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The Covid-19 pandemic is hitting, directly and indirectly, economies throughout the world. While the pandemic is far from over, countries are searching for ways to enhance a quick recovery of their economies. Among others, the downturn is hampering the access of firms to the financial means necessary for investments. Therefore, facilitating access to financial means is an important component of rescue operations.

This paper presents the current structure of banking regulation and banking supervision in Europe. We discuss three main challenges resulting from the specific structure of the European system. Firstly, with the integration of the European banking market, main supervisory tasks were conferred on the European Central Bank (ECB). In consequence, new conflicts of interest arise, because the functions of monetary policy and prudential supervision are no longer separated. Secondly, the prudential supervision by European authorities and national authorities might differ to a certain extent. Although this is reasonable with respect to the proportionality principle, it may affect the domestic competitive environment. Thirdly, the European level playing field is harmed by differences in the supervisory stringency among European countries. We conclude that there is still need for action, and a structural solution is not generally apparent. Instead, incentives need to be corrected to eliminate conflicts of interest and agency problems, in particular regarding implicit bail-out guarantees. The recent introduction of a bank recovery and resolution regime might be a first step in the right direction.

Poor transparency of asset-backed securities (ABS) exacerbated the latest subprime lending crisis. In response, the European Central Bank introduced the ABS loan-level reporting initiative, obliging originators to disclose quarterly loan-by-loan information. However, does this increase in transparency alleviate the agency problems inherent in securitization? To answer this question, we examine a novel dataset of 107 ABS pools that are backed by more than 2.8 million loans for small and medium-sized enterprises from the first securitization repository in Europe. The results show that the increase in transparency indeed has valuable effects for investors, inducing originators to improve pool performance and diversification for existing as well as newly issued ABS. These effects persist for a large set of control variables and a broad variety of robustness tests.

Do banks with a specialized credit portfolio have superior selection and monitoring abilities? Controlling for the composition of the banks’ loan portfolios, we show that specialized banks have lower loan loss rates. We also see that for more focused German banks in our sample period 2003–2011 the standard deviation of loan loss rates seems to be lower. Moreover, the loan loss rate of a given industry in a bank‘s loan portfolio is lower if the bank has a major exposure to that industry.

Zusammenfassung Kreditportfolios können breit über alle Branchen diversifiziert oder auf einzelne Branchen fokussiert sein. Die vorliegende Studie ergänzt frühere Analysen dieses Sachverhalts für deutsche Kreditgenossenschaften mittels neuer Daten. Es zeigen sich ein Wechsel von Diversifikations- auf Fokussierungstendenzen und Struktureffekte der Finanzkrise.

We investigate whether small business clients could use revocable credit lines, firstly, in their cash management and, secondly, as a funding source. Since the medium-size bank that provided our unique sample has the right to call these lines and charges considerably high rates for using them, we argue that these lines are particularly suitable for managing short-term liquidity needs. From our findings on how the line terms (line availability, line limit, and charged line rate) depend on a client’s liquidity-at-risk, the duration of its relationship with the bank, and its limit overdrafts, we nonetheless conclude that these lines, although they are revocable, fulfill both purposes.

The opportunity of building up visible �Reserves for General Banking Risks� by the bank management represents a peculiarity in the German financial accounting framework for banks. We investigate German banks' motives for the creation and usage of these reserves and assess their role in financial stability. We find that banks primarily create and use GBR reserves to build up Tier 1 capital for regulatory capital management and earnings management purposes. Most importantly, however, we also reveal that banks using these reserves are less likely to experience a future distress or a bank default event. We therefore conclude that the existence of GBR reserves within the financial accounting framework represents both a convenient capital and earnings management tool for bank managers and a beneficial regulatory instrument to enhance bank stability.

We examine the developments of depositor knowledge, attitudes, and behavior throughout the recent financial crisis and discuss their impact on bank run risk. Based on a self-collected data set surveying depositors before (2007), at (2008), and after the peak of the crisis (2009), we observe a worrying dynamic pattern. At the peak, depositors knew more about deposit insurance, placed more importance on deposit security, and slightly raised their deposits. However, in the aftermath of the crisis the enhanced depositor knowledge proved to be non-permanent while the increased importance of deposit security and the exposure of depositors persisted. The proportion of completely uninformed, strongly involved, and highly exposed depositors, who carry the highest risk of triggering a bank run, was reduced around the peak of the crisis but rebounded strongly afterwards, even exceeding pre-crisis levels. These findings point to a higher bank run risk in the aftermath than during the financial crisis.

For this study, a unique sample provided by a German universal bank reveals whether small and medium-sized enterprises (SMEs) actually use bank lines of credit to substitute for cash holdings. The bank has the right to recall these lines and charges considerably higher rates for using them compared with regular loans. However, because the bank does not require any upfront commitment or usage fee, rational SMEs should demand a line, such that comparisons of the cash holdings of SMEs with and without lines as a means to detect cash substitution effects becomes inapplicable. Therefore, this study proposes an alternative test that reveals that the impact of the line rate and line limit on cash holdings and line use by SMEs is in line with the trade-off theory of cash. Moreover, SMEs' adverse behavior when using lines, their creditworthiness, and the duration of the bank-client relationship all influence the terms and conditions surrounding the lines.

There is empirical evidence that specialization in lending leads on average to lower loan loss provisions and a higher profitability. In this paper we examine whether a better monitoring quality and/or lending to industries with lower loss rates are able to explain these results.The main results are as follows: Specialized banks show a lower ratio of actual to expected losses, i.e. they possess a higher monitoring quality than diversified banks. Specialized cooperative banks particularly lend to low-risk industries. The level of specialization has a stronger explanatory content with respect to the monitoring quality than monitoring expenses.

Banks face a tradeoff between diversifying and focusing their loan portfolio. In this paper we carry out an empirical study for the German market to shed light on the question whether or not the benefits of risk sharing outweigh those of specialization. We use data from the Bundesbank's quarterly borrowers statistic to determine the degree of diversification in the banks' loan portfolios and combine this data with the banks' balance sheets and audit reports. The unique database comprises data from all German banks during the period from 1993 to 2003. Our main results can be summarized in three statements: i) Specialized banks have a slightly higher return than diversified banks. ii) Specialized banks have lower relative loan loss provisions and lower shares of non-performing loans, iii) However, the standard deviations of the loan loss provision ratio and the non-performing loan ratio are lower for diversified banks.

1. In Asset Backed Securities (AB S) sind Aktiva als handelbare Wertpapiere verbrieft. 2. Banken konnen bei einer Finanzierung mit ABS zahlreiche Rollen ubernehmen und insbesondere Teile ihrer eigenen Kreditforderungen in ABS verbriefen. 3. Finanzierungen mit ABS haben tendenziell hohere Transaktionskosten als andere Finanzierungen und moglicherweise geringere Kosten der asymmetrischen Information. Sie haben auserdem Vorteile angesichts existierender Marktunvollkommenheiten. 4. Kreditinstitute konnen durch den Einsatz von ABS ihre Geschaftsvolumina erhohen, ohne zusatzliche aufsichtsrechtliche Eigenmittel aufbringen zu mussen. 5. Bei einer Finanzierung mit ABS sind Risiken aus den Aktiva, Risiken aus der Struktur der Finanzierung sowie vielfaltige Verhaltensrisiken zu beachten und durch geeignete Sicherungsmasnahmen zu begrenzen.