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FIIE-2: Reallocation of risk accross countries
The Credit Channel of Fiscal Policy Transmission
1Carnegie Mellon University; 2Pennsylvania State University
We propose and test a new channel through which fiscal policy changes affect the supply of intermediated credit and the real economy. Banks that have greater exposure to firms expected to repatriate a significant amount of foreign income as a result of a 2004-2005 U.S. tax holiday subsequently increase lending to other, purely domestic firms during the period of the tax holiday, leading to higher investment at these firms. Our results complement the existing literature on the credit channel of monetary policy transmission and highlight an important indirect spillover effect of fiscal policy changes on credit-constrained firms.
The (re)allocation of bank risk
1European Central Bank, Germany; 2Columbia GSB
Little is known about the location of bank risk, i.e., which investors in which countries hold bank-issued securities like bonds and stocks. In this paper, we analyze the (re-)distribution of bank risk across asset classes (short- and long-term debt, equity), across investor types and across geographic locations. We also differentiate bank holdings according to riskiness based on credit ratings and yield spreads. We use the Securities Holdings Statistics database for the euro area which contains information on securities holdings at the ISIN level. Our main findings are as follows. First, bank risk is held disproportionately by other banks. Second, households are disproportionally exposed to riskier bank securities. Third, about 30% of bank securities are held outside the euro area, with these percentages larger (smaller) for short term debt and equities (long term debt). Large issuers of bank risk also hold most of the bank risk, with the exception of the Netherlands, which, despite being a top 5 issuer, holds almost no bank securities. Fourth, bank risk re-allocation is overall statistically significant but economically more important for bonds than for equities. Finally, we use a comprehensive stress test administered by the European Central Bank in 2014 to define differential shocks to bank’s riskiness. We find that if the riskiness of a bank increases, other banks increase their holdings of riskier bonds.
”Brexit” and the Contraction of Syndicated Lending
1Frankfurt School of Finance & Management, Germany; 2New York University
We analyze the effect of policy uncertainty on global syndicated loan markets using the “Brexit vote” – the vote of the UK citizens to leave the European Union – as a laboratory. Issuances in the UK syndicated loan market drop by 23% after the Brexit vote relative to a set of comparable syndicated loan markets. We propose a new matching strategy – “Siamese Twins Matching” – to identify appropriate counterfactuals for the UK market. We further analyze a novel channel, market attractiveness: firm-bank combinations that used to issue loans in both the UK market and other markets do not decrease their issuances in the UK market more than in other markets after the Brexit referendum – suggesting that the UK market did not significantly lose attractiveness relative to other international markets. We also document a strong decrease in the issuance of British pounds denominated loans after the Brexit for the same firm-bank combinations who switch into alternative currencies such as the US Dollar and the Euro. Our results help to understand the dynamics of competition between financial centers and the role of policy uncertainty shocks in this competition.
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