House of Finance News

 

Central Banks Should Continue Quantitative Easing

Thursday, 23 May 2013 09:32

 

While the United States are recovering after the financial crisis and unemployment is decreasing despite low growth, the Eurozone has returned to a recession. Inflation is low on both sides of the Atlantic and monetary policy rates are close to zero. What are the monetary policy options for central bankers in these times to improve the economic situation?
 
On Tuesday, 21 May, James Bullard, President and CEO of the Federal Reserve Bank of St. Louis, was invited by the Institute for Monetary and Financial Stability (IMFS) and the U.S. Consulate General Frankfurt to discuss possible approaches of monetary policy in a low rate environment. The central banker argued in favor of quantitative easing (QE), which implies the purchase of government debt by central banks.
 
Bullard presented the different monetary policy measures that central bankers could use in a low rate environment: 1) Do nothing, keep the interest rate close to zero for an extended period of time and wait. This could lead to a mildly deflationary situation, warned Bullard. 2) Implement "forward guidance" by announcing future monetary policy measures, for example, maintaining the near zero rate even if the economy is recovering. According to the Fed member, this would also be problematic. The announcement would have to be perfectly credible to stimulate consumption and investment in the private sector. Otherwise no real effects could be expected. On the contrary, the promise could even send a pessimistic signal to the private sector that might interpret the central bank's move as a reaction to a possible long-lasting depression. 3) Charge or rather "grant" negative interest rates on banks' reserves or 4) do a twist operation: Exchange government debt with a short duration for debt with a longer duration. Bullard explained that these last two options were not very effective.
 
In Bullard's view, the best policy option was quantitative easing: "Quantitative easing is closest to standard monetary policy, involves clear action and has been effective." The US central bank should therefore continue their quantitative easing program. Bond purchases should be adjusted to the economic performance and inflation rate.
 
For the Eurozone, Bullard recommended a GDP-weighted quantitative easing program: The European Central Bank (ECB) should buy government bonds of all Euro countries according to their share of Eurozone-GDP. In this way, it could counteract deflationary tendencies and, at the same time, calm down critics who reproach the ECB for buying government bonds to support highly indebted countries.
 

Commentary on the European Monetary Union, edited by Prof. Helmut Siekmann, published

Friday, 03 May 2013 09:58

 

Kommentar bild
The commentary fills a gap between the existing works covering the Treaty on the European Union and the Treaty on the Functioning of the European Union in general and the detailed monographs on specific aspects of the Monetary Union. Leading experts from academia and central banking have joined to expound all relevant provisions of primary law – including protocols – and of secondary law. In particular, all rules of the Statute of the European System of Central Banks and the European Central Banks are comprehensively treated.

The commentaries take into consideration all amendments and supplements by the Lisbon Treaty. Furthermore, they address in detail the problems that result from the current financial crisis and the budgetary crisis of single Member States of the European Union. A particular emphasis has been laid on court rulings concerning the European Monetary Union. This is of special interest for practitioners. The commentary provides an encompassing explanation of all provisions of European Union law in the version of the Lisbon Treaty, which are related to the European Monetary Union.

With contributions from: Florian Becker, Christof Freimuth, Charlotte Gaitanides, Christoph Herrmann, Heinz Herrmann, Stefan Kadelbach, Jörn Axel Kämmerer, Christoph Keller, Julian Langner, Katharina Muscheler-Lorange, Christoph Ohler, Marion Schmidt-Wenzel, Helmut Siekmann, Jochen Sprung, Christine Steven, Christian Waldhoff
 
 

Controversial Debate about Banking Regulation

Monday, 22 April 2013 12:10

 

Foto Weimer
On April 19, Theodor Weimer, Board Spokesman of the HypoVereinsbank, and Jan Pieter Krahnen, Director of the Center for Financial Studies and the Center of Excellence SAFE, discussed the implications of new banking regulations on systemic stability and competition. The talk was part of the SAFE Policy Center series about structural reforms in the European banking sector.

