussions in the public and among economists who come to very diff... more The target balances generate discussions in the public and among economists who come to very different results in their analyses. An overview of the most important arguments
Die Target-Salden sorgen für Diskussionen in der Öffentlichkeit und unter Ökonomen, die in ihren ... more Die Target-Salden sorgen für Diskussionen in der Öffentlichkeit und unter Ökonomen, die in ihren Analysen zu sehr unterschiedlichen Ergebnissen kommen. Eine Übersicht der wichtigsten Argumente
The Center for Financial Studies is a nonprofit research organization, supported by an associatio... more The Center for Financial Studies is a nonprofit research organization, supported by an association of more than 120 banks, insurance companies, industrial corporations and public institutions. Established in 1968 and closely affiliated with the University of Frankfurt, it provides a strong link between the financial community and academia. The CFS Working Paper Series presents the result of scientific research on selected topics in the field of money, banking and finance. The authors were either participants in the Center´s Research Fellow Program or members of one of the Center´s Research Projects. If you would like to know more about the Center for Financial Studies, please let us know of your interest.
The performance of a sample of German open-end mutual funds is analyzed, using monthly observatio... more The performance of a sample of German open-end mutual funds is analyzed, using monthly observations which cover the p riod 1987-1993. We show that the risk-adjusted performance of these funds varies significantly in cross-section. We provide evidence that these performance differences translate into changes in market shares, allowing better funds to grow faster than poor performers. A specification test supports the hypothesis that households base their investment decisions on risk-adjusted returns rather than on raw returns.
This note proposes a new set-up for the fund backing the Single Resolution Mechanism (SRM). The p... more This note proposes a new set-up for the fund backing the Single Resolution Mechanism (SRM). The proposed fund is a Multi-Tier Resolution Fund (MTRF), restricting the joint and several supranational liability to a limited range of losses, bounded by national liability at the upper and the lower end. The layers are, in ascending order: a national fund (first losses), a European fund (second losses), the national budget (third losses), the ESM (fourth losses, as a backup for sovereigns). The system works like a reinsurance scheme, providing clear limits to European-level joint liability, and therefore confining moral hazard. At the same time, it allows for some degree of risk sharing, which is important for financial stability if shocks to the financial system are exogenous (e.g., of a supranational macroeconomic nature). The text has four parts. Section A describes the operation of the Multi-Tier Resolution Fund, assuming the fund capital to be fully paid-in (Steady State). Section B ...
The publication of the Liikanen Group's final report in October 2012 was surrounded by high e... more The publication of the Liikanen Group's final report in October 2012 was surrounded by high expectations regarding the implementation of the reform plans through the proposed measures that reacted to the financial and sovereign debt crises. The recommendations mainly focused on introducing a mild version of banking separation and the creation of the preconditions for bail-in measures. In this article, we present an overview of the regulatory reforms, to which the financial sector has been subject over the past years in accordance with the concepts laid out in the Liikanen Report. It becomes clear from our assessment that more specific steps have yet to be taken before the agenda is accomplished. In particular, bail-in rules must be implemented more consistently. Beyond the question of the required minimum, the authors develop the notion of a maximum amount of liabilities subject to bail-in. The combination of both components leads to a three-layer structure of bank capital: a ba...
The European Central Bank (ECB) increased the emergency liquidity assistance (ELA) for Greek bank... more The European Central Bank (ECB) increased the emergency liquidity assistance (ELA) for Greek banks from €50 billion in February 2015 to approximately €90 billion in June 2015. Its actions were accompanied by a discussion among academics, politicians and practitioners regarding the legitimacy of the ELA. Some have even accused the ECB of deliberately delaying the bankruptcy filing of already insolvent Greek banks. We take the claim regarding insolvency delay as an opportunity to highlight the underlying economics of the ELA program and discuss its legitimacy in the current situation. We start by characterizing the complex interrelationship of the European Union, the ECB and the Greek banks through the lens of financial economics, with a particular focus on the political economy of a monetary union with incomplete fiscal union (or fiscal consolidation). Combining these two issues, we examine the decision of the ECB to continue the provision of ELA to Greek banks. Our conclusions, draw...
