FINANCIAL MARKETS 2021
I N N O V A T I O N S A N D S U S T A I N A B I L I T Y
Proceeding from the 10th International Conference
held in Prague on 27th-28th May, 2021
Otakar Schlossberger (eds.)
Vysoká škola finanční a správní, a.s.
(University of Finance and Administration), Praha, 2021
www.vsfs.cz
Financial Markets 2021
- Innovations and Sustainability
Proceeding from the 10th
International Conference held in Prague
on 27t h
- 28t h
May, 2021
Otakar Schlossberger (eds.)
Vysoká škola finanční a správní, a.s.
Praha, 2021
Vzor citace/pattern quote:
ČERNÍK, O. a R. VALENČÍK. Basic Question of Financial Markets Theory. In
SCHLO SSBERGER, Otakar (eds.). Financial Markets 2021 - Innovations and Sustainability
- proceeding from the 10th
International Conference. Prague, VSFS 2021, 156 pgs. Edition
SCIENCEpress. ISBN 978-80-7408-233-7 (print), ISBN 978-80-7408-234-4 (online).
Otakar Schlossberger (eds.)
Financial Markets 2021 - Innovations and Sustainability, Proceeding from the 10th
International Conference held in Prague on 27t h
- 28th
May, 2021
Vydala Vysoká škola finanční a správni,
a.s., Estonská 500, 101 00 Praha 10,
www.vsfs.cz
v edici SCIENCEpress jako svou 332.
publikaci
Počet stran 156
První vydání, Praha 2021
Prepress: VSFS, a.s.
Tisk: dům tisku s.r.o., Hviezdoslavova
614/16, 400 03 Ústí nad Labem
Vydání odborné publikace bylo schváleno
vědeckou radou nakladatelství VSFS.
Všechna práva vyhrazena. Žádná část
tohoto sborníku nesmí být reprodukována
a používána v elektronické podobě,
kopírována a nahrávána bez předchozího
písemného souhlasu nakladatele.
Za odbornou a jazykovou stránku tohoto
sborníku zodpovídají autoři.
Rukopis neprošel redakční ani jazykovou
úpravou.
Issued by the University of Finance and
Administration, a. s., Estonská 500,
101 00 Praha 10, www.vsfs.cz
in the SCIENCEpress edition as its 332.
publication
Number of pages 156
First Edition, Prague 2021
Prepress: VSFS, a.s.
Print: dům tisku s.r.o., Hviezdoslavova
614/16, 400 03 Ústí nad Labem
The publication of the scientific
publication was approved by the
Scientific Council of the VSFS publishing
house.
All rights reserved. No part of this
publication may be reproduced and used
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© Vysoká škola finanční a správní, a. s., 2021
ISBN 978-80-7408-233-7 (print)
ISBN 978-80-7408-234-4 (online)
Book Cataloging - National Library of the Czech Republic
O t a k a r Schlossberger (eds.)
F i n a n c i a l M a r k e t s 2021 - Innovations a n d Sustainability, P r o c e e d i n g from the 10t h
International C o n f e r e n c e Praha:
V y s o k á š k o l a finanční a s p r á v n í , 2021 - 156 pgs.
I S B N 978-80-7408-233-7 (print)
I S B N 978-80-7408-234-4 (online)
- b o n d s
- capital m a r k e t
- competitiveness
- e d u c a t i o n
- financial institutions
- F i n t e c h
- i n n o v a t i o n
- investment
- p a y m e n t s
- regulation
- S M E s
- Start-Ups
- p a n d e m i c
J E L C L A S S I F I C A T I O N
F21, G11, G15, K23
F I E L D C O D E S R I V (17+)
A H - E c o n o m y
A G - L a w
Abstrakt:
Tato publikace je sborníkem příspěvků z desátého ročníku mezinárodní vědecké konference
Finanční trhy 2021 - Inovace a udržitelnost. Tato konference byla v minulých letech již
tradičním vyvrcholením mezinárodní prezentace výsledků vědy a výzkumu v oblasti financích
trhů, kterou pořádá Vysoká škole financí a správní každé dva roky. Záštitu nad výročním
desátým ročníkem převzal opět guvernér České národní banky pan Jiří Rusnok. Konference
se zaměřila na prezentaci a diskusi financování investičního rozvoje malých a středních
podniků, na rozvoj akciového a dluhopisového trhu včetně východisek pro rozvoj
regulovaného trhu s finančními nástroji v rámci Koncepce kapitálového trhu v letech 2019-
2023. Místo konání: Vysoká škola finanční a správní, Estonská 500, 101 00 Praha 10, datum
konání: 27. - 28. května 2021.
Abstract:
This publication is a collection of papers from the tenth annual international scientific
conference Financial Markets 2021 - Innovation and Sustainability. In recent years, this
conference has been the traditional culmination of the international presentation of the results
of science and research in the field of financial markets, organized by the University of
Finance and Administration every two years. The Governor of the Czech National Bank,
Mr. Jifi Rusnok, again took over the auspices of the tenth annual year. The conference focused
on the presentation and discussion of financing the investment development of small and
medium-sized enterprises, the development of the stock and bond market, including the basis
for the development of a regulated market for financial instruments within the Capital Market
Concept in 2019-2023. Estonskä 500, 101 00 Prague 10, date: May 27 - 28, 2021.
Klíčová slova:
Dluhopisy, kapitálový trh, konkurenceschopnost, vzdělávání, finanční instituce, Fintech,
inovace, platební styk, regulace, MSP, Start-Upy, pandemie
Keywords:
Bonds, capital market, competitiveness, education, financial institutions, Fintech, innovation,
payments, regulation, SMEs, Start-Ups, pandemic
Pokud není dále uvedeno jinak, publikace zohledňuje právní předpisy a judikaturu
ve znění účinném k 31. březnu 2021.
Unless otherwise specified below, the publication takes into account legislation and case-law
as in force on 31 March 2021.
5
Content
PREFACE 7
PROGRAMME 8
Černík, O. a R. Valenčík. Basic Question of Financial Markets Theory 16
Frank, B. The Financial Crisis in the 2000s: Further Effects regarding
Lending, Regulation and Efficiency 31
Chlumská, Z. a V. Jandus. Behavioral Aspects of Asset Management
in Relation of Financial Literacy 41
Kloppenburg, W. Are Real Estate Evolving into an Asset Price Bubble ? 52
Knihová, L. Opportunities and Challenges of Digital Customer
Learning in Banking 61
Kraibichová, K. Payment Cards and their Use in Premium Banking 71
Mertl, J. Public Debt amidst low Interest Rates: the Issue of Cheap Money 72
Muratovic, A. Covid-19 Impact on the Euroarea Financial System 85
Pavlát, V. The BREXIT Phenomenon 94
Pirgmann, M. Impact of Tokenization on the Economics of Crowdfunding
Investments through a Change of Investment Behaviour 104
Schulz, B. The Cum-ex Case in Germany 114
Steyer, K. Financial Sustainability in Germany during the Covid-19
Pandemic 127
Vostatek, J. Voluntary Pension Arrangements through the OECD Prism 138
Zubko, M. Cyberterrorism: Global Threat to Financial Institutions 145
6
Preface1
On 27-28 May 2021, the University of Finance and Administration organised the tenth edition of the
International Scientific Conference Financial Markets 2021, this time with the subtitle "Innovation
and Sustainability". The conference was held under the auspices of the Governor of the Czech
National Bank, Mr. Ing. Jin Rusnok.
The conference's organization and course were marked by the fading Covid-19 pandemic, so the
organisers decided to hold the conference online for the first time in its ten-year existence via a web
application designed for universities.
The content of the conference focused mainly on presentations and discussion of financing the
investment development of small and medium-sized enterprises, the development of the stock and
bond market, including the basis for the development of the regulated financial instruments market
within the framework of the Capital Market Development Concept 2019-2023, in the period aff ected
by the Covid-19 pandemic. The conference included the following general topics:
• Current trends in financial market development in the EU and the Czech Republic.
• The current development of financial market regulation in the E U and its impact on the
Czech Republic.
• Starting points and opportunities for small and medium-sized enterprises in terms of raising
and strengthening investment resources from the Czech organised capital market in the covid
era.
• Support for start-ups after one year in the current situation.
• The impact of Brexit on the financial markets of EU member states.
• Impact of digitalization and robotization on financial markets.
• Analyses of financial market infrastructures in E U countries including the Czech Republic,
etc.
The specific structure of the conference was divided by the organizing committee into two days. The
first day of the conference was a structured day with pre-addressed Keynote speakers and individual
panellists within the conference sessions. The welcome of all participants, which numbered more than
50 including foreign participants, was made on behalf of the University by doc. RNDr. Petr Budinsky,
CSc. After this formal act, the two protagonists of the opening session, who were Mrs. JUDr. Ing.
Lenka Dupakova, Ph.D, Deputy Minister of Finance of the Czech Republic and Ing. Ales Michl,
Ph.D., Member of the Bank Board and Chief Executive Officer of the Czech National Bank. Their
speeches were a challenge for the next four blocks of the first day of the conference, as they focused
on the role and position of the regulator and the supervisory authority in the implementation of the
capital market concept with its role in supporting small and medium-sized enterprises, respectively,
the implementation of supervision and ensuring macroeconomic tasks creating space for the
entrepreneurship of these entities.
The first panel, moderated again by doc. Budinsky, focused on the perspectives of the development
of the Czech financial and capital market in the stage of restarting the Czech economy after the
1
Source: SCHLOSSBERGER, Otakar. The Conference "Financial markets" for the Tenth Time. ACTA VSFS. Praha:
Vysoká škola finanční a správní, a. s., 2021, roč. 2021, č. 1, s. 114-116. ISSN 1802-792X. doi:10.37355/acta-2021/l-07
7
pandemic situation caused by the coronavirus. The panel featured presentations and discussions by
representatives of the Ministry of Finance and representatives of the Czech Capital Market
Association (AKAT CR) and the Association of Small and Medium-sized Enterprises (AMSP CR).
This expert panel was followed by a thematic second panel, which presented representatives of the
Czech financial and capital market in the stage of restoring economic prosperity and growth after
2020. The moderator of the panel was none other than the Executive Director of A K A T CR, Ms.
Mgr. Ing. Jana Brodani, MBA, LL. M . In her panel she invited representatives of entities active on
the capital market to discuss the topic.
The following session was focused on fin-tech and its content included presentations focused on how
fin-tech technology can be a tool to deepen and improve the provision of financial services on the
financial market in the coming years. The moderator of this innovative session was Ms. Maria
Stazskiewicz, Chairman of the Board and Executive Director of the FinTech Association. The
keynote speech was delivered by the Deputy Minister of Industry and Trade of the Czech Republic,
Mr. Ing. Petr Očko, Ph.D., who was followed by representatives of fin-tech companies and a
representative of the academic sphere - Vice-Rector for Strategy and Development of the Czech
Technical University in Prague Mrs. Ing. Veronika Kramaříkova, MBA.
The last panel of the first day, moderated by Mrs. Ing. Jana Kotěšovcová, Ph.D., from the Department
of Finance of the organizing university, was a panel focused on the characteristics of the conditions
of the Czech capital market development from the perspective of financing innovative investment
programmes of companies in the stage of restoring economic prosperity and growth after 2020. It was
no coincidence that the keynote speaker was RNDr. Jan Lánský, Ph.D., also from the University of
Finance and Law, who is a recognized expert in the field of cryptocurrencies. The other four speakers
complemented his contribution with their views and approaches to help companies raise funds
through the capital market, assuming an analysis of the company's financial health as a basis for,
among other things, investor confidence.
The second day of the conference was already marked by presentations by representatives of the
academic community, both researchers and students of bachelor's, master's or doctoral study
programmes. In three blocks, moderated by doc. JUDr. Ing. Otakar Schlossberger, Ph.D., Vice Dean
for Research and Publications of the Faculty of Economic Studies of the organizing university, who
also serves as the Head of the Department of Finance, and his colleague - Ing. Eva Kostikov, Ph.D.,
who is his deputy at the Department of Finance. There were more than 15 presenters, including six
foreign students, mostly from the Federal Republic of Germany.
This day was dedicated as an acknowledgement for his lifetime work to doc. Ing. Vladislav Pavlát,
CSc, who is still an active member of the Department of Finance despite his "blessed" age. Mr.
Pavlát was the co-founder and "scriptwriter" of almost all previous Financial Markets conferences,
which are regularly held every two years.
Prague, October 2021
Assoc. Prof. JUDr. Ing. Otakar Schlossberger, Ph.D.
Editor and Dean of Faculty of Economic Studies VSFS
8
VYSOKÁ ŠKOLA
FINANČNÍ A SPRÁVNÍ
Program 10. ročníku mezinárodní vědecké konference na téma
„FINANČNÍ TRHY 2021 - INOVACE A UDRŽITELNOST"
Záštitu nad konferencí převzal guvernér České národní banky
pan Ing. Jiří Rusnok
čtvrtek 27. května - pátek 28. května 2021
On-line prostřednictvím aplikace Teams, přístup do týmu Financial Market Conference 2021:
https://teams.microsoft.eom/l/team/19%3azcpTSwnKMkBz47CqDYVnWgl6tsQ6EtESiX_LxJGd2
HQl%40thread.tacv2/conversations?groupId=2c70403e-35f0-4640-b7f9-
576b24afl6fa&tenantId=e4341966-3781-40cl-9948-186e5a4b8852
1. den - 27. května 2021
08:30 - 09:00 - Registrace účastníků na Teams
09:00 - 10:00 - Zahájení konference Finanční trhy 2021 — Inovace a udržitelnost — doc.
RNDr. Petr Budinský, CSc, VŠFS, prorektorpro strategii a mezinárodní vztahy.
Hlavní referát „Keynote speakers ":
Ing. Aleš Michl - člen Bankovní rady České národní banky a vrchní ředitel
JUDr. Ing. Lenka Dupáková, Ph.D. - náměstkyně ministryně financí
České republiky
10:00 - 11:00 - I. tematický blok — Perspektivy vývoje českého finančního a kapitálového
trhu v etapě restartu české ekonomiky po koronavirové krizi.
Moderátor: doc. RNDr. Petr Budinský, CSc, prorektor VŠFS
V panelu vystoupí:
Mgr. Ing. Jana Brodani, MBA, LL. M . , AKAT - key note speaker, Mgr. Bc.
Aleš Králík, L L M , Ing. Karel Dobeš, předseda Asociace malých a středních
podniků.
11:00 - 12:15 - II. tematický blok — Český finanční a kapitálový trh v etapě obnovení
hospodářské prosperity a růstu po roce 2020.
Moderátotka: Mgr. Ing. Jana Brodani, MBA, LL. M., výkonná ředitelka AKAT
V panelu vystoupí:
Jaromír Sladkovský - key note speaker, Martin Hudeček, Asset Manager of
RSJ Tech and RSJ Insurtech, RSJ Investments, Martin Řezáč, vedoucí pobočky
Erste Asset Management a zástupce Cyrus - panelista kontaktován.
9
12:15 - 12:30-Přestávka
12:30 - 13:45 - III. tematický blok — Technologiefintech a další jako nástroj prohloubení
finančního trhu a zkvalitnění finančních služeb v příštích letech.
Moderuje Maria Stazskiewicz, předsedkyně představenstva a CEO, FinTech
Asociace.
V panelu vystoupí:
Ing. Petr Očko - nám. ministra průmyslu a obchodu ČR - key note speaker,
Petr Hojný, Liberis, Ing. Veronika Kramaříkova, MBA, prorektorka ČVUT pro
strategii a rozvoj, Marek Subrt - externí expert ministerstva financí ČR.
13:50-15:10 - IV. tematický blok — Podmínky rozvoje českého kapitálového trhu z hlediska
financování inovačních investičních programů podniků v etapě obnovení
hospodářské prosperity a růstu po roce 2020.
Moderuje Ing. Jana Kotěšovcová, Ph.D., VŠFS, Katedra financí.
V panelu vystoupí:
RNDr. Jan Lánský, Ph.D., VSFS, Katedra informatiky a matematiky - Key
note speaker, Ing. Jiří Mesároš, Dluhopisy.cz, Ing. Bc. Jiří Mihola, CSc,
VSFS, Katedra informatiky a matematiky, Ing. Pavel Finger, CRIF, Czech
Credit Bureau, Ing. Jana Kotěšovcová, Ph.D., VSFS, Katedra financí, Ing.
Arnošt Klesla, Ph.D., VSFS, Katedra financí.
15:10-15:30 - Závěrečná diskuse, vyhodnocení a závěr I. dne.
2. den - 28. května 2021
08:30 - 09:00 - Registrace účastníků na Teams
09:00 - 09:10 - Zahájení - doc. JUDr. Ing. Otakar Schlossberger, Ph.D., VŠFS, proděkan
pro výzkum a publikační činnost Fakulty ekonomických studií a vedoucí
Katedry financí a Ing. Eva Kostikov, Ph.D., VŠFS, zástupce vedoucího
Katedryfinancí.
I. Blok — akademický a studentský panel — ČJ. Moderuj e doc. JUDr. Ing.
Otakar Schlossberger, Ph.D.
09:10 - 09:30 - Prof. Ing. Jaroslav Vostatek, CSc, VŠFS, Katedra financí - Voluntary
Pension Arrangements through the OECD Prism.
09:30 - 09:50 - Ing. Jan Mertl, Ph.D, VŠFS, Katedra financí - Public debt amidst low interest
rates: the issues of cheap money.
09:50 - 10:10 - PhDr. Ladislava Knihová, VŠFS, Katedra jazyků - Opportunities and
challenges of digital customer learning in banking.
10:10- 10:30 - Doc. Radim Valenčík, CSc, VŠFS, Katedra ekonomie a managementu - Jak
chápat dokonalý finanční trh, význam dokonalosti a příčiny nedokonalosti
reálných finančních trhů.
10:30 - 10:50 - Kateřina Kraibichová, VŠFS, studentka Bc. - Využití platebních karet
v prémiovém bankovnictví.
10:50 - 11:10 - Matouš Král, DiS, VŠFS, student Bc. - Zhodnocení nabídky studentských
kont a úvěrů na českém bankovním trhu.
11:10 - 11:30 - Ing. Zuzana Chlumská, Ing. Vlastislav Jandus, VŠFS, oba studenti Ph.D. Behaviorální
aspekty při správě aktiv s ohledem na finanční gramotnost.
11:30- 11:40-Přestávka
II. Blok - studentský - AJ. Moderuje Ing. Eva Kostikov, Ph.D., VŠFS,
zástupkyně vedoucího Katedry financí.
11:40 -12:00 - Wolfgang Kloppenburg, VŠFS, student Ph.D. - How can the regional rail
transport companies achieve further growth - in view of the shortage of skilled
workers and macroeconomic consequences of the achievement.
12:00 - 12:20 - Bastian Schulz, VŠFS, student Ph.D. - The cum-ex case in Germany.
12:20 - 12:40 - Martin Zubko, MUP, student Ph.D. - Cyberterrorism: A Global Threat to
Financial Institutions.
12:40 - 13:00 - Mick Pirgmann, VŠFS, student Ph.D. - Impact of Tokenization on the
Economics of Crowdfunding Investments through a change of Investment
Behaviour.
13:00- 13:10-Přestávka
///. Blok - studentský - AJ. Moderuje Ing. Eva Kostikov, Ph.D., VŠFS,
zástupkyně vedoucího Katedry financí.