Weimer admitted that the banking sector had made mistakes before the financial crisis. They had taken too much risk while having only low capital endowment and thus infected each other during the crisis. Therefore, a better regulation of the banking sector was necessary. At the same time, Weimer warned that too many new regulations would strongly increase the costs for banks. This could especially threaten the existence of smaller banks. Customers would also suffer because banks would pass the costs of regulations on to them. As an example, Weimer pointed to the proposal of the Liikanen-Commission that recommended separating commercial banking and market making from customer business. This would make banking automatically more expensive, he said. According to Weimer, there was also no reason for the introduction of such a separation because the universal banking system had proved robust so far.

Krahnen, who was a member of the Liikanen-Commission, replied that the objective of the Commission was not to decide which banking system was better. It rather tried to find a possibility to reform the financial sector in a way that protects taxpayers if banks get problems. To achieve this, it was important to reduce the dependences between institutes, the systemic risk, and make a bank resolution possible even if banks were linked to each other.

Krahnen also questioned Weimer's reservations. Prices would change through more regulation but the new regulatory situation would affect all banks equally so that a new balance in the banking sector would be regained.

Both discussants rejected the "Liikanen light" proposal of the German government that plans to separate only proprietary trading but not trading on behalf of customers and market making. The separation between proprietary trading and trading on behalf of customers was difficult. When implementing this proposal, disproportionate costs in relation to the increase in stability would arise.

Apart from the separation of commercial banking and customer business, Krahnen suggested the emission of a new type of debt, bail-in debt, to stabilize the financial market and discipline banks. Bail-in debt would always and without warning incur liability when a bank gets in trouble. This kind of debt should not be hold by banks in order to reduce the danger that other banks would become liable as debt holders, when one bank gets into trouble, which could result in a collapse.

For Weimer it didn't make any sense to introduce bail-in debt. Debt holders always had to reckon on being liable during a crisis. But according to Krahnen this was exactly what did not happen during the crisis in 2007 because politicians had been afraid that when banks as debt holders were made liable, this could provoke an even greater crisis.
 
 
Press reports:
 

George Soros held CFS Presidential Lecture

Wednesday, 10 April 2013 14:38

 

Soros3

Germany should leave the European Monetary Union or accept Eurobonds. This was the core message of George Soros, Chairman of Soros Fund Management LLC, in Frankfurt on Tuesday. Soros gave a lecture on “How to Save the European Union from the Euro Crisis” following an invitation from the Center for Financial Studies (CFS). The event was part of the CFS Presidential Lecture Series and was visited by around 1200 people as well as numerous journalists. The discussion was moderated by Otmar Issing, President of the CFS.

According to Soros, Germany should take a leading role to combat the crisis and not only do the minimum necessary to save the Euro. The introduction of Eurobonds would reduce the interest burden in countries affected by the crisis and thereby support their economic growth. The Euro could also survive without Germany. If Germany left, the Euro would automatically depreciate and heavily indebted Eurozone countries would regain their competitiveness.

After the lecture, Otmar Issing dissented from Soros referring to the principle of „No taxation without representation“. The consequence of introducing Eurobonds would be that German tax payers would indirectly finance other countries’ debts, he said. This redistribution would lack a transparent vote and therefore democratic legitimacy.

 

First SAFE Newsletter ready for download

Wednesday, 20 March 2013 12:36

 

 
NL Q1 2013 klein
 
 
 
 
 
Research 
Zeno Adams, Roland Füss, Reint Gropp "Spillover Effects among Financial Institutions: How important are Hedge Funds in a Crisis?"
Tobias Tröger "Organizational Choices of Banks and the Effective Supervision of Transnational Financial Institutions"
  Andreas Hubener, Raimond Maurer,
Ralph Rogalla		 "Optimal Portfolio Choice with Annuities and Life Insurance for Retired Couples"
Policy
Brigitte Haar "The Path towards Civil Liability of Credit Rating Agencies in Europe under CRA3"
Guest Commentary Florian Rentsch "The EU must make a Fresh Attempt for the Uniform Regulation of Financial Markets"
 

Policy Center Lecture: Caroline Atkinson

Wednesday, 13 March 2013 09:52

 

On 12 March 2013, Caroline Atkinson, Senior Director in US President Barack Obama's National Security Staff for International Economics, gave a Policy Center lecture at the House of Finance. Her talk about "International Economic Priorities for Obama's Second Term: US and Europe as Partners" was the inaugural lecture of a new SAFE Policy Center lecture series.

