German Central Bank Research Articles

Trading Offshore: Evidence on Banks' Tax Avoidance

Little is known about how banks shift profits to low-tax countries. Because of their specific business model, banks use other profit shifting channels than non-financial firms. We propose a novel and bank-specific method of profit shifting: the strategic relocation of proprietary trading to low-tax jurisdictions. Using regulatory data from the German central bank, we show that a one percentage point lower corporate tax rate increases banks' fixed-income trading assets by 4\% and trading derivatives by 9\%. Suggestively, this increase does not arise from a relocation of real activities (i.e. traders); instead, it stems from the relocation of book profits.

Trading Offshore: Evidence on Banks' Tax Avoidance

Little is known about how banks shift profits to low-tax countries. Because of their specific business model, banks use profit shifting channels different from those of other firms. We propose a novel and bank-specific method of profit shifting: the strategic relocation of proprietary trading to low-tax jurisdictions. Using regulatory data from the German central bank, we show that a one percentage point lower corporate tax rate increases banks’ fixed-income trading assets by 4.0% and trading derivatives by 9.0%. This increase does not arise from a relocation of real activities (i.e. traders); instead, it stems from the relocation of book profits.

A Margin Call Gone Wrong: Credit, Stock Prices, and Germany's Black Friday 1927

Leverage is often seen as villain in financial crises. Sudden deleveraging may lead to fire sales and price pressure when asset demand is downward-sloping. This paper looks at the effects of changes in leverage on asset prices. It provides a historical case study where a large, well-identified shock to margin credit disrupted the German stock market. In May 1927, the German central bank forced banks to cut margin lending to their clients. However, this shock affected banks differentially; the magnitude of credit change differed across banks. Using the strong connections between banks and firms in interwar Germany, I show in a difference-in-differences framework that stocks affiliated with affected banks decreased over 12 percent during 4 weeks. Volatility of these stocks doubled. Relating directly bank balance sheet information to asset prices, this paper finds that a one standard deviation decrease in lending to investors increased an affected stock's volatility by 0.22 standard deviations. These results are robust to the problem that banks' lending decisions may be influenced by asset prices. The Reichsbank threatened banks to cut their short-run funding. Using the differences in exposure towards this threat, an instrumental variable strategy provide further evidence that a sharp decrease in leverage may lead to stock price fluctuations.

A Margin Call Gone Wrong: Credit, Stock Prices, and Germany's Black Friday 1927

Leverage is often seen as villain in financial crises. Sudden deleveraging may lead to fire sales and price pressure when asset demand is downward-sloping. This paper looks at the effects of changes in leverage on asset prices. It provides a historical case study where a large, well-identified shock to margin credit disrupted the German stock market. In May 1927, the German central bank forced banks to cut margin lending to their clients. However, this shock affected banks differentially; the magnitude of credit change differed across banks. Using the strong connections between banks and firms in interwar Germany, I show in a difference-in-differences framework that stocks affiliated with affected banks decreased over 12 percent during 4 weeks. Volatility of these stocks doubled. Relating directly bank balance sheet information to asset prices, this paper finds that a one standard deviation decrease in lending to investors increased an affected stock's volatility by 0.2 2 standard deviations. These results are robust to the problem that banks' lending decisions may be influenced by asset prices. The Reichsbank threatened banks to cut their short-run funding. Using the differences in exposure towards this threat, an instrumental variable strategy provides further evidence that a sharp decrease in leverage may lead to stock price fluctuations.

Exploring the Keynesian–Ordoliberal Divide. Flexibility and Convergence in French and German Leaders’ Economic Ideas During the Euro-Crisis

The Euro-crisis is the most severe crisis the European Union has ever faced. Despite its scale and urgency, political and financial leaders have struggled to find its solution. Several observers have traced this inability back to the divide between states adhering to Ordoliberal and those advocating Keynesian policies, Germany and France in particular. Preceding the question of whether and how leaders’ policy ideas influenced decision-making, however, is the question to what extent such paradigmatic divide actually existed. To provide an in-depth and dynamic view of the French and German divide, this study uses the technique of Comparative Cognitive Mapping to explore the extent to which the views of Chancellor Merkel, President Sarkozy and the German and French central bank presidents, Weber and Noyer, may be characterised as Ordoliberal or Keynesian. Moreover, the article analyses how the crisis affected these ideas. The study finds that in paradigmatic terms, leaders’ policy views are rather ambiguous and flexible. Moreover, it shows that the Euro-crisis actually fostered a convergence in views towards a more modest Ordoliberal view rather than a greater divide. Remarkably, this convergence moves the group consensus towards a more compromising position, away from the traditional position of the dominant partner, Germany.

