Research and Policy 2 Joint Lunchtime Seminars 10 1 7 The ECB and Its Watchers/ IX 25 Research Articles 2 CFSluncheon 11 CFS Financial Center Index 27 CFSworking papers 6 CFSpresidential lectures 11 Miscellaneous 29 Events 8 CFSresearch conferences 12 Timetable of Forthcoming Events 31 CFScolloquium series 8 The Deutsche Bank Prize 21

Editorial Any time a Euro area head of government several adverse oil shocks lead to the Great will be faced with severe economic recession, Inflation in the United States, the United the temptation will be there to blame overly Kingdom and many other countries. Of course, While Building restrictive interest rates set by the ECB the Great Inflation was no must. Germany, for and to call for changing its mandate. Of example, was able to avoid the sustained rise Europe ... course, as long as other Euro area economies in inflation. The Bundesbank was independent, are performing satisfactorily and remain determined to fight inflation, had a strategy, „And the Goat shall bear upon him all supportive of the ECB’s independence, Euro and, importantly, she could always rely on the their iniquities unto a Land not inhabited.“ inflation aversion (Leviticus 16:22). In this manner, the of the German goat that departs – the (e)scape goat – public. is blamed and punished for the crimes or sufferings of others. The usefulness of such an While the ECB animal should not escape a reformer bent on is similarly inde- changing the French economy but expecting pendent and com- some unavoidable suffering along the way. mitted by treaty Thus, it is easy to understand that French to fight inflation, presidential candidates Ségolène Royal and she cannot count Nicolas Sarkozy repeatedly pointed fingers at on a single natio- the European Central Bank’s “euro fort” policy nal public to during the electoral campaign. stand behind it. As a supra-natio- More recently, President Sarkozy has refrained area central bankers may easily brush this nal institution she conducts monetary policy from further calls for changing the ECB’s policy criticism aside. But what if the economic for a large number of nations whose people mandate. The reactions of other European business cycle in the Euro area becomes more identify with the ECB’s goal of price stability government officials, such as the German, synchronized? Ironically, this is a long-held to very different degrees. Dutch and Austrian finance ministers, made wish by central bankers who hope that the clear that allies for such an initiative would be task of designing a common monetary policy As Chancellor Merkel and President Sarkozy hard to find. Similarly, the lack of a reaction would become easier in such an environment. sit down to discuss how to ensure the long- in foreign exchange markets emphasized However, synchronization would also bring term success of the European Union they may market participants’ belief that the ECB’s along stronger political pressure on the ECB be well advised to guard against long-term independence will remain undisputed for now. in bad economic times. vulnerabilities of its youngest institution.

Central bankers taking a longer-term per- To carry the thought experiment further let us Volker Wieland spective, however, should not relax just yet. think of a scenario such as the 1970s, when CFS Director

Gesellschaft für Kapitalmarktforschung e.V.: Chairman Board of Trustees: Prof. Dr. Dr. h.c. mult. Otmar Issing; Chairman Managing Board: Dr. Rolf-E. Breuer Center for Financial Studies: President: Prof. Dr. Dr. h.c. mult. Otmar Issing; Directors: Prof. Dr. Jan P. Krahnen, Prof. Volker Wieland Ph.D. (Frankfurt University) Research and Policy | CFS Research Articles CFS Research Articles | Research and Policy

Deutsche Börse AG operates the trading Comparing Market Quality ������������������ system Xetra that has also been adopted by the exchanges in Austria and Ireland. Across Exchanges ��� It has attempted mergers with both the ��� ��� ��� February 2007 London Stock Exchange and Euronext, ��� by CFS Program Director Erik Theissen (University of Bonn) and Maria Kasch-Haroutounian (University of Bonn)1 but both attempts failed. Interestingly, during the negotiations with Euronext, ��� Deutsche Börse offered to adopt ��� Exchanges around the world are facing massive structural change. Mergers (like the one between Euronext Euronext‘s trading platform for the � and the NYSE), attempted takeovers, acquisitions of minority stakes, and co-operations are rapidly changing merged entity. ����������� ������������� ��� ��� �������������� the face of the industry. As more and more exchanges are organized in the form of for-profit firms (rather than as mutualized non-profit organizations), both the objectives of exchanges and the nature of competition The two trading systems share many are changing. At the same time, banks and institutional investors are putting pressure on exchange officials to Figure 1 similarities. Most importantly, they are decrease transaction costs. Recently a group of large investment banks has published plans to establish a pan- both anonymous electronic open limit European trading platform for stocks. Such a move would obviously increase the pressure on exchanges to order books, and both have liquidity strive for efficiency. ��������������������� providers (designated market makers

referred to as animateurs as well as ��� Given that merging exchanges typically have a significant impact on liquidity, from both markets in question such that designated sponsors in Euronext and ��� ��� ��� have different trading systems, after it is important to control for differing the stocks are as similar as possible with Xetra, respectively) for less liquid stocks. ��� a merger the new entity will have to characteristics. There are two principal respect to these matching criteria. However, closer inspection reveals ��� decide which trading system to adopt approaches to achieving this. The first that there are a number of potentially ��� (or whether to retain both, which is is to analyze identical stocks traded in The idea is simple. If the matching important differences between the tra- likely to reduce the attainable cost both markets, e.g. US stocks, which are procedure is successful (i.e., if the paired ding platforms. These concern, among � ����������� ������������� ��� ��� �������������� reductions). Similarly, an independent also traded on Xetra, or German stocks, stocks are indeed similar with respect other things, trading hours, the existence exchange seeking cooperation with a which are cross-listed on the New York to the criteria used, and if the criteria of intra-daily call auctions, and the rules

partner should consider the quality of the Stock Exchange. Although this approach capture all stock-specific characteristics for cross and block trades. Another Figure 2 trading system when choosing between has been used in several empirical studies, that systematically affect liquidity), then potentially important point is that Xetra potential partners. Finally, potential new it has a serious shortcoming. Liquidity differences in liquidity may indeed be faces competition by the Frankfurt Stock entrants need to assess the quality of is positively related to trading volume traced back to the trading system. Exchange and several small regional incumbent exchanges’ trading systems that, in turn, tends to be higher in a exchanges, whereas no such competition before deciding to incur the fixed cost of stock’s home market. Thus, comparing An application: exists in France. Further, there are many entering the market. the liquidity of a stock in its home market Xetra versus Euronext more designated sponsors in Xetra than Since 2000, Erik Theissen has been Professor of with liquidity in another market will there are liquidity providers in Euronext. Business Administration at the Department Against this background, it is important most likely yield the result that liquidity The trading systems Finally, the minimum tick size is different of Economics of the University of Bonn. to measure the quality of a trading system is higher in the home market. In Continental Europe, there are cur- between the two markets. It is always € and to compare different trading systems. rently two major players: Euronext 0.01 in Xetra (for stocks trading at prices Liquidity is usually considered to be The second approach is the matched group and Deutsche Börse. Euronext above € 0.10). In Euronext, on the the most important measure of market samples procedure which has been used was formed in 2000 by a merger between other hand, it is € 0.01 only for stocks quality, and the bid-ask spread is the most extensively in the market microstructure the French Stock Exchange and the trading at prices below €�50. It increases We use three months (65 trading days) of The matching criteria we use are market widely used measure of liquidity. In the literature, e.g. in order to compare the exchanges in Amsterdam and Brussels. to €�0.05 for stocks with prices above data (May, June and July 2002). During capitalization, price level, and volatility. present article, we use this established liquidity of the New York Stock Exchange Euronext has been operating a common €�50, to €�0.1 for stocks with prices our sample period trading hours in Xetra measure of market quality in order to to the liquidity of NASDAQ (e.g. Huang trading platform since 2001. In 2002, above €�100, and to €�0.5 for stocks were longer than those in Euronext. We We use two measures of market quality: address the issue of how to compare and Stoll 19962). It is well known the exchange in Lisbon and the London- with prices above € 500. restrict the analysis to those hours during the percentage quoted spread and the different trading systems. that the liquidity of a stock depends based derivatives exchange LIFFE joined which both markets are open. percentage effective spread. The per- on characteristics such as its market the Euronext group. In 2006, a merger Sample and Results centage quoted spread is simply the A cross-exchange comparison of the bid- capitalization, the trading volume, the between the New York Stock Exchange Both Deutsche Börse AG and Euronext We create matched samples of 40 pairs difference between the best ask and the ask spread is complicated by the fact that volatility of the stock’s return, and the and Euronext was negotiated and provide CD-ROMs containing time- of stocks where each pair consists of one best bid, expressed as a percentage of the firms listed on different exchanges price level of the stock. The matched approved by the shareholders‘ meetings stamped data on bid and ask prices, French stock traded on Euronext Paris the quote midpoint. It changes whenever are not identical. As firm characteristics sample procedure selects pairs of stocks of both exchanges. transaction prices and trading volumes. and one German stock traded in Xetra. either the best bid or the best ask

