Upcoming Talks and Conferences (selection)
University of Bonn (Nov 13)
AFA (Atlanta, Jan 2019), AEA (Atlanta, Jan 2019, 4 papers), IBEFA (Atlanta, Jan 2019)
Follow me on twitter: @sascha_steffen
Current Academic and Non-Academic Appointments
Professor of Finance, Frankfurt School of Finance & Management, Since August 2017
Research Fellow Center for Financial Studies (CFS), Since 2013
Forschungsprofessor ("Professor of Research"), IWH - Halle Institute of Economic Research, 2014 - 2017
Member of the Schmalenbach-Arbeitskreis „Strategieentwicklung und Controlling in Banken“, Since 2015
Academic Advisory Board "Frankfurt Institute for Risk Management and Regulation (FIRM)", Since 2016
Associate Editor, Journal of Banking and Finance, Since 2017
Curriculum Vitae (September 2018)
2018 Stress Test
Pierret, D. and S. Steffen, 2018, Capital Shortfalls of European Banks following the 2018 Stress Test.
Abstract
The European Banking Authority (EBA) disclosed the effect of hypothetical losses in a stress scenario on bank capital ratios on November 2, 2018. We assess the capital adequacy of the participating banks based on these disclosures and using an alternative supervisory approach (the methodology used by U.S. supervisors in the Comprehensive Capital Analysis and Review (CCAR)) and a market-based approach to define capital shortfalls. The CCAR approach ranks banks according to their capital shortfalls similarly as the market-based approach. The two capital shortfall measures are negatively correlated with the regulatory risk measures (the “risk weights”) used in the stress test to assess the riskiness of bank assets and therefore, their capitalization needs. Differences in the magnitude of capital shortfalls between market-based and CCAR approaches are however substantial, and can be attributed to (i) different prudential thresholds applied to capital ratios, (ii) different loss projections under the stress scenario, and (iii) the difference between market and book values of bank equity.
Pierret, D. and S. Steffen, 2018, Have European banks become safer?
Abstract
European banks have become safer since the last stress test of the European Banking Authority (EBA) in 2016. Important risk measures related to capital adequacy, liquidity and asset quality have improved; market-to-book ratios have also increased but they are still well below one. A further drop in profitability is worrisome particularly when the economy might enter a downturn and banks need to provide for possible elevated loan losses. While banks have broadly added capital buffers in excess of their regulatory capital requirement, our market-based estimates of capital shortfalls during a financial crisis show that these buffers accumulate on the balance sheet of safer banks, as both regulatory (e.g. due to required buffers under Basel III) as well as discretionary buffers rely on risk-weighted assets that are still decoupled from the market’s assessment of bank risk.
News
"A Capital Structure Channel of Monetary Policy" with Benjamin Grosse-Rueschkamp and Daniel Streitz
accepted for publication in the Journal of Financial Economics.
Paper (incl. Online Appendix)
EFA 2018
Abstract
We study the transmission channels from central banks’ quantitative easing programs via the banking sector when central banks start purchasing corporate bonds. We find evidence consistent with a “capital structure channel” of monetary policy. The announcement of central bank purchases reduces the bond yields of firms whose bonds are eligible for central bank purchases. These firms substitute bank term loans with bond debt, thereby relaxing banks’ lending constraints: banks with low Tier-1 ratios and high non-performing loans increase lending to private (and profitable) firms, which experience a growth in capital expenditures and sales. The credit reallocation increases banks’ risk-taking in corporate credit.
"Kicking the can down the road: government interventions in the European banking sector", with Viral V. Acharya and Lea Steinruecke. ***NEW***
Abstract
Building on a novel and comprehensive dataset of all government interventions in the eurozone banking sector, we analyze the implications of government interventions in the European banking sector during the 2007 to 2009 financial crisis for the subsequent sovereign debt crisis. We find that governments with weaker public finances were more reluctant to recapitalize distressed banks during the financial crisis of 2007 to 2009. Insufficient recapitalizations of distressed banks had significant negative consequences for financial stability and real sector lending as weak banks remained vulnerable to future shocks, increased their risk-taking and did not write down defaulted loans by evergreening loans to “zombie” borrowers.
"Lender of Last Resort, Buyer of Last Resort, and a Fear of Fire Sales in the Sovereign Bond Market" with Viral V. Acharya and Diane Pierret . ***NEW VERSION***
Abstract
We document the mechanism through which the risk of fire sales in the sovereign bond market contributed to the effectiveness of two major central bank interventions designed to restore financial stability during the European sovereign debt crisis. As a lender of last resort via the long-term refinancing operations (LTROs), the European Central Bank (ECB) improved the collateral value of sovereign bonds of peripheral countries. This resulted in an elevated concentration of these bonds in the portfolios of domestic banks, increasing fire-sale risk and making both banks and sovereign bonds riskier. In contrast, the ECB’s announcement of being a potential buyer of last resort via the Outright Monetary Transaction (OMT) program attracted new investors and reduced fire-sale risk in the sovereign bond market..
