Some selected ongoing collaborations:

Internal Credit Risk Models – Between Regulatory Intention and End-Effects: Why Do Banks’ Risk Weighted Asset Levels Converge over Time?

Victoria Boehnke, Steven Ongena, Florentina Paraschiv, and Endre J. Reite

The internal ratings-based (IRB) approach maps banks’ distinct risk profiles more adequately than the standardized approach. After the switch to the IRB approach, banks’ risk-weighted asset (RWA) densities are thus expected to diverge, especially across countries with different supervisory strictness and risk levels. However, by examining 52 listed banks headquartered in 14 European countries that adopted the IRB approach, we observe a gradual convergence of their RWA densities over time. Whereas banks in high-risk countries and in countries with lax regulation reduce their RWA densities, banks in countries with strict supervision increase theirs. Furthermore, especially for banks in high-risk countries, the RWA densities underestimate banks’ actual economic risk position. We analyze whether the IRB approach provides opportunities for regulatory arbitrage, whereby authorities only enforce strict supervision on capital requirements if they do not jeopardize bank resilience.

Determinants of Price Discrimination and Switching Mortgage Provider Under Regulation and Digitalization

Steven Ongena, Florentina Paraschiv, Endre J Reite

This study analyzes price discrimination and household switching in the residential mortgage market. Using a unique proprietary micro dataset from Norway, we examine the difference between the loan rate paid by current clients when receiving a competing offer from another bank and the best rate being offered to new customers by the current bank at the same time. The results show that current clients pay around 20 basis points more than new customers are offered; however, this rate differential is kept in check by the existing clients switching or accepting counter-offers from the home bank. New regulations and digitalization enhance transparency; that is, they can reduce the rate differential, but the introduction of new banking products as well as changes in the timing of rate differentiation ̶ from immediate upfront to gradually over time ̶ may be used to keep the differential constant.

Banks` role in the gas crisis picture

Steven Ongena, Endre Jo Reite, Ranik Raaen Wahlstrøm, Florentina Paraschiv

When looking at the gas crisis, two aspects may be possible avenues. One is the doubtful loan provisions. Increased gas prices and possible shortages should be reflected in increased loss provisions in Q2/Q3 2022. This measures how a bank incorporates the indirect effect of the prices. There is significant discretion in doubtful loan provisions. Suppose a liquidity shock and a sector/commodity shock occur simultaneously. In that case, one (from a bank perspective) may be tempted to smooth income by reducing loss provisions to seem more secure and reduce the risk of being unable to access liquidity. To address this in analysis, one could look at the loss provisions, commodity price shocks, and credit spreads. Ideally, the loss provisions in banks should not decrease when commodity prices of imported commodities necessary for the production in one country increase. They may on the other hand decrease when the bank is in a net exporter of the same commodity. 

Banks and “Green Appearance”

Endre Jo Reite and Florentina Paraschiv

When studying the 2008 financial crisis, one interesting aspect is the ability of banks to bundle and separate tranches of credit risk – seemingly making the risk disappear and selling tranches of high risk loans as low-risk assets. What if what we observe now with the ESG efforts of banks shroud a similar strategy?
As suggested by Benincasa, Kabas, and Ongena (2023), banks continue to provide loans to “brown” industries and to profit from higher margins on such loans due to an increase in the cost of pure market financing to the brown companies through industry bonds. They do this by maintaining an overall “green” appearance of the bank, separating tranches of assets in the bank as “green-bonds”, and marking assets with green labels provided by different consultants. This secures the bank’s access to attractive financing terms and creates a nice little way to profit more as the ESG regulations tighten.

Possible identification strategies:
•    Is the credit/financing cost of banks related to the ESG risk in their portfolio?
•    Do banks with a larger proportion of brown assets communicate more positive ESG-related news?
•    Do banks with a larger proportion of brown assets have lower ESG scores?  

Projects in this field cover a wide range of topics in corporate finance, ranging from corporate funding and investments through to valuation. Focus is also on promoting good governance practices in managing firms’ resources as well as maintaining transparent communication with stakeholders.

• Capital structure: financial and non-financial factors that affect capital structure of firms and their probability of default, and in connection with governmental policies,  
• Corporate disclosure: insights on disclosure practices regarding non-financial information such as CSR reporting in light of the changing regulatory framework and their implications for valuation,
• Corporate governance: the influence board structure and attributes as well as the owners have on corporate outcomes and strategies, 
• Corporate investments: factors at firm-level and institutional-level that can affect corporate investments,
• Information asymmetry: the implication of information transparency and earnings quality on firm value and investors’ decision making.

Financial accounting projects encompass a range of subjects that revolve around the key elements of reporting quality and audit quality. The overarching objective is to investigate the extent to which both corporate financial and non-financial reporting, along with audit reports, meet the expectations of stakeholders. Moreover, these projects aim to examine the influence of new regulations on the quality of reporting, encompassing both financial and non-financial aspects, as well as the quality of audits.