Von Februar bis Juni 2015 hat die Europaische Zentralbank (EZB) die Notfall-Liquiditatshilfen (em... more Von Februar bis Juni 2015 hat die Europaische Zentralbank (EZB) die Notfall-Liquiditatshilfen (emergency liquidity assistance, ELA) fur griechische Banken von 50 auf etwa 90 Milliarden Euro ausgeweitet. Dies hat zu einer Diskussion unter Wissenschaftlern, Politikern und Praktikern gefuhrt, ob diese Liquiditatshilfen rechtmasig sind. Es wurde der Vorwurf erhoben, die EZB trage bewusst zu einer Konkursverschleppung der bereits insolventen griechischen Banken bei. Wir nehmen diesen Vorwurf zum Anlass, die Grundsatze des ELA-Programms genauer zu betrachten und die Frage zu diskutieren, ob das Programm in der aktuellen Situation rechtmasig war. Zunachst beschreiben wir hierfur aus finanzwirtschaftlicher Perspektive die komplexe Beziehung zwischen der Europaischen Union, der EZB und den griechischen Banken. Dabei gehen wir insbesondere auf die wirtschaftspolitischen Grundsatze einer Wahrungsunion mit einer unvollstandigen Fiskalunion (oder Haushaltskonsolidierung) ein. Vor diesem Hintergr...
In this paper we propose a way forward towards increased financial resilience in times of growing... more In this paper we propose a way forward towards increased financial resilience in times of growing disagreement concerning open borders, free trade and global regulatory standards. In light of these concerns, financial resilience remains a highly valued policy objective. We wish to contribute by suggesting an agenda of concrete, do-able steps supporting an enhanced level of resilience, combined with a deeper understanding of its relevance in the public domain. First, remove inconsistencies across regulatory rules and territorial regimes, and ensure their credibility concerning implementation. Second, discourage the use of financial regulatory standards as means of international competition. Third, give more weight to pedagogically explaining the established regulatory standards in public, to strengthen their societal backing.
The European Commission has published a Green Paper outlining possible measures to create a singl... more The European Commission has published a Green Paper outlining possible measures to create a single market for capital in Europe. Our comments on the Commission's capital markets union project use the functional finance approach as a starting point. Policy decisions, according to the functional finance perspective, should be essentially neutral (agnostic) in terms of institutions (level playing field). Our main angle, from which we assess proposals for the capital markets union agenda, are information asymmetries and the agency problems (screening, monitoring) which arise as a result. Within this perspective, we make a number of more specific proposals.
We raise some critical points against a naïve interpretation of “green finance” products and stra... more We raise some critical points against a naïve interpretation of “green finance” products and strategies. These critical insights are the background against which we take a closer look at instruments and policies that might allow green finance to become more impactful. In particular, we focus on the role of a taxonomy and investor activism. We also describe the interaction of government policies with green finance practice – an aspect, which has been mostly neglected in policy debates but needs to be taken into account. Finally, the special case of green government bonds is discussed.
The Center for Financial Studies is a nonprofit research organization, supported by an associatio... more The Center for Financial Studies is a nonprofit research organization, supported by an association of more than 120 banks, insurance companies, industrial corporations and public institutions. Established in 1968 and closely affiliated with the University of Frankfurt, it provides a strong link between the financial community and academia. The CFS Working Paper Series presents the result of scientific research on selected topics in the field of money, banking and finance. The authors were either participants in the Center´s Research Fellow Program or members of one of the Center´s Research Projects. If you would like to know more about the Center for Financial Studies, please let us know of your interest.
The Center for Financial Studies is a nonprofit research organization, supported by an associatio... more The Center for Financial Studies is a nonprofit research organization, supported by an association of more than 120 banks, insurance companies, industrial corporations and public institutions. Established in 1968 and closely affiliated with the University of Frankfurt, it provides a strong link between the financial community and academia. The CFS Working Paper Series presents the result of scientific research on selected topics in the field of money, banking and finance. The authors were either participants in the Center´s Research Fellow Program or members of one of the Center´s Research Projects. If you would like to know more about the Center for Financial Studies, please let us know of your interest.
This paper provides a systematic analysis of individual attitudes towards ambiguity, based on lab... more This paper provides a systematic analysis of individual attitudes towards ambiguity, based on laboratory experiments. The design of the analysis captures different degrees of ambiguity in various settings, and it allows to disentangle attitudes towards risk and attitudes towards ambiguity. In addition to individual attitudes, the experiments also elicit expectations about other participants’ attitudes, allowing us to relate own behavior to expectations about others. New measures are introduced for both, the degree of ambiguity in a situation and ambiguity aversion. Ambiguity is embedded in standard utility theory and a parameter of ambiguity aversion is estimated and contrasted to the parameter of risk aversion. The analysis provides a test of theoretical models of ambiguity aversion. The main findings are that ambiguity aversion on average is much more pronounced than human aversion against risk and that it is very different across individuals. Moreover, while most theoretical work...
