Rainer Frey Libri

After the collapse of Lehman Brothers, a rapid and far-reaching shrinkage of international banks’ assets with a focus on foreign claims took place. For the largest 67 German banking groups, we find that both their characteristics and behavior in the pre-crisis episode had repercussions for the crisis period. Above all, prior non-traditional banking activities - proxied by the relevance of securities and noninterest income - resulted in balance sheet contraction in the crisis. While, from 2002 to mid-2008, a disproportionately high growth rate in profits to assets is found to be indicative of too much risk taking, both high average income and a strong balance sheet expansion in the pre-crisis period are found to be positive per se. In contrast, a high average income or a strong growth in assets in just the last three and a half years before the outbreak of the crisis put balance sheets during the crisis under adjustment pressure. During the crisis, short-term wholesale funding proved to be a disadvantage, while good capital endowment (core Tier 1 capital to RWA ratio), deposit funding and strong affiliate presence abroad had a stabilizing impact. Most of these variables lose their significance in normal times.

In Europe, numerous institutional reforms aimed at creating an economic union have led to a decreased relevance of borders over time. This study focuses on the market for corporate control within the EU 15 from 1995 to 2007, using gravity regressions to analyze integration. Findings indicate that borders lost significance from 1995 until the new economy bubble burst, with the transition from the European Economic Community to the EU in 1993 and the euro's introduction likely accelerating this integration. However, after this period, no further progress driven by institutional factors was observed. Geographical distance consistently became less relevant for mergers and acquisitions throughout the entire timeframe. The ongoing lack of full integration is highlighted by the heterogeneity within Europe, evidenced by varying bilateral border effects. Country pairs with liberal capital market perspectives, such as the Netherlands, Germany, and the UK, still face relatively minor barriers. This suggests that the incomplete integration in Europe may not stem from insufficient institutional reforms. Additionally, Poisson estimations reveal that results are stable regardless of observation numbers or the log of aggregated transaction values, although using levels as a dependent variable is deemed inappropriate.

For the largest 55 German banks, we detect the presence of countercyclical yield seeking in the form of acquisition of high-yielding periphery bonds in the period from Q1 2008 to Q2 2011. This investment strategy is pursued by banks not subject to a bailout, banks characterised by high capitalisation, banks that rely on short-term wholesale funding, and trading banks. In the subsequent period up to 2014, these banks switched to a procyclical divestment strategy resulting in the sale of risky assets. Following the launch of the public sector purchase programme (PSPP) in 2015, a clear investment pattern can no longer be identified. Unlike existing evidence for banks domiciled in vulnerable countries, we find that the recourse to central bank finance is rather limited and does not affect the risk-taking behaviour of banks in the non-stressed country Germany. Yield-seeking strategies were predominantly pursued by healthy banks in Germany. This contrasts with the increases in domestic sovereign holdings in vulnerable countries which can be primarily regarded as the result of moral suasion or, for weakly capitalised banks, a kind of „indirect“ moral suasion or „home-biased“ gambling for resurrection.