Projects in details: 
•    Audit quality: This project focuses on assessing the audit quality in Norwegian private firms. This entails a comprehensive evaluation of the effectiveness and rigor of auditing practices within the context of privately held companies operating in Norway. By examining various parameters related to audit quality, this project seeks to gain insights into the overall standard of auditing in this specific setting.

•    Auditor effort and fees: This project delves into the relationship between individual auditor efforts (audit fees) and the resulting audit quality and auditor disclosure. By exploring the impact of auditors' efforts on the quality of their work and the extent of information they disclose, this project aims to shed light on the factors that influence audit outcomes. This investigation provides valuable insights into the role of auditors in ensuring accurate and reliable financial reporting.

•    Sustainability reporting: This project focuses on sustainability reporting, with two specific areas of inquiry. Firstly, it investigates the market reaction to corporate greenwashing, which refers to the deceptive practice of presenting a false impression of environmental responsibility. By analyzing the market's response to such misleading claims, this project aims to highlight the importance of accurate and trustworthy sustainability reporting for maintaining stakeholder trust and avoiding reputational risks. Secondly, this project explores the role of corporate governance and stakeholder engagement in corporate disclosure quality, particularly regarding sustainability reporting. By examining the impact of governance mechanisms on the quality of disclosure practices, it seeks to identify the factors that contribute to effective and transparent communication of sustainability-related information. This investigation can help organizations enhance their reporting practices and align them with stakeholder expectations.

Some selected ongoing collaborations: 
 

Market reactions to corporate greenwashing

Mahmoud Hosseinniakani, Ishwar Khatri, Per Ståle Knardal, Ranik Raaen Wahlstrøm

Auditor independence in private firms under a voluntary audit regime

Amir Amel-Zadeh, Mahmoud Delshadi, Mahmoud Hosseinniakani, Ranik Raaen Wahlstrøm

Individual auditor traits, audit effort and audit quality

Amir Amel-Zadeh, Mahmoud Delshadi, Mahmoud Hosseinniakani, Ranik Raaen Wahlstrøm

Financial technology offers exciting new developments to the field of finance. We appreciate the factors that drive the development in FinTech as well as the implications FinTech has on the investment community and the financial system. Some key themes in the FinTech area include: 

• Cryptocurrencies: the dynamics of the cryptos and the opportunities they offer, if there is any, to the investors
• Machine learning and explainable artificial intelligence (xAI) for financial analysis and credit risk assessment

Research projects here focus on understanding how businesses and governments facilitate the transition towards a sustainable economy.

• Climate change: capital market in relation to climate risk, and ways in which the capital market, businesses and regulators can accelerate the transition towards addressing climate issues, 
• ESG: opportunities and challenges firms face when addressing sustainability issues, actions firms can undertake to mitigate ESG controversies, and the role played by the institutional framework.
• Environmental Innovation: factors that facilitate environmental innovation and the impact government can have on the innovation process.

Some selected ongoing collaborations:

Market coupling – between benefits and losses

Ranik Raaen Wahlstrøm, Michael Schuerle, Dogan Keles, Florentina Paraschiv

Which energy markets benefit from the market coupling? With a focus on the market coupling dynamics at Nord Pool, including Benelux and Germany, we aim at answering questions such as: is the current market coupling model optimal for balancing out renewable energies across involved markets? We consider demand/supply driven variables: production mix in each country, interconnector capacity, trades, CO2 emission certificate prices, gas prices, temperature data in each country to assess the price drivers in each involved country. We further aim at determining benefits and drawbacks of market coupling for different times of the day for the different countries involved. 

Fueling the energy transition: The effect of German wind and PV electricity infeed on TTF gas prices

Christoph Halser and Florentina Paraschiv

Gas plants play an essential role in the electricity generation in several fuel-based energy systems through balancing out intermittent renewable energies, which is why it is labeled ”green” in the EU Taxonomy. We show the substitution effect between renewable energies, wind and PV, and gas, in the context of a threshold model. Applied to daily Dutch natural gas prices (TTF) between 2016 and 2020, we determine the effect of demand/supply price drivers and lay special emphasis on the asymmetric effects of the day-ahead forecasts of wind and PV infeed. Results show a negative marginal effect of the day-ahead wind and PV infeed forecasts on day-ahead natural gas prices. Employing threshold models, we find that in regimes with low wind infeed, marginal increases in the wind and PV infeed forecasts decrease gas prices faster than in regimes with high infeed. Our findings further reveal that the day-ahead TTF price is positively associated with heating demand, supplier concentration, coal, and CO2 prices. We discuss these findings in the context of the debate on the usage of gas for the European energy transition.