This note discusses the basic economics of central clearing for derivatives and the need for a pr... more This note discusses the basic economics of central clearing for derivatives and the need for a proper regulation, supervision and resolution of central counterparty clearing houses (CCPs). New regulation in the U.S. and in Europe renders the involvement of a central counterparty mandatory for standardized OTC derivatives’ trading and sets higher capital and collateral requirements for non-centrally cleared derivatives. From a macrofinance perspective, CCPs provide a trade-off between reduced contagion risk in the financial industry and the creation of a significant systemic risk. However, so far, regulation and supervision of CCPs is very fragmented, limited and ignores two important aspects: the risk of consolidation of CCPs on the one side and the competition among CCPs on the other side. i) As the economies of scale of CCP operations in risk and cost reduction can be large, they provide an argument in favor of consolidation, leading at the extreme to a monopoly CCP that poses the...
This note discusses the basic economics of central clearing for derivatives and the need for a pr... more This note discusses the basic economics of central clearing for derivatives and the need for a proper regulation, supervision and resolution of central counterparty clearing houses (CCPs). New regulation in the U.S. and in Europe renders the involvement of a central counterparty mandatory for standardized OTC derivatives' trading and sets higher capital and collateral requirements for non-centrally cleared derivatives. From a macrofinance perspective, CCPs provide a trade-off between reduced contagion risk in the financial industry and the creation of a significant systemic risk. However, so far, regulation and supervision of CCPs is very fragmented, limited and ignores two important aspects: the risk of consolidation of CCPs on the one side and the competition among CCPs on the other side. i) As the economies of scale of CCP operations in risk and cost reduction can be large, they provide an argument in favor of consolidation, leading at the extreme to a monopoly CCP that poses...
Some of the most widely expressed myths about the German financial system are concerned with the ... more Some of the most widely expressed myths about the German financial system are concerned with the close ties and intensive interaction between banks and firms, often described as Hausbank relationships. Links between banks and firms include direct shareholdings, board representation, and proxy voting and are particularly significant for corporate governance. Allegedly, these relationships promote investment and improve the performance of firms. Furthermore, German universal banks are believed to play a special role as large and informed monitoring investors (shareholders). However, for the very same reasons, German universal banks are frequently accused of abusing their influence on firms by exploiting rents and sustaining the entrenchment of firms against efficient transfers of firm control. In this paper, we review recent empirical evidence regarding the special role of banks for the corporate governance of German firms. We differentiate between large exchangelisted firms and small...
The target balances generate discussions in the public and among economists who come to very diff... more The target balances generate discussions in the public and among economists who come to very different results in their analyses. An overview of the most important arguments
Die Target-Salden sorgen für Diskussionen in der Öffentlichkeit und unter Ökonomen, die in ihren ... more Die Target-Salden sorgen für Diskussionen in der Öffentlichkeit und unter Ökonomen, die in ihren Analysen zu sehr unterschiedlichen Ergebnissen kommen. Eine Übersicht der wichtigsten Argumente
The Center for Financial Studies is a nonprofit research organization, supported by an associatio... more The Center for Financial Studies is a nonprofit research organization, supported by an association of more than 120 banks, insurance companies, industrial corporations and public institutions. Established in 1968 and closely affiliated with the University of Frankfurt, it provides a strong link between the financial community and academia. The CFS Working Paper Series presents the result of scientific research on selected topics in the field of money, banking and finance. The authors were either participants in the Center´s Research Fellow Program or members of one of the Center´s Research Projects. If you would like to know more about the Center for Financial Studies, please let us know of your interest.
The performance of a sample of German open-end mutual funds is analyzed, using monthly observatio... more The performance of a sample of German open-end mutual funds is analyzed, using monthly observations which cover the p riod 1987-1993. We show that the risk-adjusted performance of these funds varies significantly in cross-section. We provide evidence that these performance differences translate into changes in market shares, allowing better funds to grow faster than poor performers. A specification test supports the hypothesis that households base their investment decisions on risk-adjusted returns rather than on raw returns.