13:10 - 13:30 - Benedikt Frank, VŠFS, student Ph.D. - The financial crisis in the 2000s:
Further effects regarding lending, regulation and efficiency.
13:30 - 13:50 - Azra Muratovic, VŠFS, studentka Ph.D. - Covid Impact on the Euroarea
Financial System.
13:50 - 14:10 - Katrin Steyer, VŠFS, studentka Ph.D. - Financial sustainability in Germany
during the covid-19 pandemic.
14:10- 14:30 - Závěrečné slovo - doc. JUDr. Ing. Otakar Schlossberger, Ph. D. - proděkan
pro výzkum a publikační činnosti FES, VŠFS a Ing. Eva Kostikov, Ph.D.,
VŠFS, zástupkyně vedoucího Katedry financí.
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VYSOKÁ ŠKOLA
FINANČNÍ A SPRÁVNÍ
Program of the 10th
International Scientific Conference on
91 FINANCIAL MARKETS 2021 - INNOVATION
AND SUSTAINABILITY"
The conference is held under the auspices of the Governor of the Czech National Bank
Ing. Jifi Rusnok
Thursday, May 27 - Friday, May 28, 2021
Online via the Teams application, access to the Financial Market Conference 2021 team:
https://teams.microsoft.eom/l/team/19%3azcpTSwnKMkBz47CqDYVnWgl6tsQ6EtESiX_LxJGd2
HQl%40thread.tacv2/conversations?groupId=2c70403e-35f0-4640-b7f9-
576b24afl6fa&tenantId=e4341966-3781-40cl-9948-186e5a4b8852
Day 1-27t h
May 2021
08:30 - 09:00 - Registration of participants in MS Teams
09:00 - 10:00 - Financial Markets 2021 — Innovations and Sustainability Conference
opening address and welcome speech — Assoc. Prof. RNDr. Petr Budinsky
CSc, VSFS, Vice-rectorfor Strategy and International Relations.
Keynote speakers:
10:00 - 11:00 - Thematic block I — Perspectives of the Development of the Czech Financial
and Capital Markets in the stage of the Czech Economy Restart after the
Coronavirus Crisis.
Moderator: Assoc. Prof. RNDr. Petr Budinský, CSc, vice-rector of the VSFS
Panel members:
Mgr. Ing. Jana Brodani, MBA, LL. M . , AKAT - keynote speaker, Mgr. Be
Aleš Králík, L L M , Ing. Karel Dobeš, Chairman of the Association of Small
and Medium-sized Enterprises.
11:00-12:15 - Thematic block II —The Czechfinancial and capital market in the stage of
restoring economic prosperity and growth after 2020.
Moderator: Mgr. Ing. Jana Brodani, MBA, LL. M., výkonná ředitelka AKAT.
Ing. Ales Michl, Ph.D. - Czech National Bank Board member and Chief
Executive Director
JUDr. Ing. Lenka Dupakova, Ph.D. - Deputy Minister of Finance of the
Czech Republic
13
Panel members:
Jaromír Sladkovský - keynote speaker, Martin Hudeček, Asset Manager of
RSJ Tech and RSJ Insurtech, RSJ Investments, Martin Řezáč, Branch Manager
Erste Asset Management.
12:15 - 12:30-Break
12:30-13:45- Thematic block III—Fintech technology and others as a toolfor deepening
thefinancial market and improvingfinancial services in the coming year.
Moderator: Maria Stazskiewicz, Chairman of the Board of Directors a CEO,
FinTech Association.
Panel members:
Ing. Petr Očko - Deputy Minister of Industry and Trade C R - keynote speaker,
Petr Hojný, Liberis, Ing. Veronika Kramaříkova, MBA, Vice-Rector for
Strategy and Development CTU, Marek Subrt - external expert of the Ministry
of Finance CR.
13:50 - 15:10 - Thematic block IV— Conditions for the development of the Czech capital
market in terms of financing innovative investment programs of companies
in the stage of restoration of economic prosperity and growth after 2020.
Moderator: Ing. Jana Kotěšovcová, Ph.D., VSFS, Department of Finance
Panel members:
RNDr. Jan Lánský, Ph.D., VSFS, Department of Informatics and Mathematics
-Keynote speaker, Ing. Jiří Mesároš, Dluhopisy.cz, Ing. Be. Jiří Mihola, CSc,
VSFS, Department of Informatics and Mathematics, Ing. Pavel Finger, CRIF,
Czech Credit Bureau, Ing. Jana Kotěšovcová, Ph.D., VSFS, Department of
Finance, Ing. Arnošt Klesla, Ph.D. VSFS, Department of Finance.
15:10-15:30 - Final discussion, evaluation and conclusion of the first day.
Day 2 - 28th
May 2021
08:30 - 09:00 - Registration of participants in MS Teams.
09:00 - 09:10 - Opening - Assoc. Prof. JUDr. Ing. Otakar Schlossberger, Ph.D., VŠFS,
Vice-Dean for Research and Publications of the Faculty of Economic
Studies and Head of the Department of Finance and Ing. Eva Kostikov,
Ph.D., VSFS, Deputy Head of the Department ofFinance.
I. Block — Academic and studentpanel — Czech
Moderator: Assoc. Prof. JUDr. Ing. Otakar Schlossberger, Ph.D.
09:10 - 09:30 - Prof. Ing. Jaroslav Vostatek, CSc, VSFS, Department of Finance - Voluntary
Pension Arrangements throughj the OECD Prism.
09:30 - 09:50 - Ing. Jan Mertl, Ph.D, VŠFS, Department of Finance - Public debt amidst low
interest rates: the issues of cheap money.
09:50 - 10:10 - PhDr. Ladislava Knihová, VSFS, Department of Languages and Ph.D. student
- Opportunities and challenges of digital customer learning in banking.
10:10 - 10:30 - Assoc. Prof. Radim Valenčík, CSc, VŠFS, Department of Economics and
Management - How to understand a perfect financial market, the importance
of perfection and the causes of imperfection of real financial markets.
10:30 - 10:50 - Kateřina Kraibichová, VSFS, Be. student - Use of payment cards in premium
banking.
10:50 - 11:10 - Matouš Král, DiS, VŠFS, Be. student - Evaluation of the offer of student
accounts and loans on the Czech banking market.
11:10-11:30- Ing. Zuzana Chlumská, Ing. Vlastislav Jandus, VŠFS, both Ph.D. students Behavioral
Aspects of Asset Management in Relation of Financial Literacy.
11:30- 11:40-Break
II. Block — studentpanel — English
Moderator: Ing. Eva Kostikov, Ph.D., VŠFS, Deputy Head of the Department
of Finance
11:40 -12:00 - Wolfgang Kloppenburg, VŠFS, Ph.D. student - How can the regional rail
transport companies achieve further growth - in view of the shortage of skilled
workers and macroeconomic consequences of the achievement.
12:00 - 12:20 - Bastian Schulz, VŠFS, Ph.D. student - The cum-ex case in Germany.
12:20 - 12:40 - Martin Zubko, MUP, Ph.D. student - Cyberterrorism: A Global Threat to
Financial Institutions.
12:40 - 13:00 - Mick Pirgmann, VŠFS, Ph.D. student - Impact of Tokenization on the
Economics of Crowdfunding Investments through a change of Investment
Behaviour.
13:00- 13:10-Break
III. Block — studentpanel — English
Moderator: Ing. Eva Kostikov, Ph.D., VŠFS, Deputy Head of the Department
of Finance
13:10 - 13:30 - Benedikt Frank, VŠFS, Ph.D. student - The financial crisis in the 2000s:
Further effects regarding lending, regulation and efficiency.
13:30 - 13:50 - Azra Muratovic, VŠFS, Ph.D. student - Covid Impact on the Euroarea
Financial System.
13:50 - 14:10 - Katrin Steyer, VŠFS, Ph.D. student - Financial sustainability in Germany
during the covid-19 pandemic.
14:10 - 14:30 - Concluding remarks - Assoc. Prof. JUDr. Ing. Otakar Schlossberger,
Ph.D. - Vice-Dean for Research and Publications of the Faculty of Economic
Studies and Head of the Department of Finance, VŠFS and Ing. Eva Kostikov,
Ph.D., VŠFS, Deputy Head of the Department of Finance.
PARTNERI:
J&TBANKA APOIIÍÍOVNA VÍR M
Chránime to nejcennějši
o^onsulting E27\POGEO
Nezávislý finanční konzultant
DELOR
r T CESKA FINTECH ASOCIACE
AKAT CR U ČASF
m m ^ram CReoir
D 0 L L E M C
MEDIÁLNÍ PARTNEŘI:
Bankovnictví. EKONOMICKY
MAGAZÍN
EVR0PA2 á 0 d ? O T S
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i6
BASIC QUESTION OF FINANCIAL MARKETS THEORY
ONDŘEJ ČERNÍK, RADIM VALENČÍK
Abstract
The basic question of the financial markets theory can be formulated as follows: Why are investment
opportunities (including those associated with the acquisition, retention and use of human capital) not
used based on their rate of return. The paper substantiates the importance of this issue for
understanding the development trends of financial markets, as well as the problems associated with
the failure to use of investment opportunities. Subsequently, the original theoretical apparatus is
presented, which is based on the connection of the microeconomic financial market model and the
model of the financial market through cooperative games, specifically (S, d) Nash's bargaining
problem. The multipoint extension of this model makes it possible to reveal and describe the
phenomenon of social position investment, which plays a key role in terms of the fundamental
question of financial market theory.
Keywords
Investment opportunity, human capital, Pareto efficiency, cooperative games, Nash's bargaining
problem, productive consumption
JEL Classification
D12, D53, G24
Introduction
The paper's title rightly raises some eyebrows: Can such a multifaceted issue as the theory of financial
markets be subordinated to one question?
The aim of our paper will be to show and prove the following:
1. Such a question can be formulated.
2. The answer to that question shows the main tendency of the development of financial markets and
the pitfalls of this development.
3. There are very effective tools in the field of game theory that help to answer questions derived
from the basic question of financial market theory, and these answers are relevant from a practical
point of view.
4. This question stimulates the development of tools in the field of game theory.
The issue at hand is directly related to the dynamic concept of social equality and reaching a
consensus using the generalised solution of (S, d) Nash's bargaining problem.
17
1 Subject-matter and method
The subject of the paper is the issue of defining general trends in financial markets in the context of
transformations in contemporary society, where the alternative of social growth increased rapidly,
which is comparable in importance and scope to the industrial revolution, but which also means a
decline represented by the prevailing trend towards a society whose economy is bound by the
redistributive power controlled by positional investment.
The basic theoretical tools used are as follows:
1. The concept of transition to a society whose dominant sector are productive services, i.e. services
aimed at acquiring, maintaining and applying human capabilities.
2. Defining terms to formulate the basic question of financial markets theory.
3. The original microeconomic model of supply and demand of investment means and investment
opportunities.
4. Application of a theory based on Nash's (S, d) bargaining problem (Nash 1950a, 1950b, 1953),
especially the generalisation of this problem (Thompson 1989), (Cernik, Valencik, Wawrosz 2020).
2 Defining and reasoning the basic issues of the financial markets
development theory
According to the authors of this paper, the basic questions of the financial markets theory are as
follows: What prevents investment opportunities from being used based on their rate of return?
The deeper meaning and societal context of this question comes to light when we realise that part of
the multidimensional spectrum of investment opportunities are also investment opportunities
associated with the acquisition, retention and application of human capabilities (Becker 1993),
(Carmichel 2017), (Friedman 1957). If investment opportunities were used based on their rate of
return, the economic system would be as efficient as possible and at the same time fair (in the sense
of a dynamic concept of justice based on ensuring that everyone has the conditions to fully develop
and apply their skills so that it is also beneficial for all the other participants). This is a certain view
of the general development direction of society and financial markets (Neumann 1945-1946),
(Palacios 2007), (Psarska 2019).
At first glance, the answer to the question "What prevents investment opportunities from being used
based on their rate of return?" may seem rather trivial (given its importance). The following prevents
investment opportunities from being used based on their rate of return:
- Lack of information (it is very difficult to assess the return on investment opportunities in general
and those associated with the acquisition, retention and application of investment opportunities in
particular).
- Insufficient development of financial markets, lack of instruments that would allow the conclusion
of contracts between owners of investment opportunities and investment means.
i8
Are the main restrictions in fact the main cause? If this were the case, we would undoubtedly observe
a very significant tendency to overcome them both in terms of private financial institutions and
national policies.
3 The essence of the problem: Where do the barriers to the
development of financial markets arise?
It is time to see how financial markets work. For that, we will use the microeconomic model of
financial markets.
Graph No. 1: Supply and demand of investment means andoi investment opportunities
T
Yi E Y1 + Y2 Y
Source: prepared by the author
Y is the current income
Y ' is the future income
M X ' is the marginal yield curve of investment opportunities of the first entity (player A)
M Y ' is the marginal yield curve of investment opportunities of the second entity (player B)
Y i is the current income of player A (in the following we will also use the term "poorer player")
Y2 is the current income of player B (in the following we will also use the term "richer player")
E is the point where M X ' i = M Y ' i
The shaded triangle shows the possibility of increasing the future income if investment opportunities
are based on their rate of return, regardless of who disposes of the relevant investment means (who
is their owner).
From here we get to this Nash's (S, d) bargaining problem (it is the same relationship in other
coordinates).
19
Graph No. 2: Expression of supply and demand of investment means and investment
opportunities as Nash's (S, d) bargaining problem
y
s N
y»
XI Xo X
Source: prepared by the author
d is the point of disagreement; it corresponds to a situation in which the own investment means
are not used to realise investment opportunities of another;
S is the set of maximum attainable sums of income obtained by using investment opportunities
based on their rate of return, irrespective of who owns them; it is bounded by a 45° slope with the
coordinate axes expressing the payouts of the individual players;
the bold portion of the line bounding the S-set bounded by the arrows is a subset of the S-set that
meets the requirements of individual rationality, collective rationality, and accessibility;
the shaded formation between the d point and the bold portion of the line surrounding the S-set are
the achievable revenue distribution points using the creditor-debtor relationship at a given budget
constraint (i.e. when one player uses the other player's investment means to realise their investment
opportunities in such a way that his payout increases without reducing the payout of the other).
If we connect both models, we get a complex dual model:
2 0
Graph No. 3: Dual microeconomic model of supply and demand of investment means and
investment opportunities
Source: prepared by the author
Left side of the model:
Y current income
Y ' future income
Y i current income (budget constraint) of the poorer player
Y2 current income (budget constraint) of the richer player
M Y ' 1
marginal return on investment opportunities available to the poorer player
M Y ' 2
marginal return on investment opportunities available to the richer player
E point where M Y ' 1
= M Y ' 2
, all investment opportunities are fully exploited regardless of who
owns the investment means (can be interpreted as the equilibrium point on the capital market)
Dashed vertical line: Threshold of the budget constraint of the poorer player from the right and the
richer player from the left
Darker grey triangle: The area of Pareto improvements of given possibilities to use own investment
means of one of the players to realise the investment opportunities of the other player
Lighter grey bevelled quadrangle: Payout (future income) of the richer player at the point of
disagreement or in a situation where Pareto improvements of given possibilities are not utilised to
utilise one's own investment means to realise the other player's investment opportunities
21
Right side of the model:
x, y payouts of poorer and richer player
d(xd, ya)
point of disagreement, or the under-utilisation of the capital market, is determined by the budget
constraints of the players and by the MY'1
a MY'2
marginal yield curves
E point where all investment opportunities are fully exploited regardless of who owns the
investment means (can be interpreted as the equilibrium point on the capital market)
S a set of all possible distributions of payouts among players
45° slope line: The boundary of set S, where x + y = s applies to all points on it, where s is the
maximum sum of payouts given by the fact that all investment opportunities are fully utilised
regardless of who owns the investment means
Highlighted 45° slope line limited by arrows: The part of the boundary of set S that meets the
requirements of individual rationality, collective rationality and accessibility
Shaded area between points d and E: The area of Pareto improvements of given opportunities to use
one's own investment means to realise the other player's investment opportunities; an area meeting
the prerequisite of individual rationality and achievability in the (S, d) Nash's bargaining problem
given by the opportunity to exploit investment opportunities no matter who owns them, the only point
here that also meets the prerequisite of collective rationality (Pareto optimality) is point E; its shape
(of the boundary) is determined by the course of marginal yield curves from investment opportunities
(in the left part of the figure MY'1
a MY'2
.
Some connections between the left and right sides of the model (shown by dotted lines with arrows):
(1) Point E on the left side of the figure corresponds to point E on the right side of the figure
(2) The triangle highlighted in dark grey on the left side of the figure corresponds to the shaded
closed area between points d and E on the right side of the figure
(3) The bevelled quadrangle highlighted by the lighter colour on the left side of the figure
corresponds to value ya (the coordinate of point d of the richer player) on the right side of the figure
(we do not provide more context in order not to reduce the clarity of the figure)
Nash's bargaining problem means that we are looking for a function f:{(S,d)} —> R which meets the
specified requirements. Where:
f is the corresponding function
S is a set that meets the prerequisite of achievability, i.e. the solution must be a part of it
d is the default point of disagreement
R is the space in which we are looking for solutions
2 2
In our case:
- For S it is true that: x, y belongs to S <-> (x+y) < s and at the same time > 0
- R2
, i.e. in the case of two players we consider two-dimensional space
- d belongs to S
- players' payouts, x, y, are interpreted as future returns of players from the combination of
investment means and investment opportunities
- the following applies for x: J^1
x(Y)dY
- the following applies for y: fy*+Y2
y(Y±+Y2 - Y)dY
- the following applies for s: s = max {J^1
x(Y)dY + ^+Y2
y{Y1+Y2 - Y)dY}
If the owners of investment means and investment opportunities (players of the relevant cooperative
game, i.e. entities on the capital market) behaved in accordance with the model of Nash's bargaining
problem, they would find ways to use investment opportunities based on their rate of return. This
would be accompanied by an actual tendency to eliminate financial market imperfections that would
be observable and verifiable. If we are not observing such tendency, there must be something in
reality that prevents the tendency towards Pareto improvements to which the model points out (Nash
1950a. 1950b, 1953), (Osborn 2004), (Peleg 2007), (Selten 1999a, 1999b).
One way to explain what hinders the use of investment opportunities based on their rate of return is
positional investing, i.e. investing in a social position in order to reduce the possibility of using the
investment opportunities available to the other entity (player), thereby increasing the profitability of
their own investment opportunities (Dhami 2017), (Loomes 1999). The original model (based on
Nash's bargaining problem) is not enough to describe this phenomenon.
4 The path towards extending the model based on Nash's
bargaining problem
One of the leading figures in contemporary research in the field of game theory, W. Thompson, offers
a way to a suitable extension of the model based on Nash's bargaining problem, following a
previously published article (Chun, Thomson 1989). Even though Nash's model may seem rather
general, it has a number of limitations that are not obvious at first glance. For example, the point of
disagreement may not be provided in many tasks.