2 1E-Mail: [email protected]; [email protected] 3 2Huang, R. and H. Stoll (1996): Dealer versus Auction Markets: A Paired Comparison of Execution Costs on NASDAQ and the NYSE’,Journal of Financial Economics, Vol. 41, pp. 313-357. Research and Policy | CFS Research Articles Research Articles | Research and Policy changes. We record all quoted spreads Erik Theissen’s research and teaching interests are in the area of Market Microstructure, of financial institutions may be driven cash available to buyers in the market. and calculate weighted averages, where Experimental Economics and Empirical Finance. In 2006, he became CFS Program by short-term fluctuations in the market If mark-to-market accounting is used, the weight is the time the spread was Director of the newly started Program Area “Economics of Exchanges” (XEcon). The that do not reflect the value of the then the volatility of asset prices directly valid. purpose of the program is to advocate research in the area of trading and exchanges. This fundamentals and the long-term value of affects the value of bank’s assets. This can includes the analysis of market participants and their behavior, the analysis of market assets and liabilities. lead to contagion and force banks into The percentage effective spread can design and trading protocols, the analysis of “downstream services” like clearing and insolvency even though they would be only be measured when a transaction settlement, and the industrial economics of exchanges. The debate is complex as it features fully able to cover their commitments occurs. It is the absolute value of the many different aspects. In our paper if they were allowed to continue until difference between the transaction price The research activities in the program will involve academics as well as practitioners and entitled “Mark-to-Market Accounting and the assets mature. In contrast, if historic and the quote midpoint, expressed as representatives of the regulatory authorities. Conferences, workshops and roundtable Liquidity Pricing” we analyze the effects cost accounting is in use, this problem a percentage of the latter. The effective discussion will be organized in order to present the research results. Results will be of using mark-to-market accounting does not compromise the solvency of spread is obviously identical to the quoted published as CFS Working Paper as well as in academic and applied journals. when financial markets are illiquid. The banks as it does not affect the accounting spread at the time the transaction occurs. Current research projects are: main insight is that valuing the assets value of their assets. Thus, historical cost Average effective spreads, however, are • Iceberg Orders of financial institutions using market accounting may prevent crises which The Federal Reserve Bank of New York typically smaller than average quoted • A Comparison of the Market Efficiency and Market Quality of the New York Stock prices may not be beneficial in these would occur under mark-to-market justified its action of facilitating a private spreads because transactions tend to be Exchange and Xetra circumstances. In times of financial crisis accounting. sector bailout of LTCM by arguing that if executed when the spread is low. • The Industrial Economics of Exchanges - Clearing and Settlement the interaction of institutions and markets the fund had been liquidated many prices can lead to situations where prices in The issue is illustrated by the case of in illiquid markets would have fallen and We report results for the full sample Christian Schlag (University of Frankfurt) and Joachim Grammig (University of illiquid markets do not reflect future the Long Term Capital Management this would have caused further liquidations and for four groups of stocks sorted by Tübingen) are involved in the Project as CFS Fellows. Further collaborators to the payoffs but rather reflect the amount of (LTCM). and so on in a downward spiral. Similarly, market capitalization. Results for the Project are: Maria Kasch-Haroutounian (University of Bonn) and Oliver Wünsche (University of Tübingen). quoted spread are shown in figure 1. The Elena Carletti: a Staff Portrait on page 29 average quoted spread in Euronext is larger in the full sample and in three out rather than quoted spreads confirms this comparable stocks are lower in Xetra of the four groups. The differences are finding. Average effective spreads are than in Euronext. This result is robust to The result that mark-to-market accoun- Second, there must be a source of conta- statistically significant for the full sample lower in Xetra for the full sample and for a variety of alternative specifications 3. An ting can be distortionary and generate gion through market prices. This means and for groups 1, 3 and 4. The results all four groups of stocks, and with only important issue for future research would “artificial” contagion is obtained in a that the banking and the insurance thus indicate that quoted spreads in Xetra one exception (group 2) the differences be to analyze which specific features of model with a banking sector and an companies must hold at least one type are, on average, lower than those in are statistically significant. Our analysis the trading systems actually cause these insurance sector. Banks obtain funds of asset in common that is liquidated on Euronext. Considering effective spreads has shown that bid-ask spreads for differences. from depositors who can withdraw on a secondary market. We analyze the case demand, and can invest in loans, short and where both the banks and the insurance long term assets. Insurance companies companies hold the long term asset. insure firms against the possibility of Third, the market where the “common” Accounting Systems and Financial Stability their machines being damaged, collect asset is sold must be characterized by premiums and invest in short or long liquidity problems in that some investors by Franklin Allen (University of Pennsylvania and CFS) term assets to fund the costs of repairing must be provided with incentives to hold Elena Carletti (Center for Financial Studies) the firm’s machines. liquidity and liquidity pricing occurs. the results of our analysis illustrate how This implies that prices do not always There has been an extensive debate in recent years on the advantages and disadvantages of moving towards using accounting values based on market In such a framework mark-to-market represent the future value of the assets. a full mark-to-market accounting system for financial institutions such as banks and insurance companies. prices can significantly exacerbate the accounting generates contagion when This debate was initiated with the move of the International Accounting Standards Board (IASB) and the problem of contagion when markets are three elements are present. First, there When the bad state of the economy US Financial Accounting Standards Board (FASB) to make changes in this direction as part of an attempt to illiquid. The notion that market prices must be a source of systemic risk. For is realized, the insurance companies go standardize accounting standards across countries. cannot be trusted to value assets in times simplicity, we focus on the case where bankrupt and need to liquidate the long of crisis also resembles the suggestion in only the insurance sector faces such risk. term asset. Market participants need to Bagehot (1873) that in response to crises In particular, the insurance companies be given incentives to hold liquidity and The debate has two opposing views. On of financial institutions and therefore of to-market accounting is thought to lead central banks should value bank collateral find it optimal to insure firms when purchase the assets. This means there the one hand, mark-to-market accounting allowing investors and policy makers to to excessive and artificial volatility. As weighting panic and pre-panic prices as only a limited number of machines are must be states in which asset prices are has the advantage of reflecting the true better assess the risk profile of financial a consequence, under this accounting market prices are not accurate measure damaged, and go bankrupt when a large „low“ so the participants can make a profit (and relevant) value of the balance sheets institutions. On the other hand, mark- system the value of the balance sheets of values in those circumstances. number of machines are damaged. and cover the opportunity cost of holding

4 3 See Kasch-Haroutounian, M. and E. Theissen (2007): Competition Between Exchanges: Euronext versus Xetra, CFS Working Paper, 5 forthcoming in European Financial Management Research and Policy | CFSworking papers CFSworking papers | Research and Policy the short asset in the other states. The low contagion is to lower welfare compared References 2007/17 Günter W. Beck, Volker Wieland 2007/02 Francis X. Diebold, Kamil Yilmaz prices are determined by the endogenous to what would happen with accounting Allen, F. and E. Carletti (2007), Money in Monetary Policy Design under Uncertainty: Measuring Financial Asset Return and Volatility Spillovers, amount of liquidity in the market rather values based on historic costs. In some “Mark-to-Market Accounting and Liquidity The Two-Pillar Phillips Curve versus ECB-Style Cross-Checking With Application to Global Equity Markets than the future earning power of the cases banks will structure their portfolios Pricing”, Journal of Accounting and 2007/16 Silvio Colarossi, Andrea Zaghini 2007/01 Günter W. Beck, Kirsten Hubrich, asset. If accounting values are based on and deposit contracts to remain solvent Economics, forthcoming. Gradualism, Transparency and Improved Operational Massimilliano Marcellino historic cost, the low market prices do so that contagion is avoided. However, Bagehot, W. (1873), “Lombard Street: Framework: A Look at the Overnight Volatility Transmission Regional Inflation Dynamics within and across Euro Area not lead to contagion. Banks are not even in this case there is a distortion. A Description of the Money Market,” Countries and a Comparison with the US affected by the low prices. They remain London: H. S. King. 2007/15 Annamaria Lusardi, Olivia S. Mitchell solvent and can continue operating until This analysis has important implications Financial Literacy and Retirement Preparedness: 2006/35 Christopher D. Carroll, Misuzu Otsuka, Jirka Slacalek their assets mature. for the debate on the optimal accounting Evidence and Implications for Financial Education Programs How Large Is the Housing Wealth Effect? A New Approach system. In particular, it stresses the In contrast, when assets are priced potential problems arising from the use 2007/14 Jean Boivin, Marc P. Giannoni, Ilian Mihov 2006/34 Guiseppe Bertola, Winfried Koeniger Sticky Prices and Monetary Policy: Consumption Smoothing and Income Redistribution according to market values, low prices of mark-to-market for securities traded Evidence from Disaggregated U.S. Data can cause a problem of contagion from in markets with scarce liquidity. Also, the 2006/33 Siem Jan Koopman, Roman Kräussl, the insurance sector to the banking analysis has important implications in the 2007/13 Virgiliu Midrigan André Lucas, André Monteiro sector. Even if banks would be solvent light of the recent accounting standards Menue Costs, Mulit-Product Firms, and Aggregate Fluctuations Credit Cycles and Macro Fundamentals if they were allowed to continue, the SFAS 157 and IAS 39. According to current market value of their assets can these standards, prices should be used to 2007/12 Michael Woodford 2006/32 Rachel A. Campbell, Roman Kräussl be lower than the value of their liabilities. value assets if there is an active market Robustly Optimal Monetary Policy Does Patience Pay? Empirical Testing of the Option to Delay Banks are then declared insolvent by with continuously available prices. Our with Near-Rational Expectations Accepting a Tender Offer in the U.S. Banking Sector regulators and are forced to sell their long analysis suggests that it is also necessary 2007/11 Lars E.O. Svensson, Noah Williams 2006/31 Rachel A. Campbell, Roman Kräussl term assets. This worsens the illiquidity that the market be liquid in the sense that Bayesian and Adaptive Optimal Policy Revisiting the Home Bias Puzzle. Downside Equity Risk problem in the market and reduces prices it can absorb abnormal volume without under Model Uncertainty even further. The overall effect of this significant changes in prices. 2006/30 Joao Miguel Sousa, Andrea Zaghini 2007/10 Alessandro Calza, Tommaso Monacelli, Livio Stracca Global Monetary Policy Shocks in the G5: A SVAR Approach Mortgage Markets, Collateral Constraints, and Monetary Policy: Do Institutional Factors Matter? 2006/29 Julia Hirsch Public Policy and Venture Capital Financed Innovation: 2007/09 Mark Gertler, Antonella Trigari A Contract Design Approach Unemployment Fluctuations with Staggered Nash Bargaining 2006/28 Christian Gollier, Alexander Muermann 2007/08 Olivier Blanchard, Jordi Galí Optimal Choice and Beliefs with Ex Ante Savoring A New Keynesian Model with Unemployment and Ex Post Disappointment

2007/07 Kai Christoffel, Keith Kuester, Tobias Linzert 2006/27 Christian Laux, Uwe Walz Identifying the Role of Labor Markets for Monetary Policy Tying Lending and Underwriting: CFSworking papers in an Estimated DSGE Model Scope Economies, Incentives, and Reputation The CFSworking paper series presents the result of scientific research on selected topics in the field of money, 2007/06 Gauti B. Eggertsson, Benjamin Pugsley 2006/26 Christian Laux, Alexander Muermann banking and finance. The authors are either participants in the Center’s Research Fellow Program or members The Mistake of 1937: A General Equilibrium Analysis Mutual versus Stock Insurers: of one of the Center’s Program Areas. Around 200 Working Papers are currently available and can be downloaded Fair Premium, Capital, and Solvency from our website: www.ifk-cfs.de 2007/05 Michael Bordo, Christopher Erceg, Andrew Levin, Ryan Michaels 2006/25 Bea Canto, Roman Kräussl Three Great American Disinflations Stock Market Interactions and the Impact of Macroeconomic 2007/21 Wolfram J. Horneff, Raimond H. Maurer, 2007/19 Maria Kasch-Haroutounian, Erik Theissen News – Evidence from High Frequency Data of European Olivia S. Mitchell, Michael Z. Stamos Competition between Exchanges: Euronext versus Xetra 2007/04 Michael Sonnenholzner, Achim Wambach Futures Markets Money in Motion: Dynamic Portfolio Choice in Retirement On the Role of Patience in an Insurance Market 2007/18 Günter W. Beck, Volker Wieland with Asymmetric Information 2007/20 Bea Canto, Roman Kräussl Money in Monetary Policy Design under Uncertainty: Electronic Trading Systems and Intraday Non-Linear Dynamics: A Formal Characterization of ECB-Style Cross-Checking 2007/03 Michael Binder, Volker Wieland An Examination of the FTSE 100 Cash and Futures Returns The European Central Bank

