Rational partisan theory suggests that firms perform better under right- than left-leaning governments. In the pre-election time, investors should anticipate these effects of government partisanship. This is the first study to investigate such anticipated partisan effects in Germany. Applying conditional volatility models we analyze the impact of expected government partisanship on stock market performance in the 2002 German federal election. Our results show that small-firm stock returns were positively (negatively) linked to the probability of a right- (left-) leaning coalition winning the election. Moreover, we find that volatility increased as the electoral prospects of right-leaning parties improved, while greater electoral uncertainty had a volatility-reducing effect.
In Central, Eastern and Southeastern Europe a substantial share of bank deposits
are denominated in foreign currency. Deposit euroization poses key challenges for
monetary policy and financial sector supervision. On the one hand, it limits the effectiveness of monetary policy interventions. On the other hand, it increases financial sector fragility by exposing banks to currency risk or currency-induced credit risk.Policymakers disagree on whether countries in the region should tackle deposit euroization with ‘dedollarization' policies or should rather strive to adopt the Euro as their legal tender. Assessing the potential effectiveness of ‘dedollarization' policies requires a clear understanding of which households hold foreign currency deposits and why they do so. On the basis of survey data covering 16,375 households in ten countries in 2011 and 2012, we provide a comprehensive household-level analysis of deposit euroization in Central, Eastern and Southeastern Europe. We examine how households' preferences for, and holding of, foreign currency deposits are related to individual expectations about monetary conditions and network effects. We also examine to what extent monetary expectations and deposit euroization are the legacy of past financial crises or the outflow of current policies and institutions in the region. Our findings suggest that deposit euroization in Central, Eastern and Southeastern Europe can be partly tackled by prudent monetary and economic decisions by today's policymakers. The preferences of households for Euro deposits are partly driven by their distrust in the stability of their domestic currency, which in turn is related to their assessment of current policies and institutions. However, our findings also suggest that a stable monetary policy may not be sufficient to deal with the hysteresis of deposit euroization across the region. First, we confirm that the holding of foreign currency deposits has become a "habit' in the region. Second, we find that deposit euroization is still strongly influenced by households' experiences of financial crises in the 1990s. Our findings question the effectiveness of supply side interventions (e.g. bank regulation) or demand side interventions (e.g. local currency capital market development) in de-euroizing household savings. First, we show that deposit euroization is largely demand driven. Second, we show that households already have Access to a broad range of savings products in local currency.
We model how an information asymmetry between the lending bank and the applying firm about the currency structure of firm revenues may affect loan currency choice. Our framework features a trade-off between the lower cost of foreign currency debt and the costs of currency induced loan default. We show that under imperfect information about firm revenues more local earners choose foreign currency loans, as they do not bear the full cost of the corresponding credit risk. This result is consistent with recent evidence showing that information asymmetries may increase foreign currency borrowing by retail clients in the transition economies.
We examine how bank funding structure and securitization activities affect the currency denomination of business loans. We analyze a unique data set that includes information on the requested and granted loan currency for 99,490 loans granted to 57,464 firms by a Bulgarian bank. Our findings document that foreign currency lending is at least partially driven by bank eagerness to match the currency structure of assets with that of liabilities. Our results also show that loan currency, as well as loan amount and maturity, are adjusted to make loans eligible for securitization.
This paper examines the impact of the recent banking crises in Europe and Central Asia on households’ incomes and consumption patterns. The analysis is based on the 2010 wave of the Life in Transition Survey, which covers 12,704 households in eleven countries that experienced
a banking crisis between 2008 and 2011. It finds that households in middle-income crisis countries are more than twice as likely to be hit by an income shock as households in high-income crisis countries. The labor market channel is the predominant source of income
shocks, with wage reductions more widespread than job-losses. In reaction to income shocks, households reallocate spending from non-essential goods to staple foods. Reductions in staple-food consumption are,however, prevalent among low-income households. The paper examines potential crisis mitigators and finds that at the macro level a flexible monetary regime is associated with fewer cutbacks in household consumption. At the meso level, it finds no evidence that foreign bank ownership amplified the transmission of banking crises to households in Europe. With respect to micro-level
mitigators, the analysis finds that diversified income sources as well as stocks of non-financial and financial assets help households to cushion income shocks. Access to informal and formal credit also mitigates the impact of income shocks on household consumption, with the former especially important in middle-income countries.
Theoretical and empirical work on banking emphasizes the role of banks in overcoming information asymmetries and agency problems between borrowers and lenders. This paper investigates the importance of bank ownership in determining the sorts of customers that a bank serves, and consequently, the sorts of information problems a bank lender chooses to address. Using survey data for over 16,500 households from 19 emerging economies in Central and Eastern Europe in 2010 this paper is the first to document that information asymmetries in the retail credit market lead foreign banks to cherry-pick financially transparent clients in similar ways as documented previously for enterprise credit. First, a higher market share of foreign banks in a country is associated with a larger gap in credit use between households with and without formal employment. Second, among mortgage borrowers, clients of foreign banks are more likely to be formally employed, are more likely to have personal assets, and are richer than clients of domestic banks. Third, consistent with these results, retail lending techniques of foreign banks rely more on financial information and collateral than those of domestic banks.
How does divided government affect the probability of economic policy change, and thus policy risk on financial markets? In contrast to the standard balancing model we argue that divided government, i.e., partisan conflict between the executive and the legislative branches, negatively affects the possibility of economic policy change. Using a simple spatial model we demonstrate that one should expect divided government to increase the probability of policy gridlock. Since divided government reduces the probability of economic policy change, financial markets can operate under lower policy risk in times of divided than in periods of unified government. For the empirical evaluation we exploit the fact that stock return volatility provides us with a measure of risk. If the gridlock argument does hold, stock return fluctuations should be lower under divided than under unified government. Our results confirm that divided government has a volatility reducing effect on the German stock market. This supports the view that divided government lowers policy risk.