W. Thompson, who is characteristic with his passion for practical applications, gives an example of
a strike, namely a case of negotiations between the company's management (which represents the
interests of the owner) and employees. The set of achievable payouts (S) is known, but the costs of
the conflict if employees start to strike are not known, i.e. the parameters of the disagreement point
(d) are not known. He proposes certain tools that allow the task to be resolved if the costs of a potential
conflict and therefore the point of disagreement are not known. This opens up considerable space for
research. When investigating this area, it is important to find suitable interpretations, simplify them
23
in a suitable way (identify the basic ones in them), convert them into a concept and subsequently a
model from the field of game theory.
In our case, the point is that one of the players who is predominant in terms of property (i.e. has a
larger amount of investment means) can consider the alternative of positional investment. If we want
to express this possibility, we move away from the original Nash's (S, d) bargaining model to models
we call the multipoint extension of the original Nash's bargaining problem, i.e. to problems similar
to those dealt with by W. Thomson, but with a slightly different interpretation. We will take a look at
one of the ways in which the alternative between concluding a contract that leads to Pareto
improvement and the conflict arising from positional investment can be expressed.
Graph No. 4: Elementary model of positional investment
y
yi
s
d
Xl Xo X
Source: prepared by the author
If the richer player has the opportunity to use his or her material advantage to achieve the division at
p (and the poorer player will not be able to respond), he or she will not have an interest (in terms of
individual rationality) to participate in solving Nash's bargaining problem.
Three situations can arise:
yp > ymax the richer player will choose a positional investment strategy
ymax ->
yp ->
ymin the solution of Nash's bargaining problem influenced by the position of point
P
ymin > yP the opportunity of positional investment does not affect the game
One of the interpretations of positional investment is that the profitability of the richer player's
investment opportunities increases and that the poorer player's investment opportunity profitability
decreases.
24J
Graph No. 5: One of the interpretations of positional investment
Y'
\ M X ' i
Source: prepared by the author
The following corresponds:
Graph No. 6: One of the interpretations of positional investment
y
\ s
yi
1 i N .
\
\
i
i
i
1
Fi(x. y)l F0(x,y) \ .
Xl X
Source: prepared by the author
Note that positional investment, which affects the rate of return on investment opportunities available
to players, can "reverse" the relationship between the creditor and the debtor.
A larger lighter triangle indicates the original area of Pareto improvements resulting from the use of
the capital market.
25
A smaller, darker triangle indicates the area of Pareto improvements resulting from the use of the
capital market after a change in the profitability of investment opportunities as a result of positional
investment.
We know this situation well. Poorer people save not only for the worse, but also because they do not
have sufficient investment opportunities (they do not hold the right position in the society). Large
projects are realised from their savings by those who in the right position (in terms of image, social
contacts, inside information, etc.).
5 Games with opposition action by the players
So far, we have only considered the case where one (the richer) player can invest in his or her social
position to increase his or her payout. Either by affecting the cooperative game in question, or by
achieving higher payouts than in the cooperative game. The second (poorer) player had no
opportunity to respond to the decision of the richer player. However, in reality, the poorer player very
often does not have to be just a mere by-stander, but he or she may react or show resistance in order
to:
- enforce an increase in his or her payout;
- reduce the payout of the richer player (either by punishing him or her, but mainly to discourage him
or her from investing in a social position, even at the cost of reducing his or her own payout).
This is described in the following figure:
Graph No. 7: Poor player reaction to positional investment
y
y i
pi \
. r>
r• i n
Xl X
Source: prepared by the author
Here, points rn and ri2 represent the poorer player's reaction to the first player's positional
investment (realised or intended), where:
26
- If point rn is reached, the effect of increasing the income of the poorer player in the form of his or
her resistance prevails, and the reduction of the payout of the richer player (punishing the richer
player) is an accompanying effect.
- If point ri2 is reached, the effect of punishing the richer player prevails, even at the cost of the poorer
player reducing his or her own payout. This can have two causes. Either the poorer player is trying to
discourage the richer player from the positional investment strategy, or the poorer player is preparing
for a follow-up game involving the use of positional investment.
The richer player may answer the reaction of the poorer player. The richer player can also react to it,
while considering two different effects - either wanting to reduce the payout of the poorer player (to
punish him or her or to create better conditions for positional investment in the follow-up game), or
wanting to increase his or her payouts despite the resistance of the poorer player. This can be
illustrated by the following figure.
Graph No. 8: Reaction of the richer player to the reaction of the poorer player
y
y i
Source: prepared by the author
Figure 6 shows a case where the richer player responds to point rn (the poorer player attempted to
increase his or her payouts by opposing positional investment) while:
- If point p2i is reached, the richer player is mainly concerned with increasing his or her own payout.
- If point p22 is reached, the effect of punishing the poorer player for opposing positional investment
prevails, even at the cost of the richer player reducing his or her own payout, which in this case may
have two causes similar to the case of the poorer player.
27
The poorer player can respond to the reaction of the richer player, the richer player can respond with
another reaction, etc. There are two ways to analyse such a chain of reactions:
- Either we have the opportunity to express the whole chain of reactions through a certain model (for
example a game in an explicit form) and investigate it by achievable methods. This is only possible
in exceptional cases.
- Or we will assume that both players are in some way able to appreciate the endpoints of the chain
of reactions depending on the initial positional investment. This reduces the very complicated, multiround
game to a one-round game, and by analysing it we can gain valuable insights.
Whether we analyse a single-round game or have a game that was created by reducing the chain of
events to a single-round game, we get a situation like of this type.
Graph No. 9: Model with final states after mutual reactions
y
yi
Source: prepared by the author
Here:
fKK is the final situation where both players cooperate, in which case they are solving the relevant
cooperative game
fKN is the final situation where the poorer player cooperates and the richer does not
fNK is the final situation where the richer player cooperates and the poorer does not
fNN is the final situation where none of the players cooperate
28
The general rule here is that if one player does not cooperate, the other player has a lower payout if
he or she cooperates than if he or she does not cooperate.
As for the relationship between payouts on a case-by-case basis, there may be a variety of options,
which we will discuss below.
It is relatively easy to see that the payout values of the players in each case can be converted into a
table of a two-matrix game, where the points have the following values:
fkk (XKK, yKK)
fKN (XKN, yKN)
fNK (XNK, yNK)
fNN (XNN, yNN)
Table No. 1: Expression of dilemmas in the form of a two-matrix game
Richer player B
cooperates does not
cooperate
Poorer
Player A
cooperates XKK : yKK XKN : yKNPoorer
Player A does not
cooperate
XNK : yNK XNN : yNN
Source: prepared by the author
Positional investing can be modelled in the form of a multipoint extension of Nash's (S, d) bargaining
problem, which brings us to the type of task pointed out by W. Thompson. In some cases, there are
alternatives for opposition action from players, which can be described through two-matrix games.
6 Summary and discussion
The basic question of financial markets theory can be formulated in such a way as to express the
general tendency of financial markets development and the barriers that prevent the realisation of
these tendencies: What limits the ability to take advantage of investment opportunities (including
those associated with the acquisition, retention and use of human capital) based on their rate of return?
Based on this, models can be created that are based on the microeconomic model of financial markets
and the models provided by the cooperative games theory. Using these models, the phenomenon of
positional investing (investing in a social position) can be identified. Based on this, significant stimuli
arise for the generalisation of some basic models in the field of game theory, including the possibility
of generalising Nash's bargaining problem.
29
Further research may lead to the development of a consistent theory, which will include (as a specific
case) Nash's bargaining problem (Thomson's theoretical outbursts are on this path). Another
significant outcome with practical implications is the revelation of the relationship between positional
investing and other phenomena distorting financial markets. This is important for understanding
current events and creating a well-founded idea of long-term, but at the same time achievable
perspective of the society's development.
Conclusion
The paper complements the mosaic of theoretical materials that seek to create a comprehensive
concept expressing the transition from the current post-industrial society to a society with productive
services as the dominant sector, i.e. where services contributing to the acquisition, retention and use
of human capital will be predominant. It contains some other theoretical instruments that are
important for the development of the productive consumption economy as an overlap of mainstream
economic theory in the main direction of its development.
Based on the sequence of four consecutive objective we formulated in the introduction, we consider
the most important theoretical shift in the area to be the generalised solution (S, d) of Nash's
bargaining problem, directly in connection with the work of W. Thompson. The "stronger" (in terms
of general applicability, abstraction and mathematical apparatus used) the theoretical instruments we
use, the more weight the theoretical approach can have and the more it can influence the real world.
Acknowledgment
The result was created in solving the student project "Wealth and poverty as a problem in terms of
economics of productive consumption" using objective oriented support for specific university
research of the University of Finance and Administration.
References
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Cernik, O., R. Valencik and P. Wawrosz. Economics of Pproductvie Consumption and Multipoint
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Dhami, S. The Foundations of Behavioral Economic Analysis. Oxford: Oxford University Press.
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Loonies, G. Some lessons from past experiments and some challenges for the future. Economic
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Osborn, M. An Introduction to Game Theory (2004). Oxford: Oxford University Press. 2004.
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Springer. 2007.
Psárská, M . Determinants of real decision making on productive components of consumption under
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České Budějovice. 2019.
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Contact
doc. Radim Valenčík, CSc.
University of Finance and Administration
Estonska 500
101 00 Praha 10, Czech Republic
valencik@seznam.cz
Ondřej Černík
The University of Economics, Prague
Jarosovska 1117/1,
377 01 Jindřichův Hradec, Czech Republic
3i
THE FINANCIAL CRISIS IN THE 2000s: FURTHER EFFECTS
REGARDING LENDING, REGULATION AND EFFICIENCY
BENEDIKT FRANK
Abstract
The global financial crisis starting in 2007 was a central element of the new millennium and had a
major impact on the global economy. This paper deals with research and insights on the financial
crisis in the area of liabilities and future lending, effects of regulations and bank resilience, as well as
the changes in the banking industry in relation to the determinants of profitability. The findings
revealed that the effect of the external funding shock on banks' domestic lending is significant, strong
regulation, characterized as one-size-fits-all international best practice, is not always the blueprint for
bank resilience and that efficiency has been a determining factor in bank profitability. So, the paper
throws a light on further effects and thoughts on the financial crisis in the late 2000s.
Keywords
financial crisis, liabilities, lending, regulation, resilience, profitability
JEL Classification
G01, G28, P34
Introduction
The economic crisis of the late 2000s was a key event in the economic experience and thinking of the
modern era. In addition to the occurrence of a steadily growing price bubble and its sudden bursting,
what was particularly frightening at the time were the far-reaching and global effects and linkages, as
well as the central lack of foresight and initiation of countermeasures by governing authorities to
prevent a crash at an early point in time.
Questionable is, in what way problems arising in a small class of assets in one region, such as the
United States, could spread worldwide, triggering a great recession. A traditional stylized description
is divided into two sections and is based on the globalization of the banking system. Firstly, strain in
the US banking system and those specifically exposed to US mortgages and structured goods spread
across foreign borrowing markets, causing a liquidity crisis for banks around the world. Second, the
disruption to different countries' banking systems' international financing was conveyed domestically
by a decline in credit availability (Aiyar, 2012).
Because of the multinational nature of the situation and the large number of participants affected,
such as banks, there were significant differences in their resilience and effects. As a result, it is unclear
how the banking sector's resistance to the global financial crisis of 2007-2008 can be clarified
(Maxfield & Magaldi de Sousa, 2015). Furthermore, the global economy and many markets have
been affected by the financial collapse. Consequently, it is reasonable to conclude that widely
respected topics like the study of systemic parameter of profitability have shifted as a consequence,
32
and that the crash has altered the relationship between bank market share, performance, and
profitability, as well as the link between market risk and concentration (Azofra et al., 2013).
The paper is structured as followed with the analyzation of a link between foreign liabilities and future
lending at the beginning. Afterwards, the paper examines whether measures taken after previous
crises have protected countries in the financial crisis in the late 2000s. In addition, there is a focus on
the systemic determinants of profitability as a constant theme in the banking research. Hypotheses
formulated in each area are then verified and revised in the results section. The paper ends with a
corresponding conclusion.
1 Link between foreign liabilities and future lending
Though there is a large analytical dataset on the tension in the US banking system, there is little
information on the disruption to foreign funding. Given the overwhelming policy consensus that this
was a bank-led slowdown in most countries, with declining credit supply leading to the decline of the
real economy rather than vice versa, this void in the literature is critical. However, defining a
connection between the external funding shock and domestic credit availability is difficult. In a crosscountry
environment, it is important to separate the need and supply components of the domestic
credit contraction. Scientists seldom have access to this kind of bank-specific data that might help
them solve identifying issues. Shekhar Aiyar (2012) creates and uses a novel bank-level dataset to
investigate how the foreign funding shock affects banks' domestic credit offering in a big,
industrialized economy like the United Kingdom. Any resident banks in the United Kingdom are
required to report accurate balance sheet details to the Bank of England every three months. This
confidential data document resident banks' domestic loans, broken down by recipient industry, as
well as their liabilities, which enclose varying reports about non-resident liabilities. As a previous
work, Aiyar (2011) provides a more detailed overview of the dataset. The bank-specific funding
shock is instrumented and thus identified using pre-shock data on market positions of various forms
of liabilities, whilst the variation of banks' lending patterns across sectors is utilized to control for
demand effects.
As an example, the resident banking industry in the United Kingdom consists of UK-owned banks'
domestically incorporated divisions, as well as units and branches of banks headquartered abroad
(Aiyar et al., 2012). Moreover, it is the world's biggest financial industry in terms of asset value. At
the end of 2009, the UK had over 300 banks, with combined reserves of £7.6 trillion, or more than
500 percent of the country's gross domestic product (GDP). Although UK-owned banks are in the
mean larger than international branches and affiliates, the latter are more numerous, resulting in assets
of 50.5 percent and 49.5 percent of total assets for foreign-owned and UK-owned banks, respectively.
The accumulation of assets is significant but not overpowering. As a result, the top ten banks own
about 59.8 percent of all financial assets. Banks based in the United Kingdom are increasingly
globalized, with large liabilities to non-residents, rendering them especially vulnerable to
international contagion. After the worldwide recession, the disruption to foreign funding was not only
high, but also unparalleled. The estimated foreign liabilities of all UK-resident banks dropped by 22
percent on an exchange rate-simplified level from their height in end-March 2008 to end-October
2009, when they began to stabilize one more time, according to data from the Bank for International
Settlements (BIS). By contrast, the previous highest 6-quarter drop in external liabilities occurred
33
during the early 1990s European Exchange Rate Mechanism (ERM) depression, when external
liabilities fell by just 9 percent (Aiyar, 2012).
A bank may respond to a disruption to external liabilities in one of three ways, or a mixture of them,
according to its balance sheet (Aiyar, 2012):
1. It has the ability to expand its domestic liabilities. That includes borrowing more from local units.
2. By lending less to non-residents, it will flatten its foreign assets.
3. By lending less to residents, it will reduce its domestic claims.
Given the large shock to banks' external funding that occurred during the financial crisis and with
focus on 3., the following Hypothesis could be proposed:
Hypothesis 1: A reduction in banks 'foreign liabilities causes a contraction in domestic lending.
2 Possible protection due to measures taken after previous crises
There is a perception that countries that were affected by economic collapses before the Great
Financial Crisis were in fact less distressed. One explanation may be that regulatory changes enacted
in response to the previous meltdown discouraged them from participating in reckless practices to the
degree that triggered such high exposure anywhere during the late-2000s financial crisis. Cases like
Mexico, Thailand or other Asian countries, for instance, have seen banking problems and eventual
banking restructuring in the decades leading up to the worldwide financial crisis, but have shown
resiliency before and since the 2007-2008 crisis. Firm regulation has also been cited by academics
as a reason for banking sector stability in other countries, including India, Egypt, Canada, and Islamic
nations for that matter (Maxfield & Magaldi de Sousa, 2015).
Furthermore, some reports claim that financial deepening, or expanded availability of financial
markets with a broader range of goods aimed at all layers of society, is a feature of the financial
environment that has exacerbated crisis contagion (Reinhart & Rogoff, 2010, Aisen & Franken,
2010). According to this line of study, firms in more mature capital markets rely more heavily on
foreign financing, meaning that when a monetary recession arises, the economy experiences a long
decline due to the effect of credit contraction on the actual economy. It is indeed a point being made
in case reports of nations such as Cyprus, whose underdeveloped financial institutions escaped the
global financial crisis largely uninjured (Besim & Mullen, 2009). Based on that logic, another
justification for the banking sector's stability in Mexico and other areas is that they have weak
financial institutions or so-called shallow banking structures (Maxfield & Magaldi de Sousa, 2015).
Moreover, Maxfield and Magaldi de Sousa (2015) created a framework to classify four ideal forms
of regulation and bank growth and allocate 129 countries along this typology to provide a summary
of countries studied, which can be seen below.
341
Figure No. 1: Listing of countries with strong regulation and shallow banking
Deep banking & Strong
ngnlation
Shallow banking & strong Deep banking & weak regulation
regulation
Sltaüow banking & weak
regulation
Aigens, Australia, Bahrain. Argentina, Brazil,
Bangladesh, Canada, Dominican Republic,
China, Cyprus, Czech Estonia, Hungary-,
Republic, Denmark, Jamaica, Kazakhstan,
Egypt, El Salvador, Kenya, Latvia, Lithuania,
Finland, France, Germany, Mexico, Nicaragua,
Greece, Hong Kong, Papua New Guinea,
Iceland, Ireland, Israel, Russian Federation,
Italy, Japan, Jordan, Sri Lanka, Zimbabwe
Kuwait, Malaysia, Malta,
Mauritius, Morocco,
Netherlands, New
Zealand, Norway,
Pakistan, Philippines.
Portugal, Singapore,
Slovenia, South Africa.
Korea (Rep.), Spain,
Sweden. Switzerland,
Syrian Arab Republic,
Thailand, U K , US
Antigua & Barbuda, Austria, Angola, Annerua, Belarus,
Belgium, Bolivia, Chile, Belize, Benin, Bhutan,
Dominica, Ethiopia, Bosnia & Herzegovina,
Grenada, Guyana, India, Botswana, Bulgaria,
Lebanon, Luxembourg, Burkina Faso, Bunmdi,
Oman, Panama, Saudi Cameroon, Central
Arabia, Seychelles, Slovak African Republic, Chad,
Republic. St. Kitts & Colombia, Congo (Rep.),
Nevis, St. Lucia, St. Costa Rica, Cöte d'lvoire,
Vincent & the Grenadines Croatia, Equatorial
Guinea. Fiji, Gabon,
Ghana, Guatemala,
Guinea-Bissau, Honduras,
Indonesia, Kyrgyz
Republic, Lesotho.
Macedonia, Malawi,
Maldives, Mali, Moldova,
Mozambique, Niger,
Nigeria, Peru, Poland.
Romania, Senegal,
Suriname, Tanzania,
Togo, Tnnidad &' Tobago,
Uganda, Umguay,
Vanuatu, Venezuela
Source: Maxfield and Magaldi de Sousa (2015)
Therefore, the liberalization of access and operation conditions, the financial sector could
overexpand, resulting in a boom-cycle and the accumulation of threats. Without judicious regulation
interventions, these threats will ultimately result in economic crises, known as a bust-cycle, reducing
banking resilience (Maxfield & Magaldi de Sousa, 2015).
Based on these findings, the following hypothesis can be formulated:
Hypothesis 2: Strong regulation allowedfor bank resilience to the 2007-2008 financial crisis.