"Similar Investors" with Co-Pierre Georg and Diane Pierret *** NEW ***
Abstract
We study the effect of strategic complementarities among investors on their decisions to continue to invest in a security issuer. Using detailed security level holdings of U.S. Money Market Mutual Funds (MMFs), we construct a novel measure of portfolio similarity among institutional investors (i.e. MMFs) who are exposed to the same security issuer. Consistent with correlated liquidity needs of more similar investors, the similarity of a fund to other investors in an issuer induces a correlation between the default states of the issuer and the states where the fund's liquidity demand is high. Among funds investing in the same issuer at the same time, we find that the funds reducing their exposure to the issuer are the most similar funds. At the issuer level, the average similarity of the funds investing in an issuer predicts the issuer's total funding flows in the next period. In other words, issuers cannot substitute this loss in funds from similar investors, particularly during crises, and are thus exposed to greater funding liquidity risk.
"Loan Syndication Structures and Price Collusion" with Jian Cai, Frederik Eidam and Anthony Saunders *** NEW ***
Abstract
How does the organizational form of loan syndicates evolve and what are the effects on price collusion? We develop a novel measure of distance in lending expertise among syndicate lenders, and relate this novel measure to the organizational form of loan syndicates and loan pricing. Studying the U.S. syndicated loan market from 1989 to 2017, we find that the organizational form of loan syndicates significantly varies across our lender measure based on similar specializations in lending which we call syndicated distance. Large lead arrangers prefer to form close and concentrated syndicates by letting lenders with similar lending expertise into their syndicates and allocating those lenders higher loan shares. Analyzing loan pricing, we find that concentrated syndicates possess improved screening abilities, but collude on loan pricing. Consistent with Hatfield et al. (2017), we find however that price collusion of concentrated syndicates only occurs during periods of low market concentration. Our findings imply that both the organizational form of loan syndicates and the level of market concentration affect price collusion.
"Feasibility Check: Transition to a New Regime for Bank Sovereign Exposure?" with Yannik M. Schneider, prepared in the context of Economic Dialogues with the President of the Eurogroup in ECON, November 2017
Official Paper
Abstract
Excessive sovereign debt exposures of banks contributed to the gravity of the financial and sovereign debt crisis in 2011 and 2012, as well as to the slow and asymmetric recovery of European countries. Various policies that improve banks’ resilience were introduced in recent years, however the regulatory regime for the sovereign debt exposure of banks has not changed. We identify four criteria that a new regime for bank sovereign exposures should fulfil: (1) attenuate the home bias to the domestic sovereign, (2) break the doom loop, (3) avoid a flight-to-quality of assets, and (4) mitigate risk spillovers. We assess the implications for banks’ balance sheets for five policy proposals, based on simulations on a sample of European banks. We show that none of the proposals would fulfil all four criteria in the absence of a safe asset. We conclude that a new regime for bank sovereign exposure should be conditional on restoring the value of sovereign bonds as a safe asset.
News - Academic Research
"Does the Lack of Financial Stability Impair the Transmission of Monetary Policy?" with V. Acharya, B. Imbierowicz, and D. Teichmann, September 2017 * being revised for second resubmission to the Journal of Financial Economics.
We investigate the transmission of central bank liquidity to bank deposits and loan spreads in Europe over the January 2006 to June 2010 period. We find evidence consistent with an impaired transmission channel due to bank risk. Central bank liquidity does not translate into lower loan spreads for high-risk banks, even as it lowers deposit rates for both high-risk and low-risk banks. This adversely affects the balance sheets of high-risk bank borrowers, leading to lower payouts, lower capital expenditures, and lower employment. Overall, our results suggest that banks’ capital constraints at the time of an easing of monetary policy pose a challenge to the effectiveness of the bank lending channel and the effectiveness of the central bank as a lender of last resort.
"The Zero Risk Fallacy - Banks' Sovereign Exposure and Sovereign Risk Spillovers", with Karolin Kirschenmann and Josef Korte, New version, August 2017.
European banks are exposed to a substantial amount of risky sovereign debt. The “missing bank capital” resulting from the zero-risk weight exemption for European banks for European sovereign debt amplifies the co-movement between sovereign CDS spreads and facilitates cross-border financial-crisis spillovers. Risks spill over from risky periphery sovereigns to safer core countries, but not in the opposite direction nor for exposures to countries not exempted from risk-weighting. We consider the trade-off of benefits of sovereign debt (for banks and sovereigns) and spillover risk when applying risk-weights. More bank capital as well as positive risk-weighting for sovereign exposures mitigates spillovers.
