Financial Stability

When you are looking for indicators for imbalances on asset markets, early warning systems, stress tests, or credit risk assessments, I can help you.

Examples of recent projects:

  • the development of a tool to calculate the fundamental values for international real estate and stock markets
  • a model of mortgage losses.

Food for thought:

A challenge for financial stability in Europe is the fact that a single monetary policy has to deal with very different economies. Reflecting the weak economic development in Germany, monetary policy was rather expansive in the first years of the new millenium. Too expansive for fast growing countries like Spain and Ireland. As a colleague and I have demonstrated, low interest rates have triggered real estate imbalances and finally the financial crisis in these countries. This does not imply that a single monetary policy is a bad idea. In any case, borrowing costs should have been different across the countries in the euro zone reflecting the different levels of risks. However, this disciplining effect of the markets didn´t play because lenders believed that they will be bailed out anyway. And they were (mostly) right. While in the US hundreds of banks and even the City of Detroit defaulted, the euero zone rescued banks of all sizes and policymakers have difficulties with letting Greece default.

 

In the recent crisis many banks suffered in particular from high losses in their mortgage portfolio. In my paper on Lending Behavior and Real Estate Prices, I show how biased risk assessments of banks can not only cause the buildup of banks´ mortgage exposure but also trigger real estate crises which in turn result in losses for the banks. Complementing the risk management of financial institutions with a more fundamental, long-term oriented risk assessment (e.g. based on my paper on mortgage losses or the calculation of fundamental real estate prices) would make banks more resilient and imbalances on real estate markets less likely.

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© Dr. Christian Hott