3 Changes in banking industry
The evaluation of the systemic determinants of profitability is a constant theme in the banking
research. Due to the consequences for competitiveness, rules, and bank management, several analyses
have focused on the connection regarding profitability, market concentration, and performance
(Demsetz, 1973, Berger, 1995). At the one hand, the market power theory holds that greater market
concentration, or market power, makes it easier to establish higher prices for consumers, resulting in
higher windfall profits for banks. The efficiency theory, on the other hand, suggests a favorable
association among efficiency and bank earnings (Azofra et al., 2013).
Existing research that investigated the link between profitability, market concentration, and
productivity found that market share and market concentration lead to non-competitive rentals.
(Hannan, 1991, Berger and Hannan, 1997, Berger et al., 1999). Deregulation, technical advances, and
the internationalization of capital markets have intensified challenges in the banking industry over
the years. This may have resulted in a decrease in the impact of market concentration on profitability.
35
New research, nevertheless, have shown that market concentration continues to be important in
deciding bank profitability, particularly in certain goods. In this respect, Carbo-Valverde et al. (2007)
observed that market power is greater in non-traditional practices. According to De Jonghe and
Vander Vennet (2008), banks with a wide market share in concentrated markets also produce noncompetitive
rents. They also discovered that banks with the best management had a competitive
advantage. Furthermore, several scholars demonstrated that the validity of the performance and
market power theory varied across countries (Gonzalez, 2008, Hsieh and Lee, 2010, Goddard et al.,
2011). One major disadvantage of these experiments is that they were undertaken during a time of
economic recovery and expansion when banks were profitable (Azofra et al., 2013).
Economic collapse may cause significant shifts in the banking industry's relationship between
profitability, market power, and efficiency. They have a negative impact on bank profitability. From
the other hand, mergers and acquisitions boost the concentration of the banking sector. Industry
shocks, as per Mitchell and Mulherin (1996), trigger takeover motions. Despite the fact that greater
market concentration can improve bank profitability, acquiring rents from market power is more
challenging during crises due to decreased credits, higher borrowing costs, and a growth in nonpayments
(Demirguc-Kunt et al., 2006, De Jonghe and Vander Vennet, 2008, Bolt et al., 2012).
Furthermore, during a recession, the disparity in profitability between more and less effective banks
becomes more apparent when the former are able to cut costs, prevent unnecessary delinquency, and
obtain better financing terms (Dietrich & Wanzenried, 2011, Bolt, et al., 2012).
Azofra et al. (2013) investigated previously shifts in the link between bank market share, efficiency,
and profitability caused by financial crashes. In addition, the 2008 financial meltdown offered an
impetus to examine the consequences of instability and assess the situation before and after a
recession. While the severity of the recession varies by region, the gradual departure and
consolidation of banks, a huge wave of mergers and acquisitions (Wheelock, 2011), a rise in
delinquency, and a downturn in banking operation (Ivashina & Scharfstein, 2010) could be seen. Not
only can a crisis change the connection between profitability, efficiency, and market strength, but it
could also change the relationship between market concentration and bank risk. Hence, the second
approach of Azofra et al. (2013)'s study was to examine the adjustments that the collapse created in
this link. Market power has the potential to enhance or reduce bank risk based on two conflicting
assertions: concentration-stability and concentration-fragility (Uhde & Heimeshoff, 2009). There
may be a suggestion that crises perpetuate the concentration-fragility theory since there is a propensity
to consider greater danger in more concentrated markets due to structural risk in the aftermath of a
meltdown (Azofra et al., 2013).
Based on the above, the following hypothesis can be formulated:
Hypothesis 3: A financial crisis strengthen the efficiency hypothesis as well as reinforce the
concentration-fragility hypothesis.
4 Results
Based on the strong assistance from post-estimation checks and the intuitive appeal of the tools used
in Shekhar Aiyar (2012)'s study, it is possible to conclude that the effect of the external funding shock
on banks' domestic lending is well known and significant, proving Hypothesis 1 correctly. Aiyar
(2011) examines the transmission process in greater depth, and multiple robustness tests were
36
performed. Given the variations in funding trends and the scale of the shock reported, differences in
delivery by form of bank - UK-owned, international branch, or foreign affiliate - should be explored
in particular. The implication is that foreign extensions and affiliates cut lending by a higher
proportion than domestically owned banks, while the latter adjusted domestic lending reductions
more similarly to the scale of the funding shock. This implies a race-to-the-exits reaction by foreignowned
banks compared to domestically owned banks, which is a turbulent rush to deleverage
regardless of funding pressures. There is some indication that foreign currency lending was reduced
more than sterling lending, although this is most definitely due to the fact that foreign-owned banks
invest in foreign currency comparably more (Aiyar, 2012).
Inspired by the Mexican situation, Maxfield and Magaldi de Sousa (2015)'s study sought to
investigate the impact of policy and banking sector growth on bank resilience in the aftermath of the
2007-2008 financial crisis. They separated bank stability into two parts in their research: resilience
in terms of bank profitability and resilience in terms of credit provision. In addition, they developed
new analytical metrics of resilience, strict regulation, and shallow banking for 129 countries.
According to a large-n quantitative experiment, neither strong regulation nor the mixture of strict
control and shallow banking may justify bank stability in terms of credit provision. The only plausible
reason for the survival of bank credit after the recession is shallow banking. Solid regulation could
not alleviate the influence of the crisis on bank profitability. Rather, it exacerbated the crisis's
disruptive effects on profitability in nations with shallow banking. These findings suggest that strong
regulation, characterized as one-size-fits-all international best practice, is not always the blueprint for
bank resilience, and therefore Hypothesis 2 cannot be completely proven. In reality, it could have an
adverse impact on profitability when introduced in countries with comparatively underdeveloped
banking systems. It is an interesting finding that requires more attention. The issue is whether robust
regulatory frameworks designed to mitigate the effect of a recession end up exacerbating its negative
consequences when implemented in countries with weak banking structures. There is guess that, by
exposing deficiencies in a deeply dysfunctional financial structure, the recession rapidly causes
corrective intervention and investor reactions that reduce bank profitability. This is probably a good
idea from a policy standpoint, as it ensures that rules are in effect and working to enact the
transparency required as a check on corporate governance. Furthermore, these findings demonstrated
that the financial recession is associated with significant decreases in post-crisis credit provision in
nations with mature banking systems. The recession has had a significant effect on countries with
financial institutions that have a huge deposit base and are effective in issuing large amounts of credit.
Finally, the results call into question the suggestion of one-size-fits-all regulation, such as the Basel
Accords, for global banking industries (Maxfield & Magaldi de Sousa, 2015). Further than attempting
to draw general lessons from the collapse in order to provide a fail-safe regulatory structure that will
fit for any nation, the idea that various regulatory focus is needed for different national banking
structures should be accepted (Acharya, 2003). An even more complex, multi-layered response to
bank regulation is required, one that refers to the rationale of national financial system strengths and
vulnerabilities. So even world market integration necessitates greater regulatory harmonization
(Maxfield & Magaldi de Sousa, 2015). Other ideas involve reclassifying principles-based regulation
as judgment-based and highly responsive risk-based regulation (Black & Baldwin, 2010). Whether
or not, these interventions' contribute to increased bank resilience should be the subject of interest of
future academic research (Maxfield & Magaldi de Sousa, 2015).
37
A further argument to consider is that crises change the framework of the banking sector, which can
have an effect on the link between market concentration, efficiency, and profitability, as well as the
connection between market concentration and risk. Azofra et al. (2013) conducted an observational
study of a survey of credit institutions from major OECD countries from 2002 to 2009 to examine
the shifts. The empirical research revealed a very substantial shift in the determinants of profitability
after the beginning of the financial meltdown. Prior to the recession, most developed-country banks
saw a significant rise in business as a result of increased mortgage demand, low interest rates, and
favorable economic conditions. In the sense of ample liquidity, strong demand for loans and credit
from families and companies prompted financial institutions to pursue financing through bond
markets, securitization, and asset packaging. According to the findings of this study, banks in more
concentrated markets might have gained the most from this procedure, as suggested by the structureconduct-performance
(SCP) hypothesis. When the recession hit, many banks faced heavy losses due
to increasing delinquencies. Moreover, the abrupt disappearance of liquidity in capital markets
narrowed the options for funding troubled banks, many of which had to be stabilized or sought
government interference. As a result, bank financing declined dramatically, leading in a shift in
business strategies. Azofra et al. (2013) found that efficiency has been a determining factor in bank
profitability, as suggested by the efficiency hypothesis, which is addressed in Hypothesis 3.
Therefore, in a downturn, more profitable banks will achieve higher profits by improved cost
containment and the introduction of better accounting and risk control strategies. In terms of risk
analysis, these results revealed that the relationship between concentration and risk was quadratic
over a time of development and expansion. When market concentration is poor, greater market
concentration leads to increased risk. As a result, the concentration-fragility hypothesis was given
more weight, which also supports Hypothesis 3. Nevertheless, as market concentration grew, so did
its connection to risk, with the concentration-stability theory becoming more significant. Increased
market concentration would minimize risk after a certain period. Even so, during a recession, there is
little evidence to confirm a connection between concentration and risk, which may be attributed to
financing and liquidity issues, as well as an increase in mergers and acquisitions.
Conclusion
The late-2000s global recession was a defining moment in contemporary economic history and
thinking. Problems occurring in a specific class of assets in the United States expanded globally and
caused a great recession. Due to the overwhelming policy consensus in most countries that the
recession was caused by a bank-led slowdown, with decreasing credit supply contributing to a decline
in the real economy rather than vice versa, this gap in the literature is important. However, it is
complicated to establish a linkage between the external funding shock and domestic credit
availability.
According to its balance sheet, a bank could react to a disturbance in external liabilities in one of the
following three ways, or a combination of them (Aiyar, 2012). Firstly, it has the ability to expand its
domestic liabilities. That includes borrowing more from local units. Secondly, by lending less to nonresidents,
it will flatten its foreign assets. Or thirdly, by lending less to residents, it will reduce its
domestic claims. Based on the strong support provided by post-estimation checks and the intuitive
appeal of the methods used in analysis conducted by Shekhar Aiyar (2012), it is possible to infer that
the impact of the external funding shock on banks' domestic lending is well recognized and
38
significant, thus proving Hypothesis 1: A reduction in banks 'foreign liabilities causes a contraction
in domestic lending.
Aiyar (2011) investigated the transmission process in greater depth, and multiple robustness tests
were carried out. Given the differences in funding patterns and the magnitude of the recorded shock,
disparities in delivery by form of bank should be investigated in particular. The implication is that
foreign subsidiaries and branches reduced lending more than domestically owned banks, while the
latter modified domestic lending decreases more similarly to the magnitude of the funding shock.
Furthermore, there is a widespread belief that countries that experienced financial crises prior to the
financial crisis in the late 2000s were less affected. One possible reason is that reform efforts
introduced in response to the recent meltdown prevented these previously hit countries from engaging
in risky activities to the extent that caused such high exposure anywhere during the late-2000s
financial crisis. Moreover, according to some sources, financial deepening, or the increased
availability of financial markets with a wider variety of products targeted at all levels of society, is a
characteristic of the financial system that has accelerated crisis contagion.
Another significant observation of this paper was the focus on resilience. In the context of the 2007-
2008 financial crisis, Maxfield and Magaldi de Sousa (2015) aimed to explore the effect of regulation
and banking sector development on bank resilience. A large-n quantitative experiment found that
neither strong regulation nor a combination of close watch and shallow banking would explain bank
stability in terms of credit provision. The only logical interpretation for bank credit to survive after
the crisis would be shallow banking. These results imply that strong regulation, identified as a onesize-fits-all
international recommended solution, is not always the template for bank resilience, and
therefore Hypothesis 2: Strong regulation allowed for bank resilience to the 2007-2008 financial
crisis, cannot be proved completely. When implemented in countries with relatively underdeveloped
financial structures, it can even have a negative effect on profitability.
Furthermore, assessing the structural determinants of profitability is a recurring topic in research
studies. Because of the implications for competition, rules, and bank management, numerous studies
have concentrated on the connection between profitability, market concentration, and performance.
The so-called efficiency hypothesis, for example, proposes a favorable association between
efficiency and bank earnings. Furthermore, there is a possibility that disasters reinforce the
concentration-fragility hypothesis since, in the wake of a meltdown, there is a propensity to perceive
greater threat in more concentrated economies due to systemic risk. Azofra et al. (2013) investigated
previously observed changes in the relationship between bank market share, efficiency, and
profitability as a result of financial crashes. Besides that, the 2008 financial crisis provided motivation
to investigate the implications of instability and evaluate the situation before and after a recession. In
order to examine Hypothesis 3: A financial crisis strengthen the efficiency hypothesis as well as
reinforce the concentration-fragility hypothesis, and thus the possible strengthening of the efficiency
theory as well as a reinforcing of the concentration-fragility theory by a financial crisis, further
literature was reviewed. Azofra et al. (2013), for example, examined the changes in an empirical
analysis of a survey of credit institutions from major OECD countries from 2002 until 2009. The
empirical analysis showed a significant change in the determinants of profitability following the start
of the financial meltdown. When the crisis struck, many banks suffered significant losses as a result
of rising delinquencies. Furthermore, the sudden absence of liquidity in financial markets limited the
opportunities for financing distressed banks, many of which needed to be stabilized or pursued
39
government intervention. As a result, bank lending fell precipitously, causing a transition in corporate
strategy. According to the efficiency hypothesis, which is discussed in Hypothesis 3, Azofira et al.
(2013) discovered that efficiency has been a deciding factor in bank profitability. Throughout terms
of risk assessment, research showed that the association between concentration and risk was quadratic
over a period of development and expansion. As a consequence, the concentration-fragility
hypothesis received more weight, supporting Hypothesis 3.
Although a decade has passed since the financial crisis of the late 2000s, not all of its effects and
implications have been fully understood. In this paper, the aspects of bank liabilities and contraction
in domestic lending, strong regulation as well as bank resilience could be examined. Some further
effects and thoughts on the financial crisis in the late 2000s are recommended to be investigated more
profound in the future.
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values in European banking? Journal of Banking & Finance, 32, 1820-1835.
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Contact
Benedikt Frank
University of Finance and Administration
Estonska 500
101 00 Praha 10, Czech Republic
37216@mail.vsfs.cz
4i
BEHAVIORAL ASPECTS OF ASSET MANAGEMENT IN
RELATION OF FINANCIAL LITERACY
ZUZANA CHLUMSKÁ, VLASTIMIL JANDUS
Abstract
People have to make financial decisions concerning their expenses and savings on daily basis.
However, they frequently decide upon their feelings and emotions instead of their respective
knowledge and reason. Behavioral economy deals with the psychological impetuses of man and
relevant social influences. Contemporary consumer has a number of options how to get to a decision.
The objective of this paper is the analysis of a sample of 100 clients of a chosen company, their profile
and chosen investment service with the aim to understand the basic elements of behavioral economy.
Keywords
Behavioral finances, psychology, banking, financial literacy, investment profile
JEL Classification
G24, G41, G53
Introduction
Human behaviour and decision-making is not studied by economy alone but also by marketing,
psychology, sociology and other sciences which sometimes overlap each other. An important area
which encompasses behaviour and decision-making is the area of financial literacy, defined as a set
of knowledge and skills. Behavioral economy is a rather young field, dealing with the impact of
social, cognitive and emotional factors on the economical decisions made by individuals or by
institutions. In the life of every individual economical behaviour and decision-making takes places
almost daily.
The purchase of food or consumer goods, choosing between individual products and decision-making
based on the preferences of every given person which goods shall be purchased and which shall not.
People spend their time on work for which they receive wage - revenue. From these financial means
the individual pays for consumption or these means are set aside - savings, usually deposited in a
bank. Taxes are paid to the state and the state, in reverse, allocates transfers (such as child or
unemployment support).
The consumer does not think whether his decisions are right or not. In a given situation he forms a
decision based on his options and with the intention of maximalising his benefit. However, people
often commit behavioral mistakes and are subject to behavioral prejudices as well. According to
Nováková - Sobotka (2011) et coll. the necessity of educating citizens in the area of financial literacy
became even larger as a consequence of the fact that many citizens have no idea how to manage their
finances, or lost their money or are ignorant of their personal or family financial situation. People are,
in today's modern world, also influenced by media, social media, references and information that
sway their judgement and in cooperation with the choice architecture set foundations for their
decision.
People also have to make financial decisions concerning their expenses and savings every day as
Moreno (2018) states. Such a person can make use of a mortgage to purchase a place to live in, leasing
or credit to buy a new or used vehicle, household appliances, holiday etc. Financial market offers the
consumers credit cards or non-purpose loans for anything. In the non-banking sector high-interest
loans are also provided without proof of income.
From the opposite point of view the consumer can, while managing his assets, make use of products
of retail banking (savings accounts, building savings, common funds). In the case of assets of higher
value services of private banking can be used. That usually focuses on security trading (shares, bonds)
but also real estate or investment gold trading. In this case the consumer usually relies on an
investment broker who, on the basis of a written contract, makes investment decisions on behalf of
the consumer.
The expertise principle emphasizes the expert knowledge of investment brokers who should spread
financial literacy successfully and correctly. These individuals should possess sufficient knowledge
and skills not only deriving from their education but their experience learnt at the financial market as
well. Expertise can be perceived as a set of activites that lead to mastering of key competences of a
pedagogue. These activities, according to Tilinger (2014), include professional activity, skills, habits
and mastering of behavioral patterns and acting within the chosen field.
As a representative sample for this research 100 clients of a chosen company were picked randomly.
Every client, while concluding an asset managment agreement, completes a client profile and an
investment questionnaire on the basis of which the asset manager decides how to use the client's
money and securities. This paper tries to form a basis for understanding of the basic behavioral
economy elements using the example of asset management of chosen clients. The research was
conducted as a survey of the clients. The results are analyzed and generalized, it is therefore a
synthesis. The survey was done in the form of an interview during which the asset manager completes
a questionnaire and an investment profile of the client. The answer sheet is customized to the
questioner who completes it.
Aim of the survey is to obtain material, thanks to which the client can be provided with a relevant
service based on his requests and in accordance with the relevant legal frame and also classifying the
client into an adequate group. The prerequisite for a successful cooperation of an investment company
with the client is a professional team formed by an asset manager (namely portfolio managers),
economists and analysts, necessary technologies and trading systems (Bloomberg, Reuters.)
1 Behavioral economy
Behavioral economy works with human psychological impulses and social influences. Today's
consumer has many options how to form a decision. The basis of behavioral economy lies in its
psychological approach. This field explores what impulses influence the behaviour of individuals.
Sciences such as psychology, sociology or politology are part of this exploration.
Nowadays, an individual does not satisfy only his vital needs but also other desires and whims as
well. It can be said that these are „created" by modern times, since the consumer is heavily influenced
43
by media and advertisement on TV or on social media. Famous fast food hamburgers are a good
example of this phenomenon, creating the need of an immediate satisfaction of hunger (or craving)
while driving on highways for example.
These food chains have a detailed and masterfully constructed marketing which targets most of
today's population starting with children (selling food packages with toys included, organisation of
birthday parties, adjusting the size of the menu etc.). These enterprises keep on perfecting their
marketing using the latest trends and technologies. Simply put they force their clients to spend money
for something they do not need without even realizing it most of the time. Similar cases can be found
throughout the whole market in large numbers, since society lives in consumer times and often with
debt. Among important parts of behavioral economy are also psychology, behaviouralism,
motivation, emotions and rationality.