Hedging Disaster

Hedging Disaster

Form Follows Function? Evidence on Tax Savings by Multinational Holding Structures

I provide evidence on the group structures of multinationals and analyze to what extent these structures are tax efficient. While the corporate income tax can hardly be avoided if a subsidiary is active in a country, withholding taxes depend on the structure in which the subsidiary is embedded. By vertically inserting holding companies or adjusting the superior/subordinate relationship of subsidiaries, multinationals can often influence their total tax burden, especially regarding the repatriation of profits by means of dividends. I analyze group structures across 58 countries in the years 1996 to 2008 using the MiDi database provided by the German Central Bank (Deutsche Bundesbank). The results show that a higher withholding tax between two members of a group located in different countries increases the probability of indirect participation. However, in about half of the observations, the existence of an intermediate subsidiary does not lower the overall tax burden, and in 5% of the cases the tax burden on repatriated profits with such a holding company is even higher than without it. Although group structures generally seem to be tax driven, there are non-tax influencing factors which sometimes prevail. Besides drivers of the vertical company structure, I provide evidence of a horizontal driver: once a form of group taxation is available, groups seem to spread their national investments across more subsidiaries.

Editorial – KombiFiD – Combined Firm Data for Germany

This special section contains papers on the project KombiFiD. KombiFiD is an acronym that stands for Kombinierte Firmendaten fur Deutschland (or Combined Firm Data for Germany). The project is financially supported by the German Ministry for Education and Research (BMBF). It is a joint project of the Institute of Economics of Leuphana University Lueneburg, the research data centres of the German Federal Statistical Office and the statistical offices of the German federal states, the Institute of Employment Research of the Federal Employment Agency and the research department of the German Central Bank.

INVESTMENTS OF GERMAN MNES INTO PRODUCTION NETWORKS IN CENTRAL EUROPEAN AND BALTIC STATES / VOKIETIJOS TARPTAUTINIŲ BENDROVIŲ INVESTICIJOS Į GAMYBOS TINKLUS VIDURIO EUROPOS IR BALTIJOS ŠALYSE

In the first part of the paper, which is dedicated to the theories related to MNEs, strategic management, FDI and global production networks, a variety of theoretical and empirical literature is examined. The main ideas related to MNEs and FDI are based on Dunning, whereas Dicken and Mellahi contributed to the topics related to strategic management and global production networks. Furthermore papers of the European Investment Bank (EIB) about the internationalisation of production in Europe give some basic ideas. Many other scholars are used to illustrate the topic as well. In the empirical part data from sources such as the German Central Bank, EU, United Nations Conference on Trade and Development (UNCTAD) and the German chamber of commerce (DIHK) will be analyzed together with academic papers of various writers like Marin or Nordas. Santrauka Vokietijos tarptautinių bendrovių investicijos į gamybos tinklus naujose ES narėse Vidurio Europoje bei Baltijos šalyse pasiskirsto labai netolygiai, todėl pagrindinis šio tyrimo tikslas – nustatyti pagrindinius veiksnius, lemiančius Vokietijos investicijas šiose šalyse. Autoriai naudoja aprašomąją statistiką bei regresinę analizę verslo aplinkoms skirtingose šalyse palyginti ir nustatyti jų poveikį tiesioginių užsienio investicijų mastui. Tyrimo metu nustatyta, kad Vokietijos investicijose ištirtas šalis dominuoja vertikalios investicijos, o daugiausia jų pritraukia Čekijos Respublika, Vengrija ir Slovakija dėl palankios investicijų skatinimo politikos, pakankamos vidutinės kvalifikacijos darbo jėgos, lankstesnes darbo politikos, geografinės padėties ir kitų veiksnių.