Caroline Atkinson spoke of the partnership between the US and the European Union. She compared their different responses to the financial crisis and their strategies to overcome the economic downturn with fiscal and structural policies. A major challenge after the crisis had been to secure growth and jobs without questioning the mid-term goal of returning to a level of sustainable debt. A striking difference in the approaches has been the use of fiscal stimuli in the US compared to a focus on fiscal consolidation in Europe. In Atkinson's view, fiscal consolidation may have been more damaging to growth in the peripheral countries than had been expected.

Atkinson highlighted the importance of trade between the US and the European Union for their partnership. She discussed potential difficulties for a comprehensive trade agreement. As tariffs between the partners are already low, the gains from a comprehensive trade agreement must come from harmonization of standards and regulations. Atkinson was available for questions from the interested audience after the lecture.
 

Conciliation Committee: Insurance Expert warns about Distribution of Valuation Reserves

Tuesday, 26 February 2013 14:22

 

Prof. Helmut Gründl, Managing Director of the International Center for Insurance Regulation at Goethe University's House of Finance, warns about the distribution of certain valuation reserves of life insurances. "The participation of insurance customers in valuation reserves of fixed-interest securities is the exact opposite of consumer protection", writes Gründl in a short commentary. On Tuesday, February 26, the conciliation committee of Bundestag and Bundesrat discusses about an amendment of § 153, para. 3 VVG.
 
Gründl points to the fact that valuation reserves for fixed-interest securities are only of a temporary nature. When the security matures, they will be "automatically" released such that all insurance customers participate with the normal surplus sharing. A participation as provided in § 153, para. 3 VVG since its amendment in 2008 – participation in half of those customers whose insurance contract matures – would in contrast mean that only those insurance customers benefit from the reserves whose contracts coincidentally are at maturity.
 
Gründl stresses that life insurance is an intergenerational product. Payments can be withheld from one generation to benefit another generation that for example is affected by persistently low interest rates. For this reason, Gründl favors the participation of life insurance customers in such valuation reserves that are not necessary for the intergenerational spreading of risks. Therefore, a target for valuation reserves should be set, for example subject to the amount of the actuarial reserves.

According to Gründl, the current problem arises to a large extent because of the interest rate reductions in the last years. Together with the present period of low interest rates it increases the problems of life insurance companies to generate given long-term warranties through their capital investments.
 
Prof. Gründl's commentary can be downloaded here.
 

Symposium „Central Banking: Where are we headed?“ in Honor of Stefan Gerlach

Tuesday, 12 February 2013 11:13

 

On 7 February 2013, the Institute for Monetary and Financial Stability (IMFS) and the House of Finance honored Stefan Gerlach, Deputy Governor of the Central Bank of Ireland and former Managing Director of the IMFS, for his contributions to the IMFS. The celebration was held in the form of a symposium – „Central Banking: Where are we headed?" –, which took place in Goethe University’s casino building and which was followed by an interested audience from the financial and central banking sector as well as the media.
 
Fotos Rednercollage randlos
 
 
 
 
 
 
From top left to bottom right: Benoît Cœuré, Stefan Gerlach, Sabine Lautenschläger, Michael Burda, Patrick Honohan, Athanasios Orphanides
 
In the first part, Sabine Lautenschläger, Deputy President of the Deutsche Bundesbank, Patrick Honohan, Governor of the Central Bank of Ireland, and Benoît Cœuré, Member of the Executive Board of the European Central Bank (ECB), discussed current topics of the European Central Banking System. The main focus was on the proposed single banking regulatory authority for the Eurozone which should be established at the ECB.
 