1.1 Psychology
Psychology originated as a science in the end of the 19th century. Its development was, besides other
things, influenced by economical and technological progress, that came into conflict with the needs
of man, which was necessary to solve not only in theory but in practice as well, as Pauknerová states
(2012). Human psyche is defined as a subjective reflection of objective reality. It is determined
biologically and socially. Biological factors, which are inherent, are the nervous system, sense and
hormones. Social factors are then education, environment and the social role of an individual.
1.2 Behaviourism
Behaviourism (from „to behave") emerged in the USA and is defined as a science studying behaviour.
It is one of the three main fields of psychological sciences. It targets behaviour, an observable human
expression. Behaviourism is used in working with people, particularly in the work process, process
of learning and motivation according to Pauknerová (2012).
The exclusive objective of behaviourism is the analysis of behaviour. In the educational,
propagandistic or advertising practice behaviourism aimed to manipulate individuals and groups and
to alter the behaviour of a larger number of people. Due to the influences of other factors, such as
surrounding environment or social control and social determination, these efforts have never been
entirely successful in a socially open environment (Vláčil, 2018).
1.3 Human personality
Personality is one of the fundamental terms of psychology. It means individual formation of human
psyche. It can be understood also as a unique „me/myself' of a person and also a compound or a
connection of character, temperament, skills and also constituting traits (Cakirpaloglu, 2012).
1.4 Motivation
A. H. Maslow became famous in the behavioral science field particularly due to his theory of
motivation based on the hierarchy of needs where:
• the base of the hierarchy is formed by physiological and existential needs,
441
• then there are the needs of safety and security - employment, wage etc.
• social needs - the need to belong, social status, identity
• esteem needs - to be successful, earn prestige,reputation, sense of accomplishment
• need of self-actualisation - realisation of one's potential (Smith, 2021)
Human values and attitudes determine how such motivation will be used. Man is motivated to actively
participate in the solving of various issues concerning himself, his surroundings or his country (i.e.
motivation to vote and decide about the future of the country or become a volunteer to help with the
pandemic crisis), as Yelkikalan (2020) states.
Human values and attitudes change over time during one's life, their preferences are different
depending on age, life experience and events. When one starts a family for example, his values change
drastically, security and stability become a priority because of the need to financially secure the family
and satisfy its material needs (equally important is the existence of spiritual values and attitudes which
lead to the securing of a stable emotional background for all family members and a correct upbringing
of the children).
1.5 Emotions and rationality
Emotions are often considered as a disturbing element when rational contexts are applied. In fairy
tales it can be often observed that the final decision has to be based either on reason or emotions
which are usually juxtaposed as completely opposite options. Even nowadays reason and emotions
are considered to be two forces which, according to Poláčková - Šolcova (2018), do not work together
and are in opposition to each other. Emotions are a changeable proces of human psyche. They consist
of three basic parts - somatic, behavioral and experience-based.
This division can be seen in Picture 1. Emotions are processed in the amygdala, the part of human
brain which is responsible for human emotional responses. It is connected to our nervous system,
which can in turn influence blood pressure, heartbeat, hormonal secretion, digestion. That is why
emotions can sometimes manifest themselves through visible physical reactions such as excitement,
shaking, sweating, faster heartbeat or stomach spasms. In contrast, rational thinking is based in the
neocortex, a different part of human brain. Emotion-targeting is therefore widely used strategy in
marketing communication with the objective of persuading the client to purchase a certain product or
service.
45
Picture No. 1: Structure of emotions
Experiencebased
part
/ • _
Behavioral part]warn(behaviour,
acting,
expression)
>-
Emotions
Source: Vysekalova et col., 2020 - edited by the author
2 Research methodology
To obtain the necessary data, the method of a direct survey was used. Subsequent analysis is a process
based on the separation of factual or psychological whole into individual parts. It is an analysis of
traits, relationships, wholes of this whole to its parts. For the provision of investment services an
investment questionnaire is used.
2.1 Investment questionnaire
Investment questionnaire is a standardized bank document and its completion is required of every
client with whom the bank negotiates or concludes any agreement on investment services provision
in the sense of Act No. 256/2004 Sb., on Capital Market Business, as amended. Based on the
information provided by the client in the investment questionnaire the investment company evaluates,
processes and sets the following:
- does a proportionality test. It evaluates whether the provision of the main investment service not
mentioned in sec. 3 (that is mediation of buying or selling of securities or trading with fund shares
outside markets), giving advise concerning an investment instrument or processing of a trade of an
investment instrument within such an investment service corresponds with sufficient skill, knowledge
and experience of the client, necessary to understand the risk.
- sets a risk profile. To its result the offer of investment instruments is adjusted. Funds risk is
determined by legal and internationally standardized processes and it is also expressed through the
synthetical risk and revenue index (SRRI). This index evaluates the risk from 1 (highly conservative)
to 7 (riskiest) with the lowest risk usually meaning lowest revenues and higher risk meaning possible
higher revenues.
- does a suitability test. This is an evaluation of whether the main investment service according to
par. 4 sec. 2 letters d) and e) of Act No. 256/2004 Sb., on Capital Market Business, as amended
corresponds with the financial background of the client, his investment objectives and his investment
knowledge necessary to comprehend the relevant risks.
4 6
- runs (beyond the legally set frame) a knowledge test in relation to derivative markets and
instruments and in cases of using the Different currency credit or Investment instrument trading credit
and loan. Investment company thus provides increased protection to the client, who, trading with
derivatives or drawing credits or loans due to investment instrument trading, usually faces a higher
risk than trading solely with non-derivative instruments using his own means.
2.2 Research questions and research
The objective of the research is to define in a more detailed way the profile of a client of an asset
management company for wealthier clientele. Research was based on the evaluation of a survey of
100 respondents, who became clients of investment companies in the last 5 years (2015-2020). This
paper then tries to look for connections, regularities or deviations, which would answer the below
stated research questions based on the above mentioned questionnaire.
Research questions
Q 1: What is the client's field of business?
Q 2: What is the client's personal economic situation?
Q 3: What is the source of the assets (savings, inheritance, real estate etc.)?
Q 4: Is the owner of the account also the real owner of the assets (beneficial owner)?
Q 5: What is the client's investment profile based on the completed questionnaire?
While answering the questionnaire the client simultaneously completes a form, which provides
regulatory bodies with the neccessary A M L (anti money-laundering) information. These forms
concerning anti money laundering measures (Act No. 253/2008 Coll. on selected measures against
legitimisation of proceeds of crime and financing of terrorism) must be properly completed and
signed. In the Czech Republic the regulatory body providing financial supervision in this case is the
Czech National Bank to which security traders are subject and must fulfill their legal obligations
towards it in order to be able to provide services to end clients.
Then the company discusses with the client his knowledge of the risk, willingness to risk and the
readiness to bear it. The client confirms that the information in this such created investment profile
reflect his answers. The client is acquainted with the Special risks related to security trading brochure,
which is an integral part of the banking documentation. He is also told all the essential information.
2.3 Asset management company
Investment company focuses mainly on bond investments and its objective is conservative investing
with protection against the depreciation of money due to inflation. For this purpose the company uses
CFPM (Cash-flow Protection Model). The structure of this investment model is based on four basic
parts: an independent investment professional, conservative interest investments, secure background
of a private bank and regular transparent information.
The priority, however, is the protection of the client's capital and the ensuring of the value of assets
against depreciation due to inflation. Other typical traits of this model are: a beforehand defined level
47
of evaluation, regular payments of interest revenue, exclusion of speculative transactions, immediate
liquidity without notice periods and a cash-flow guarantee provided by stable companies backed by
strong capital.
CFPM allows the client to achieve average asset appreciation above the level of inflation and thus
making it possible to obtain real appreciation of the invested funds. Financial means that are paid to
the clients as interest revenues can be used either for consumption or can be reinvested. Reinvestments
provide clients with another effect, the interest on interest.
As the scientific study published by the Czech National Bank states the results indicate that the
inflation trend has been decreasing since the beginning of the millenium, which overlaps with the
introduction of the inflation targeting regime and the subsequent changes of inflation objectives of
the Czech National Bank. A regression analysis mentioned in this paper moreover indicates that the
dominant role in the change of this trend is played by inflation expectations as pointed out by Franta
(2020).
3 Evaluation of the research
The data were collected in a company which focuses on professional asset management (mostly
investments in corporate bonds, shares, commodities and derivatives investments). 100 respondents
participated in the research, the data being collected between 2015 and 2020, when the company
acquired these clients. The client questionnaire is being completed by the client with the assisstance
of the company's key account manager. These records are then being kept as a part of the agreement
documentation.
Q 1: What is the client's field of business?
The data collected in the survey show that almost a quarter of the clients are professional sportsmen
(i.e. hockey or football players), almost a half - 43% to be exact - of the clients are businessmen or
top managers. Another quarter (25%) is formed by rentiers (i.e. owners of betting offices or
businessmen who transferred their enterprises to younger generations in their families) and 8% of the
clients falls under the category „other" where people such as lottery winners can be found.
Clients are actively sought out by the asset management company at various events or they come
recommended from business partners. The business strategy of the company targets a specific kind
of clientele, actively cooperates with sports clubs and lottery companies. Signficant part of the
company's portfolio is then formed by businessmen or top managers in their productive years.
Based on their area of business clients can also be divided into three different age groups (25-35 years
old - professional sportsmen, 35-55 businessmen and top managers in productive years; and 55 years
old and above - rentiers and businessmen, who passed their business on their children for example,
but still earn profit from it in some way).
Based on their age, a trend of higher consumption and higher expenses can be observed in the
youngest group of 25-35 years of age (professional sportsmen), where the money is not used for
reinvestments but to purchase luxury goods, expensive holidays, cars, home furnishing etc. The
clients in the largest group (35-55 years - businessmen and top managers) tend to make large onetime
investments every few years, thus selling their assets or investment bonds.
4 8
Rentiers and businessmen (55 years old and above), who already transferred greater part of their
business to their successors are the most conservative group, which tends not to seek many changes.
Their biggest distress concerns situations, when unexpected events affect the market, such as the
British Petrol oil spill or the impending bankruptcy of Greece, alternatively current turbulences
caused by the Covid-19 pandemic. Their asset portfolio is usually very diverse, meaning that their
investments are placed in different business areas, real estates, shares in other successful companies
etc., in order to decrease the risk of asset depreciation.
Q 2: What is the client's personal economic situation?
Due to the area of business of the asset management company it is desirable that the economic
situation of the client is favourable with favourable future prospects as well. A specific situation
concerns the case of professional sportsmen, who face significant risk of injury and the subsequent
inability to proceed with their career either for some time or, in the worst scenario, for good.
Voluntary career ending usually happens at a very early age in case of these clients, therefore in a
short-term horizon (in comparison to other client groups - i.e. businessmen). This group is also
specific due to its different financial behaviour, which can be related to their age and physical
condition. These clients tend to rather spend their money than to invest it in order to earn a long-term
revenue. Due to professional insurance of sportsmen the risk is evaluated as low with just a slight
insecurity and it concerns 24% of the company's clients.
The situation was evaluated as favourable with favourable future prospects in case of 76% of the
clients in the years 2015-2020. In 2021 some of them might pass into the area of slight risk due to the
Covid-19 pandemic, which has affected some areas of their business. This is not, however, the subject
of this research. Significant risk was detected only in 1% of the cases, when the client in question had
issues with property settlement during a divorce. Even in such a case can an asset management
company prove beneficial. With its help various off-shore companies or trusts can be established and
thus the property can be transferred to appointed succesors such as children. Similar situation can
arise out of criminal prosecutions or civil litigations, when the client is forced to act quickly in regard
to his property. In such a case everything is handled with the help of a legal office and in accordance
with legislative regulations.
If the client's economic situation is not favourable, conservative asset managers are not sought out at
all, since people in such distress look for other investment products and instruments in order to solve
their situation. It is not in the interest of the company, which offers mostly conservative investments,
to acquire such clients either. Such people are in most cases forced to bear higher or even
disproportionate risk in order to solve such problematic situations.
Q 3: What is the asset source (savings, inheritance, real estate etc.)?
In majority of the cases (89%) the source of clients' assets are savings which come from their business
activities (business, professional sports). 7% of the clients rely on the ownership of investment real
estates such as flats, apartment blocks, hotels or hospitals as the source of their assets. In 4% of the
cases the source of the investment funds are gifts or inheritance, usually from family members or
relations in the direct line.
49
Q 4: Is the owner of the account also the real asset owner (beneficial owner)?
As it was mentioned above, a Beneficial Owner is the real owner of the assets. It is a legal term
defining a situation when certain ownership rights connected to the property belong to a certain
person, even though the legal title to the asset belongs to another person. The real owner needs to
follow the laws on interest or property transfers etc. This term is usually used in off-shore structures
which are benefical due to their low or zero taxation. These structures also provide the real asset
owners with anonymity. It has been a frequently discussed topic whether it is morally acceptable that
wealthy people pay lower or even no taxes at all compared to others. These taxes, if paid, are
moreover paid in foreign countries. The laws of many countries, however, states that this procedure
is legal. It is a rather controversial topic that has sparked numerous discussions.
Q 5: What is the client's investment profile resulting from the completed questionnaire?
Since the company deals mostly with conservative investments, it is agreed upon that majority of the
clients can be defined as careful (15%), thrifty (23%) or consolidated (54%). Consolidated investment
profile also corresponds with the duration of corporate bonds investments, which is a few years, when
markets are subject to different development and different economic cycles. The benefit of CFPM is
that whereas the price of bonds is prone to fluctuate, the interest are paid to investors on a regular
basis. It can be determined beforehand what the revenue rate will be and the time frame when the
guaranteed interest will be paid. In this way a reasonable rate of asset appreciaton can be achieved in
the long term. This even applies to times when market prices of investment instruments fall due to
many different reasons. Only 8% of the clientele can be classified as „courageous" meaning that they
are willing to undertake higher risks while investing in shares, securities or other instruments. It is of
no surprise that this group is mostly formed by young professional sportsmen.
Conclusion
Behavioral aspects of asset management target, in their theoretical part, basic definitions from
psychology, behaviorism, behavioural economy and human personality. Motivation, attitudes and
values, emotions and human rationality are all important components. The subject of the research was
formed by a representative sample of 100 clients of an asset management company.
A questionnaire survey done with these clients is a part of the asset management agreement
conclusion process and a part of the banking documentation. Conclusion of these agreements took
place between 2015-2020 with the participation of the company's key account manager and under
the auspices of a professional employee of the company. The key account manager personally
completes these questionnaires so that they correspond with the client's idea of how his property,
securities and financial means will be managed.
The objective of the research was to closely define the profile of a client of a company that manages
assets for wealthy clientele. It was found out that there are various types of clients in relation to their
field of business. Businessmen are one of the groups of society that certainly needs financial literacy.
In contrast with workers and employees, businessmen enter the market with their own business
acitivities and a good knowledge of financial terms, as well as the ability to make quality decisions
for the successful establishment and development of a company, is paramount. Financial literacy is
also linked to the source of the clients'assets, which they invest through the asset management
54
company. The company deals mostly with conservative investments, therefore the clients'profiles
correspond with this trend and the research did not discover any significant or disproportionate
deviations.
In summary it can be generalized that behavioral aspects play an important part in the process of asset
management. When managing their money, people usually make more or less responsible decisions
mostly based on how those finances were earned and how much effort it cost. Age and corresponding
life experience, expectations and mental maturity is an important factor as well. Ansong and Gyensare
(2012) discovered in their research that there is a connection between financial literacy and age. Older
generations of clients also tend to take into account the securing of future generations and aim for the
securing of their property in case of unexpected events, such as death. However, all clients show
motivation to secure their property against depreciation due to inflation, economic recession or crisis.
In this particular case, when assets are invested in securities, the role of the asset manager - a
professional in whom the client places his trust and financial means to manage - is irreplaceable. This
person's purpose is to eliminate flawed decisions and he tries to make the client's portfolio as strong
as possible and make it generate the highest revenues possible, with the client being able to accept
the undertaking of an adequate risk. The asset manager's reward is usually paid every three months
based on the performance of the client's portfolio, from which a percentage reward is deducted. The
clientele's demand has in the recent years shifted towards more conservative types of investments
and instruments which represent a long term perspective of conservation of property. The current
Covid-19 pandemic certainly influences the reasoning of peopl, a trend which is likely to continue
and even grow stronger in the foreseeable future.
Acknowledgment
This thesis was written as a part of the student project no. 7427/2019/04 Financial Literacy in
international context with the use of the support purposed for specific university research of VSFS.
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Contact
Zuzana Chlumská - Ph.D. student
Vysoká škola finanční a správní
Estonska 500
101 00 Praha 10, Czech Republic
Zuzana.chlumska@mail.vsfs.cz
Vlastimil Jandus - Ph.D. student
Vysoká škola finanční a správní
Estonska 500
101 00 Praha 10, Czech Republic
v.j andus@gmail. com
52
ARE REAL ESTATE PRICES EVOLVING INTO AN ASSET
PRICE BUBBLE?
WOLFGANG KLOPPENBURG
Abstract
The development of real estate prices is of extraordinary importance for the financial and economic
system, as undesirable developments could endanger financial stability - as seen in the financial crisis
of 2008 and 2009. This applies not only to speculators, but also to private households, which have to
borrow to pay the purchase price. The market has been "fueled" in particular by the monetary policy
of the central banks - expansion of the money supply and low interest rates. Investors are looking for
investment opportunities due to the money glut, and the real estate market still promises a return.
Furthermore, many people looking to build are willing to go into debt to buy a property. This demand
ultimately has a driving effect on real estate prices. The aim of this paper is to compare and analyze
the development of real estate prices in the most important OECD countries with those of Germany.
A model of real estate prices is presented, which takes into account the most important indicators and
provides information on when a price bubble exists. The model shows that asset price bubbles can be
identified in some OECD countries. In Germany, on the other hand, there are only signs of a price
bubble in a few major cities. Since private debt is low, it does not seem to be a problem across the
board in Germany. A general problem remains with regard to the timely detectability of price bubbles.
Keywords
Asset price bubbles, Monetary policy, Price bubble in
JEL Classification
E44, G12, E52
Introduction
In 2008, the bankruptcy of the U.S. investment bank Lehman Brothers triggered one of the biggest
global economic crises (Mishkin, 2011; Shiller, 2013). The bank had been significantly involved in
financing the housing price bubble in the U.S. and insuring credit default risks, and eventually had to
declare bankruptcy. The U.S. government was no longer willing to prop up Lehman Brothers after
support actions for the two government mortgage state agencies, Freddie Mac and Fannie Mae. This
fateful step triggered a bursting of the real estate price bubble worldwide. This led to massive real
economic problems on the financial markets, characterized by pessimism and uncertainty about future
developments. In the United States, the unemployment rate rose to more than 10%. In Germany, for
example, overall economic output fell by 5.6% in 2009. Banks stopped lending money to other banks
because confidence in the solvency of commercial banks was severely damaged. This ultimately
represented a failure of the money market. There was a concern that it would lead to a major credit
crunch. Global support measures by governments and, in particular, central banks were therefore
necessary. Governments and central banks around the world were forced to introduce support
53
measures, backed in particular by monetary policy focusing on an expansion of liquidity to banks and
a low interest rate policy. As a result, central banks pursued a very expansionary monetary policy and
key interest rates, and thus financing costs, became significantly more favorable. Overall, the global
economy recovered.
