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Session Overview
FIIE-6: Bank Risk
Saturday, 26/Aug/2017:
11:00am - 12:30pm

Session Chair: Reint E. Gropp, Halle Institute for Economic Research
Location: O148

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Bank Use of Sovereign CDS in the Eurozone Crisis: Hedging and Risk Incentives

Viral Acharya1, Yalin Gündüz2, Timothy C. Johnson3

1NYU Stern School of Business, CEPR, NBER; 2Deutsche Bundesbank; 3University of Illinois at Urbana-Champaign

Discussant(s): Jan Pieter Krahnen (Goethe University Frankfurt)

Using a comprehensive data set from German banks, we document the usage of sovereign credit default swaps (CDS) during 2008-2013. Banks used the sovereign CDS market to extend, rather than hedge, their long exposures to government default risk during the crisis period: Less loan exposure to sovereign risk is associated with more protection selling in CDS, the effect being weaker when sovereign risk is high. Somewhat surprisingly, bank risk variables are not associated with protection selling. The findings are driven by the actions of a few non-dealer banks, which sold aggressively at the onset of the crisis and started covering their positions at its height. The results suggest that the increasing shift by bank loan books towards sovereign bonds and loans over the course of the crisis caused reductions to their sovereign CDS exposure.

EFA2017-350-FIIE-6-Acharya-Bank Use of Sovereign CDS in the Eurozone Crisis.pdf

Geographic Diversification and Banks’ Funding Costs

Ross Levine1, Chen Lin2, Wensi Xie3

1UC Berkeley, NBER; 2University of Hong Kong; 3Chinese University of Hong Kong

Discussant(s): Felix Noth (Halle Institute for Economic Research)

We assess the impact of a bank expanding its assets geographically on the cost of its interest-bearing liabilities. Existing research suggests that expansion can both intensify agency problems that increase funding costs and facilitate risk diversification that decreases funding costs. Using a newly developed identification strategy, we discover that the geographic expansion of banks across U.S. states lowered their funding costs. These results are especially strong when banks are headquartered in states with lower macroeconomic covariance with the states into which they can legally expand and when banks are more transparent, allowing investors to assess the effects of expansion. The results are consistent with the view that geographic expansion offers large risk diversification opportunities that reduce funding costs.

EFA2017-1544-FIIE-6-Levine-Geographic Diversification and Banks’ Funding Costs.pdf

Do Corporate Depositors Risk Everything for Nothing? The Importance of Deposit Relationships, Interest Rates and Bank Risk

Daniel Friedmann1, Bjorn Imbierowicz2, Anthony Saunders3, Sascha Steffen4

1Goethe University Frankfurt; 2Copenhagen Business School; 3NYU Stern School of Business; 4Frankfurt School of Finance and Management

Discussant(s): Andre Guettler (Ulm University)

We analyze more than 75,000 auctions in which banks bid for firm deposits. In each of these auctions, only the firm observes the banks and their bids and decides where to deposit its funds. Our results show that a bank’s risk is irrelevant to firms in their decision, irrespective of its measurement and the economic period. In many cases, firms simply select the highest bidding bank. Our data show that this implies on average the risk of losing €74 million for a maximum higher interest income of only €1,300, that is, 0.18 basis points, compared with the worst bid in the auction. Firms only diversify extraordinarily large deposit amounts but also in this case do not account for the individual banks’ risk. Our findings argue for moral hazard of firms, which seem to rely on government bailouts of banks and/or central bank interventions. We further observe that also in rather impersonal electronic markets, relationships are an important decision criterion for firms. A stronger deposit relationship with a firm increases a bank’s probability to be selected in an auction. Furthermore, it also increases a bank’s access to more unsecured deposits from the firm in future periods, including severe crises. Our results reveal that also in markets with high transparency and no switching costs firms base the decision of where to deposit their money on bank relationships as well as the interest rate, but largely disregard bank risk. This has important implications for banks’ access to unsecured corporate funding.

EFA2017-950-FIIE-6-Friedmann-Do Corporate Depositors Risk Everything for Nothing The Importance.pdf

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