This paper investigates the returns and flows of German money market funds before and during the financial crisis of 2007/2008. The main finding of this paper is that, in liquid times, some money market funds (MMF) enhanced their returns by investing in riskier assets. By doing so they outperformed other MMFs, as long as liquidity in the market was high. Investing in riskier money market products, however, widens the typically narrow structure of MMFs and makes them vulnerable to withdrawals. When market liquidity declined during the subprime crisis, illiquid MMFs experienced withdrawals, while funds with safer and liquid portfolios functioned as a safe haven. As German MMFs calculate the value of their shares based on fluctuating net asset value, the findings inform the current debate on regulating MMFs.

This paper analyzes the effect of the business cycle on the regulatory capital buffers of German local banks in the period 1993–2004. The capital buffers are found to fluctuate countercyclically over the business cycle. The evidence supports that low-capitalized banks do not catch up with their well-capitalized peers over the observation period and they do not decrease risk-weighted assets during a recession. This finding suggests that their low capitalization does not force them to retreat from lending.

During the 6-month period from December 2005 to June 2006, the German Real Estate mutual fund industry suffered an unprecedented liquidity crisis. We investigate to what extend competing theories of liquidity crises help explain this event. Our results show that fundamental factors not only mattered for the liquidity outflow in normal times but also during the crisis. However, strategic complementarities accelerated the withdrawals during the crisis suggesting that pure panic behavior contributed substantially to the massive outflows. Thus higher liquidity buffers might help mitigating these tail events. Furthermore, we find that funds with a lower fraction of shares held by institutional investors suffered from less significant outflows suggesting that a segmentation of funds for different investor groups might help mitigate panics.

We analyse sub-custodian chains using a unique data set from a survey. Our key question is whether there is evidence for moral hazard in the delegation of asset safe-keeping to sub-custodians. Sub-custodian chains can be relatively long and frequently reach across several countries. The risk that securities are lost or the return to their owners delayed is not negligible. Our findings highlight that foreign or better informed banks are associated with shorter sub-custodian chains. Better capitalised banks seem to have longer, but safer sub-custodian chains. Our findings support the view that central securities depositories (CSDs) play a beneficial role in the management of sub-custodian structures. A CSD as the first sub-custodian reduces the country risk in sub-custodian structures. When we analyse the choice of a CSD, we find that better capitalised, larger and foreign banks are less likely to rely on CSDs as their first sub-custodian.

How do firms invest when financial constraints are relaxed? We document that firms affected by a large positive credit supply shock predominantly increase borrowing for transaction-based purposes. These treated firms have larger asset and employment growth rates; however, growth entirely stems from the increased takeover activity. Announcement returns indicate a low quality of the credit-supply-induced takeover activity. These results offer the possibility that credit-driven growth can simply reflect redistribution, rather than net gains in assets or employment. (JEL G21, G23, G31, G32) Received June 29, 2021; editorial decision August 18, 2022 by Editor Andrew Ellul. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

This paper investigates whether the new Basel Accord will induce a change in bank lending to emerging markets using a comprehensive new data set on German banks’ foreign exposure. We test two interlinked hypotheses on the conditions under which the change in the regulatory capital would leave lending flows unaffected. This would be the case if (i) the new regulatory capital requirement remains below the economic capital and (ii) banks’ economic capital to emerging markets already adequately reflects risk. On both accounts the evidence indicates that the new Basel Accord should have a limited effect on lending to emerging markets.

In this study, we test whether regional growth in 11 European countries depends on financial development and suggest the use of cost- and profit-efficiency estimates as quality measures of financial institutions. Contrary to the usual quantitative proxies of financial development, the quality of financial institutions is measured in this study as the relative ability of banks to intermediate funds. An improvement in bank efficiency spurs five times more regional growth then an identical increase in credit does. More credit provided by efficient banks exerts an independent growth effect in addition to direct quantity and quality channel effects.