In the years that followed, real estate prices rose sharply (see the following Chart, OECD Data.
Housing Prices, 2021). Housing prices include housing rent prices indices, real and nominal house
prices indices, and ratios of price to rent and price to income.
Table No. 1: Housing prices
S h o w : Chart M a p Table J J f u l Iscreein ^ share I ^ download My pinboard V
f TT T l
o i I o • ° o o
•
• •
o o
o o
Wominal h-ouse prices O R e n ; P M C E
Perspectives
N o m i n a l h o u s e prices. R e n t pri... (z/5) T
Q C o m p a r e variables
2015=100 T
Countries
Highlighted Countries (7] yea rl y q u a rte rJy
Q latest d a t a available
IJÜ
Source: OECD (2021)
Real estate price bubbles are a threat to financial and macroeconomic stability (Blot, 2017). The
recent financial crisis has highlighted the importance of housing markets as both a source and a
transmission mechanism of financial instability (Bauer, 2014). This view has been forcefully
supported by the Bank for International Settlements (BIS). Several prominent BIS economists have
argued that monetary policy should "lean against the wind," i. e. try to prevent the build-up of
financial imbalances by reacting early on to upward-trending asset prices (Cecchetti et al. 2000, Borio
and Lowe, 2002, White, 2006 and Brunnermeier, Schnabel, 2014). The empirical analysis of this
paper shows that there is evidence of a significant multidirectional link between house prices, broad
money, private credit and the macroeconomic.
The following section uses data from OECD countries to show whether and to what extent risks have
built up again on the international real estate markets. A common answer is that the monetary policy
of central banks has encouraged this development. This is followed by a comparison of selected
541
OECD countries with real estate price developments in Germany. A brief review of the literature
opinion as well as empirical tests for the identification of speculative price bubbles follow.
1 Literature Review
In recent years, a large number of research papers have been published dealing with the causes and
forecasting models of real estate price bubbles. In the following, some papers on this topic are briefly
presented.
Kholodilin and Michelsen compare the experiences of different countries with speculative price
bubbles and contrast this with Germany. They focus on the institutional framework and whether this
can prevent such a real estate price bubble. Although the authors do not see any signs of a speculative
price bubble in Germany, they believe that there is an increased risk in some larger metropolitan
areas. The authors see one reason for this in lending to customers with a low equity ratio (Kholodilin
and Michelsen, 2019a).
Engsted use econometric methods to examine data from 18 OECD countries from 1970 to 2013 for
explosive increases in real estate prices and were able to prove this in all countries - with the exception
of Germany and Italy (Engsted, Hviid, and Pedersen, 2016).
Brunnermeier analyze the relationship between asset price bubbles and systemic risk using bank-level
data in 17 OECD countries and over a 30-year period. The systemic risk of banks increases already
during the build-up phase of a bubble and even more during its bursting. The increase varies
considerably across banks and bubbles and depends in particular on the size of the bank. The results
show that higher credit growth, stronger maturity mismatch, and especially bank size make financial
institutions, and thus the financial system, vulnerable to asset price bubbles. The increase in systemic
risk is largest for housing price bubbles (Brunnermeier, Rother, and Schnabel, 2019).
In their paper, Huber and Punzi (2016) propose a model with time-varying parameters for the housing
market in the United States, the United Kingdom, Japan and the euro area. The results indicate that
the monetary policy transmission mechanism to the housing market has not changed with the
implementation of quantitative easing or forward guidance and that central banks can influence the
composition of an investor portfolio by investing in the housing market. Furthermore, it is shown that
the U.S. was able to influence the consequences of the financial crisis more successfully through
unconventional monetary policy than the other countries considered.
In a paper by Wolfle (2017) paper, for example, values were presented for the very unequal cities of
Hamburg and Freiburg, in terms of purchase prices of residential real estate, and considered over
time. There was already an increase in the bubble risk for both cities in the years 2009 to 2012.
2 Development of the real estate prices in OECD countries
The risks in many OECD countries are high. In Germany, there has been an explosive price
development, which has decoupled from the returns on real estate. (Kholodilin, Michelsen, 2017,
2019a). Housing price bubbles have developed especially in the following OECD countries as France,
Germany, Italy, Spain, U K and USA.
55
Table No. 2: Development of real house prices Q11970 / Q12019
Source: Kholodilin (2019a)
It should be noted that price developments have been supported to a large extent by the very expansive
global monetary policy. Almost all central banks lowered their key interest rates to historically low
levels in response to the global financial and economic crisis. As a result, yields on government bonds
fell significantly, which also made financing costs for real estate investments much more favorable.
In some countries the analyses show that the development of real estate prices points to speculative
investment behavior on the part of investors. In particular, the continuing high level of household
debt and the generally very low level of interest rates suggest a new bubble in many places.
Corresponding patterns can be seen in the time series of the countries examined. For example, price
exaggerations have been likely again in Sweden since 2012, in Australia and Belgium since 2014, in
Germany, the UK and Italy since 2015, and in Portugal and the USA since 2016.
In view of the breadth and momentum of price increases, concerns are increasingly being voiced that
overvaluations on the real estate markets could occur or are already a reality. In this context, two risks
are viewed synonymously that should actually be separated from each other. A distinction must be
made between the risks arising from the low-interest phase and those attributable to speculative
investment behavior. The low interest rates increase demand for real estate, the price of which is
rising sharply in view of the rigid supply in the short term.
56
If there are unexpectedly rapid increases in the key interest rate, demand for real estate could fall
drastically, whereupon prices are likely to come under pressure. Households that have not taken
sufficient account of such developments in their financing could be forced to sell their property. If
the market price of the property is lower than the mortgage in the meantime, the household will be
over-indebted. These risks are reduced, at least in Germany, with comparatively long fixed-interest
periods. This would create severe macroeconomic problems that would have to be addressed by new
support measures on the part of policymakers.
3 Development of real estate prices in Germany
Starting from the 1st quarter of 2004 (index = 100), the so-called empirica real estate index in
Germany was 165 points in the 4th quarter of 2020. The price index is based on a weighted average
of purchase and rental prices (owner-occupied or rented apartments and single- and two-family
houses of all construction years) and on over 100 sources of advertisements (empirica Preisdatenbank
2020).
Steadily rising real estate prices have resulted from strong demand coupled with low supply. Despite
the many new buildings, the supply of housing is not enough, as the population has also increased in
recent years. This creates a shortage of living space, especially in metropolitan areas, which leads to
rising rents or price increases for properties for sale. Another shortage is affordable building land. In
2019, a square meter of land ready for construction in Germany cost an average of around 190 euros.
Fifteen years earlier, it was still around 100 euros for the square meter. Scarce building land is
becoming more expensive and is therefore also causing property prices to rise overall. Another reason
for the development of real estate prices is the current monetary policy of the European Central Bank.
Low interest rates are making it cheaper to finance real estate and are crowding out other investment
opportunities for lack of an alternative. As a result, more is being invested in real estate and prices on
the real estate market are rising due to increased demand (Statista Research Department, 2021 und
Statistisches Bundesamt (Destatis), 2021).
According to the Federal Statistical Office (Destatis), the house price index in the third quarter of
2020 was 7.8% higher on average than in the prior-year quarter. Furthermore, prices for apartments
as well as for detached and semi-detached houses rose by 2.9% compared with the previous quarter.
In the seven largest metropolitan areas, the year-on-year increase was 8.9% for detached and semidetached
houses and 7.3% for condominiums. However, rural counties (less populated counties) also
saw price increases of 9.7% (8.4%) for houses and 7.1% (8.1%) for condominiums. Statistisches
Bundesamt (Destatis), 2020).
57
Table No. 3: House price index 2020
-
2
0
, 1 • , • 1 • • 1 • • F ! • • ' ' 1 1 ' ' F
JO 10 1011 1011 3013 » U » 1 5 1017 1016 UttS 2MB
Source: Statistisches Bundesamt (2021)
In Germany, signs of speculative overvaluation are seen primarily in the major cities. The
macroeconomic risks are considered to be low, not least because of the significantly lower level of
private household debt (Kholodilin, Michelsen, 2017 and 2018). According to a UBS study, however,
there are warnings of price bubbles on the real estate markets in Europe and Germany, as price growth
has accelerated considerably (UBS Study, 2020).
4 Data Description and Methodology
It is important for regulators to identify the emergence of price bubbles at an early stage (see
Hagemann and Wohlmann (2019)) which developed an early warning system to signal speculative
price bubbles. Evaluations of price-rent ratios are valuable for this purpose - but it is better if the
"ingredients" for speculative bubbles are known. There are already assessments of this, according to
which loose monetary policy in particular harbors major risks.
Following Gilles and LeRoy (1992) and Giirkaynak (2008), every price system can be decomposed
into two parts, namely a fundamental component and a bubble component. In the given context, the
fundamental house price equals the sum of the present values of expected future rents. The bubble
component equals the difference between the market value and the fundamental value. Two statistical
methods are used for the investigation of the price development in the German housing market: tests
for stationarity and for explosive behaviour. The terms stationarity and difference stationarity are
used simultaneously. In both tests, bubbles are assumed to be rational. The previously explained
features of a price system and a rational bubble are modified respectively (Mayer and Gehrke, 2018).
In Germany, the empirica property price index is published regularly on the basis of the empirica
price database and is prepared using statistical methods. The index contains data from the
Bundesbank, Destatis and information on real estate advertisements (empirica, Preisblasenindex,
2016).
A bubble risk is seen, as purchase prices are rising faster than rents or incomes. The low interest rate
may justify this, but it is an unstable equilibrium. The risk of a bubble is also high because prices
have escaped middle income or equity in many places. This means that a "rather high" bubble risk is
58
now indicated for 10 out of 12 major cities (previous quarter 9, three years ago 8). Accordingly, a
bubble is imminent if the "normal earner" can no longer afford real estate because purchase prices
are rising faster than a) rents or b) incomes and c) more and more housing is being built (in excess of
demand) d) and more and more loans are being taken out for this purpose. These four indicators
(multiplier, price-income ratio, completions per inhabitant and housing loans relative to GDP) can be
observed (empirica, Price Bubble Index (2020).
Kholodolin and Michelsen (2018) determine the probability of a speculative bubble as a function of
various external variables such as (gross value added, real interest rate, credit-to-GDP ratio, and
population growth) using a so-called panel logit estimation. Logit models find wide application in
determining and predicting economic recessions, currency crises and speculative excesses in asset
markets, and allow to estimate the significance and sign of the relevant variables and thus to draw
conclusions about the conditions under which a speculative bubble is likely to occur. They calculated
logit models for a panel of 20 OECD countries in their model.
Conclusion
The development in Germany does not seem too alarming compared to other countries, but precaution
is still necessary. Ten years after the financial crisis, real estate markets worldwide have recovered.
Monetary policy probably played a major role in this, as low interest rates make real estate
investments more attractive. This also applies to Germany - although the analyses were only carried
out for the large metropolises and not for the country as a whole.
In their study, Kholodolin and Michelsen (2019b) show that ten years after the financial crisis, price
developments can again be observed in many countries, which are probably also characterized by
speculative investment behavior. This applies to eight of the 20 countries studied (in European
countries, North America as well as Australia), where corresponding patterns can be identified in the
time series.
References
Bauer, Gregory H. (2014). International House Price Cycles, Monetary Policy and Risk Premiums.
Bank of Canada Working Paper 2014-54.
Blot, Christophe, Paul Hubert and Fabien Labondance (2017). Does monetary policy generate Asset
Price Bubbles? Working Paper 5/2017. Paris, Science Po, OFCE.
Borio, Claudio and Philip Lowe (2002). Asset prices, financial and monetary stability: exploring the
nexus. BIS Working Papers No 114.
Brunnermeier, Markus K , Simon C. Rother and Isabel Schnabel (2019). NBER Working Paper No.
25775. NATIONAL BUREAU OF ECONOMIC RESEARCH. Cambridge, MA, USA.
Brunnermeier, Markus K. and Isabel Schnabel (2014). Bubbles and Central Banks. Historical
Perspectives. Discussion Paper number 1411. Mainz. Johannes Gutenberg University.
Cecchetti, S., H. Genberg, J. Lipsky and S. Wadhwani (2000). "Asset prices and monetary policy",
Report prepared for the conference "Central Banks and Asset Prices" organized by the International
Centre for Monetary and Banking Studies, Geneva, May.
empirica-Preisdatenbank Blasenindex IV/2020: https://www.empirica-
institut.de/fileadmin/Redaktion/Publikationen_Referenzen/PDFs/Blasenindex-_Q42020.pdf
(Accessed on 2. March 2021).
59
empirica-Preisdatenbank Blasenindex 1/2016: https://www.empiricainstitut.de/fileadmin/Redaktion/Publikationen_Referenzen/PDFs/Blasenindex
Q12016.pdf
(Accessed on 27. February 2021).
Engsted, T., S. J. Hviid and T. Q. Pedersen (2016). Explosive bubbles in house prices? Evidence from
the OECD countries, in: Journal of hiternational Financial Markets, Institutions and Money, Nr. 40.
Huber, Florian and Maria Teresa Punzi (2016). International Housing Markets, Unconventional
Monetary Policy and the Zero Lower Bound. Wien, Vienna of Economics and Business. University
Department of Economics Working Paper 2016.
Gilles, C. and SF. LeRoy (1992). Bubbles and Charges. International Economic Review 33(2):323-
339. DOI: 10.2307/2526897.
Gürkaynak, R.S. (2008). Econometric tests of asset price bubbles: Taking stock. Journal of Economic
Surveys 22(1): 166-186. DOI: 10.1111/j. 1467-6419.2007.00530.
Hagemann, D. and M. Wohlmann (2019): An early warning system to identify house price bubbles.
http://dx.doi.org/10.1108/JERER-03-2019-0006 (Access 2. 3. 2021).
Kholodilin, Konstantin A. und Claus Michelsen (2019a). Das Risiko einer Immobilienpreisblase ist
in Deutschland sowie in den meisten OECD Ländern hoch. DIW Wochenbericht Nr. 32/2019.
Kholodilin, Konstantin A. und Claus Michelsen (2019b). Zehn Jahre nach dem großen Knall: wie ist
es um die Stabilität der internationalen hnmobilienmärkte bestellt? Z Immobilienökonomie (2019)
5:67-87. https://www.diw.de/documents/publikationen/73/diw_01.c671978.de/19-32-l.pdf
Kholodilin, Konstantin A. und Claus Michelsen (2018). Anzeichen für neue Lnmobilienpreisblase in
einigen OECD-Ländern: Gefahr in Deutschland geringer. DIW Wochenbericht, ISSN 1860-8787.
Kholodilin, Konstantin A. und Claus Michelsen (2017). Keine Immobilienpreisblase in Deutschland
- aber regional begrenzte Übertreibungen in Teilmärkten. DIW Wochenbericht Nr. 25/2017.
Mayer, Thomas and Matthias Gehrke (2018). A Statistical Evaluation of Possible Bubbles in the Price
Development in the German Housing Market. doi:10.5445/KSP/1000085951/06. (Accessed on 2
March 2021).
Mishkin, Frederic S. (2011). Monetary Policy Strategy: Lessons from the Crisis. NBER WORKING
PAPER SERIES. Working Paper 16755. Cambridge, MA, USA.
OECD (2021). Housing prices (indicator), doi: 10.1787/63008438-en (Accessed on 19 April 2021).
Shiller, Robert J. (2013). Speculative Asset Prices. New Haven, CT, USA. Yale University.
Statista Research Department (2021). Lnmobilienpreisentwicklung in Deutschland bis 2020.
https://de.statista.com/statistik/daten/studie/597304/umfrage/immobilienpreise-alle-baujahre-indeutschland/
(Accessed on 2. March 2021).
Statistisches Bundesamt, Destatis (2021). Häuserpreisindex.
https://www.destatis.de/DE/Themen/Wirtschaft/Preise/Baupreise-Immobilienpreis-
index/inhalt.html.
Statistisches Bundesamt, Destatis (2020). Preise für Wohnimmobilien im 3. Quartal 2020: +7,8 %
zum Vorjahresquartal. Wohnimmobilien verteuern sich trotz Corona-Krise weiter.
https://www.destatis.de/DE/Presse/Pressemitteilungen/2020/12/PD20_534_61262.html.
UBS Studie (2020). UBS Studie warnt vor Preisblasen auf zahlreichen Immobilienmärkten - Europa
besonders heiß gelaufen, https://www.anlegen-in-immobilien.de/ubs-studie-warnt-vor-preisblasenauf-zahlreichen-immobilienmaerkten-europa-besonders-heiss-gelaufen.
(Accessed on 28. February
2021).
White, William R. (2006). Is price stability enough? BIS Working Papers No 205.
Wölfle, Marco and Felix Löffler (2017). Freiburg. Center for Real Estate Studies (CRES), Discussion
Paper No. 1.
6o
Contact
Wolfgang Kloppenburg - Diplom Kaufmann
University of Finance and Administration, Prague
Am Bergedorfer Schiffgraben 52
27726 Worpswede, Germany
37314@mail.vsfs.cz
6i
OPPORTUNITIES AND CHALLENGES OF DIGITAL
CUSTOMER LEARNING IN BANKING
LADISLAVA KNIHOVÁ
Abstract
In every industry, including the banking sector, we are experiencing two fundamental changes: the
ongoing change in the portfolio of products on offer along with the change in the portfolio of
customers. The former is the result of fierce competition intensified by the introduction of new
technologies; the latter is conditioned by demographic changes. As a rule, the products offered by
banking institutions are better and better at meeting the customers' needs but they are also
increasingly complex. As for the portfolio of customers, their typical preferences and behaviour
patterns differ with their generations. Currently, the market encompasses baby boomers (those born
between 1946 and 1964), along with generations X, Y and Z. The aim of this paper is to examine,
analyse and critically evaluate the typical buying behaviour of potential clients - that is, those new
to the banking industry. Their personal traits and preferred ways of acquiring information and
learning are considered in correlation with the content, forms and platforms conducive to the design
of effective communication processes typically needed in banking institutions. The design of these
communication processes can be optimized and enhanced by the smart selection of digital
communication formats and platforms. These can significantly help convey a complex message and
achieve the banks' communication strategies' goals. The paper is complemented by a proposal for
the focus of five interactive communication strategies based on content marketing. The focus of
these strategies reflects the typical needs, wants and expectations of digital customers in information
gathering on the customer conversion journey.
Keywords
digital learning, digital learning platforms, education-based content, explainer video, generation Z,
in-app marketing, omnichannel marketing, podcast, social media
JEL Classification
G41.M310
Introduction
Gerald Zaltman in his iconic book How Customers Think - Essential Insights into the Mind of the
Market believes that "Customers say they want something, companies create it, and once it's
available, customers don't buy it. Why? It is just because customers don't know what they want"
(Zaltman, 2003, cover page). In 2003, the same author believed that the marketing tools we used,
including surveys and focus group sessions, did not dig deep enough to find out the real customers'
preferences (Zaltman, 2003, cover page). Almost twenty years later, with a lot of data on customer
behaviour available, we are still trying to find efficient ways of communication with our customers
with varying degrees of success. With new generations entering the market, communication experts
62
now need to know and understand the behavioural patterns of a new type of potential clients who
grew up surrounded by modern technologies.