6 7 Events | CFScolloquium series CFScolloquium series | Events

the company’s strategy and offer investors the opportunity voting against any proposals aimed at introducing different CFScolloquium series to express their opinions and doubts. Mansfeld regards this classes of shares. Secondly, the positions of Chief Executive method of cooperation to be of growing importance. A and Chairman of the Board should be split. Furthermore, second, and more official approach, is to exercise share voting members of the Board of Directors should be free of conflicts Unternehmensverfassung im Wandel/ rights. The exercising of these rights derives from two distinct of interest, particularly those that may lead to disadvantages Corporate Governance in Transition motives: On the one hand, institutional investors should for the shareholders. And finally, Union Investment demands attend shareholder meetings to exercise their voting rights in transparent management remunerations based on long-run compliance with government regulation and self-regulation performance. and, on the other hand, they should do so in order to fulfill Corporate Governance in Unternehmen – Die wachsende Rolle their role as trustees of their clients’ money. Concluding his presentation, Mansfeld called attention to the institutioneller Anleger/ Corporate Governance in Companies – Corporate Governance Action Plan and associated work that The Growing Role of Institutional Investors Mansfeld supports the view that institutional investors should is being done at the European level. Many of the concepts in exercise their voting rights and that active shareholders the Action Plan are fully supported by Mansfeld. However, contribute to more efficient capital markets. He also explicitly some of the legislative proposals, such as the disclosure In his speech at the CFScolloquium on 11 October 2006, Wolfgang Mansfeld, a member of the Managing Board of supports self-regulation, which is also the basis for the rules of of shareholder voting and the promotion of independent Union Asset Management Holding AG, presented his views on the topic “Corporate Governance in Companies conduct of the BVI - Bundesverband (Federal Association of) directors, do not meet with his approval. He also spoke about – The Growing Role of Institutional Investors”. In his opinion, this topic is important for two reasons. Firstly, Investment und Asset Management e.V. However, institutional the commitments of unregulated funds, i.e. hedge funds, active institutional investors make capital markets more efficient. And secondly, more active behavior may investors should verify carefully whether it is worth influencing as institutional investors. Rules of conduct for hedge funds contribute to an increase in private investors’ wealth. In this context, it has to be clarified what role institutional the corporate governance of companies. Shareholder activism are currently non-existent but are badly needed. This would investors should play as shareholders and how they should exercise their shareholder rights. has to be conducted in accordance with the fiduciary obligations enhance the transparency of their strategies as shareholders as regards clients, but should not be a goal in itself. He warns and would reduce possible conflicts of interest. that a more active role on the part of institutional investors the self-interests of management and the influence exerted might be postulated by different interest groups. Institutional In summary, it may be said that Mansfeld’s answer to the through workers’ participation play too big a role. investors should be wary of becoming instruments for an array question whether institutional investors should use their of socio-politically motivated engagement. Although important growing importance to influence corporate governance of While presenting his definition of good corporate governance, for society as a whole, efforts put into projects such as the companies suggests that ultimately the performance of the he spoke about a recent initiative by a leading stock exchange Carbon Disclosure Project (an initiative to enforce companies company is of foremost importance to the investor and that index provider, who intends to set up a corporate governance to publish their pollutant emission) have to be justified in terms corporate governance has to be in line with this issue. rating based on five criteria: the compensation system of the of higher returns for their clients, the private investors. At this executive and non-executive directors, the quality of the stock point, Mansfeld cited research that shows that companies with Tim Oliver Berg and Lut De Moor (CFS staff) option programs for the managers, shareholder rights and a high corporate governance rating do not necessarily offer a how they may be exercised, the structure of the board, and better performance. Furthermore, limits have legally been set the audit process. Although this project is at an early stage, it to determine the extent to which an investor may intervene nevertheless gives some indication of what constitutes good in the actual management of a company. The EU Investment Mansfeld stated that a structural change has taken place on the corporate governance. Directive serves as a formal framework in this respect. capital markets over the last 15 years. The share of investors in a position to play an active role in the corporate government In summary, it can be said that the influence of institutional Mansfeld presented the policy of Union Investment as an of the target company, in particular the share of institutional investors has been growing and good corporate governance example of how these principles may be implemented in a investors, has been growing rapidly. Today institutional should primarily take the interests of shareholders into concrete policy context. Since time and resource constraints investors hold a majority in many DAX-listed companies and account. Having established this point, Mansfeld proceeded to make it impossible for Union Investment to exercise its voting can exert influence and defend their interests by exercising focus on how institutional investors could influence corporate rights at the shareholder meetings of every single company in their voting rights in the shareholder meetings. According governance. In the past, they have played a mostly passive role which it has invested, the investment company picks the 200 to Mansfeld, good corporate governance is primarily about by purchasing shares they regarded as promising and selling largest companies in its portfolio. However, when it comes to shareholder value. Investors are interested in high returns on those deemed otherwise. Nowadays, their role has changed the actual decision-making process, Union prefers to act in their investments and, therefore, good corporate governance and institutional investors see themselves as shareholders who accordance with a catalog of general guidelines, rather than exists when a company works in such a way that it serves the want to improve the company performance. Two mechanisms to make decisions case by case. This is a common approach to interests of its shareholders. This implies that there should be are used for this purpose. One way to exert influence is the so- structuring the decision-making process among investment no room for a broad concept of stakeholder interests. He cited called “one-to-one” or direct cooperation approach. Through a companies. The catalog contains the following principles. the notion of “Deutschland AG”, arguing that in Germany both direct dialog, the management can present the company and Firstly, it includes the principle of “one share one vote”,

8 9 Events | Joint Lunchtime Seminars CFS Luncheon | Events

Joint Lunchtime Seminars 21 Mar. 2007 Learning from Public and Private Observation of Other‘s Action CFSluncheon Pierre Olivier Weill (New York University) The Joint Lunchtime Seminars are a series of weekly research lectures 14 Mar. 2007 Informed Lending: Foundations and The Center for Financial Studies organized a lunch-time lecture under the new heading “CFS Luncheon”. The first event was inviting academics from other institutions to present their research Applications to Corporate and Consumer held on 19 April 2007 with a talk by Professor Martin Weber (University of Mannheim) on the topic of “Active versus Passive in the fields of Monetary Economics, Macroeconomics, Finance and Finance Portfolio Management”. Udo Rosendahl (DWS Investment GmbH) acted as discussant and Dieter Kuckelkorn (Börsen-Zeitung) Econometrics. The speakers comprise both well-established senior Roman Inderst (Frankfurt University) as moderator of the discussion. The lecture and discussion were held in German. This first CFS Luncheon was well received and researchers as well as those at the assistant and associate level from all 7 Mar. 2007 New Keynesian Models, Durable Goods, and the attendance was above all expectations. Around 150 participants, mainly from the banking sector, have attended the event. Jan over Europe and the United States. Collateral Constraints Pieter Krahnen (CFS Director and Organizer of the event) said that similar events are under consideration for the future. Tommaso Monacelli (Bocconi University) Originally started in January 2001, the weekly presentations have 28 Feb. 2007 News shocks with Limited Enforcement Karl Walentin (Sveriges Riksbank) become a fixed entry in the diary of many members of research 21 Feb. 2007 Household Need for Liquidity and the institutions and central banks located in Frankfurt. As a result, seminars CFS Credit Card Debt Puzzle presidential lectures are usually accompanied by lively debates and subsequent discussions. Irina Telyukova (University of California, San Diego) The Joint Lunchtime Seminars are organized by Klaus Adam (European 14 Feb. 2007 Learning, Macroeconomic Dynamics and “Die Zukunft Europas” Central Bank), Heinz Herrmann/Sandra Eickmeier (Deutsche the Term Structure: A Bayesian Analysis (The Future of Europe) Bundesbank) and Volker Wieland (Frankfurt University and CFS)/ Hans Dewachter (KU Leuven) Günter Beck (Frankfurt University). 7 Feb. 2007 Are Valuation Effects Desirable from a Dr. Helmut Kohl, 21 June 2007 Global Perspective? Pierpaolo Benigno (LUISS - Free University for 30 May 2007 Dynamic Factor and Factor Augmented International Studies in Social Science, Rome) that took place in Europe, such as 24 Jan. 2007 The Role of Housing Collateral in an Error Correction Models the German Reunification and the Estimated Two-Sector Model of the U.S. Anindya Banerjee (European University signing of the Maastricht Treaty, which Institute) Economy led to the creation of the European 23 May 2007 Market Liquidity and Funding Liquidity Stefano Neri (Bank of Italy) Union. He became a greatly respected Marcus Brunnermeier (Princeton University) 17 Jan. 2007 Financial Innovation and the Transactions 16 May 2007 Consumer Confidence and Elections Demand for Cash European statesman. Gikas Hardouvelis (Eurobank) Francesco Lippi (University of Sassari) 8 May 2007 A Century of Work and Leisure 19 Dec. 2006 Restructuring the Sovereign Debt His visions to “Overcome the division Valerie Ramey (University of California, Restructuring Mechanism of Germany and Europe” and to San Diego) Mark L. Wright (University of California, bring forward the French-German 2 May 2007 Competition, Risk-Shifting, Los Angeles) reconciliation and European integration and Public Bail-Out Policies 12 Dec. 2006 Risk Sharing in Private Information Models were vital in this respect. Dr. Helmut Kohl was born in 1930 Isabel Schnabel (Max Planck Institute for with Asset Accumulation: Explaining the Excess Smoothness of Consumption and studied Law, Political Science and Research on Collective Goods) Helmut Kohl received many awards Nicola Pavoni (University College London) History at the Universities of Frankfurt 25 Apr. 2007 Exchange Rate Models are Better than You and prizes throughout his career. Think 5 Dec. 2006 Banks’ Choice of Liquidity: The Role of Fire and Heidelberg. In 1958, he received To name a few, he was awarded the Charles Engel (University of Wisconsin) Sales and Entry the degree of Dr. phil. He joined the “Großkreuz des Verdienstordens der 18 Apr. 2007 Idiosyncratic Uncertainty, Inflation, and Tanju Yorulmazer (Bank of England) Christian Democratic Union (CDU) in BRD in besonderer Ausführung” Welfare 1947 and was the federal chairman of (Grand Cross of the Order of Merit Miguel Molico (Bank of Canada) the CDU party from 1973 to 1998. 11 Apr. 2007 Assessing Estimates of the Exchange Rate of the Federal Republic of Germany), was made honorary citizen of Europe Pass-through His 16 year tenure as Chancellor of and received the “Presidential Medal Ida Wolden Bache (Norges Bank) Germany (Bundesrepublik Deutsch- 4 Apr. 2007 Changes in Predictive Ability with Mixed of Freedom” from U.S. President land) was the longest in post-war Frequency Data Clinton. German history: he held the office Ana Beatriz Galvao (University of London) from 1982 till 1998. During this time, 28 Mar. 2007 Five Facts About Prices: A Reevaluation of Among his publications are: Helmut Kohl. Menu Cost Models Helmut Kohl played a crucial role Erinnerungen Emi Nakamura (Harvard University) in many important historic changes (1982-1990 and 1930-1982).

© European Community

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CFS Presidential Lecture Series on European Integration “Corporate Governance and Capital Markets” Jointly organized by CFS and ECGTN

In everyday life “Europe” widely stands the CFS has invited prominent speakers for “Bureaucracy from Brussels”, disputes with expert knowledge in questions of about finances and national interests. European Integration. The CFS-ECGTN Summer School 2007 on “Corporate The school is intended for doctoral and post-doctoral students Beyond these quarrels, the track record Governance and Capital Markets” is organized by the Center in economics, finance, law and political science. Participation is of the European Integration is endangered The lecture series will be opened by for Financial Studies and the European Corporate Governance compulsory for Early Stage Researchers of ECGTN. to fall into oblivion. After two terrible the former chancellor Dr. Kohl with Training Network (ECGTN). The topics of this year’s summer world wars in the first half of the 20th the speech “Die Zukunft Europas” (“The school are: the role of mergers, acquisitions, restructurings; The Summer School will be held at the Training Center of the century, the European Union today Future of Europe”) on 21 June 2007. venture capital and private equity; corporate governance and Deutsche Bundesbank, situated 30 miles west of Frankfurt at unites more than 490 million Europeans The speech will be held in German. shareholder value. the riverside of the Rhine and in the midst of one of the most from 27 countries in freedom and peace. Cardinal Lehmann will make a speech famous wine growing areas in Germany. Thirteen of these member states, of which on the topic “Über die Chancen des The lectures will be given by: many did not know a solid currency for biblisch-christlichen Leitbildes für • Yakov Amihud (Stern School of Business, New York The program will start on Monday morning and is scheduled decades, now share a common stable die europäische Integration” (“On the University) on “Mergers, acquisitions, and restructurings” to end on Saturday evening. Meals and lodging will be provided currency, the Euro. Particularly younger Opportunities of the Biblical Christian • Francesca Cornelli (London Business School) on “Venture from Sunday evening (12 August) until Sunday morning (19 generations are at risk to lose knowledge Overall Concept for the European capital and private equity” August). Social events will also be organized. Participants will about the importance of the European Integration”) on 5 September 2007. The • David Yermack (Stern School of Business, New York be charged EUR 1,350.- covering registration, full board at the Integration. speech will be held in German. Mario University) on “Corporate governance and shareholder Training Center and background material. Draghi (Governor of the Bank of Italy) value” The Center for Financial Studies (CFS), will give a speech on 22 November Further information about the Summer School 2007 can be beyond its engagement in questions 2007. In addition Mario Monti (10 years found on the CFS website. of financial markets and monetary member of the European Commision), problems, would like to contribute with Lord Dahrendorf (House of Lords) and this lecture series to the awareness of Professor di Fabio (German Federal International Conference on Public the importance and achievements of the Constitutional Court) have accepted to versus Private Ownership of Financial Institutions European Integration. For this purpose, © European Community contribute to future lectures.

