HEINEN Andreas

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Over the past twenty years, the global microfinance industry has grown exponentially. It has enabled millions of low-income people excluded from the mainstream financial sector to better smooth their consumption and invest to improve their well-being. However, during this same period, the microfinance sector has also been hit by repayment crises and a number of microfinance institutions (MFIs) have seen their default rates rise alarmingly. It is thus crucial to have a thorough understanding of the determinants of risk at the macro and micro levels. This thesis makes a contribution in this direction by studying credit risk at the sector and borrower levels in microfinance. In the first chapter, we suggest a new measure of systemic risk for the microcredit market. We then explore the determinants of this risk for 37 countries from 2000 to 2014. To do so, we model the joint distribution of portfolio quality of all MFIs in a given country using a semi-parametric equidistant copula. Our measure is based on the idea that higher portfolio quality dependence in a country is an indicator of fagility in the sector. We show that after controlling for country effects, competition, level of market penetration, commercialization, overgrowth of the sector as well as high interest rates increase the fragility of the sector. In the second chapter, we use data from the microfinance platform Kiva.org to assess the default rate of loans that MFIs post on the platform. We identify, first, that longer loan terms have a higher default rate, second, that the default rate decreases with the age of the borrower, and finally that grace periods increase the default rate for group loans with a monthly repayment frequency. The evaluation of public policies is particularly difficult when they affect a large number of people and have non-marginal effects. The third chapter of this thesis makes a contribution to this literature by estimating the effect of an education policy to give households more school choice on the price of high school quality in South Korea. Specifically, we use a hedonic approach to estimate the effect of the education policy on the equilibrium price of high school quality in Seoul. Our identification strategy relies on specific spatial effects such as high-rise apartments in Seoul. These effects allow us to estimate the equilibrium price of high school quality before and after the policy without having to rely on the policy itself as an identification strategy. Thus, we mitigate the bias due to households allocating based on their preference for locally distributed goods. We estimate that this school choice policy decreases the equilibrium price of high school quality by USD 26,871 on average.

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Natural disasters have always been and probably always will be a problem for humans and their settlements. With global warming seemingly increasing the frequency and strength of the climate related disasters, and more and more people being settled in urban centers, the ability to model and predict damage is more important than ever.The aim of this thesis has been to model and analyze a broad range of disaster types and the kind of impact that they have. By modeling damage indices for disaster types as different as hurricanes and volcanic eruptions, the thesis helps with understanding both similarities and differences between how disasters work and what impact they have on societies experiencing them. The thesis comprises four different chapters in addition to this introduction, where all of them include modeling of one or more types of natural disasters and their impact on real world scenarios such as local budgets, birth rates and economic growth.Chapter 2 is titled “Natural Disaster Damage Indices Based on Remotely Sensed Data: An Application to Indonesia". The objective was to construct damage indices through remotely sensed and freely available data. In short, the methodology exploits that one can use nightlight data as a proxy for economic activity. Then the nightlights data is matched with remote sensing data typically used for natural hazard modeling. The data is then used to construct damage indices at the district level for Indonesia, for different disaster events such as floods, earthquakes, volcanic eruptions and the 2004 Christmas Tsunami. The chapter is forthcoming as a World Bank Policy Research Paper under Skoufias et al. (2017a).Chapter 3 utilizes the indices from Chapter 2 to showcase a potential area of use for them. The title is “The Reallocation of District-Level Spending and Natural Disasters: Evidence from Indonesia" and the focus is on Indonesian district-level budgets. The aim was to use the modeled intensity from Chapter 2 to a real world scenario that could affect policy makers. The results show that there is evidence that some disaster types cause districts to move costs away from more general line items to areas such as health and infrastructure, which are likely to experience added pressure due to disasters. Furthermore, volcanic eruptions and the tsunami led to less investment into more durable assets both for the year of the disaster and the following year. This chapter is also forthcoming as a World Bank Policy Research Paper under Skoufias et al. (2017b).The fourth chapter, titled “Urban Global Impact of Earthquakes from 2004 through 2013", is a short chapter focusing on earthquake damage and economic growth. This chapter is an expansion of the index used in the previous two chapters, where we use global data instead of focusing on a single country. Using a comprehensive remotely sensed dataset of contour mapsof global earthquakes from 2004 through 2013 and utilizing global nightlights as an economic proxy we model economic impact in the year of the quakes and the year after. Overall, it is shown that earthquakes negatively impact local urban light emissions by 0.7 percent.Chapter 5 is named “A Whirlwind Romance: The Effect of Hurricanes on Fertility in Early 20th Century Jamaica" and deviates from the prior chapters in that it is a historical chapter that looks at birth rates in the early 1900s. The goal was to use the complete and long-term birth database for Jamaica and match this with hurricane data to check fertility rates. We create a hurricane destruction index derived from a wind speed model that we combine with data on more than 1 million births across different parishes in Jamaica. Analyzing the birth rate following damaging hurricanes, we find that there is a strong and significant negative effect of hurricane destruction on the number of births.