Along with the demographic changes in the portfolio of customers, the communication environment
has changed profoundly, in terms of the content of the marketing message, its forms and its
distribution platforms. The nature of a bank adviser's job is also changing as communication with
customers becomes predominantly digital supported by technology. Hand-in-hand with the increasing
complexity of products, these advisers are becoming learning facilitators who use technology as a
learning tool. They are less 'a fount of wisdom' as digitally savvy customers prefer looking for
information themselves on the basis of 'self-service'. So, they are no longer a 'sage on the stage' but
a 'guide by the side'.
Changes in customer behaviour lie at the core of a new role to be embraced by bank advisers. Instead
of sharing unemotional information on the product portfolio, they are becoming invaluable
companions who empower the customers (in the role of learners) to become independent thinkers
through well-elaborated digital learning materials reaching the customers in multiple formats and
through multiple communication channels. Customers educated in this way tend to become
consistently loyal to the brand that helped educate them. So, this approach not only benefits the
customer but also the bank that developed and promoted the digital learning materials.
In the constantly evolving atmosphere, banking industry marketing and communication experts are
supposed to design efficient communication processes. The following chapters will focus on selected
aspects of customer behaviour in relation to the banking industry, notably customers' typical
behavioural patterns and expectations along with banks' success in relation to loyalty boosted by
customer education.
1 Digitally savvy clients entering the banking sector
Digitally savvy clients are now entering the banking sector. Simultaneously, the already existing
clients are acquiring and upskilling themselves in digital skills. Members of Generation Z, i.e., new
clients entering the banking sector who were born after 1997, differ from the previous generations in
terms of their attitude to technology. Theirs is the first generation of 'true digital natives' (Generation
Z characteristics and its implications for companies | McKinsey, 2020) who have grown up totally
surrounded and absorbed by digital technologies. These technologies have influenced their way of
seeking and processing information. Most probably, these young people have never put a stamp on a
letter. Even email is a somewhat outdated communication channel for them, and they have grown up
with smartphones whose use has become an indispensable element in their lives. They are digital.
The preceding generation were the millennials.2
Today, many of the oldest millennials are likely to
have paid off more than a half of their mortgages. However, the new clients, the truly DIGITAL ones
(Gen Z), are currently coming to banks as their new clients. Consequently, we need to examine their
typical behaviour patterns in acquiring and processing information. Data-driven customer
segmentation, with the help of modern analytical tools, is indispensable in creating the profile of the
fictionalized prospective customer. Kotler et al. note: "Big data empowers marketers to segment the
market into the most granular unit: an individual customer. [..] Based on it, companies can then
2
Millennials are people born between 1980 and 1996.
63
execute one-to-one or segments-of-one marketing, tailoring their offerings and campaigns to each
customer" (Kotler, Kartajaya, Setiawan, 2021, pp. 133-134).
When we are uncertain, we look for information because uncertainty is not a pleasant feeling. Humans
are born curious and we continue to be driven by our curiosity to discover facts. If, for example, we
do not understand completely a bank product, it can make us uneasy. "[Open-mindedness and selfcriticism]
are two qualities which not only enhance curiosity, they help satisfy it. They are at the heart
of curiosity's dual nature: the drive to know and the satisfaction we get from finding out" (Zaltman,
2018, p. 79). Members of Generation Z also need to satisfy their curiosity but their ways of doing so
- in terms of behaviour patterns and expectations - are rather different from the traditional approach.
Updated annually, McKinsey's Global Banking Annual Review offers insights into the global
banking industry (Staples, 2020). Independently, to get an insight into the local situation, in May
2021, the author of this study conducted an opinion poll among bank clients in the Czech Republic
(n = 394). The survey question was: "How often do you actually visityour primary bank to carry out
banking operations or financial transactions, or speak to your bank adviser in afairly typicalyear? "
- see Tab. 1.
Table No. 1: The frequency of visiting primary bank branch 'physical location'
- local and global comparison
Opinion poll in the CR
in May 2021
McKinsey's Global Banking Annual
Review in December 2020
not a single time in a year 54% "Even before the crisis, leading banks in
developed markets had achieved 25 per cent
less branch use per customer than their
peers by migrating payments, transfers, and
cash transactions to self-service and digital
channels. In addition to those who were
already digital-only customers previously,
another 10 to 15 per cent of customers will
be unlikely to use a branch after the crisis."
exceptionally 32%
"Even before the crisis, leading banks in
developed markets had achieved 25 per cent
less branch use per customer than their
peers by migrating payments, transfers, and
cash transactions to self-service and digital
channels. In addition to those who were
already digital-only customers previously,
another 10 to 15 per cent of customers will
be unlikely to use a branch after the crisis."
once a year 7%
"Even before the crisis, leading banks in
developed markets had achieved 25 per cent
less branch use per customer than their
peers by migrating payments, transfers, and
cash transactions to self-service and digital
channels. In addition to those who were
already digital-only customers previously,
another 10 to 15 per cent of customers will
be unlikely to use a branch after the crisis."
twice a year 3%
"Even before the crisis, leading banks in
developed markets had achieved 25 per cent
less branch use per customer than their
peers by migrating payments, transfers, and
cash transactions to self-service and digital
channels. In addition to those who were
already digital-only customers previously,
another 10 to 15 per cent of customers will
be unlikely to use a branch after the crisis."
more than 4 times a year 2%
"Even before the crisis, leading banks in
developed markets had achieved 25 per cent
less branch use per customer than their
peers by migrating payments, transfers, and
cash transactions to self-service and digital
channels. In addition to those who were
already digital-only customers previously,
another 10 to 15 per cent of customers will
be unlikely to use a branch after the crisis."
Source: own elaboration with the use of the opinion poll results and (Staples, 2020)
We can see that Czech banking clients' behaviour trends are almost identical with the findings and
predictions for the near future reported in McKinsey's Global Banking Annual Review in December
2020 (GBAR 2020).
Nowadays, traditional bank customers are changing their typical behaviour towards becoming almost
exclusively digital customers. The banking sector's digital customers typically avoid visiting their
banks' physical location. Also, communication with bank advisers is not their favourite way of
acquiring information. They expect to find everything they need "within two mouse clicks",
demonstrating their cognitive capability to understand the complexities of various banking products
and operations within minutes. Their behaviour and expectations from their bank clearly suggest an
omni-channel digital approach. They conduct all their banking operations using smartphones, PCs
and tablets. They have quickly adopted mobile banking. It is convenient for them to check their
64
account balance, pay their bills or even find A T M locations - to name just a few everyday operations
- via mobile banking. Thus, their bank is "a bank on the go".
If the banking sector's digital customers demonstrate the above-mentioned behaviour patterns and
preferences, a relevant digital communication system must be developed. The GBAR 2020 also
observes that, despite the global pandemic year 2020, "Leading banks, fintechs, and platform
companies have continued to invest during the crisis, particularly in digital channels " (McKinsey's
Global Banking Annual Review | McKinsey 2020). Interestingly, the leading banks operating in the
Czech Republic keep up with this trend.
When dealing with a modern bank, customer expectations are changing - as highlighted in the GBAR
2020: (1) "Customers expect a better, more predictive, and seamless experience than ever before and
better advice - across every channel", and (2) "Customers also are increasingly expecting banks
to anticipate not only whatproducts and services they need, but also how and when they need them.
In particular, many expect to be able to do everything digitally and remotely " (McKinsey's Global
Banking Annual Review | McKinsey 2020).
All the individual aspects mentioned in the previous paragraphs represent a challenge for banking
institutions' experts in their endeavour to design a fully functioning communication 'highway',
accommodating all the requirements and expectations of this new, digitally competent type of client
entering the banking sector.
2 Customer success in relation to loyalty boosted by customer education
Customer loyalty has been a key topic of numerous research studies. Very often, customer loyalty is
examined in relation to customer trust, customer engagement (Iglesias, Markovic, Bagherzadeh,
Singh 2020), and customer experience (Rather, 2020). However, research studies examining customer
loyalty in relation to customer education are rare. In the research conducted by Bell et al., customer
education for firm-specific expertise has been contrasted with customer education aimed at building
market-related expertise. The former leads to increased loyalty, unlike the latter (Bell, Auh,
Eisingerich, 2017).
A modern communication mix of various digital communication channels can keep banking
institutions' customers updated (mobile app alerts, e-newsletters, push notifications). They can act as
early warning messages or timely notifications on investment opportunities etc. In each case, banks
not only inform and educate customers but empower them to make informed decisions. Online
banking, mobile banking and digital wallets as online payment tools, usually in the form of an app,
save customers both time and costs. Unique and highly relevant educational content can lead to
improving customers' well-being.
For the banks, customer success is likely to be attributed to a long-term, high-quality relationship
between the bank and its clients. Banks exist, make plans and do business on the premise of customer
loyalty. It is usually referred to as attitudinal (emotional) loyalty and behavioural (intellectual)
loyalty. In their work, Nick Mehta et al. describe attitudinal loyalty as follows: "Attitudinal loyalty is
much harder to create and sustain because it's expensive. It's expensive to build products that
customers love instead of products that they simply own. It's expensive to create an experience that
delights instead of one thatjust tries to not annoy" (Mehta, Steinman, Murphy, 2016).
65
Undoubtedly, every company needs loyal customers. It is becoming obvious that customer education,
notably via the use of digital technologies, has the potential to help the creation of attitudinal loyally.
As a premium brand, Apple is not only aware of customer education benefits but keeps it high on its
agenda. Even at the most difficult time of restrictions due to the pandemic, they organized virtual
learning labs instead of traditional face-to-face learning labs (Today at Apple - Dubai Mall - Apple
2021). This is an example of a company that employs customer success managers who are in charge
of creating a unique customer experience through customer education.
Every industry, including the banking sector, can achieve similar success through creating attitudinal
loyalty boosted by content marketing strategy based on customer education.
3 Five interactive content marketing strategies for banking industry
In attempting to guide prospects and existing clients through a multi-channel world, marketing
experts might become overwhelmed by the number of options and their combinations within the
communication mix.
Simon Thatcher, a senior learning and development consultant, highlights the importance of the
human touch in a multi-channel world: "What's clear is that there is no one-size-fits-all approach for
customer service, or a single communication platform that works for every customer, and therefore
businesses must be prepared to offer equally effective customer service on all communication
channels if they are to engage and retain customers, and this relies on a confident team of well trained
and empowered advisors" (Thatcher, 2018).
The communication process' design can be optimized and enhanced by the smart selection of digital
communication formats and platforms which can significantly help to get even
a complex message across and reach the communication strategies' goals. Fulfilling the objectives
of this study and taking into account the latest developments in digital communication formats,
channels and platforms, the author presents five interactive content marketing strategies which
reflect typical needs, wishes and expectations of the digital customers in the banking industry in
their search for information. Their selection is based on the approach to individual digital
communication channels from the viewpoint of varying and changing preferences of different
generations with their different levels of tech-sawiness. They are the following generations: "(I)
BABYBOOMERS - the majority of baby boomers are still in the workforce; (2) GENERATION X
- now holds most of the leadership roles globally; (3) GENERATION Y - is now the largest in the
workforce; (4) GENERATION Z - represents the newest entrants" (Kotler, Kartajaya, Setiawan,
2021, p. 19). Kotler et al. already started to contemplate the so-called GENERATION ALPHA, i.
e. 21st
-century children, born from 2010 to 2025, whose parents from Generation Y often teach their
children about money at an early age. (Kotler, Kartajaya, Setiawan, 2021, p. 27).3
Marketing to four,
or even five, different generations shaped by the influence of different socio-cultural environment,
different levels of education, different access to technologies and different life experience can be a
true challenge.
3
The situation might be different in different parts of the world. In the Czech Republic, financial literacy has been a
part of the primary school syllabus only for a couple of years.
66
Having taken into account the PwC's4
2017 Digital Banking Customer Survey enlightening the
rapidly changing behaviour of the digital banking customer, Sam Makad in his article for MoEngage
Blog expresses the idea that "interactive marketing strategies can help the banking sector grow its
market share while increasing customer satisfaction levels significantly" (5 Bank Marketing
Strategies that can Enhance the Online Banking Experience 2019). The author focuses mainly on
explainer videos, influencer posts and/or YouTube tutorials as well as on e-mail marketing and
mobile marketing.
Taking into account the latest development, the author of this study proposes the following five
marketing strategies (Fig. 1) which are based on content marketing5
with a focus on educational
content prepared in different formats and distributed through different platforms allowing for
interactivity.
Figur No. 1: Five interactive content marketing strategies for banking industry
Five interactive content marketing strategies
for banking industry (ICMS)
r% mi
Source: own elaboration, partly based on (5 BankMarketing Strategies that can Enhance the Online Banking
Experience, 2019)
It is not the purpose of this paper to go into the details of the proposed digital communication
channels and content marketing strategies suitable for the banking industry in the near future.
However, providing substantiation of the suggested strategies might be worthwhile to understand
the rationale behind it.
4
PwC - PricewaterhouseCoopers is a global network of firms delivering world-class assurance, tax, and consulting
services for business entities.
5
Content marketing is a strategic marketing approach focused on creating and distributing valuable, relevant, and
consistent content to attract and retain a clearly-defined audience — and, ultimately, to drive profitable customer action
{What is ContentMarketing, 2021).
67
EXPLAINER EDUCATIONAL VIDEO - In education-based marketing, we use this type of video
in situations where it is necessary to explain, in a simple and understandable way, a banking product
or financial concept, which can be complex. This type of video is usually accompanied by
animations that make it easier to understand. These are usually short videos with a direct focus on
the concept in question.
WEBSITE & SOCIAL MEDIA - a banking institution website is the main touchpoint where the
customer comes into contact with his/her primary bank. Currently, it is carefully linked to the
selected social networks where the bank also has its corporate profiles. All the online presence is
expected to be interactive, responsive, user-friendly, structured with intuitive navigation and eyepleasing
design.
YOUTUBE CHANNEL - YouTube channel of a banking institution will be primarily used for
sharing educational content. Typical areas of special focus include the smart organization of videos
into categories, monitoring of/posting to the chat below the video, evaluation of success/failure of
videos with the help of YouTube metrics, but especially with Google Analytics 4, with the aim of
taking appropriate action (even while running the marketing campaign).
PODCASTS -Podcasts include audio programmes or recordings. This relatively new development
in this sector is enabled by easily accessible mobile apps and cheap recording equipment. Podcasts
have many advantages. They can be listened to anytime/anywhere, even while doing another
activity, and a podcast offers rest for eyes tired by looking at a computer monitor. Evidence of
customer interest in podcasts is the meteoric rise of CLUBHOUSE, the latest social network for
PODCASTS. The availability of recording technology, the increasing fragmentation of the mobile
internet and the user-friendly environment of streaming platforms such as Spotify, Apple Podcast,
Google Podcast and others have inspired more and more companies, universities and individuals to
venture into podcasting. Mobile apps for podcast capture are also making their proliferation easier.
IN-APP MARKETING - In-app marketing means marketing directly inside a mobile app.
A bank, in the role of the mobile app operator, shares information about complementary products
within its environment. The customers - app users - become familiar with these products through
using the app. In mobile games, a similar concept labelled as advergaming has been used for a long
time, usually for advertising purposes.
The seamless integration of the new digital communication channels into the marketing mix is
inevitable. The term "omnichannel marketing" or "multi-channel marketing" refers to the need to
"broadcast a communication message" on multiple digital communication channels simultaneously.
The reason is clear: the media market is fragmented and customer preferences in terms of
information search and processing are also diversified. Today, the interplay between the different
communication channels is the highest priority. Thus, the marketing professional can now be seen
as the "conductor of a great orchestra" whose symphony must be in tune as if it were a concert at
Carnegie Hall.
Moreover, the customer experience must be appealing, engaging to captivating. It must literally
"pull the customer into the action". Designing the process of digital communication offers
interesting opportunities but, simultaneously, it poses an enormous challenge. The competitive
68
environment in which brands fight for customers' precious moments of attention and, more
importantly, for brand loyalty or even for brand attachment, is relentless.
4 Discussion and further research
The literature review revealed that research studies examining customer loyalty in relation to
customer education are rare. This paper aims to open the door to research studies focused on the role
of educational content in marketing in general and its application in the financial sector specifically.
The cardinal research question is the relationship among three variables: education-based marketing
focusing on educational content and customer loyalty in view of their impact on customer lifetime
success. The nature of the marketing communication of financial institutions towards their clients
should be examined carefully as financial services represent a socially sensitive sector that has the
capacity to influence greatly - positively and negatively - the quality of life of their clients.
Furthermore, there is a need for more in-depth analyses of cognitive information processing, as well
as studies on the important role of emotions present in the whole communication process. Also, more
studies on attitudinal/emotional and behavioural/intellectual loyalty are needed to help digital
communication designers find the ideal communication models. This is especially important in
relation to the incorporation of virtual reality elements into the communication process, which we are
already experiencing.
The results of further research in the above-suggested directions will help all participants in this area
to improve the effectiveness of communication with customers and to set up communication
processes in ways that meet customer expectations and anticipate their needs.
Simultaneously, the author is fully aware of constraints on this study. The main constraint is the
demographic development which influences the character of new clients entering the market for
financial services, along with their personal traits as well as their expectations from interactions with
their financial services providers. Apart from that, new marketing communication tools and
communication channels are constantly being developed. All these aspects undergo constant change.
Therefore, longitudinal research into the topic might be the most effective way to provide muchneeded
insight for marketing experts who are responsible for all types of marketing communication
with customers.
Conclusion
The aim of this paper was to examine, analyse and critically evaluate the typical buying behaviour
of the potential clients - newcomers currently entering the realm of banking institutions. Their
personal traits and preferred ways of acquiring information and learning are considered in
correlation with the content, forms and platforms used to design effective communication processes
that are, typically, needed in banking institutions. The author of the study proposes a set of five
interactive content marketing strategies for the banking industry, to optimize and enhance their
communication process design. Focusing on modern digital communication formats and platforms
driven by technological enhancements can help to get even complex messages across and reach
communication strategies' goals. Simultaneously, the role of bank advisers is also changing as they
become learning facilitators, using technology as a learning tool.
6 9
The examined topic is somewhat sensitive because the classical type of face-to-face communication
with clients in the banking sector is currently shifting towards digital communication on the basis
of 'self-service'. In this process, technology plays a vital part. Therefore, it is extremely important
to set up the communication processes to be well-balanced in terms of combining the much-needed
human touch with technology.
Let me conclude the study with the following remark. We often talk about digital technologies,
artificial intelligence, virtual reality and/or augmented reality. In this context, I was intrigued by
Mark Foster's podcast. In his recent interview for MIT Sloan Management Review, Mark Foster put
it like this: "There's no point having an incredibly powerful technology capability if actually there's
no empathy, no humanity, in the way it's presented to the people who are going to engage with it"
(Michelman, 2020).
This idea should be both a wake-up call and an inspirational encouragement for all participants in
the field of communication. This is particularly true for the financial services sector.
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technologyfor humanity. Hoboken, New Jersey: Wiley. ISBN 978-1-119-66851-0.
