PUBLICATIONS
Taxes, Risk Taking, and Financial Stability
Journal of Public Economic Theory, 25(5), 1043-1068, 2023.
Abstract: After the global financial crisis, the use of taxes to enhance financial stability received new attention. This paper analyzes the corrective role of taxes in banking and compares two instruments, namely, an allowance for corporate equity (ACE), which mitigates the debt bias in corporate taxation, and a Pigovian tax on bank debt (bank levy). We emphasize financial stability gains driven by lower bank asset risk and develop a principal-agent model, in which risk taking depends on the bank's capital structure and, by extension, on the tax treatment of debt and equity. We find that (i) the ACE unambiguously reduces risk taking, (ii) bank levies reduce risk taking if they are independent of bank performance but may be counterproductive otherwise, and (iii) taxes are especially effective if regulatory capital requirements are constrained to low levels.
Monetary Union, Asymmetric Recession, and Exit (jointly with Christian Keuschnigg, Linda Kirschner and Hannah Winterberg)
Review of International Economics, 31(5), 1833-1863, 2023.
Abstract: We propose a model of the Eurozone and analyze an asymmetric recession in a vulnerable member state with high public debt, weak banks, and low growth. We compare macroeconomic adjustment under continued membership with two exit scenarios that introduce flexible exchange rates and autonomous monetary policy. An exit with stable investor expectations could significantly dampen the short-run impact. Stabilization is achieved by a targeted monetary expansion combined with depreciation. However, investor panic may lead to escalation, aggravate the recession and delay the recovery.
Trade and Credit Reallocation: How Banks Help Shape Comparative Advantage (jointly with Christian Keuschnigg)
Review of International Economics, 30(1), 282-305, 2022.
Abstract: Innovative production is driven by creative destruction. High turnover requires frequent reallocation of capital. Banks play a major role in capital reallocation by withdrawing funds from non-viable firms and redirecting credit to scale up the most productive firms. Structural parameters of the banking system thus affect a country's comparative advantage in innovative sectors. Using a Heckscher-Ohlin model with banks, this paper shows how insolvency laws, investor protection, and bank capital regulation shape reallocation, specialization, and trade patterns.
Published Paper, VoxEU Article (2019)
Risk Shifting and the Allocation of Capital: A Rationale for Macroprudential Regulation
Journal of Banking and Finance 118, 105890, 2020.
Abstract: This paper reconsiders the risk-shifting problem of banks and presents a novel rationale for macroprudential regulation. The interplay between this agency problem and equilibrium investment creates a welfare-reducing pecuniary externality that causes capital misallocation and excessive bank risk taking. Therefore, the banking sector tends to be too large, under-capitalized, and inefficiently risky. This distortion is independent of typical frictions like government guarantees or default costs. Macroprudential regulation with capital requirements or deposit rate ceilings corrects misallocation thereby magnifying rent opportunities for banks to reduce risk shifting. Regulation is, however, no Pareto improvement and causes redistribution from households to bank owners.
The Schumpeterian Role of Banks: Credit Reallocation and Capital Structure (jointly with Christian Keuschnigg)
European Economic Review 121, 103349, 2020.
Abstract: 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.
Published Paper, EU Research Article (2021)
On the Incidence of Bank Levies: Theory and Evidence
International Tax and Public Finance 26, 677-718, 2019.
Abstract: 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.