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1Universität Konstanz, Germany; 2European Central Bank, Frankfurt; 3University of Groningen, Netherlands
Discussant: Oliver Rehbein (Vienna University of Economics and Business)
This paper analyzes probabilities of default (PD) and book leverages of firms. Both are almost uncorrelated. The development of PDs is modelled as an AR(5) process. We find mean diversion of PDs in the short-run and mean reversion to long-term target PDs over longer time intervals. The expected PD does not converge monotonically to the target PD, but overshoots and oscillates with declining amplitude. The same is true of the book leverage. Including leverage in the PD regression does not improve explanatory power. The PD converges faster to the target PD starting at a high PD. The target PD of a firm is lower when more than one bank reports a PD, also if an owner bears unlimited liability.
10:00am - 10:30am
Taxation and bank liquidity creation
Allen Berger1, Dimitris Chronopoulos2, Anna Lucia Sobiech2,3, John OS Wilson2
1University of South Carolina, USA; 2University of St Andrews, United Kingdom; 3University of Cologne, Germany
Discussant: Günter Franke (Univesität Konstanz)
We investigate the impact of taxes on bank liquidity creation using the Tokyo bank tax as a quasi-natural experiment. This tax is on the gross profit of large commercial banks operating in the Tokyo prefecture. Using bank-only taxes offers better identification than prior research using taxes covering banks and non-financial firms. We find the tax significantly decreases liquidity creation, consistent with empirical domination of the Risk Absorption Hypothesis over the Financial Fragility-Crowding Out Hypothesis. Banks shift from long-term loans liquefying the public and supporting the economy to short-term government securities holdings that decrease public liquidity without economic stimulus. The tax also impairs bank capital and risk management, making the financial system riskier.
10:30am - 11:00am
When the Dam almost Breaks: Disasters and Credit Risk
Sophia Arlt2,3, Christian Gross2, Oliver Rehbein1, Iliriana Shala2,3
1Vienna University of Economics and Business, Austria; 2Deutsche Bundesbank; 3Goethe University
Discussant: Anna Lucia Sobiech (University of Cologne)
How does risk perception in credit markets change after observing a nearby catastrophic event? We combine detailed geospatial data on ex-ante flood risk of German firms with credit register data and show that after a major flood in 2021, loan rates decrease for high-flood risk firms that were not directly affected. This negative indirect effect is strongest for banks with a large loan portfolio exposure to the flood. Firms that were affected by earlier, but similar floods do not experience rate reductions. The decrease is also strongest in areas with low climate change belief, while high climate change belief areas experience rate increases.