Internal Debt and Multinationals' Tax Planning - Empirical Evidence from Panel Data

This paper investigates the determinants of internal debt issued by foreign affliates of multinational corporations. A theoretical analysis discusses the choice of the capital structure in a setting where internal debt can be used to shift taxable profits to low-tax countries and derives testable predictions. Empirical evidence on the tax sensitivity of internal debt is provided using micro-level panel data of virtually all German multinationals made available by the German central bank (Bundesbank). This comprehensive dataset allows us to exploit differences in taxing conditions of 175 countries over a period of ten years. The empirical results confirm a robust impact of tax-rate differences within the multinational group on the use of internal debt, supporting the profit-shifting hypothesis. However, the tax effects are rather small, suggesting that costs related to adjusting the capital structure are substantial.

INSIDE THE IMPOSSIBLE TRIANGLE: MONETARY POLICY AUTONOMY IN A CREDIBLE TARGET ZONE

This paper examines the trade‐off between exchange rate stability and monetary autonomy for a target zone. Using the guilder‐mark target zone in the pre‐Economic and Monetary Union period as a case study, we empirically estimate how much policy discretion the Dutch central bank still enjoyed and how much had been ceded to the German central bank. The sum of these two measures is an estimate of the policy autonomy under a free float. We find that the narrow guilder‐mark target zone still permitted a modest degree of policy independence. This result suggests that intermediate exchange rate regimes may offer an attractive trade‐off compared to the corner solutions (free float and monetary union), which is consistent with the “fear of floating” phenomenon. (JEL E52, F33, F41, F42)

The Stability and Growth Pact Germanising the Euro

The Stability and Growth Pact (SGP) was agreed upon by the European Union Member States in 1997 to maintain and enforce fiscal discipline in the EU. Applying the agenda-theory approach, this paper seeks to explain how the German government was influenced by domestic actors such as the German Central Bank, parties, labour unions, and employers' associations during the negotiations. The evolution of the SGP was strongly influenced by the ideas, interests and ideologies of the German media democracy. Our findings show that the SGP constituted a political instrument that was implemented to overcome the German public's scepticism of a united Europe. While many of the domestic actors played critical roles during the process, the German Central Bank, assisted by the Federal Government, was of paramount importance during the negotiations. Germany's leading role in the SGP negotiations can be explained by the European-wide acceptance of its exemplary decades-long stabilisation policy.

Foreign banks' attraction to the financial centre Frankfurt--an inverted 'U'-shaped relationship

This article traces the location of foreign banks in Germany from 1949 to 2006. As suggested by New Economic Geography models, we find an inverted U -shaped concentration of foreign banks in Germany. Only after a competition between several cities, Frankfurt has emerged as the pre-eminent financial centre, triggered by the historical event of setting up the German central bank in Frankfurt. After a strong increase, Frankfurt's share in the location of foreign banks in Germany decreases slowly but significantly since the mid-1980s. We conclude that there will be a lesser role in Europe for second-tier financial centres in the future.

Efficient, Profitable and Safe Banking: An Oxymoron? A Panel VAR Approach

Cost and profit efficiency (CE and PE) are key to evaluate bank performance. But efficiency improvements may imply deteriorating profitability and excessive risk-taking. The dynamic reactions of performance in response to efficiency changes remain unclear on both theoretical and empirical grounds. We use panel data provided by the German central bank to estimate impulse response functions derived from a vector autoregressive model to measure the response of profitability (ROA) and probabilities of default (PD) to efficiency shocks. A unit shift in efficiency reduces PD's and increases ROA. The long-run impact of PE on risk is larger than for CE, but the latter reduces PD's faster. CE has a slightly larger impact on profits than PE. In sum, efficient and stable banking do not contradict each other.

Wealth Tax as Alternative Minimum Tax - The Impact of a Wealth Tax on Business Structure and Strategy

An alternative minimum tax (AMT) is often regarded as desirable. We analyze a wealth tax at corporate and personal level that is designed as an AMT as proposed by the German Green Party. This wealth tax is imputable to profit taxes and is hence intended to prevent multiple (multistage) taxation. Referring to data from annual reports and the German Central Bank we model enterprises of different structure, industry, size and legal status. We show that companies in the service sector which generally maintain rather high gearing rates are more frequently subjected to the wealth tax than capital intensive industries. This result runs counter to well-known effects of a common wealth tax. Capital intensive firms, e.g. in the metal industry, are levied with definitive wealth tax only if they have large loss carry-forwards or extremely volatile profits. Furthermore, partnerships often enjoy wealth tax privileges due to uniform taxation at individual level whereas corporations may suffer from the wealth tax at corporate and personal level caused by imputation backlogs. Obviously, the underlying AMT influences corporate dividend policy evoking a push-out effect. We prove that this kind of wealth taxation usually favors financial rather than real investment and encourages outbound investment. Consequently, introducing an AMT discriminates against many firms and investment projects, especially if economic income is lower than taxable income. This proves that whenever income is taxed correctly, AMT is dispensable.