The conference jointly organized by the Center for Financial Studies, the Deutsche Bundesbank, and the Wharton Financial Institutions Center was held at the Deutsche Bundesbank, Frankfurt on 17-18 November CFSresearch conferences 2006. The focus of the conference was to address the implications of the ownership structure of financial institutions for performance, growth, credit availability, and stability of the financial sector. CFS Summer School 2007 12 – 19 August 2007 The opening speech was held by Edgar The first session on “The Role of Meister (Member of the Executive Board, Government” was chaired by Beatrice Training Center of the Deutsche Bundesbank Eltville (near Frankfurt am Main), Germany Deutsche Bundesbank). He started with a Weder (University of Mainz and brief review of the characteristics of the CFS). Julan Du (Chinese University German banking system and its three-pillar of Hong Kong) presented the first structure, emphasizing the reasons for the paper in the session, “Government- existence of public banks in the economy. Business Relationship and Financial Meister compared the system in Germany System Structure”. This paper shows with those of other European countries that government intervention plays an that have faced a privatization trend in the important role in shaping the structure last years. He argued that further research is of a financial system. A higher degree required before the positive consequences of state intervention tends to lead to a of privatization in a banking sector can be more bank-based financial system and satisfactorily analyzed. government ownership of banks, since

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ment ranking due to the relatively longer government-owned banks as well as the Allen N. Berger, Board of Governors of The final paper of the session and the sample period. links to politics. Levine concluded his the Federal Reserve System and Wharton conference was presented by Elisabetta speech with a summary of findings that FIC; Leora F. Klapper, World Bank and Fiorentino (Dresden University of The second session, chaired by Thilo government-owned banks frequently Rida Zaidi, University of Cambridge). Technology) entitled “Productivity Liebig (Deutsche Bundesbank), slow economic growth and that their Investigating the impact of bank ownership Change, Consolidation, and Privatization addressed “Bank Ownership and Financial lending is based on political criteria. type on banking relationships for Indian in Italian and German Banking Markets” Stability” and began with a presentation firms, the authors find that firms with (co-authored by Alessio De Vincenzo, by Gianni De Nicolo (International The third session chaired by Jan Pieter relationships to foreign banks are more Bank of Italy; Frank Heid, Deutsche Monetary Fund) on “Bank Ownership, Krahnen (University of Frankfurt likely than other firms to be transparent, Bundesbank; Alexander Karmann, Market Structure and Risk” (joint work and CFS) focused on “SME Financing to have multiple relationships, and to Dresden University of Technology with Elena Loukoianova, International and Relationship Lending: Evidence diversify across bank ownership types. and Michael Koetter, University Monetary Fund). This paper models from Asia”. Wako Watanabe (Tohoku But firms that have relationships with of Groningen). The authors find that the impact of market structure, bank University) presented the paper entitled state-owned banks are less likely to both countries’ banking systems have bank financing is less sensitive to the monitoring and bankruptcy costs to lower volatility in returns, cooperative “Do Governmental Financial Institutions maintain multiple banking relationships experienced productivity growth owing negative effects of state intervention on banks’ risk of failure by focusing banks are more stable than commercial Help Startups Grow? Evidence from and to diversify across ownership to the improvement of technology in when compared with equity financing. on the heterogeneity of banks, and it banks. Moreover, commercial banks are Japan” (co-authored by Hikaru Fukanuma, types compared to other firms. Todd the period 1995-2004. Moreover, Italian The paper was discussed by Giovanni also empirically tests the predictions less stable if they are in a system with National Life Finance Corporation and Gormley (Washington University in St. banks’ productivity growth, positively Dell’ Ariccia (International Monetary derived using data for non-industrialized a higher presence of cooperative banks. Tadanobu Nemoto, Chuo University). Louis) expressed his concern about the affected by privatization, has been Fund), who focused on the characteristics countries. The findings may be Ralf Elsas (University of Munich) Based on a survey of small and medium direction of causality for the impact of higher than that of German banks. Cost of the sample and suggested that additio- summarized as follows: first, the positive discussed the paper by focusing on sample enterprises (SMEs), the paper finds foreign banks when discussing the paper. efficiency changes have contributed little nal controls in the empirical analysis relationship between bank concentration characteristics and the methodological that government financial institutions He suggested the use of more controls in to growth. Steven Ongena (Tilburg and more theoretical background would and risk of failure is stronger when bank issues. In particular, he suggested (GFIs) lend to firms with limited credit the model and the investigation of within- University) discussed the paper, and provide a better motivation to the paper. ownership is taken into account, and controlling for mergers since distress availability, and firms that borrow from district variation for foreign banks. suggested exploring the timing of the relationship is strongest if the state- mergers might have an impact on the GFIs grow faster than firms that borrow the effects of ownership changes and Elias Papaioannou (European Central owned banks’ market share is larger. financial status of banks. from private banks. The paper was The second day of the conference started controlling for other factors in order Bank) presented the next paper entitled Second, foreign banks are riskier than discussed by João A.C. Santos, (Federal with the session on “The Experience in to show that privatization really affects “Financial Development and Intersectoral private domestic banks. Third, there are Reserve Bank of New York), who argued European countries” chaired by Elena productivity growth. Investment: New Estimates and negative “external” effects on private that the authors need to explore other Carletti (CFS). The first speaker, Evidence”, in which he examines whether domestic banks from state-owned and performance measures of firms and to Miguel A. García-Cestona (Universitat The conference concluded with a panel greater levels of financial development foreign banks’ larger market shares. control for additional firm characteristics Autònoma de Barcelona) held a talk on discussion moderated by Gertrude lead to greater investment in growing Isabel Schnabel (Max Planck Institute such as capitalization. “Multiple Goals and Ownership Structure: Tumpel-Gugerell (Member of the sectors. His study links institutional for Research on Collective Goods, Bonn) Effects on The Performance of Spanish Executive Board, European Central Bank). features with the intersectoral investment started the discussion of the paper by Savings Banks” (co-authored by Jordi The first speaker, Luis Rodriguez (Head responsiveness through financial looking at the definitions used in the Surroca, Universidad Carlos III). This of the Technical Secretariat, Associate development and finds strong evidence paper for “competition” and “public/ paper shows how the ownership structure Directorate General of Supervision, Bank for an association between financial foreign banks”. She compared the paper of savings banks affects their performance of Spain), gave a summary of the Spanish development and the intersectoral with the work by Gropp/Hakenes/ level and their goal priorities. The experience, focusing on the structure of investment responsiveness measure. Schnabel (2006) and concluded that findings suggest that insider-controlled savings banks. Paolo Marullo Reedtz Moreover, he finds that state ownership findings on externalities owing to state- savings banks favor different goals such (Deputy Head, Banking Supervision of banks is strongly related to capital owned banks and highly concentrated The keynote speech, moderated as profit maximization and perform Department, Bank of Italy) gave a brief market size and intersectoral investment banking sectors are robust to different by Franklin Allen (University of better, compared with those controlled review of the Italian banking system responsiveness. The discussant of the data and different methodologies. Pennsylvania), was held by Ross Levine by public administrators. The discussant, before 1980. He compared the figures paper, Uwe Walz (Goethe University (Brown University). Levine provided Lucy White (Harvard Business School for public and private banks and pointed Frankfurt and CFS), argued against the Heiko Hesse (World Bank and a review of the recent literature on and University of Lausanne), argued that to the limited profitability and low underlying theoretical considerations of University of Oxford) presented the next government ownership of banks and studying only savings banks does not capital endowments of savings banks. the two stage approach of the model paper in the second session, “Cooperative compared different views related to the Maria Soledad Martinez Peria answer all questions related to efficiency. He said that for private banks there are and recommended examining reversals Banks and Financial Stability” (co- topic. The studies discussed cover both (World Bank) presented the final paper In particular, she suggested that the legal barriers to acquiring a public bank. in the country ranking of investment authored by Martin Cihák, International developed and undeveloped countries of the day, “Bank Ownership Type and authors should use input-output analysis Martin Hellwig (Director, Max Planck responsiveness and in financial develop- Monetary Fund). This study finds that due and investigate the economic impact of Banking Relationships” (co-authored by to measure efficiency. Institute for Research on Collective

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Goods and Former President of the of the Executive Board, Deutsche bank ownership still continue, especially Business, American University) reconfirmed that geographic German Monopoly Commission), on the Bundesbank) asked if a bank should with respect to Germany. distance between banks and borrowers plays an important role other hand, questioned the objectives of be shareholder-oriented or stakeholder- in determining pricing and availability of credit. He noted, Basel II. He also argued that the presence oriented as many people use arguments Günseli Tümer-Alkan (CFS research staff) however, that it is not distance per se but rather informational of public banks increases competition in on profitability. Tumpel-Gugerell deficiencies that drive the results. Mainly addressing developing the industry and that the UK should responded by emphasizing that capital The complete conference program countries, Xiaoyun Yu (Kelly School of Business, Indiana not serve as a model with regard to requirements are not equal for each type including papers and presentations can University) provided a theoretical explanation for favoritism the profitability of banks since there of bank and this prevents the industry be found at: www.ifk-cfs.de leading to the efficient allocation of capital. is limited competition in the industry. from being a legal playing field. All Hans-Helmut Kotz (Member discussions showed that the debate on In his keynote lecture, Philippe Aghion (Harvard University) revisited the finance-growth debate, focusing on potential interaction effects between the two. Aghion presented ECB-CFS Research Network on The first session revisited the financial development-growth evidence that catching up was easier for countries with a “Capital Markets and Financial Integration in Europe” nexus. It was generally agreed that financial development drives high level either of financial or technological development, economic growth - although reverse causality exits. Drawing whereas less endowed countries were likely to fall back. He from the results of two technically demanding papers, Elias went on to argue that a more counter-cyclical budgetary Papaionnou (ECB) showed that financial development is policy was more growth enhancing in countries with lower The ECB-CFS Research Network on “Capital Markets and Financial Integration in Europe” is currently in its second phase vital in channeling capital into the most productive industries, levels of financial development. Presenting his arguments with until the end of 2007. The Internal Steering Committee consists of the following members: Gertrude Tumpel-Gugerell (ECB), and that countries with larger capital markets were faster to verve, he concluded that for the EU it would be advisable Michael Binder (University of Frankfurt), Philipp Hartmann (ECB), Jan Pieter Krahnen (CFS and University of Frankfurt). adapt to technological change. Jean Imbs (HEC Lausanne) to have a more pro-cyclical budgetary policy. These remarks The ECB-CFS network organizes two conferences per year on topics related to its priorities. In 2006, the conferences were looked at US State-level banking sector deregulation between sparked a lively discussion, as did his claim that EU countries held in Berlin and Madrid. 1972 and 1995. Applying portfolio theory to the literature on chiefly should foster financial market development and not finance and growth, he presented evidence of deregulation labor market reform, since the latter was costly and not as having a positive effect on capital efficiency. Alain de Serres responsive. (OECD) exploited cross-country as well as industry variation, th to demonstrate that competition-friendly regulation has a 7 ECB-CFS Research Network conference, positive effect on productivity and output growth. hosted by Deutsche Bundesbank 28 – 29 September 2006 “Financial System Modernisation and Economic Growth in Europe”

Financial integration and financial system modernization are recognized to be key issues in fostering competition and economic growth in Europe. But what are the exact mechanisms behind the interaction of finance and growth? Does financial development indeed cause economic growth, or is it the other way round? And, how far have European countries progressed in modernizing their financial systems?