University of Bonn (Nov 13)
AFA (Atlanta, Jan 2019), AEA (Atlanta, Jan 2019, 4 papers), IBEFA (Atlanta, Jan 2019)
Follow me on twitter: @sascha_steffen
Current Academic and Non-Academic Appointments
Professor of Finance, Frankfurt School of Finance & Management, Since August 2017
Research Fellow Center for Financial Studies (CFS), Since 2013
Forschungsprofessor ("Professor of Research"), IWH - Halle Institute of Economic Research, 2014 - 2017
Member of the Schmalenbach-Arbeitskreis „Strategieentwicklung und Controlling in Banken“, Since 2015
Academic Advisory Board "Frankfurt Institute for Risk Management and Regulation (FIRM)", Since 2016
Associate Editor, Journal of Banking and Finance, Since 2017
Curriculum Vitae (September 2018)
2018 Stress Test
Pierret, D. and S. Steffen, 2018, Capital Shortfalls of European Banks following the 2018 Stress Test.
Abstract
The European Banking Authority (EBA) disclosed the effect of hypothetical losses in a stress scenario on bank capital ratios on November 2, 2018. We assess the capital adequacy of the participating banks based on these disclosures and using an alternative supervisory approach (the methodology used by U.S. supervisors in the Comprehensive Capital Analysis and Review (CCAR)) and a market-based approach to define capital shortfalls. The CCAR approach ranks banks according to their capital shortfalls similarly as the market-based approach. The two capital shortfall measures are negatively correlated with the regulatory risk measures (the “risk weights”) used in the stress test to assess the riskiness of bank assets and therefore, their capitalization needs. Differences in the magnitude of capital shortfalls between market-based and CCAR approaches are however substantial, and can be attributed to (i) different prudential thresholds applied to capital ratios, (ii) different loss projections under the stress scenario, and (iii) the difference between market and book values of bank equity.
Pierret, D. and S. Steffen, 2018, Have European banks become safer?
Abstract
European banks have become safer since the last stress test of the European Banking Authority (EBA) in 2016. Important risk measures related to capital adequacy, liquidity and asset quality have improved; market-to-book ratios have also increased but they are still well below one. A further drop in profitability is worrisome particularly when the economy might enter a downturn and banks need to provide for possible elevated loan losses. While banks have broadly added capital buffers in excess of their regulatory capital requirement, our market-based estimates of capital shortfalls during a financial crisis show that these buffers accumulate on the balance sheet of safer banks, as both regulatory (e.g. due to required buffers under Basel III) as well as discretionary buffers rely on risk-weighted assets that are still decoupled from the market’s assessment of bank risk.
News
"A Capital Structure Channel of Monetary Policy" with Benjamin Grosse-Rueschkamp and Daniel Streitz
accepted for publication in the Journal of Financial Economics.
Paper (incl. Online Appendix)
EFA 2018
Abstract
We study the transmission channels from central banks’ quantitative easing programs via the banking sector when central banks start purchasing corporate bonds. We find evidence consistent with a “capital structure channel” of monetary policy. The announcement of central bank purchases reduces the bond yields of firms whose bonds are eligible for central bank purchases. These firms substitute bank term loans with bond debt, thereby relaxing banks’ lending constraints: banks with low Tier-1 ratios and high non-performing loans increase lending to private (and profitable) firms, which experience a growth in capital expenditures and sales. The credit reallocation increases banks’ risk-taking in corporate credit.
"Kicking the can down the road: government interventions in the European banking sector", with Viral V. Acharya and Lea Steinruecke. ***NEW***
Abstract
Building on a novel and comprehensive dataset of all government interventions in the eurozone banking sector, we analyze the implications of government interventions in the European banking sector during the 2007 to 2009 financial crisis for the subsequent sovereign debt crisis. We find that governments with weaker public finances were more reluctant to recapitalize distressed banks during the financial crisis of 2007 to 2009. Insufficient recapitalizations of distressed banks had significant negative consequences for financial stability and real sector lending as weak banks remained vulnerable to future shocks, increased their risk-taking and did not write down defaulted loans by evergreening loans to “zombie” borrowers.
"Lender of Last Resort, Buyer of Last Resort, and a Fear of Fire Sales in the Sovereign Bond Market" with Viral V. Acharya and Diane Pierret . ***NEW VERSION***
Abstract
We document the mechanism through which the risk of fire sales in the sovereign bond market contributed to the effectiveness of two major central bank interventions designed to restore financial stability during the European sovereign debt crisis. As a lender of last resort via the long-term refinancing operations (LTROs), the European Central Bank (ECB) improved the collateral value of sovereign bonds of peripheral countries. This resulted in an elevated concentration of these bonds in the portfolios of domestic banks, increasing fire-sale risk and making both banks and sovereign bonds riskier. In contrast, the ECB’s announcement of being a potential buyer of last resort via the Outright Monetary Transaction (OMT) program attracted new investors and reduced fire-sale risk in the sovereign bond market..
