Law & Banking/Finance Web Seminar Series: Rainer Haselmann (Goethe University)

09 Jun 2020 15:00 PM
09 Jun 2020 16:00 PM

Financial Regulation Lab (LabEx ReFi), the New York University (NYU), the Leibniz Institute for Financial Research SAFE (SAFE) and the Center for Advanced Studies on the Foundations of Law and Finance (LawFin) organize and cordially invite you to the the first web seminar from the Law & Banking/Finance Web Seminar Series

Speaker: Rainer Haselmann (Goethe University)

Title: Forward-looking Regulation and Procyclicality

As a response to the last financial crisis, politicians designed rules to force banks to timely recognize future losses. Exploiting the introduction of forward-looking provisioning rules in Germany, we show how banks' adjust their loan portfolio to counteract the new standards. The assessment of the same borrower's future default risk is significantly more favorable for banks that have to comply with the new standards compared to unaffected banks for those loans that would have required higher provisions. For loans not affected by the new rules, we do not find such a pattern. As a consequence of these adjustments, the overall provisions of affected banks are drastically reduced. We further simulate how a shock similar to the Lehman crisis would impact banks' provisions under the different regimes. Affected banks would have to enhance their provisions in response to such a shock by 50 percent more compared to the old regime. The simulation illustrates how the combination of risk-sensitive capital regulation and forward looking provisioning rules result into more procyclicality likely to be detrimental to financial stability.