Sabine Lautenschläger and Benoît Cœuré said that it is essential to strictly separate off monetary policy from banking supervision when implementing such an authority within the ECB. Thereby, they addressed the concerns of many critics who fear a conflict of interest between these two areas. Sabine Lautenschläger said that according to the current proposal the ECB’s Governing Council will have the final say on decisions in the banking supervision and not the authority’s board. In her view, this would complicate the strict separation between monetary policy and banking supervision. On the other hand, if the authority’s decisions were binding for the Governing Council, the ECB’s independence would be jeopardized.
 
Patrick Honohan fundamentally questioned if the ECB should be responsible for the banking supervision in the long run. Moreover, Benoît Cœuré said that the decision to establish a European supervision within the ECB was primarily due to the urgent need for a solution in the middle of the European debt crisis.
 
Despite these reservations, the central bankers described the single banking supervision as an important step to adapt the institutional framework of the Eurozone in response to the crisis and to prevent that future national banking crises spread across borders.
 
Sabine Lautenschläger pointed out that an advantage of the European banking supervision is that it operates on the basis of more comprehensive information compared to a national supervision. Therefore, it will be possible to detect risks that affect the banking system or emanate from it more easily and at an earlier stage. Benoît Cœuré said that more information will also help to better design monetary policy.
 
Patrick Honohan stressed the importance of breaking the links between sovereigns and banks by implementing a supranational banking supervision. According to Sabine Lautenschläger, national supervisors often run the risk of being overprotective towards domestic banks for national concerns.
 
Finally, Cœuré called for quickly implementing the European banking supervision in order to be able to continue with the development of the other elements of a European banking union, such as the bank resolution mechanism.
 
After a discussion with the audience, Athanasios Orphanides from the MIT Sloan School of Management and Michael Burda from the School of Business and Economics of the Berlin Humboldt University spoke about monetary policy, fiscal policy and the politics of the European Monetary Union.
 
Orphanides compared the ways European governments acted in former crises with the current crisis. In the past, politicians usually worked towards a solution that also advanced the European project. Today, they do not immediately address problems even if these were recognized. According to Orphanides, the reason is a crisis of European political leadership. Governments prefer to postpone decisions that involve political costs - especially shortly before elections. With always having an election in one country of the Eurozone, there is risk of a permanent blockade. Only the threat of an imminent collapse could encourage politicians to incur the political costs. He regrets in this regard that during the current crisis interventions of the ECB diffused the pressure on political leaders to solve upcoming problems.
 
In the end, Michael Burda presented three scenarios of how Europe could look like in ten years. He gave an optimistic, a pessimistic and a realistic outlook. He considered as realistic that the Euro remains the common currency in all Euro countries, but transfer payments will continue to be made within the EU. Furthermore, Burda assumed that Greece receives a debt reduction but doesn’t continue with its reform efforts. Finally, he warns the European governments that they should go back to the no bailout principle and be no longer liable for the debt of other member countries.
 
As last speaker, the honored Stefan Gerlach took the opportunity to stress the importance of the interdisciplinary research conducted by the IMFS. The symposium was closed by the Managing Director of the IMFS, Volker Wieland.
 

Minister hands over LOEWE Certificates

Friday, 08 February 2013 08:22

 

On Wednesday evening, 6 February 2013, a ceremony was held in Goethe University's casino building to celebrate this year's LOEWE winners. Eva Kühne Hörmann, Hessian Minister of Higher Education, Research and the Arts, handed over a certificate to, among others, Prof. Jan Pieter Krahnen as speaker of the Center of Excellence SAFE. The certificate documents the granting of 13 million euro for the coming three years from the funds of the Hessian excellence initiative LOEWE (Landesoffensive zur Entwicklung wissenschaftlich-ökonomischer Exzellenz).
 
 
LoewePreis-290
 
From left: Prof. Werner Müller-Esterl, President of Goethe University, Minister Eva Kühne-Hörmann, Prof. Jan Pieter Krahnen
 

Master´s Open Day

Friday, 01 February 2013 10:54

 

Have you chosen your Master's program yet?
Join us at the next Master's Day on Thursday, 7 February 2013, 2–4 pm and find out which program best matches your skills and interests.

