Contributions published at Department of Banking and Finance (Pablo Koch Medina)

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The paper analyzes the relationship between bank competition and stability, with a specific focus on the Middle East and North Africa. Price competition has a positive effect on bank liquidity, as it induces self-discipline incentives on banks for the choice of bank funding sources and for the holding of liquid assets. On the other hand, price competition may have a potentially negative impact on bank solvency and on the credit quality of the loan portfolio. More competitive banks may be less solvent if the potential increase in the equity base—due to capital adjustments—is not large enough to compensate for the reduction in bank profitability. Also, banks subject to stronger competitive pressures may have a higher rate of nonperforming loans, if the increase in the risk-taking incentives from the lender’s side overcomes the decrease in the credit risk from the borrower’s side. In both cases, country-specific policies for market entry conditions—and for bank regulation and supervision—may significantly affect the sign and the size of the relationship. The paper suggests policy reforms designed to improve market contestability and to increase the quality and independence of prudential supervision.

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This paper studies social responsibility in the financial market under uncertainty. Using the COVID-19 induced stock market crash as a natural experiment, we present causal evidence for a significant market-wide increase in sentiment for and attention to socially responsible investments. An artefactual field experiment suggests three behavioral channels for this shift in preferences. First, investors view socially responsible assets as less risky and uncertain. Second, the crisis triggered an increase in prosocial preferences in general. Third, the affect heuristic, in which the emotional response acts as a mental shortcut in relation to a stimulus, triggers favorable expectations of socially responsible investment performance. Our insights provide evidence for the time varying nature of morality in the market and may explain the recently documented resilience of socially responsible stocks in times of market turmoil.

This study contributes to the current debate on central bank collateral frameworks. It relates to the idea that central bank collateral policies affect the types of securities being issued (Nyborg, 2016). It examines bond issuance patterns around downgrades of bank credit ratings to below a threshold uniquely important in the ECB's collateral eligibility rules. 58 out of 124 European banks lost their A- senior unsecured rating during the sample period 2007-2017. Banks fund an additional 3 % of total assets with covered bonds within the three years after the threshold downgrade (60 % of the unconditional mean). Market placed covered bond funding is mostly determined by bank ratings and bank business model, retained covered bond funding by the financial health of a bank. This article discusses the results in the context of the corporate finance literature, theories of asset encumbrance as well as the systemic implications.

Focusing on the QE program of the Eurosystem in the covered bond market, this study shows that yields of eligible and closely matched ineligible bonds diverge in response to central bank buying activity. The magnitude of this price pressure depends on the country of issuance and is not there in all euro area countries. In countries with high price pressure, banks issue abnormal amounts of bonds in the first two years after the start of the QE program, not before and not after. The source of price pressure is central bank buying activity as it is larger in countries with on average smaller bond sizes and its effect declines after persisting for 12 months as buying activity abates. These findings suggest mispricing between similar bonds is an important factor in explaining abnormal bond issuance during a QE program.

This paper investigates how mortgage credit conditions affect housing markets and the demand for homeownership. Using unique data on homeowners' listings and transactions and exploiting policy-driven changes in mortgage credit conditions in China, I provide empirical evidence that tightened mortgage credit conditions have a negative effect on housing demand and prices. Estimating a structural model of households' demand and supply of residential properties, I obtain measures for market liquidity and bargaining power of home buyers and sellers and find that mortgage interest rates and down payment requirements negatively affect the value of owning residential properties. With counterfactual experiments, I quantify the impact of mortgage interest rates, down payment requirements, property tax rates, and transaction tax rates on housing demand, supply, and prices. At the cost of a welfare loss for home buyers (owners), 1 percentage point higher mortgage interest rates (property tax rates) reduce demand-supply imbalance and decrease the average transaction price by 2.3% (1.9%), which cannot be achieved with higher transaction tax rates.

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