A large number of home loan defaults and the collapse of the housing market led to the failure of several investment banks in the United States. These factors also triggered the latest financial crisis. These events have given rise to a body of work that seeks to explain the factors determining the simultaneous failures of real estate lending. This thesis provides additional evidence of the importance of default dependence in the management of real estate loan portfolios. This thesis consists of three chapters identifying the key factors determining the dependence of home loan defaults and home prices. We show that a more accurate measure of credit risk is possible by taking into account the factors mentioned below. In chapter 1, we analyze the variation in the dependence of 13 regional price indices. We estimate a multivariate hidden Markov chain with two equidistant regimes. We model the transition probability using the growth of the interest rate and the loan-to-value ratio. Our results show that the average regional dependence of house prices varies over time. Moreover, this trend is related to changes in the interest rate and the loan-to-value ratio. Considering a subsample of metropolitan regions, we also show that a decrease in the loan-to-value ratio is associated with a higher probability of being in a high-dependence regime as described by a canonical tree copula. In Chapter 2, we use a composite likelihood copula and a mathematical function to analyze the pairwise default dependence of a set of securitized subprime mortgages from the Los Angeles area between 2000 and 2011. Our results show that default dependence is affected by the geographic distance between loans, the mean, and the dyadic differences in variables such as loan-to-value ratio, FICO credit scoring, and income at the borough level. In addition, we identify a contagion effect or a negative regional house price change index and a high default rate increases default dependence. Finally, our model gives a good estimate of the Value at Risk of the number of defaults in a block of securitized loans. In chapter 3, we analyze the efficiency of a portfolio of subprime mortgages. We estimate the spread and variance of returns using default probabilities obtained from a pairwise default dependence model. We analyze the 13 largest blocks of real estate loans, securitized between 2001 and 2005. Our results show that the diversification of loan blocks was not optimal. Moreover, we show that it is possible to further reduce the risk associated with loan pools by taking into account non-geographic risks.

We use a sample of banks from 24 European countries to investigate whether the adoption of the Basel II Capital Accord in 2008 affects the market valuation of discretionary loan loss provisions (DLLPs). Although Basel II lowers the incentives of internal ratings-based (IRB) banks to recognize income increasing DLLPs in an opportunistic manner, it has no such impact on the remaining banks, which adopt the Standardized methodology. We use this setup in a difference-in-difference (DiD) design, where Standardized banks act as a control group. Our evidence supports the three hypotheses that, for IRB relative to Standardized banks, Basel II is associated with (i) less income-increasing DLLPs and (ii) less income-smoothing via DLLPs, which enhances the informational content of DLLPs about future loan losses and leads to (iii) higher market valuation of DLLPs. Our findings are timely and have policy implications for future regulatory developments in the banking industry.

The central theme of my doctoral dissertation is Regulation in multiple forms. Specifically, I focus on the parameters affected by mandatory, optional or self-developed regulation. The three chapters of the current paper use the banking industry in European Union (EU) countries as a parameter. Over the past decade, the banking industry has undergone several regulatory transformations that have affected the quantity and quality of information disclosed. In addition, the recent financial crisis had banks in the spotlight, given their central role in the market downturn.In the first chapter, "Does Basel II Affect the Market Assessment of Discretionary Loan Loss Provisions?", I examine the impact of the 2008 Basel Capital Accord implemented in the European Union. Basel II was intended to bring an increased level of transparency to the operations of banks. As a result, Basel II introduces an incentive for banks to (1) increase their forward-looking provisioning and (2) reduce their opportunistic provisioning.In our institution, Basel II introduces incentives for managers to recognize less discretionary income-growing loan loss provisions (DLLPs). The increasing income-DLLPs are important since they are recognized in the literature as mostly opportunistic. These findings are of particular importance in light of recent and upcoming regulatory developments in the banking industry. I am referring to the introduction of IFRS 9 in 2018 and Basel III in 2019. Our results highlight the need for accounting and banking regulators to coordinate their efforts with disregard to their innate way of different objectives.For my second chapter, "Has Basel II induced conservatism reduced the level of revenue management of EU banks?" Basel II reduces the discretionary power of provisions that is used in the pre-adoption period of opportunistic reporting (to recognize the increasing revenues to achieve earnings management DLLPs objectives).The third chapter, "The impact of the EU Bank 2010 Stress Test Disclosure results on banks" earnings management analyzes the impact that the disclosure of the Prospective 2010 Macroeconomic Stress Test (ST) has on the level of participating banks opportunistic reporting. Specifically, it tests whether the disclosure decreases and therefore the opacity of the bank earnings (approximated by management and regularization of the benchmark income to beat it) tested banks relative to non-banks tested.We find that banks that enter the era of reducing the level of their benchmark hits. In corroboration with previous results, we document that disclosure of ST likely reduces the results of banks' opacity and managers reduce opportunistic reporting due to increased public scrutiny. This paper is the first to analyze the impact that ST disclosure results has on the earnings level of banks' management practices and adds to the emerging ST literature.Overall, my thesis sheds light on current and relevant issues that concern one of the most scrutinized and criticized industries in the world. By analyzing the effect of different sets of regulations on financial reporting and accounting numbers, this thesis makes numerous contributions to the academic literature and sheds light on the practical effects of overlapping regulations in the EU.

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The file associated with this record is under a 36-month embargo from publication in accordance with the publisher's self-archiving policy, available at https://www.elsevier.com/about/company-information/policies/sharing. The full text may be available through the publisher links provided above.We consider the effect on performance of very large controlling shareholders, who are mostly organized in voting blocks and business groups, in a sample of Belgian listed firms from 1991 to 2006. Since the shape of the relation between ownership and firm value is a controversial issue in corporate finance, we use semiparametric local-linear kernel-based panel models. These models allow us not to impose a priori functional restrictions on the relation between ownership and performance. Our semiparametric analysis shows that the effect on performance varies depending on the size of ownership stakes and that there are departures from linearity, especially in family firms. Our results suggest that this non-linearity in family firms is related to whether or not the CEO is a family member.Peer-reviewedPost-prin.