"Similar Investors" with Co-Pierre Georg and Diane Pierret *** NEW ***
Abstract
We study the effect of strategic complementarities among investors on their decisions to continue to invest in a security issuer. Using detailed security level holdings of U.S. Money Market Mutual Funds (MMFs), we construct a novel measure of portfolio similarity among institutional investors (i.e. MMFs) who are exposed to the same security issuer. Consistent with correlated liquidity needs of more similar investors, the similarity of a fund to other investors in an issuer induces a correlation between the default states of the issuer and the states where the fund's liquidity demand is high. Among funds investing in the same issuer at the same time, we find that the funds reducing their exposure to the issuer are the most similar funds. At the issuer level, the average similarity of the funds investing in an issuer predicts the issuer's total funding flows in the next period. In other words, issuers cannot substitute this loss in funds from similar investors, particularly during crises, and are thus exposed to greater funding liquidity risk.
"Loan Syndication Structures and Price Collusion" with Jian Cai, Frederik Eidam and Anthony Saunders *** NEW ***
Abstract
How does the organizational form of loan syndicates evolve and what are the effects on price collusion? We develop a novel measure of distance in lending expertise among syndicate lenders, and relate this novel measure to the organizational form of loan syndicates and loan pricing. Studying the U.S. syndicated loan market from 1989 to 2017, we find that the organizational form of loan syndicates significantly varies across our lender measure based on similar specializations in lending which we call syndicated distance. Large lead arrangers prefer to form close and concentrated syndicates by letting lenders with similar lending expertise into their syndicates and allocating those lenders higher loan shares. Analyzing loan pricing, we find that concentrated syndicates possess improved screening abilities, but collude on loan pricing. Consistent with Hatfield et al. (2017), we find however that price collusion of concentrated syndicates only occurs during periods of low market concentration. Our findings imply that both the organizational form of loan syndicates and the level of market concentration affect price collusion.
"Feasibility Check: Transition to a New Regime for Bank Sovereign Exposure?" with Yannik M. Schneider, prepared in the context of Economic Dialogues with the President of the Eurogroup in ECON, November 2017
Official Paper
Abstract
Excessive sovereign debt exposures of banks contributed to the gravity of the financial and sovereign debt crisis in 2011 and 2012, as well as to the slow and asymmetric recovery of European countries. Various policies that improve banks’ resilience were introduced in recent years, however the regulatory regime for the sovereign debt exposure of banks has not changed. We identify four criteria that a new regime for bank sovereign exposures should fulfil: (1) attenuate the home bias to the domestic sovereign, (2) break the doom loop, (3) avoid a flight-to-quality of assets, and (4) mitigate risk spillovers. We assess the implications for banks’ balance sheets for five policy proposals, based on simulations on a sample of European banks. We show that none of the proposals would fulfil all four criteria in the absence of a safe asset. We conclude that a new regime for bank sovereign exposure should be conditional on restoring the value of sovereign bonds as a safe asset.
News - Academic Research
"Does the Lack of Financial Stability Impair the Transmission of Monetary Policy?" with V. Acharya, B. Imbierowicz, and D. Teichmann, September 2017 * being revised for second resubmission to the Journal of Financial Economics.
We investigate the transmission of central bank liquidity to bank deposits and loan spreads in Europe over the January 2006 to June 2010 period. We find evidence consistent with an impaired transmission channel due to bank risk. Central bank liquidity does not translate into lower loan spreads for high-risk banks, even as it lowers deposit rates for both high-risk and low-risk banks. This adversely affects the balance sheets of high-risk bank borrowers, leading to lower payouts, lower capital expenditures, and lower employment. Overall, our results suggest that banks’ capital constraints at the time of an easing of monetary policy pose a challenge to the effectiveness of the bank lending channel and the effectiveness of the central bank as a lender of last resort.
"The Zero Risk Fallacy - Banks' Sovereign Exposure and Sovereign Risk Spillovers", with Karolin Kirschenmann and Josef Korte, New version, August 2017.
European banks are exposed to a substantial amount of risky sovereign debt. The “missing bank capital” resulting from the zero-risk weight exemption for European banks for European sovereign debt amplifies the co-movement between sovereign CDS spreads and facilitates cross-border financial-crisis spillovers. Risks spill over from risky periphery sovereigns to safer core countries, but not in the opposite direction nor for exposures to countries not exempted from risk-weighting. We consider the trade-off of benefits of sovereign debt (for banks and sovereigns) and spillover risk when applying risk-weights. More bank capital as well as positive risk-weighting for sovereign exposures mitigates spillovers.