This note proposes a new set-up for the fund backing the Single Resolution Mechanism (SRM). The p... more This note proposes a new set-up for the fund backing the Single Resolution Mechanism (SRM). The proposed fund is a Multi-Tier Resolution Fund (MTRF), restricting the joint and several supranational liability to a limited range of losses, bounded by national liability at the upper and the lower end. The layers are, in ascending order: a national fund (first losses), a European fund (second losses), the national budget (third losses), the ESM (fourth losses, as a backup for sovereigns). The system works like a reinsurance scheme, providing clear limits to European-level joint liability, and therefore confining moral hazard. At the same time, it allows for some degree of risk sharing, which is important for financial stability if shocks to the financial system are exogenous (e.g., of a supranational macroeconomic nature). The text has four parts. Section A describes the operation of the Multi-Tier Resolution Fund, assuming the fund capital to be fully paid-in (Steady State). Section B ...
The publication of the Liikanen Group's final report in October 2012 was surrounded by high e... more The publication of the Liikanen Group's final report in October 2012 was surrounded by high expectations regarding the implementation of the reform plans through the proposed measures that reacted to the financial and sovereign debt crises. The recommendations mainly focused on introducing a mild version of banking separation and the creation of the preconditions for bail-in measures. In this article, we present an overview of the regulatory reforms, to which the financial sector has been subject over the past years in accordance with the concepts laid out in the Liikanen Report. It becomes clear from our assessment that more specific steps have yet to be taken before the agenda is accomplished. In particular, bail-in rules must be implemented more consistently. Beyond the question of the required minimum, the authors develop the notion of a maximum amount of liabilities subject to bail-in. The combination of both components leads to a three-layer structure of bank capital: a ba...
The European Central Bank (ECB) increased the emergency liquidity assistance (ELA) for Greek bank... more The European Central Bank (ECB) increased the emergency liquidity assistance (ELA) for Greek banks from €50 billion in February 2015 to approximately €90 billion in June 2015. Its actions were accompanied by a discussion among academics, politicians and practitioners regarding the legitimacy of the ELA. Some have even accused the ECB of deliberately delaying the bankruptcy filing of already insolvent Greek banks. We take the claim regarding insolvency delay as an opportunity to highlight the underlying economics of the ELA program and discuss its legitimacy in the current situation. We start by characterizing the complex interrelationship of the European Union, the ECB and the Greek banks through the lens of financial economics, with a particular focus on the political economy of a monetary union with incomplete fiscal union (or fiscal consolidation). Combining these two issues, we examine the decision of the ECB to continue the provision of ELA to Greek banks. Our conclusions, draw...
Von Februar bis Juni 2015 hat die Europaische Zentralbank (EZB) die Notfall-Liquiditatshilfen (em... more Von Februar bis Juni 2015 hat die Europaische Zentralbank (EZB) die Notfall-Liquiditatshilfen (emergency liquidity assistance, ELA) fur griechische Banken von 50 auf etwa 90 Milliarden Euro ausgeweitet. Dies hat zu einer Diskussion unter Wissenschaftlern, Politikern und Praktikern gefuhrt, ob diese Liquiditatshilfen rechtmasig sind. Es wurde der Vorwurf erhoben, die EZB trage bewusst zu einer Konkursverschleppung der bereits insolventen griechischen Banken bei. Wir nehmen diesen Vorwurf zum Anlass, die Grundsatze des ELA-Programms genauer zu betrachten und die Frage zu diskutieren, ob das Programm in der aktuellen Situation rechtmasig war. Zunachst beschreiben wir hierfur aus finanzwirtschaftlicher Perspektive die komplexe Beziehung zwischen der Europaischen Union, der EZB und den griechischen Banken. Dabei gehen wir insbesondere auf die wirtschaftspolitischen Grundsatze einer Wahrungsunion mit einer unvollstandigen Fiskalunion (oder Haushaltskonsolidierung) ein. Vor diesem Hintergr...
In this paper we propose a way forward towards increased financial resilience in times of growing... more In this paper we propose a way forward towards increased financial resilience in times of growing disagreement concerning open borders, free trade and global regulatory standards. In light of these concerns, financial resilience remains a highly valued policy objective. We wish to contribute by suggesting an agenda of concrete, do-able steps supporting an enhanced level of resilience, combined with a deeper understanding of its relevance in the public domain. First, remove inconsistencies across regulatory rules and territorial regimes, and ensure their credibility concerning implementation. Second, discourage the use of financial regulatory standards as means of international competition. Third, give more weight to pedagogically explaining the established regulatory standards in public, to strengthen their societal backing.
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