According to work presented by Avanidhar Subrahmanyam Leading-edge research addressing these and related questions (UCLA) in the third session, high CEOs salaries can be was presented and discussed at the seventh ECB-CFS Research explained by larger shares of unsophisticated retail investors. Network conference ‘Financial System Modernization and The second session focused on the relationship between In contrast to institutional investors, retail investors may be Economic Growth in Europe’ at Harnack Haus in Berlin. lenders and borrowers in corporate and household financing. unable to decipher true CEO compensation from disclosures. Charles Grant (University of Reading) showed that debt Kaspar Meisner Nielsen (Copenhagen Business School and In her opening remarks, Gertrude Tumpel-Gugerell (Member repayment behavior of households differs significantly across CEPR) showed that publicly traded corporations in Europe of the Executive Board of the ECB) emphasized the strong European countries. The way households deal with adverse that adhere to the “principle of proportional ownership” have ties between financial development and economic growth. As events that restrain ability to pay largely depends on the on average higher firm value. the benefits of European financial market modernization have institutional setting and the cost of default. Using a novel data not always been fully perceived by European citizens, raising set which includes information from accepted and rejected The first day ended with a superb view over Berlin city from general awareness of these benefits would be essential. loan applications, Robert Hauswald (Kogod School of the top of the “Reichstag” building. In his dinner speech,

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machines. A first analysis suggests that these indicators can be was used as a hub for financial services by the hedge fund He also pointed to the role of policy makers, who should be useful when measuring access to and use of financial services, and private equity industry, as Frankfurt was not able to offer committed to providing an effective legislative and regulatory yielding complementary information to standard indicators the required expertise. Angel Ubide (Tudor Investment) framework. of financial depth. Challenging the seminal paper of Rajan believed that future hedge fund regulation might become and Zingales (1998), George von Fuerstenberg (Indiana necessary, more because of consumer protection issues than Christian Weistroffer (CFS and Deutsche Bank AG) University) proposed an alternative measure of external for financial stability reasons. He also lobbied for a reformed With thanks to the ECB staff who provided the Conference Summary finance dependence that is not related to technological factors. and integrated mortgage market in which consumers would He argued that differences in dependence on external finance be able “to take their mortgages to other banks”. The complete conference program and downloadable papers as in Rajan and Zingales, might merely reflect differences in can be found at: http://www.eu-financial-system.org/Berlin technology across different manufacturing sectors. In his closing remarks, Axel Weber resumed that financial 2006_programhtm.html integration and modernization do matter for economic Thomas Mayer (Chief Economist Europe of Deutsche Philipp Hartmann (ECB) presented a number of indicators growth, but were first and foremost market driven processes. Bank AG) pleaded for monetary policy makers to pay closer that can be used to measure financial development as opposed attention to financial markets change in risk appetite and the to financial integration in the EU. The numbers considered way financial markets price risk. suggest that Greece, Italy and Portugal need further financial th system improvements, while France and Germany offer a 8 ECB-CFS Research Network conference, The second conference day started with two parallel sessions: somewhat mixed picture. Finland, the Netherlands and Sweden hosted by Banco de España one focusing on the interrelation between transparency, finance are front-runners regarding their financial systems. Not 30 November – 1 December 2006 and growth, the other looking at startup financing. Vladimir surprisingly, the UK, and to a lesser extent the US, somewhat “Financial Integration and Stability in Europe” Atanasov (Mason School of Business) claimed that restricting stand out as performing better than the Euro area countries the possibilities of financial tunneling proved beneficial to according to a number of measures. The interpretation of stock market development in Bulgaria. Ari Hyytinen (Bank the numbers stimulated large interest from the audience. It The 8th Conference of the ECB-CFS Research Network was hosted by the Bank of Spain in Madrid on of Finland) presented evidence for Finland, indicating that was generally welcomed that the indicators focus on quality 30 November and 1 December 2006. The topic “Financial Integration and Stability in Europe” addressed one of mandatory disclosure requirements may have a positive impact rather than size of the financial systems and that the results be the Network’s new priorities introduced after the start of the second phase. The conference combined research on small businesses financing costs. Within the parallel session, made public, although in some cases, such as competition and paper presentations with a policy panel discussion. Marco Da Rin (Tilburg University and Università di Torino) liquidity, more sophisticated yardsticks would be required. analyzed the effects of trust on investment and economic growth, while Luísa Farinha (Bank of Portugal) assessed In his opening remarks, Governor Miguel Fernández The first session on “Relationships between Financial Integration whether initial financing conditions matter for the survival of Ordóñez (Bank of Spain) noted that financial integration and Stability” started with a presentation by Iftekhar Hasan start-up firms. in Europe was advancing along different paths in different (Rensselaer Polytechnic Institute and Bank of Finland) who markets and that progress had been fairly limited in certain spoke about his empirical research concerning the impact markets. Ordóñez reviewed the main aspects of the relationship of cross-border bank mergers and acquisitions (M&As) on between financial integration and financial stability and bank risk. Gianni De Nicoló (IMF) presented empirical identified a number of challenges that supervisory authorities research on the evolution of synchronization between real face. To meet these challenges, he said, cooperation among activity and financial market integration and the implications supervisors needs to be reinforced. He noted that the recently for financial stability in Western Europe. The results suggest implemented Lamfalussy approach provided a sound basis in that the integration process does not necessarily signify an this direction. unambiguously positive effect on financial stability. Philipp Hartmann (ECB) presented the third paper “Financial Axel Weber (President of Deutsche Bundesbank) chaired the Integration, Specialization and Systemic Risk”. The main results panel discussion on “How to Reconcile Global Capitalism with of this paper demonstrate that increased inter-bank integration Local Stakeholders?”. Karl-Peter Schackmann-Fallis from fosters banks specialization, thereby increasing both the actual the German savings banks association (DSGV) was convinced benefits from diversification as well as the risk of contagion. Thorsten Beck (TheWorld Bank) pointed out that breadth and that “all business is local” and that the institutions he represents outreach of financial sectors in cross-country comparison and would be able to “substitute the merger of enterprises by The second session focused on “International Financial Flows, over time were not well researched, largely owing to a lack of the consolidation of processes”. Hanns Ostmeier (The Political Links, and Financial Fragility”. Jerry Parwada consistent data. Therefore, the World Bank has taken first steps Blackstone Group) pointed out that private equity - as (University of New South Wales) examined whether market to develop a new database that comprises the number of loans opposed to public listings - would be more patient, and thus co-movements affect international portfolio investment and and deposits in a given country as well as the number of ATM benefit the targeted companies. He also noted that London presented evidence of increased investment opportunities

18 19 Events | CFSresearch conferences CFSresearch conferences | Events when co-movements increase. Giuseppe Vulpes (UniCredit matters in the choice of the accounting system. Alfred Lehar Charles Goodhart (London School of Economics) focused on crisis management. In his opinion, the supervisory framework Group) spoke about his research into measuring co-movements (University of Calgary) focused on the third pillar “Market various issues relating to financial crises and argued that more was working with respect to crisis prevention, but had not yet in EU banks’ risk using a dynamic factor model, from which Discipline” of Basel II and analyzed the theoretical foundation of linkages between financial institutions brought greater strength been seriously tested for crisis management. a bank fragility indicator is derived. Co-movements in the market-based bank regulation. In the parallel session, Ignacio in response to small and medium shocks, but could widen the fragility indicator across EU banks appear to have increased Hernando (Bank of Spain) presented a paper about the scale and scope of big shocks. He also stressed that the greater In her closing remarks, Gertrude Tumpel-Gugerell (ECB) significantly since 1999. Xiaoyun Yu (Indiana University) reaction of industry insiders to the announcement of M&As robustness of an integrated financial system might be tested by commented that the current level of financial integration in investigated the causal relation between bilateral political in the European financial industry. The results would seem to the greater pro-cyclicality of Basel II. The other members of the Europe is not very high. She concluded that effective and relations and economic trade flows for the US and showed suggest that domestic merger deals have led to a reduction in the panel included George Kaufman (Loyola University Chicago), efficient banking supervision is essential both to promote that a change in political relations do indeed affect investment level of competition. Steven Ongena (University of Tilburg) who discussed issues relating to bank insolvency and an efficient financial integration and to safeguard financial stability. The strategies. spoke about the impact of legislative changes that strengthen resolution strategy, Matías Rodríguez-Inciarte (Santander introduction of the Euro, the single monetary policy, the competition policy on stock market valuations of banks and non- Group) who highlighted the advantages of stress tests for existence of a single payment area, and the growing process of financial firms. The findings were that legislative changes aimed measuring risk, Peter Nyberg (Finnish Ministry on Finance) European financial and banking integration are good reasons at strengthening competition policy decrease the valuation of who focused on the management of cross-border systemic for an enhanced common European approach to prudential firms but increase the market valuation of banks. Furthermore, crises and on how to proceed in the future in order to improve supervision and financial stability. he argued that supervisory control, although not bad per the handling of cross-border systemic problems and finally se, might not be helpful for efficiency and value-enhancing Henk Brouwer (De Nederlandsche Bank), who presented an The text is based on the Conference Summary, decisions owing to its greater focus on stability issues. overview of the EU institutional framework for supervision and which has been kindly provided to us by ECB staff

