Research

Hakenes, H. & Schliephake, E., (2025) Responsible Investment and Responsible Consumption, Management Science, accepted.

We examine if responsible households should best approach a negative externality through their investment and consumption decisions. We show that socially responsible investment (SRI) and socially responsible consumption (SRC) have the highest impact when households do both together and in proportion, as each action offsets the market responses triggered by the other. This insight is relevant for large consumers and major investors, but it is even more important for small consumers and retail investors. Retail investors tend to be more risk-averse than global institutional investors, implying that any socially responsible investment (SRI) effort they make is likely to be offset by market reactions. However, because their overall investment exposure is small, reducing it slightly comes at a minimal cost. By combining a modest reduction in investment with a significant decline in personal consumption, small-scale actions can have a much greater impact together than either would achieve on its own.

Berg, T. & Schliephake, E., (2024) Market-Triggered Contingent Capital with Incomplete Information, Journal of Money, Credit and Banking, http://doi.org/10.1111/jmcb.13190. Online Appendix

In this paper,  we focus on the special instrument, contingent capital: debt securities that convert into equity in times of financial distress. Contingent capital has received considerable interest in the debate on banking regulation as an attractive instrument for bank stability. We analyze contingent capital using a global games framework to address concerns about multiple equilibria in its conversion. Departing from prior literature, we assume that bank asset values are not common knowledge. We show that a unique conversion equilibrium can exist if investors have sufficiently precise private information. We show that while highly dilutive CoCos potentially reduce agency problems, they may increase instability in the banking sector because, indeed, multiple equilibria may emerge. Our results suggest that optimal CoCo bond design must account for market microstructure and information asymmetries to avoid unintended consequences for financial stability.

Koenig, P. J. & Schliephake, E., (2023) Bank Risk-Taking and Impaired Monetary Policy Transmission, International Journal of Central Banking, 20 (3), 257-371.

We explore how prolonged low interest rates can simultaneously drive increased bank risk-taking and weaken monetary policy transmission. When deposit rates are bounded below and banks hold substantial fixed-income assets, further rate cuts can reduce margins and prompt riskier behavior. This increases bank risk-taking, and in turn, dampens the response of lending rates and loan volumes to policy rate changes. Hence, the empirically observed excessive risk-taking of banks and impaired transmission of policy rates into lending during low interest rates are two sides of the same coin. Our model provides a unified explanation for the well-documented empirical findings linking lower interest rates to both higher risk-taking and reduced bank lending responsiveness.

Schliephake, E. (2016) Capital Regulation and Endogenous Competition:  Competition as a Moderator for Stability, Journal of Money, Credit and Banking, 48(8), pp.1787-1814. (Rated among the Journal’s top 20 downloaded articles in the 12 months after online publication)

This paper analyzes the effects of the competition on the efficiency of capital requirement regulation in establishing financial stability. Stricter capital requirements increase the funding costs of banks, which may result in higher lending rates, which increase the default risk of particular loans. Therefore, while higher capital buffers allow banks to survive higher loan portfolio default rates, the increased risk of individual loans could make banks riskier overall. I show that if banking markets are concentrated, the possibility to commit for capacities and the resulting gain of price-setting power can increase the efficiency of capital regulation in contrast to perfect competition, where increased capital requirements may increase the default risk of banks.

Buck, F. & Schliephake, E., (2013) The Regulator's Trade-off: Bank Supervision vs. Minimum Capital, Journal of Banking & Finance, 37(11), 4584–4598.

We analyze the efficient mix of capital regulation and banking supervision. We show that both instruments are substitutes. If we allow for regulatory competition, we find that the implementation of the optimal policy is not feasible. As a result, an agreement on international minimum capital standards can reduce the inefficiencies of international competition among regulators. However, a harmonized capital regulation may reduce the average effort spent by national supervisors.

Schliephake, E. & Kirstein, R., (2013) Strategic effects of regulatory capital requirements in imperfect banking competition. Journal of Money, Credit and Banking 45 (4), 675–700.

Well-capitalized banks have a lower risk of failing. However, stricter capital rules may force banks to cut lending or raise costly capital, leading to higher loan rates. In this paper, we demonstrate that binding capital requirements constrain lending in the short-term and therefore alter banks’ strategic decision-making. Based on the strategic capacity commitment model of Kreps and Scheinkman (1983) we proof that if the immediate recapitalization is sufficiently costly, capital requirement regulation induces banks that compete in Bertrand competition to behave like Cournot competitors. Formally, the binding capital regulation changes the strategic price setting Bertrand game into a two-stage game, where banks first have to commit to a loan supply capacity before competing for loan interest rates. This decreases the loan supply and increases loan interest rates, resulting in positive profits for banks compared to the unregulated case.