Franziska Bremus

Big banks and macroeconomic outcomes: Theory and cross-country evidence of granularity

Does the mere presence of big banks affect macroeconomic outcomes? Gabaix (2011) shows that idosyncratic shocks can have aggregate effects if the distribution of firm sizes in manufacturing follows a power law distribution. Our contribution is two-fold. First, we expand the theory of granularity to encompass the Bertrand competition frequently used in models of banking. Using a model with banks of heterogenous size who charge endogenous markups, we show under which conditions granular effects emerge. Second, we empirically assess the relevance of granularity effects in banking using a linked micro-macro dataset of more than 80 countries for the years 1996-2009. We show that the banking sector is granular, i.e. the right tail of the bank size distribution follows a power law. Also, the presence of big banks as measured by high market concentration magnifies the effect of idiosyncratic shocks on loan growth. Through this channel, idiosyncratic shocks affecting large banks impact upon macroeconomic outcomes. This effect is particularly important for countries with less developed banking systems.

Drivers of Structural Change in Cross-Border Banking Since the Global Financial Crisis

The paper analyzes the effects of changes to regulatory policy and to monetary policy on cross-border bank lending since the global financial crisis. Cross-border bank lending has decreased, and the home bias in the credit portfolio of banks has risen sharply, especially among banks in the euro area. Our results suggest that expansionary monetary policy in the source countries – as measured by the change in reserves held at central banks – has encouraged cross-border lending, both in euro area and non-euro area countries. Regarding regulatory policy, increases in financial supervisory power or independencve of the supervisory authorities have encouraged credit outflows from source countries. The findings thus underline the importance of regulatory arbitrage as a driver of cross-border bank flows since the global financial crisis. However, in the euro area, arbitrage in capital stringency was linked to lower cross-border lending since the crisis.

Cross-Border Banking, Bank Market Structures and Market Power: Theory and Cross-Country Evidence

Patterns in cross-border banking have changed since the global financial crisis. This may affect domestic bank market structures and macroeconomic stability in the longer term. In this study, I theoretically and empirically analyze how different modes of cross-border banking impact bank concentration. I use a two- country general equilibrium model with heterogeneous banks developed by De Blas and Russ (2010) to grasp the effect of cross-border lending and foreign direct investment in the banking sector on bank market structures. The model suggests that both cross-border lending and bank FDI mitigate concentration. Empirical evidence from a linked micro-macro panel dataset of 18 OECD countries supports the theoretical predictions: higher volumes of bank FDI and of cross-border lending coincide with lower Herfindahl-indexes in bank credit markets.

Unemployment and Portfolio Choice: Does Persistence Matter?

We use a life cycle model of consumption and portfolio choice to study the effects of social security on the investment decisions of households for the European case. Our model is mainly based on the one developed by Cocco, Gomes, and Maenhout (2005). We extend it by unemployment risk using Markov chains to model the transition between different employment states. In contrast to most models in the life cycle literature, our model allows for three different states, namely employment, short-term as well as long-term unemployment. This allows us to examine the effects of persistence in the unemployment process on portfolio choice. Our main findings are, first, that in case of short-term unemployment only, social security systems as those established in the EU are able to offset the negative impact of unemployment risk on the portfolio-share invested in risky assets. Second, the simulation results reveal that when allowing for long-term unemployment the equity-share is suppressed, especially for young investors. We show that this negative effect of unemployment is mainly driven by its persistence.

Banking Market Structure and Macroeconomic Stability: Are Low-Income Countries Special?

Does the structure of banking markets affect macroeconomic volatility and, if yes, is this link different in low-income countries? Banking markets in low-income countries differ from those in developed market economies. Banking systems in lower-income countries are typically smaller and less open. In this paper, we explore the channels through which the structure of banking markets affects macroeconomic volatility. Our research has three main findings. First, we study the relevance of granular effects: if the degree of market concentration in the banking sector is sufficiently high, idiosyncratic volatility at the bank-level can impact aggregate volatility. We find weak evidence for a link between granular banking sector volatility and macroeconomic fluctuations. Second, a higher share of domestic credit to GDP coincides with higher volatility in the short run. Third, a higher level of cross-border asset holdings, i.e. a higher degree of de facto financial integration, increases volatility in low-income countries.

Financial Integration and Macroeconomic Stability: What Role for Large Banks?

This study assesses how banking sector integration and especially cross-border lending affect macroeconomic stability. I use a two-country general equilibrium model with heterogeneous banks that are hit by idiosyncratic shocks. According to the concept of granularity, idiosyncratic shocks to large firms (or: banks) do not have to cancel out under a skewed distribution of firm sizes. Given the highly skewed distribution of bank sizes, macroeconomic stability may thus be affected by shocks to large banks. Hence, to grasp the impact of financial liberalization on aggregate fluctuations, the presence of large banks as measured by high concentration in the banking industry has to be accounted for. I study the role of different forms of banking sector integration - i.e. arms-length crossborder lending versus lending via foreign affiliates - for the stability of aggregate lending. I find that banking sector integration decreases the aggregate volatility of lending due to intensified competition. The model implies that cross-border lending is more stable under lending via foreign affiliates than under arms-length cross-border lending.

Bank-specific shocks and house price growth in the U.S

This paper investigates the link between mortgage supply shocks at the banklevel and regional house price growth in the U.S. using micro-level data on mortgage markets from the Home Mortgage Disclosure Act for the 1990-2014 period. Our results suggest that bank-specific mortgage supply shocks indeed affect house price growth at the regional level. The larger the idiosyncratic shocks to newly issued mortgages, the stronger is house price growth. We show that the positive link between idiosyncratic mortgage shocks and regional house price growth is very robust and economically meaningful, however not very persistent since it fades out after two years.

Don't stop me now: the impact of credit market fragmentation on firms' financing constraints

This paper investigates how the withdrawal of banks from their cross-border business impacted the borrowing costs of European firms since the crisis. We combine aggregate information on total and cross-border credit with firm-level survey data for the period 2010 - 2014. We find that the decline in cross-border lending led to a deterioration in the borrowing conditions of small firms. In countries with more pronounced reductions in cross-border credit inflows, the likelihood of a rise in firms’ external financing costs has increased. This result is mainly driven by the interbank channel, which plays a crucial role in transmitting shocks to the real sector across borders.