The second day started with a session on “Policy Issues in European Banking”. David Mayes (Bank of Finland) presented a paper on making the system of prompt corrective action (PCA) more effective for cross-border banking groups in the The third session consisted of two parallel sessions, the first one EU. He pointed out that effective implementation of PCA would of which focussed on “The Effects of Financial Modernization and require that EU supervisors have the same authority to take Development on Retail Financing”. Oren Sussman (University corrective measures. When a bank that is part of an integrated of Oxford) talked about the effects of corporate insolvency cross-border banking group reaches the point where PCA law harmonization in the EU on bankruptcy costs and raised mandates resolution, the resolution could have implications for the concern that the 2002 legislation had not achieved its a number of Member States. The second paper was presented goal. Rocco Huang (World Bank) spoke about the effects of by Dirk Schoenmaker (Vrije Universiteit Amsterdam and the Michael Woodford to receive Deutsche Bank Prize branching deregulation on economic growth. Martin Brown Dutch Ministry of Finance). The aim of the paper is to explore in Financial Economics 2007 (Swiss National Bank) presented the third paper in this session mechanisms for fiscal burden sharing in a banking crisis in about information sharing and credit market performance. He Europe. Schoenmakers clarified his preference for private sector provided evidence that information sharing is associated with solutions to solving a bank failure. He spoke about different Prize in Financial Economics 2007. Woodford advocates that central banks improved availability and lower cost of credit to firms. The mechanisms for ex ante burden sharing and argued that fiscal and This prize, presented by the Center adhere to systematic and transparent parallel third session looked at “Cross-Border Banking and Retail supervisory arrangements should be made in tandem. In a study for Financial Studies (CFS) in coopera- rules in the design of monetary policy. Integration” with presentations by Giovanni Dell’Ariccia presented by Klaus Schaeck (University of Southampton), tion with the University of Frankfurt, The effects of monetary policy depend (IMF) on the risk and organization of bank foreign affiliates, the effect of competitive conduct by financial institutions on carries an endowment of 50.000 Euro critically upon what market participants Iman van Lelyveld (De Nederlandsche Bank) on internal the banking system fragility is analyzed empirically in a cross- and is sponsored by the Deutsche Bank expect about future policy and the course capital markets and the lending by multinational bank subsidiaries country setting. The findings did not support theoretical studies Donation Fund. of the economy. Thus, interest rates should and Massimiliano Affinito (Bank of Italy) on wether the Law on the link between competition and fragility. be set according to systematic rules and of One Price holds in the euro area. Michael Woodford is one of the inter- central banks need to communicate The subsequent policy panel on “Financial Integration and nationally most highly acclaimed information about how they intend to The first day was concluded by two parallel sessions, one Stability in Europe” was chaired by Alexandre Lamfalussy researchers in the field of monetary conduct policy in the future. The best chaired by Christian Laux (CFS and University of Frankfurt) (former President of the European Monetary Institute), who economics. Woodford is to be awarded way for central banks to communicate on “Market Discipline and Bank Risk” and the other chaired by called attention to the absence of systematic crises over the the Deutsche Bank Prize in Financial the future course of policy, according to Stefan Mittnik (CFS and University of Munich) on “Bank last 7 or 8 years. In his view, this was due to a number of Michael Woodford, the John Bates Economics 2007 for his fundamental Woodford, is to be explicit about the rules mergers, competition policy, and efficiency”. Xavier Freixas factors including the actions of central banks and the behavior Clark Professor of Political Economy contributions to the theory and practical that guide policymaking decisions. Good (University Pompeu Fabra) examined different accounting rules of private banks. He also emphasized the greater opaqueness at Columbia University in New York, analysis of monetary policy. rules require explicitly stated targets using a theorical model and argued that intertemporal smoothing of the financial system as a result of financial innovations. is to be awarded the Deutsche Bank for policy, such as inflation, and clear

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Volker Wieland (Chairman of the jury 2007): Patrick Lane (The Economist):

“Michael Woodford has developed a theory of monetary macroeconomics that holds “Michael Woodford is a worthy winner of this year’s Deutsche Bank Prize in Financial widespread appeal to academic researchers owing to its rigorous microeconomic foundations. Economics. His work on monetary policy has become highly influential. The emphasis he Woodford has proved the immense practical value of his theory by analyzing the central role lays on the importance of expectations to the conduct of policy is especially notable. The played by expectations and communication in the implementation of monetary policy. same is true of his work on central banks’ transparency and communication—a topic of increasing interest not only to central banks themselves but also to those who watch them Woodford’s work, summarized in his influential monograph “Interest and Prices: Foundations in financial markets and the media.” of a Theory of Monetary Policy”, has quickly become the standard reference for monetary theory and analysis among academic economists and their colleagues at central banks.” explanations stating how an interest rate University in 2004 to take up a Chair in Frankfurt University), Otmar Issing level consistent with the policy target is Political Economy. During the course of (President of CFS), Jan P. Krahnen work has both decisively influenced of Finance at the University of Chicago, and the Group Executive Committee of to be achieved. Woodford argues in favor his academic career, Woodford has taken (CFS Director and Frankfurt University), research in the fields of finance and who in 2005 was honored for his theory Deutsche Bank AG, at an award ceremony of direct inflation targeting rather than on numerous visiting professorships and Patrick Lane (The Economist), money and macroeconomics and deli- of efficient markets. taking place in Frankfurt on 4 October, using intermediate targets or reference consultancy briefs. Thus, for example, he Lucrezia Reichlin (Director General vered important results for economic 2007. The award ceremony will be values for money and credit aggregates. has been an advisor to the central bank of Research at the ECB), Reinhard H. policy and practice. The prize is awarded This year the prize will be presented to preceded by a scientific symposium of Brazil and the U.S. Federal Reserve as Schmidt (Frankfurt University), Lars on a two yearly basis. The first prize Michael Woodford by Josef Ackermann, on “The Theory and Practice of Michael Woodford studied at the well as the European Central Bank. E.O. Svensson (Princeton University), winner was Eugene F. Fama, Professor Chairman of the Management Board Monetary Policy Today”. University of Chicago as well as Yale Norbert Walter (Managing Director of Law School, and wrote his thesis at the The recipient of the Deutsche Bank Prize Deutsche Bank Research and Chief Eco- Massachusetts Institute of Technology in Financial Economics 2007 has been nomist of Deutsche Bank Group), and Norbert Walter (Deutsche Bank Group): (MIT). His first appointment to a selected by an international jury of leading Volker Wieland (Chairman of the jury, professorship was in 1984 at Columbia economic researchers and practitioners CFS Director and Frankfurt University). “Michael Woodford combines theory and practice in a very particular way: Not only are University in New York. After further from the world of finance. This time his excellent results of research important for science – they are also of concrete use teaching and research positions at the the jury comprises Günter Franke The Deutsche Bank Prize in Financial in monetary policy around the globe. I know no other person in this field of research, University of Chicago and Princeton (University of Constance), Michael Economics is awarded to honor interna- whose findings were more crucial for discussions on monetary policy in the past decade. University, he returned to Columbia Haliassos (CFS Program Director and tionally renowned economists, whose Many central banks are keen on winning him for cooperations to improve their analyses in monetary policy. In addition, his findings also have the potential to be adapted to other political fields. The Deutsche Bank Prize in Financial Economics will provide an Lars E.O. Svensson (Princeton University): important contribution towards making Michael Woodford more popular – even beyond the circle of experts.” “The ideal DB Prize recipient is a person who has made outstanding scientific contributions in the area of finance, money, and macroeconomics that are of great relevance and importance for policy or market practice. Nobody fulfils these criteria better than Michael Woodford. Many newspapers have reported on the nomina- He has made a series of outstanding scientific contributions. For many years he has worked tion of Michael Woodford as prize winner of this on improving the microfoundations for monetary macroeconomics and during this work year’s award. In January, the German Newspaper developed and refined the theory of the so-called New Keynesian model and provide the HANDELSBLATT published an interesting article first empirical estimates of its parameters. His work is summarized in his monumental about the ideas that Woodford represents and the monograph, Interest and Prices: Foundations of a Theory of Monetary Policy, which is motivation behind the choice of the jury to select already immensely influential and will be of lasting value. Furthermore, his research is of him as prize winner. The article on page 24 is based great practical importance for policymakers. It has provided the foundations for the latest on an interview by Norbert Häring with Michael generation of empirical dynamic stochastic general equilibrium models that are now being developed by the most advanced central banks Woodford and Volker Wieland. for policy simulations and forecasting. It has also provided central bankers with a practical framework of how to think about policy and the transmission mechanism of monetary policy, in particular the fundamental role of expectations and transparency in implementing monetary policy. His research is now influencing the conduct of monetary policy in many different ways all over the world.” At this occasion, the jury would like to thank the nominators for their immense support during the nomination procedure. More than 2,700 university teachers and researchers from 24 countries had the opportunity to submit a suggestion for the nomination.

22 23 Events | CFSresearch conferences CFSresearch conferences | Events

Michael Woodford awarded generously endowed Deutsche Bank The ECB and Its Watchers IX Prize in Financial Economics (*) Frankfurt, 7 September 2007

by Norbert Häring (Handelsblatt)

should announce an inflation target In November 2006, at the invitation and adjust its interest rate according of the ECB, Woodford presented his to whether there is a shortfall or theories to an academic forum and was overshooting of this target. greeted with widespread approval from the top-level audience. “I was impressed “I would recommend that by the openness with which the ECB The 9th meeting of the CFS trademark conference series “The ECB and Its Watchers” will be held on 7 September both the ECB and faces its critics”, Woodford commented. 2007. This conference series was initiated in 1999 by Otmar Issing and Axel Weber (then Director of CFS). The the US Federal invitation-only event is regularly attended by many influential professionals from the financial community, Reserve take a close This openness was also apparent in the central banks and academia and is well known for an informal and spirited exchange of views between ECB look at how the central banks award to Woodford. The jury includes officials and academic and market experts. This way of interaction with the monetary authorities can rightly of England, Sweden and Norway Otmar Issing, who is the father of the be called a formula of success. General interest in the “The ECB and Its Watchers” conference as a forum of make and communicate their decisions”, two-pillar strategy so heavily criticized discussion has been rising over the years. Woodford told the Handelsblatt. These by Woodford, and who was until recently A prominent critic of the monetary policy central banks currently represent the chief economist of the ECB. strategy of the ECB, the U.S. eco nomist the vanguard with respect to clear This year’s conference will be the first one without Otmar published on 17 January 2007, the Wall Street Journal reported Michael Woodford, has been awarded communication and predictability of What Woodford represents Issing on the ECB side of the debate. However, the ECB’s on the U.S. Monetary Policy Forum (MPF) quoting Peter the € 50,000 Deutsche Bank Prize in policy. The Norwegian and Swedish unwavering commitment to face its critics in this public forum Hooper (Chief U.S. economist at Deutsche Bank), stating that Financial Economics. Since 2005, the central banks nowadays even forecast Top researcher is revealed in this year’s cast of speakers. ECB President Jean- the new US event is modeled after the CFS conference “The prize has been awarded jointly every two publicly what decisions regarding their Together with Lars Svensson and the Claude Trichet, Vice-President Lucas Papademos and ECB ECB and Its Watchers”. The first meeting of this new forum years by the Frankfurt-based Center for interest rate targets they are likely to take Chairman of the US Federal Reserve, Board Member Jürgen Stark will speak to and debate with the “US Monetary Policy Forum (MPF)” was held in March 2007. Financial Studies (CFS) and the Deutsche in the future, given today’s information. Ben Bernanke, Woodford is currently ECB’s watchers. They will be joined by President Axel Weber We asked Peter Hooper to write us his impressions of this new bank Donation Fund. regarded as one the world’s three leading from the ECB’s Governing Council, Pervenche Berès who initiative (See the article “The New Fedwatchers Conference” The European central bank pursues monetary policy theorists. chairs the European Parliament’s Committee on Economic on page 26). In explaining the motivation behind the a strategy similar to that of inflation and Monetary Affairs and Ignazio Angeloni from the Italian choice of prize winner, CFS Director targeting. However it makes a point of New-Keynesianism Treasury. Academic and private sector ECB watchers speaking As usual, the 9th “ECB and Its Watchers” conference is Volker Wieland mentioned in particular not naming it as such. Under its two- His treatise “Interest and Prices: at the conference include Charles Wyplosz, Stephen by invitation only. We expect about 200 participants and that Woodford has developed a theory pillar policy strategy, the ECB observes Foundations of a Theory of Monetary Cecchetti, Joachim Fels, Paul de Grauwe, Wolfgang media representatives. The next CFS Newsletter will report of the monetary policy transmission not only inflation but also the money Policy” is akin to a bible for monetary Münchau and Jan Hatzius. extensively on the event. mechanism that is consistently derived supply and credit aggregates and accords economists of a new-Keynesian orien- from the decision processes of individual these indicators greater significance. tation. This currently dominant direction At CFS we are proud of the continued success of this Lut De Moor and Volker Wieland households and businesses. of research assumes that interest- conference series. We are particularly pleased to see that a � Very open rate policy has a short-term effect on similar initiative has recently been started in the United States The complete conference program will be made available soon An important implication of Woodford’s production and employment. Neoclassical by Professors Stephen Cecchetti (Brandeis University) and on the CFS website www.ifk-cfs.de work is the significant impact of Woodford, who advises the ECB as economists such as Edward Prescott have Anil Kashyap (University of Chicago) in cooperation with expectations on monetary policy. From well as other central banks, makes no disagreed with this proposition. the Board of Governors of the Federal Reserve. In an article this he infers that central banks should bones about the fact that he strongly do everything in their power to allow disapproves of the degree of importance Career the public to be able to accurately assess given to the money supply. In his opinion, Woodford currently teaches at Columbia the central bank’s reaction to specific a rational justification for this no longer University. Previously he has held positions situations in the economy. For this reason exists. Rather, this ap proach requires an at the most important elite universities. Woodford is a proponent of the strategy unnecessary use of resources and makes He was born in Massachusetts in 1955. of inflation targeting, which in essence it difficult for the ECB to explain its rests on the notion that the central bank decisions in a coherent f ashion.