Participating faculty members:

Dean Prof. Dr. Andreas Hackethal
Prof. Dr. Hans-Joachim Böcking
Prof. Matthias Schündeln, Ph.D.
Prof. Dr. Holger Kraft
Prof. Dr. Uwe Walz
Prof. Dr. Eveline Wuttke

as well as Melanie Voigtländer.

Venue:
Lecture hall at Westend Campus, HZ 4, Grüneburgplatz 1, 60323 Frankfurt am Main

Sign up now at Facebook and invite your friends!

The program directors will introduce the respective Master´s programs, review the admission requirements and application procedures, describe the course curriculum and share information about the opportunities available upon graduation. Presentations will be held in either German or English, depending on the program´s language.

  • Master of Science in Management (MSM)
  • Master of Science in International Economics and Economic Policy (IEEP)
  • Master of Science in Business Education
  • MSQ Program
  • Part-Time Master in Finance
  • Quantitative Techniques for Economics and Management Program

This email address is being protected from spambots. You need JavaScript enabled to view it.

 

Jan Krahnen and Michael Kemmer discuss Future of Universal Banks

Friday, 25 January 2013 13:45

 

Jan Pieter Krahnen, Director of the Center of Excellence SAFE and the Center for Financial Studies, and Michael Kemmer, General Manager and Member of the Board of Directors of the Bundesverband deutscher Banken (Association of German Banks), talked about the future of the universal bank model in the House of Finance on Friday. The event was second in a discussion series on structural reforms in the European banking sector. The series aims to debate the report of the Liikanen Commission of which Jan Krahnen was a member.

Krahnen presented the Liikanen group’s recommendations on the issue of universal banking. The report suggests spinning off all trading activities of major banks in order to separate the financial structures between retail business and trading business. “In our view, both businesses should be financially independent and have to take their respective risks by themselves”, said Krahnen. But contrary to public opinion, the Liikanen Report does not call for a “Trennbankensystem” or a breaking up of universal banks.

Michael Kemmer defended the current universal bank model including the trading business. He expressed the fear that disbanding the traditional structures could throw the European banking system off balance. In addition, he warned about incentive and competition problems that could occur as a consequence of the "cliff-effect", resulting from the fact that the recommendations of the Liikanen commission include a size threshhold. For example, smaller banks could feel encouraged to expand their trading business. During the discussion with the audience, also possible legal problems with existing shareholders and creditors were touched.

The discussants also disagreed on the timing. In the face of the prevailing problems in the European banking sector, Jan Krahnen said, a fast implementation of the Liikanen recommendations was necessary. In contrast, Michael Kemmer pleaded to first wait for the implementation of the regulatory measures which are only now under way, such as "Basel III" and a common banking authority, and to assess afterwards the need for further reforms.

Contrary to their hopes, however, both discussants fear hasty political decisions. Kemmer said he expected a quick political plan already within the next three months. He especially cautioned against separate action by Germany and France. Jan Krahnen was afraid that governments could agree on a “Liikanen light” solution and only spin off banks' proprietary trading. "This would require a lot of energy but be of little advantage", he said.


Media Resonance

 

Center of Excellence SAFE now online

Monday, 14 January 2013 08:47

 

The new Center of Excellence SAFE at the House of Finance offers now its own web presence. Please visit www.safe-frankfurt.de and get informed about the new research and policy concepts of SAFE.
 
23. May 2013: Central Banks Should Continue Quantitative Easing
While the United States are recovering after the financial crisis and unemployment is decreasing...
03. May 2013: Commentary on the European Monetary Union, edited by Prof. Helmut Siekmann, published
The commentary fills a gap between the existing works covering the Treaty on the European Union...
22. Apr 2013: Controversial Debate about Banking Regulation
On April 19, Theodor Weimer, Board Spokesman of the HypoVereinsbank, and Jan Pieter Krahnen,...