Self-Regulation in Sustainable Finance: The Adoption of the Equator Principles
Critical to the success of the Sustainable Development Goals is the extent to which financial institutions are willing to adopt voluntary regulation aimed at ensuring their actions contribute positively. In this study in World Development (2019), Gabriela Contreras (Radboud University), Jaap Bos (Maastricht University) and I study the adoption of the most well-known set of rules, the Equator Principles, by applying a network approach to a unique data set containing 18,729 collaborations of financial institutions funding projects between 2003 and 2014 worldwide. We find that those exposed to the highest level of peer pressure by adopters are 33% more likely to also adopt, compared to those that face the lowest level of peer pressure. Even without this peer pressure institutions that already collaborate with adopters are more susceptible to become adopters themselves. Finally, external pressure applied through public campaigns increases adoption, although particularly large (and presumably powerful) institutions are immune to this external pressure. Our findings are particularly relevant for success of the recently launched Principles for Positive Impact Finance, that are heavily inspired by the Equator Principles.
The Travels of a Bank Deposit in Turbulent Times: The Importance of Deposit Insurance Design for Cross-Border Deposits
In this paper in Economic Inquiry (2020), Shusen Qi (Xiamen University), Harald Sander (Cologne University of Applied Sciences) and I present our latest research on the effects of deposit insurance design on cross-border depositing.
In particular, we examine the impact of the existence on an explicit deposit insurance scheme and its design features on bilateral cross‐border deposits in a gravity model setting. We find that both the absolute quality of a country's deposit insurance and its relative quality vis‐à‐vis other countries'deposit insurance generally affect depositor behavior. This suggests that depositors are engaged in regulatory arbitrage. However, during systemic banking crises, cross‐border depositors primarily seek countries with the best deposit insurance schemes - suggesting that the search for save havens dominates regulatory arbitrage during unstable periods. Similarly, during the 2008–2009 great financial crisis, the emergency actions taken by the governments, which supply and maintain these safe havens, have led to substantial relocations of cross‐border deposits.
Credit Supply: Are there negative spillovers from banks’ proprietary trading?
In this paper, Michael Kurz (De Nederlandsche Bank) and I ask the question whether banks that heavily engage in proprietary trading reduce credit supply relative to their non-trading peers. We answer this question by looking at credit provided by the 135 leading banks in the global corporate loan market between 2003 and 2016. We find that banks with greater trading expertise supply less credit during economically stable times than their non-trading peers and even less during crisis times. This double effect can be attributed to US banks. International banks only reduce their credit supply during crises. We show that these spillovers from trading to credit supply have adverse consequences for the real economy as firms’ ability to invest in capital and expand their workforce is reduced. During a crisis, firms that rely on banks with high trading expertise are most severely affected. Overall, our results suggest that the mandates by global regulators to separate trading from commercial banking are well advised.