With a Bang, not a Whimper: Pricking Germany's “Stock Market Bubble” in 1927 and the Slide into Depression

In May 1927, the German central bank intervened indirectly to reduce lending to equity investors. The crash that followed ended the only stock market boom during Germany's relative stabilization 1924–1928. The evidence strongly suggests that the German central bank under Hjalmar Schacht was wrong to be concerned about stock prices—there was no bubble. Also, the Reichsbank was mistaken in its belief that a fall in the market would reduce the importance of short-term foreign borrowing and improve conditions in the money market. The misguided intervention had important real effects. Investment suffered, helping to tip Germany into depression.

Unique Combination of Theory and Practice: Institute for Law and Finance offers LL.M. (Finance) in Frankfurt

Frankfurt, financial center of continental Europe, is home to the European Central Bank (ECB) and the Deutsche Bundesbank (the German central bank) as well as to Deutsche Börse AG (German stock exchange). Most of the important German private banks have their headquarters there, and many banks from abroad have established their subsidiaries in Frankfurt. Besides, the biggest German and international law firms have their largest German offices in the financial district of the City. Unsurprisingly, the Johann Wolfgang Goethe-Universität, one of the biggest universities in Germany, has used this advantage of location for building up and expanding its research and teaching program in Business Law and Economics. Both located in the University, the Institut für Ausländisches und Internationales Wirtschaftsrecht – AIW (Institute for Foreign and International Business Law) and the Center of Financial Studies, which is internationally well-known for its research on financial markets, financial intermediaries and monetary economics, are highly reputed.

The role of the Deutsche Bundesbank in the European System of Central Banks

This article lists the main functions and tasks of the Eurosystem NCBs in general and of the Bundesbank in particular. The bulk of these activities is related to monetary policy, payment systems and financial stability. Furthermore, this article addresses the question whether the degree of decentralisation prevailing in the Eurosystem is appropriate. General evaluation criteria such as monetary policy efficiency, the ability to act, transparency and cost efficiency do not give a clear-cut answer because they point in opposite directions and a definite weighting mechanism is not available. Looking therefore more closely at the historical development of the German Central Bank System and the U.S. Federal Reserve System, a tendency can be observed over time towards strengthening of the central office. Nevertheless, the main motive for these developments, namely improving the ability to act, does not seem to be of such importance in the European case: fears of possible inertia in the monetary-policy decision process seem to be unfounded because the respective decision-making bodies have always been able to take decisions quickly.

With a Bang, not a Whimper: Pricking Germany's 'Stock Market Bubble' in 1927 and the Slide into Depression

In May 1927, the German central bank intervened indirectly to reduce lending to equity investors. The crash that followed ended the only stock market boom during Germany's relative stabilization 1924-28. This paper examines the factors that lead to the intervention as well as its consequences. We argue that genuine concern about the 'exuberant' level of the stock market, in addition to worries about an inflow of foreign funds, tipped the scales in favour of intervention. The evidence strongly suggests that the German central bank under Hjalmar Schacht was wrong to be concerned about stockprices-there was no bubble. Also, the Reichsbank was mistaken in its belief that a fall in the market would reduce the importance of short-term foreign borrowing, and help to ease conditions in the money market. The misguided intervention had important real effects. Investment suffered, helping to tip Germany into depression.

Deviations from daily uncovered interest rate parity and the role of intervention

Abstract This paper considers the relationship between daily deviations from uncovered interest rate parity and US and German central bank intervention. The study uses daily overnight Eurocurrency deposit rates with a maturity time of 1 day, which exactly matches the sampling interval of the data. The intervention data are the official net daily purchases and sales of dollars vis-a-vis the German mark by the Federal Reserve System and the Bundesbank. The model uses FIGARCH innovations to represent the degree of long-term dependence in the volatility process. Some support is found for the intervention variables affecting the risk premium as predicted by theory. The impact of intervention in the 2 years immediately following the meltdown of the equity markets in October 1987 and Louvre Accord is particularly strong.