Michael Kogler

Capital reallocation across firms is a key source of productivity gains. This paper studies the ‘Schumpeterian role’ of banks: They liquidate loans to firms with poor prospects and reallocate the proceeds to more successful, expanding firms. To absorb liquidation losses without violating regulatory requirements, banks need to raise costly equity buffers ex ante. To economize on these buffers, they tend to reallocate too little credit and continue lending to weak firms. Tight capital standards, differentiated risk weights and low costs of bank equity facilitate reallocation. If agency costs of outside equity financing are not too high, their ability to reallocate credit renders banks more efficient than direct finance.

In the aftermath of the financial crisis, several European countries have introduced levies on bank liabilities. The aim is to compensate taxpayers for the provision of bailouts and guarantees and to internalize the fiscal costs of future banking crises. This paper studies the tax incidence: Building on the Monti-Klein model, we predict that banks shift the tax mainly to borrowers by raising lending rates and that deposit rates may increase because deposits are partly exempt. Bank-level evidence from 23 EU countries (2007-2013) shows that the levy indeed increases the lending and the deposit rate as well as the net interest margin. Banks adjust differently to this tax depending on the composition of their balance sheets: In line with theory, especially those banks with a high loan-to-deposit ratio raise the interest rates. Market concentration and the capital structure influence the magnitude of the pass-through, which is stronger in concentrated markets and weaker in case of banks with a high regulatory capital ratio.

The recent crisis has revealed that bank and sovereign risks are inherently intertwined. This paper develops a model of the bank-sovereign nexus to identify the main spillovers and to study the implications of guarantees and capital regulation. We show how banks’ asset risk may trigger a sovereign default through taxation and deposit insurance. The latter can be contagious because of its cost or stabilizing by avoiding liquidation losses. Since sovereign risks receive preferential regulatory treatment, banks purchase government bonds. This creates the opportunity for adverse feedback loops such that a sovereign default is the very reason for bank failure.

Concerns about the procyclicality of bank regulation have motivated recent reforms that include countercyclical measures. This paper analyzes how optimal capital requirements, which balance a trade-off between financial stability and investment of the real sector, adjust during a downturn. Adding an endogenous loan market reveals equilibrium effects that strongly influence the adjustment and allows studying the implications of real shocks. The results suggest a nuanced adjustment depending on the shock: In a capital crunch, capital requirements are relaxed to prevent a sharp decline in investment. If productivity decreases, they are tightened as preserving financial stability entails a smaller cost.