24 (*) The text is a translation of an article by N. Häring. The article was published in Handelsblatt on 26-28 January 2007 and has kindly been made available to CFS by Handelsblatt GmbH, 25 Wirtschafts- und Finanzzeitung – © All rights Reserved Events | CFSresearch conferences CFS Financial Center Index | Events

and tested many of the explanations inflation would not repeat itself because premiums) over quantity measures The New Fedwatchers Conference for this behaviour of inflation and policy makers and the economics (money and credit stocks and flows). by Peter Hooper (Chief Economist and Managing Director of Deutsche Bank Securities Inc., New York) concluded that shifts in monetary policy profession more generally has learned were most important. The report found much from that experience. Overall, the MPF seems to be off to a its more central focus on issues of The ECB Watchers conference has typically that central banks’ success in stabilizing good start; many participants considered direct interest to monetary policy, as had more individual papers and panel inflation and inflation expectations at In the closing session, several academic, it to be a very useful way to facilitate well as in its broader involvement of presentations, but policy makers’ relatively low levels has reduced the Wall Street, and Fed panellists (including communication between the Fed and the private financial sector. The MPF reactions/responses have been held statistical reliability of various measures Governor Kroszner and President Stern) the markets and to help further clarify is more closely patterned after the to the end in the form of general of inflation expectations as predictors wrestled somewhat inconclusively with Fed views on key issues. The organizers successful CFS conference “The ECB and comments and reactions to the entire of inflation. In their comments, Kohn how to define and measure liquidity look forward to building on this success Its Watchers” held annually in Europe, proceedings by Chief Economist Issing. and Lacker stressed the importance of and how to gauge its implications for in years to come, and the ECB Watchers soon entering its ninth year. Like the Another difference is that whereas the keeping inflation expectations low or the markets. One point of consensus conference’s experience in this regard ECB Watchers conference, the MPF stresses ECB Watchers conference has involved reducing them further, and Kohn was appeared to be a strong preference undoubtedly gives them reason to be involvement of the investor community papers and presentations by ECB staff hopeful that the history of the great for price measures (rates, spreads, and optimistic. as well as academia, the central bank, researchers, an important ingredient and the press. In both cases, policy to its success, the MPF did not do so makers are involved directly in panel this year, perhaps reflecting the relative The US Monetary Policy Forum presentations and discussions. The brevity of the conference. CFS Financial Center Index (MPF), held on March 9 this year focus is on issues of immediate interest New Sentiment Index for Germany in Washington DC, brought together to current monetary policy. Its intent As to the substance of the MPF this academic economists, financial market is to help the academic and business year, former Fed vice Chairman Alan as a Financial Center participants, and senior officials communities and the central bank Blinder kicked things off with a speech Project Team: Stephan H. Späthe & Christian Knoll (CFS) of the Federal Reserve system. The to learn from each other and in so on Fed communication. He noted forum was organized by Professors doing, to enhance the transparency of that the Fed has made much progress With its GDP share of 16% the financial sector is of considerable economic significance for both Germany in Stephen Cecchetti and Anil Kashyap monetary policy. in the direction of transparency and general and the Rhine-Main area in particular. A closer look reveals that there have been very few surveys of the Brandeis International Business predictability, but he also said that specifically related to this economic sector, as areas of financial business, leasing and insurance are frequently School and the University of Chicago There are also some differences between much remains to be done. He suggested omitted from many of the usual business surveys. With its new research project, the CFS Financial Center Index, Graduate School of Business, respec- the MPF and the ECB Watchers conference. the need for more internally consistent CFS aims to fill this gap. In quarterly intervals the index provides information about the evaluation of financial tively, in collaboration with an One is in size and scope. The first MPF FOMC forecasts, and he recommended market agents regarding the development of Germany as a financial center. advisory panel of academic and Wall was half as long in time, and had roughly that the Fed publish a Taylor-rule type Street economists and in consultation half as many presenters and participants indicator of what its forecast implies with senior Fed officials. It featured as the most recent ECB Watchers conference for the possible future course of the fed The CFS Financial Center Index is a Financial Center Monitoring Index Calculation presentation and discussion of a report, held in Frankfurt last May. From its funds rate. In ensuing discussion, the new type of instrument for analyzing the “Understanding the Evolving Inflation more modest beginning in 1999, the proposal received mixed reviews from performance of the financial community The CFS Financial Center Index is part In order to calculate the index, a stan- Process,” a panel discussing “Liquidity ECB Watchers conference, of course, has both Fed participants and investors. of Frankfurt in particular and Germany of a larger project conducted by the dard catalogue of questions requests and monetary policy,” and a speech on expanded to be a full day conference in general. It is based on a management State of Hesse that aims to measure information about the participant’s Fed communication and transparency with some 22 presenters and 250 parti- The next session of the Forum focused survey started in February 2007 and the competitiveness of Germany as a view on four business parameters: 1) by a former Fed vice chairman. cipants, a tribute to its success over on an issue of central importance to conducted at quarterly intervals of over financial center in comparison to the transaction/sales volume, 2) profit, 3) the years. Other differences are more monetary policy makers: what caused 300 leading executives from the Frankfurt rest of Europe. The Helaba Landesbank employment and 4) investments. The This year, the MPF, which its organizers subtle. A central (but not sole) focus of inflation to rise in the past, and could it financial community. The survey sample Hessen-Thüringen as a partner in this answers to the questions may be given hope to make an annual event, involved the MPF was on a report written and happen again?1 will be extended to include the whole project already published in summer as “positive”, “neutral”, or “negative” and one of the larger public gatherings presented in an unusual collaborative of Germany in the near future. The CFS 2006 the initial study “Finanzplatz a response is requested for the previous of Fed officials outside the Jackson effort by a group of academic and In addressing this issue, the report Financial Center Index summarizes Frankfurt – Ein Standort bewegt sich” and the current quarter. All participants Hole conference. It differs from the business economists and then discussed analyzed the great inflation and the current evaluations and expectations (“Financial Center Frankfurt – a location are allocated to branch-specific groups. Jackson Hole conference and many specifically by two policy makers, Fed stabilization of inflation that occurred in about the future with respect to specific in action“). The Frankfurt School of Within each group, a balance of the other Fed conferences (which typically Vice Chairman Kohn and Richmond the US and many other countries over the business parameters and thus reflects Finance & Management is the project’s share of positive and negative responses deal with broad academic topics) in Fed President Lacker. past four decades. The report reviewed a representative picture of the current third partner providing a database of is evaluated and transformed into business sentiment. historical financial center indicators. performance data. These performance

26 1 “Understanding the Evolving Inflation Process,” by Stephen G. Cecchetti, Peter Hooper, Bruce C. Kasman, Kermit L. Schoenholz, and Mark W. Watson. 27 Available at: http://research.chicagogsb.edu/gfm/events/confrences/2007-usmonetaryforum.aspx Events | CFS Financial Center Index Miscellaneous

��������������������� Business Sample - Groups 1 to 4 below), a high level were, on the other hand, tax regulations) and their impact on the ���������������������������� �������������� ������������� �������������� and third, there is a performance related slightly declining. competitiveness of Germany. dimension (transaction/sales volume and value added). The evaluation with respect The second survey that took place between The number of participants in the survey to the value added is calculated as the 16 and 27 April 2007 resulted in an index has doubled from 149 participants in the

���������������������������������� weighted average of the answers to the value of 125.0. Compared to the initial first stage to 338 in the second one. This questions related to profit, employment, value of 126.2, this can be interpreted as �������������� ���������������� ��������������������� ���������������� will continue to rise. �������������������������� ���������������������� ������������������� ���������������������� ��� ����������������� �������������������� ���� ��� ��� and investments. a flattening on a high level. �������������� ���������������������������� ��������� ������� Future Outlook When the survey is extended to cover In principle the survey shows that the Germany as a whole, then a fourth spatial business representatives are cautiously The third survey for the CFS Financial ��������������������������������� dimension will be added. Taken together, optimistic about the future development of Center Index will take place in the first ������������������������������������������������������ these individual sub-indices allow a de- Frankfurt as a financial center. In the first week of July. The extension of the survey ���������������������������������� ����������������������� tailed structural analysis of the financial survey, it was the financial center service ���������������������������������� to cover the financial sector in Germany center, whereby it is the changes from providers, whose expectations turned out �������������������������������������������� as a whole is anticipated to start in the ��� ������ ����������������� ���� ��� one quarter to the next that are of main to be distinctly more positive than those ������� fall of 2007. Interested companies from �������������� ���������������������������� ������������������������������������� ��������� ������� interest. of the traditional financial institutions, i.e. ������������������������������ the financial sector that have not yet the banks, insurances, investment trusts, participated in the survey are welcome to Business Sample and the stock exchange. The second round ��������������������� contact CFS for additional information. showed a slight decline in the optimistic ��������������������������������

���������������������������� The businesses and institutions that trend of the service providers. Further details can be found at take part in the CFS Financial Center www.finanzplatzindex.de. Index survey are not only chosen from On the contrary, the expectations of the financial sector but also from other the traditional financial institutions and data are then collated to constitute the sectors that directly profit from the brokerage firms were higher in the second Staff Portrait CFS Financial Center Index. financial sector. The underlying definition round and thus reached the same high of a financial center is deliberately chosen level as the expectations of the service This first set of questions, that is used to be very extensive and the sample of providers. Elena Carletti joined the CFS in April 2004 as a post-doctoral researcher in the area to calculate the index, is supplemented businesses is compiled of four groups as of “Credit Management and Credit Markets”. Her previous positions include that of by further sets of questions. The second shown in Figure 3 on page 29. The international stock exchange assistant professor at the Chair of Prof. Martin Hellwig at the University of Mannheim, set deals with questions regarding the consolidation is currently not perceived and that of Tutorial Fellow in Finance at the London School of Economics. She holds a expansion plans as well as the relocation Results to be a threat to Frankfurt as financial Ph.D. in Economics from the London School of Economics, a Doctorate in Economics plans of business activities. The final third center. In the long run, a Deutsche Börse from the University of Bologna, and a Master in Economics from Bocconi University block of questions deals with current The evaluation of the first survey resulted that operates alone is not in any way in Milan. Elena is expected to complete her Habilitation in Economics this fall at the issues in the financial sector, thus enabling in an initial index value of 126.2. This expected to lead to the marginalization of University of Mannheim. short-term, representative opinion polls. indicated a very positive sentiment in Frankfurt as a stock exchange location. These two additional blocks of questions the financial sector and its connected Elena‘s research interests are in the areas of financial intermediation, financial regulation, corporate finance and do not enter the index calculation enterprises, since by construction the The impending implementation of the competition policy. Recently, she has been working with Franklin Allen on a number of papers concerned with directly but provide important additional maximum attainable index value is 150 European Markets in Financial Instruments financial institutions and corporate finance. Part of this work has been published or is forthcoming in refereed information about the financial center’s and the minimum 50. A value of 100 Directive (MiFID) that should lead to journals such as the Journal of Monetary Economics and the Journal of Accounting and Economics. Her work is situation. signals a neutral prevailing mood. The greater transparency in the securities also published in other refereed journals, such as the Journal of Financial Intermediation and the Journal of Money, Sub-indices expectations of the first quarter 2007 business is reflected in the expectation Credit and Banking. even exceeded the good results obtained that there will be a redistribution in profits The CFS Financial Center Index is cur- for the last quarter of 2006. This upward from financial institutions towards service Elena Carletti has also been active as co-organizer of a number of conferences at the Center for Financial Studies, rently compiled from three dimensions. movement resulted from an expected providers. like the CFS-IMF “Open Forum on Germany’s Banking System” in 2005 and the conference on “Private versus First, there is the temporal dimension rise in employment, particularly among Public Ownership of Financial Institutions” jointly organized by the Center for Financial Studies, the Deutsche (evaluation of the current situation and the financial center-oriented services The special additional survey in the second Bundesbank and the Wharton Financial Institutions Center in 2006. In 2005 and 2006, she took on the Secretariat expectations for the near future), second, such as accountants, lawyers and rating round dealt with specific legal regulations work for the ECB-CFS Research Network on “Capital Markets and Financial Integration in Europe” and helped there is a branch-specific dimension (cf. agencies. Profit expectations whilst at in Germany (such as the REIT-law and organize various conferences and shape the research agenda of the network.

28 29 Miscellaneous Timetable of forthcoming events 2007

Next to her position at the CFS, Elena Carletti is affiliated with the Max Planck Institute for Research on Collective Goods in Bonn, and is a research fellow of the Financial Institutions Center at the Wharton School of the University CFScolloquium series 2006 CFSresearch conferences of Pennsylvania. “Funktionswandel von Banken und Börsen: 25-26 June 2007 EUI-CFS Workshop on Behavioral Approaches to Consumption, Credit, and Asset Allocation Elena Carletti has been awarded several grants throughout her career. In 2004, she received the Grant of FDIC’s Die neue Herausforderung?” “Banks and Exchanges in Flux: Organization: Michael Haliassos (Frankfurt Center for Financial Research (CFR) for a project on competition policy and bank merger control (joint with University and CFS), Nur Ata (European University The next great Challenge” Philipp Hartmann and Steven Ongena). In 2002, she was awarded the CEPR/European Summer Institute Prize for Institute and Universitat Autònoma de Barcelona), All Lectures will be held in German Alena Bi�áková (European University Institute) the Best Central Bank Research Paper (with Philipp Hartmann). 5. Sep. 2007 The ECB and Its Watchers IX 4 July 2007 Dr. Reto Francioni (Deutsche Börse AG) Organization: Volker Wieland Wachstum durch Innovation: (Frankfurt University and CFS) Das Entwicklungspotenzial von Börsen Frankfurt University in top 10 of Uniranking 2007 12 Sep. 2007 Hermann-Josef Lamberti (Deutsche Bank AG) For further information and registration please consult www.ifk-cfs.de. Clearing, Settlement und die Kosten des internationalen Wertpapiergeschäfts CFSsummer school 17 Oct. 2007 Prof. Dr. Ernst-Moritz Lipp (Odewald & Compagnie Gesellschaft für Beteiligungen mbH) 12-19 Aug. 2007 Corporate Governance and Capital Markets Private Equity: Chancen und Risiken Organization: Jan Pieter Krahnen des neuen Kapitalmarktes (Frankfurt University and CFS) Faculty: Yakov Amihud 7 Nov. 2007 Susanne Klöß (Accenture GmbH) (New York University), Francesca The German weekly magazine, WirtschaftsWoche, Die Bedeutung von IT für die Entwicklung Cornelli (London Business School), published its annual ranking of German Universities der europäischen Börsen David Yermack (New York University) in March. This ranking, “Uniranking 2007”, relates

to the universities’ economics, law, engineering, and Admission to the lectures of the CFScolloquium is only possible after registration. For further information and registration please consult www.ifk-cfs.de. computer science faculties. It is compiled in co- Interested parties who do not receive Email information regularly may contact operation with two firms from the recruiting and Isabelle Panther, Tel. +49 (0)69-798 30053 or Email: [email protected] CFSpresidential lectures consulting branch and is based on the evaluation of more than 1000 personnel managers from large CFSexecutive education “Europäische Integration” German companies. The Faculty of Economics and (European Integration) Business Administration at the University of Frankfurt All Lectures will be held in German 31 May – Zinsprodukte: Analyse und Bewertung: Teil I has been awarded its best ranking to date and now 1 June 2007 Prof. Dr. Wolfgang Bühler rates among the top 10 Germany universities. Both (University of Mannheim) 21 June 2007 Bundeskanzler a.D. Dr. Helmut Kohl the Macroeconomics Department (VWL) and the Die Zukunft Europas 14-15 June 2007 2007 Zinsprodukte: Analyse und Bewertung: Teil II Department for Business Administration (BWL) have Prof. Dr. Wolfgang M. Schmidt 5 Sep.2007 Karl Kardinal Lehmann moved up to 7th place. WirtschaftsWoche called this (Hochschule für Bankwirtschaft) (Bischof von Mainz) a change of symbolic significance. Über die Chancen des biblisch-christlichen Leitbildes 5-7 July 2007 Modernes Risikomanagement mit Kreditderivaten für die europäische Integration und Forderungsverbriefung Prof. Dr. Dirk Jens F. Nonnenmacher (DZ BANK AG) For further information, please contact Birgit Pässler, Tel.: +49-(0)69-798 Prof. Dr. Günter Franke (University of Konstanz) 30052, Fax: +49-(0) (0)69-798 30077, email: [email protected] News from the House of Finance: Goethe Business School expands its Graduate Program with the For further information and registration on all CFSseminars please contact CFSlectures “Executive Master of Finance and Accounting” Birgit Pässler, Tel.: +49-(0)69-798 30052, Fax: +49-(0) (0)69-798 30077, email: [email protected] 16 July 2007 Mehr Selbsvertrauen! Absolventen öffentlicher und pri- vater Universitäten im Vergleich, ein Erfahrungsbericht The program will be conducted in English and German and is directed towards practitioners. On 5 July 2007, Philipp Holzer (Hochschule für Bankwirtschaft) the Goethe Business School will present the new program to human resource managers and other corporate representatives (Location: Campus Westend, Room 1.314, Time: 11:00-13:00). 25 July 2007 Global Financial Warriors: The Untold Story of International Finance in the Post-9/11 World To register or for further information, please consult [email protected] or contact M. Pruessner John B. Taylor (Stanford University) (Tel. +49-69-905-50-37-60) For further information and registration please consult www.ifk-cfs.de.

30 31 The Center for Financial Studies thanks its Supporters:

Principal Donors

Supporting Members Bankhaus Metzler seel. Sohn & Co. KG aA, Frankfurt; Bank of America, Frankfurt; Bayerische Hypo- und Vereinsbank AG, München; Commerzbank AG, Frankfurt; DekaBank Deutsche Girozentrale, Frankfurt; Depfa Deutsche Pfandbriefbank AG, Frankfurt; Deutsche Bank AG, Frankfurt; Deutsche Börse AG, Frankfurt; EUROHYPO AG, Frankfurt; DZ BANK AG, Frankfurt; Frankfurter Sparkasse, Frankfurt; IXIS Corporate & Investment Bank, Frankfurt; Landesbank Hessen-Thüringen Girozentrale, Frankfurt; Merrill Lynch Capital Markets Bank Ltd., Frankfurt; Morgan Stanley Bank AG, Frankfurt; Rothschild GmbH, Frankfurt; RWE Aktiengesellschaft, Essen; Wissenschaftsförderung der Sparkassen-Finanzgruppe e.V., Bonn

Honorary Members Prof. Dr. Karl Häuser, Dr. h.c. Karl Otto Pöhl

Members Ashurst, Frankfurt; Bank of Japan, Frankfurt; Barclays Bank Plc, Frankfurt; BDO Deutsche Warentreuhand AG, Frankfurt; BHF-BANK Aktiengesellschaft, Frankfurt; Bundesverband deutscher Banken e.V., Berlin; Degussa Bank GmbH, Frankfurt; Delbrück Bethmann Maffei AG, Frankfurt; Deloitte & Touche GmbH, Düsseldorf; Deutsche Hypothekenbank (Actien-Gesellschaft), Hannover; Deutsche Postbank AG, Bonn; Dresdner Bank AG, Frankfurt; Ernst & Young AG, Frankfurt; Frankfurter Volksbank eG, Frankfurt; Franz Haniel & Cie. GmbH, Duisburg; Fraport AG, Frankfurt; Freshfields Bruckhaus Deringer, Frankfurt; Fritz Knapp Verlag, Frankfurt; Goldman, Sachs & Co. oHG, Frankfurt; Hauck & Aufhäuser Privatbankiers KGaA, Frankfurt; HeidelbergCement AG, Heidelberg; HSBC Trinkaus & Burkhardt KGaA, Düsseldorf; IKB Deutsche Industriebank AG, Düsseldorf; infoscore Forderungsmanagement GmbH, Baden-Baden; Joh. Berenberg, Gossler & Co.KG , Hamburg; J.P. Morgan AG, Frankfurt; Karlsruher Lebensversicherung AG, Karlsruhe; KfW Bankengruppe, Frankfurt; KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft Wirtschaftsprüfungsgesellschaft, Frankfurt; Landwirtschaftliche Rentenbank, Frankfurt; LHB Internationale Handelsbank AG, Frankfurt; Linde AG, Wiesbaden; Maleki Group Financial Communications & Consulting, Frankfurt; Maple Bank GmbH, Frankfurt; McKinsey & Company, Inc., Düsseldorf; Mizuho Corporate Bank (Germany) AG, Frankfurt; Moody‘s Deutschland GmbH, Frankfurt; Morgan, Lewis & Bockius LLP, Frankfurt; PROVINZIAL Rheinland Lebensversicherung AG, Düsseldorf; PwC Deutsche Revision AG, Frankfurt; Sal. Oppenheim jr. & Cie. KGaA, Köln; SEB AG, Frankfurt; Steria Mummert Consulting AG, Frankfurt; Südzucker AG, Mannheim; UBS Deutschland AG, Frankfurt; Union Asset Management Holding AG, Frankfurt; Versicherungskammer Bayern, München; VICTORIA Lebensversicherung AG, Düsseldorf; Weil, Gotshal & Manges LLP, Frankfurt; Wertpapier-Mitteilungen Keppler, Lehmann GmbH & Co. KG, Frankfurt; Westdeutsche ImmobilienBank, Mainz;

Dr. Robert E. Fiedler; Thomas Krahnen; Dr. Matthias Larisch; Karsten Rixecker; Thomas Seidel; Dr. Uwe Vielmeyer; Dietmar Vogelsang; Dr. Markus Warncke; Martin Wilhelm; Dr. Peter Wilke; Dr. Jens Zinke.

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