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Available from: https://www.mckinsey.com/industries/financial-services/our-insights/global-
banking-annual-review
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Contact
PhDr. Ladislava Knihová, M B A
The University of Finance and Administration
Faculty of Economic Studies
Department of Languages
Estónska 500
101 00 Prague 10, Czech Republic
ladislava.knihova@mail.vsfs.cz
71
PAYMENT CARDS AND THEIR USE IN PREMIUM BANKING
KATEŘINA KRAIBICHOVÁ
Abstract
Payment cards are an integral part of our everyday life. As a result of the population's wealth growth
banks started to offer above-standard services with an individual approach in the area of premium
banking. The intended contribution will target with payment cards issued in premium banking, with
focus on the benefits which they bring to their holders. The contribution will aim to compare benefits
offered by premium bank accounts of the following companies: Československá obchodní banka, a.
s., Raiffeisenbank, a. s., Komerční banka, a. s., and Česká spořitelna, a. s. All data will be collected
mainly from conducted individual interviews with employees of the banks. The accounts will be
reviewed from several different points of view and the offered benefits will be compared at the end.
It will be evaluated which premium account offers the most benefits and on which group of potential
clients the accounts focus. The reader should have a comprehensive overview of all the benefits
associated with holding premium payment cards after reading this article and have a knowledge which
of the examined account is the most advantageous from various points of view.
Keywords
Payment cards, payments, premium banking, transaction
JEL Classification
G21, G23
Contact
Be. Kateřina Kraibichová, DiS
The University of Finance and Administration
Faculty of Economic Studies
Estonská 500
101 00 Prague 10, Czech Republic
37072@mail.vsfs.cz
72
PUBLIC DEBT AMIDST LOW INTEREST RATES: THE ISSUE
OF CHEAP MONEY
JAN MERTL
Abstract
This paper will focus on the new reality that has emerged after the financial crisis in 2008, where
most European countries increased their public debt level, and the paradigm of relative indebtedness
has prevailed. Simultaneously, central banks applied the policy of low interest rates both for
stimulating the economy, but also to make the new higher levels of public debt sustainable. That was
considered as a single event effort and new regulations and recovery programs have been run so that
the European countries will get out of debt traps by increasing GDP and later having mild inflation
targets. But new unexpected crisis struck again, this time aggregate supply side shock of Covid, which
to some extent negated previous improvements. Thus, we can see that we have got to deal with new
paradigm of public debt, and we can hypothesize whether the classic magic square of economic policy
has not expanded to magic pentagon, the fifth element being the level of public debt, as it might be
difficult to do monetary policy as it was possible when the indebtedness was seen primarily as
absolute phenomenon and being able to repay in the long run. Also, the space for central bank's
interest rate adjustments might be limited when we consider the debt service changes caused by
changing the interest rates. The paper aims to explain these phenomena and discuss the ways how to
deal with them.
Keywords
public debt, monetary policy, money stock, magic square
JEL Classification
E40, E50, E62
Introduction
We have been living in times, where money stock became flexible, to some extent virtual and former
anchor to gold standard or other fixed amount (at least in short run) has been abandoned (Garber,
1993). We may even say that money stock has become a tool of monetary policy, some economists
calling it elastic money (Head & Qiu, 2011). When thinking this way, it becomes easier to borrow
the money and actually create money through commercial banks' chain. Therefore, this shifts the
shortage of money to the government budget and to the private budgets in economy, as central bank
and to the vast extent commercial banks, too have got always enough money to supply when the
monetary policy's settings are set to do so.
The price of money is the interest rate, even those have been very low (Baimbridge, Litsios, Jackson,
& Lee, 2017) and central banks in OECD countries fought for last decade with the tendency to have
even negative interest rates. Therefore, we live in a new paradigm: money is very cheap, easy to
create, and the government and fiscal policy is simultaneously under pressure to manage deficits, tax
income and public expenditure well. Also, the financial crisis in 2008 brought new challenges and
73
paradigm changes to the financial system mechanisms and regulations, as reflected in synthetic
publications (Hynes, Love, & Stuart, 2020).
So, the aim of this paper is to reflect this reality, think about the issues that it arose and present the
new concept of magic pentagon, which tries to incorporate the public debt into basic macroeconomic
variables. This is supported by the fact, that unlike it the past, where the public debt was designed to
repay as soon as possible, now majority of OECD countries simply "carries" their debt and tries to
manage it in time, which can work well, but may also be harmful when the crises (economic
downturns) come too fast after another, a country cannot recover well because of structural problems
or external shocks, such as Covid-19 pandemics, occurs.
Existence of this pentagon is of course just a hypothesis of this paper, the author is aware that while
the magic square is a standard concept of macroeconomics, widely used and proven, the pentagon is
a suggestion how we can look at the current phenomenon of maintaining high levels of public debt
throughout longer periods, either because of being unable to repay them, or even thinking that having
some debt level might be under some circumstances actually better than forcefully create fiscal
surpluses, thus being advantageous for the economic growth and living standards.
Before 2020, many papers claimed that the capacity for economic policy (fiscal, monetary) have not
fully recovered after the previous crisis (Teulings & Zubanov, 2014) (Hein, Truger, & Treeck, 2012),
even now some economists say that we are covering or postponing problems more that resolving
them. On the other hand, 2020's development was true external shocks with causes out of economic
or financial nature, so it cannot be blamed for previous failures, the situation is that the fiscal and
monetary policy's capacity has been already lowered and paths to recovery therefore might be longer.
On one hand, it is advantageous for governments and businesses, because the debt service is kept low
this way, on the other hand it encourages to borrow more and take debt as a solution to fiscal policy
problems, where in reality it is mainly postponing them.
We saw in the literature, that this approach could be taken to kind of extreme ends - an example being
the modern monetary theory (MMT) (Connors & Mitchell, 2013) (Fullwiler, 2010). While this is
theoretically interesting concept, we believe that its assumptions are so bold that it is hard to imagine
this could be applied in real life. Therefore, we remain in this paper on "classic" position, that the
public deficit and debt must not be directly monetized by the monetary policy and the public debt is
seen as a burden that a country must carry with itself, albeit it evolved from absolute to relative form
(Izak, 2010). The solution offered by MMT, that monetary policy can ease this burden as long as
there is not significant (measured) inflation, we do not see as viable option, together with some other
well-known economists (Mankiw, 2020).
1 Quantitative theory of money
It is worth mentioning at first, that strictly said and in the long run, changing money stock hasn't got
the power that some people and even some empirical evidence from expansive economic policies
attribute to it. The pure form of this type of thinking is called the quantitative theory of money, which
is based on the following simple equation (Mach, 2019).
M x V = P x Y
741
Based on this simple equation if we follow it money is completely neutral. Thus, when Y and V is
constant, changes in money stock result in proportional changes of price level only. From this
relationship the famous recommendation "just increase the money stock as much as the real GDP
growth is" outcomes. But this is probably true mainly in the long run and overall equilibrium, and
without considering the multiplicative effects in economy. In the short run and as the economic cycle
fluctuates, there is some space for monetary (and fiscal) policy, which usually tries to salvage the
economy at hard times and diminish the overheating at economic peaks.
Anyway, this theory provides a framework that we cannot neglect in principle, we must be aware that
in the long run, after the economy reaches new equilibrium, probably the money stock and price level
are tightly related, especially if real economic growth does not occur. In this sense, although kind of
weakening all the interventions we are designing and arguing about, we must remember this simple
equation and the consequences it might have for the results of monetary policy.
2 The mechanics of public debt - absolute and relative approach
The issue of public debt has become more important in the context of the recent economic crisis,
when, as part of an extensive economic policy aimed at macroeconomic stabilisation, public debt
increased quite significantly in most developed countries. Whereas until then the debate on the level
and nature of public debt was mainly a topic for academic economists and government fiscal policy
adjustments, we are now seeing a significant increase in the general interest in the evolution of public
debt and how to manage it.
Let us first look at the basic mechanisms involved in public debt. Debt itself arises as a cumulative
result of government fiscal management - it varies over time according to the annual balance of
government (public) budgets (surplus, balanced, deficit), and in the case of recurrent deficits it is
increased by their progressive sum. Like any credit, it is not free, and it is necessary to spend funds
on the so-called debt service, which consists in paying interest to the relevant creditors (citizens,
investment funds and other holders of government bonds in Czechia and abroad). Thus, in the
classical concept of public finance, public debt is the aggregate financial commitment that a state
makes in the financial market to raise funds for fiscal policy if it cannot/will not raise these funds at
the moment through the tax system (Izak, 2010).
This concept is the basis for the absolute form of deficit and public debt, which is historically older
and, for example, at the time of J. M . Keynes was practically the only form used in real fiscal policy.
In this view, debt is seen as a 'necessary evil' that will enable the economy to weather a recession at
some cost but will be repaid in good times with the aim of sustaining public finances over the long
term. It should be noted that at that time there was also still a gold standard and therefore monetary
policy was guided by less bold principles than today. The importance and volume of public debt in
this absolute form is relatively low, as there is a general tendency to minimise the debt service of the
state in the long run. In the 1970s, economist Robert Barro further developed these principles when
he formulated his Barro-Ricardian equivalence (Barro, 1974). It consists in the hypothesis that
households are even able to internalize (neutralize) an expansionary fiscal policy of the state based
on an increase in public debt. For they are aware that this debt will have to be repaid at some point,
and through an increase in tax revenues that will cause a reduction in their disposable income in the
future, for which they tend to save and thus limit to a large extent the effectiveness of the fiscal
impulse. This hypothesis has cast significant theoretical doubt on the efficacy of fiscal expansions for
75
which the state borrows, but it only applies under certain conditions that may not occur in reality
(Buchanan, 1976).
The practical problem with fiscal policy is that the conditions that promote restraint in public
borrowing are not always met. At the same time, in most countries, as the economy has grown, the
public sector, and to some extent public indebtedness, has grown. Thus, another, relative form of
public debt has gradually developed. It is possible that one of the inspirations has been the practices
of the commercial sector, where some firms have in practice maintained an "optimal" debt-to-equity
ratio over the long term. Another assumption was the abandonment of the gold standard and the move
towards inflation targeting in monetary policy. The basic principle of this form is that the ratio of
public debt to GDP, i.e., to the performance of the economy over time, is primarily monitored. Its
sustainability over time is also an economic policy objective in its own right and leads to a higher
dynamism of available resources in the state's economy than the classical absolute concept of
"borrow-repay".
At the same time, the relative form of public debt provides additional opportunities for practical fiscal
policy. If we disregard the absolute debt as an expression of the liability in units of national currency,
the relative debt level can be monitored in the context of economic policy, not only through the
repayment of principal, but also in the context of general economic development, as GDP and
inflation rates are at work. To give a fictious theoretical example: if we do not consider debt servicing
costs and we do not borrow further, then with economic growth of Y % (in real terms) and inflation
of II % per annum, every year the relative debt is changed (reduced) by approximately
where Y is real economic growth and P is price level in two successive years.
E.g., if economic growth be 3 % and inflation be 2 %, then when having public debt 500 / 1000 = 50
% GDP, next year we shall have GDP 1050 billion CZK, the new relative debt size will be 500/1050
= 0,4762, which also according to the above equation gives 1/1,05 * 50 = 47,62 %.
This is, of course, a rather tempting path, since the creation of large budget surpluses is not currently
part of the typical fiscal policy repertoire of developed countries. If we add to this the current
environment of low (or even zero) interest rates, which in real terms minimise the cost of servicing
public debt, this option (despite its theoretical questionability) becomes one of the practical practices
of economic policy.
Of course, it is not without risks: to some extent, this practice in economics is akin to "riding a tiger",
which, if calm and well-fed, can continue to operate in this way in the long term, but if the key
parameters of the magic square change, it can easily corner the country. The safety of relative debt is
thus closely dependent on the macroeconomic stability of a country.
1
which is the equivalent to
1
7 6
This is described by the so-called debt trap, where relative debt increases even if the country no longer
borrows - typically because the interest rate on government debt is higher than the GDP growth rate
in a given year. Thus, it can happen that a reduction in a country's creditworthiness, together with
developments in the financial markets, causes a country, even by simply servicing its debt, to sink
rapidly towards unsustainable public finances, a rising debt-to-GDP ratio and the threat of sovereign
bankruptcy. This too is ultimately a "solution" to the debt problem, but only the last one, because at
that point the state gives up one of its most important assets - the national currency. The consequences
for creditors and debt holders are extreme and there is a long-term loss of confidence in the country.
As regards deficit budgets as the cause of the increase in debt, these are mainly the result of an
expansionary fiscal policy aimed at satisfying the demands of the population (which cannot be
underestimated, but should be moderated), and also of the fall in public revenues during the economic
crisis, when tax revenues fell out, especially from companies and banks (if they reduced profits or
even made a loss because of the crisis), but also from the population, due to the increase in
unemployment and the reduction in consumption.
These principles are behind many of the steps that we have seen in practical economic policy in recent
years (Hermitte, 2017), including the construction of the European Stability Mechanism (ESM),
which increases the lending capacity available to European countries and makes its use conditional
on country-specific stabilisation programmes (Kapp, 2014) (Atik, 2016). They also explain why there
is so much pressure for fiscal consolidation on "problematic E U member states" such as Greece, Italy
or Portugal - there is a fear that they may not be able to keep their considerable relative debt under
control over time and, if they are members of the eurozone, this threatens the euro itself. Conversely,
countries with robust economy, such as Germany or Sweden, can make good use of their "tiger"
because they are able to predict and influence macroeconomic parameters with a high degree of
probability as part of their economic policy.
3 Czech empirical data
As for the empirical data on Czech economy, see the following pictures. On the first graph, there is
government debt in absolute terms. We can see the (almost - slight growth up to 2013, slight
fluctuation after that) stagnation of absolute debt level in last 10 years (2011-2019), before the Covid-
19 epidemic started.
77
Picture No. 1: Government debt (ESA 2010) (CZK bin, current prices)
3500,0
3000,0
2500,0
2000,0
1500,0
1000,0
500,0
0,0
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
Source: data CNB Forecast - spring 2021 (CNB, 2021). 2021-2 est.
On the second graph, we can see the relative debt development. We can observe that in 2013-2019
the relative debt decreased while the absolute debt stagnated. This is the empirical proof of the
theoretical principles about absolute and relative debt we spoke about in the first part of the paper.
Picture No. 2: Government debt/GDP (%, nominal terms)
50,0
45,0
40,0
35,0
30,0
25,0
20,0
15,0
10,0
5,0
0,0
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
Source: data CNB Forecast - spring 2021 (CNB, 2021). 2021-2 est.
On the next graph, we see the central bank's behaviour during the analysed period. We can observe,
that between 2012-2016, the central bank was at the limit of its principal tool - interest rate (more
precisely said two-week repo rate). Therefore, in those years money was really very cheap, actually
they could not be made cheaper using this standard tool, which led to controversial usage of CZK's
exchange rate control by interventions on the market.
7 8
Picture No. 3: Central bank's 2W repo rate (%, annual average)
2,50
2,00
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
Source: data CNB Forecast - spring 2021 (CNB, CNB forecast - Spring 2021, 2021). 2021-2 est.
On the following picture, we can see that the situation in the last decade was new for central bank.
This graph is interesting, because it is created so that on horizontal axis there is real time span, thus
not averaging values and showing the time when exact changes of repo rate occurred. The decade
before the interest rates were much higher, so also the room for monetary policy was bigger and the
prices of loans were generally higher, so the money was not cheap. We can say, that the phenomenon
of very cheap money for a long time is really a thing of the last decade, after the economic crisis that
happened after 2008.
Picture No. 4: Central bank's 2W repo rate in time (%, changes 2000-2020)
l/f°
° o
1/
/
^ - I - N N n n ^ ^ l n m o l O ^ ^ I O « ) O l O l O O ' - ' - M C M n n t * l n l n ( 0 0 ^ ^ l O l » O l O l O
O O O O O O O O O O O O O O O O O O T - T - T - T - T - T - T - T - T - T - T - T - T - T - T - T - T - T - T - T - C N
o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o
••— r—- — r— — r— — r— — r—- -•— r— — r—- — r— — r— -•— r— — r— — r— — r— — r—- -•— r— — r— — r— — r— -•— r— —
C=> O O <^> <^> <^> <^> <^> C=> <^> O
o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o
Source: data CNB (CNB, 2021a)
79
Thinking about this further, we can say that this policy of cheap money and low interest rates had two
principal reasons. First, to stimulate the economy to get out of the crisis. But also the second, to keep
the public debts that accumulated during the crisis sustainable. Only at the end of the decade, Czech
central bank has started to tighten the screws a bit, European central bank was even slower in this
process and its interest rates remained low (since 2016 it has been zero) even when the Covid-19
pandemic struck.
There was a good reason for that process in Czech central bank - the money policy makers knew they
could not keep that cheap money forever and after finishing the exchange rate interventions in 2017
they started to project and follow the return path (as seen on Picture 3 and 4). For example, in Czechia,
it was even accompanied with regulations (or recommendations) for mortgage buyers and everything
seemed such a way, that central bank wants to slowly but surely get the economy into more standard
environment. But then, sudden external supply side shock, Covid-19 emerged, and the rates must
have been lowered again, cancelling this path that was started before.
4 The magic square and the suggested pentagon
If we now come to the magic square of economic policy, we can first show how it looks in its classic
form. We know that its magic is rooted in the fact, that it is relatively easy to achieve 2-3 variables
(corners) of this square, but very hard and under some conditions unattainable to achieve all four of
them. Therefore, they in many cases stand against each other. For example, high tempo of economic
growth will generate higher employment, but also a higher rate of inflation. Lower inflation rates
reduce economic growth and induces higher unemployment.
Picture No. 5: Magic square
Unemployment
Inflation
Gross domestic
product Balance of payments
Source: author
If we are following the logic of this square further, we might see that in the current environment, we
are sometimes escaping from the bad situations or economic crises by expansive monetary and fiscal
policy, while increasing public debt and carrying it further even when the crisis ends. Therefore, a
question arises, whether we are not doing it at the expense of tampering with fiscal sustainability,
which was - as we wrote - the classic paradigm of economic policy when the magic square was
created and generally accepted. This fiscal approach has been criticised by independent fiscal
authorities, such as Czech Fiscal Council (Czech Fiscal Council, 2021). This leads us to thinking
within the framework of "magic pentagon", which is shown on the following picture.
8o
Picture No. 6: Magic pentagon
Public debt
Unemployment
Gross domestic
product
Balance of payments
Inflation
Source: author
Public debt in this pentagon is directly related to inflation and real GDP growth, and indirectly
connected also with unemployment and the balance of payments. Analytically, it seems best to work
with the relative form of public debt here: this way the changes in inflation and GDP are most
prominently seen in the indicator of indebtedness (% GDP). This was also proven by the equation
about relative public debt, where those variables were included.
The crucial question for the future is whether (and how long) real economic policy in the European
Union and the OECD countries will continue to allow and support the concept of sustainable relative
public debt and low interest rates, including using quantitative easing and other extensive monetary
policy instruments. If so, its sustainability is a function of economic development and stable monetary
policy linked to inflation targeting, as well as adequate public debt management in the construction
of public budgets. Should there be a future departure from such a policy with a preference for an
overall reduction of the debt burden, the debt burden can be gradually reduced over time through
balanced or slightly surplus budgets (if accepted as part of the public option) with the aim of
optimising both relative and absolute debt and the resulting debt service, which may limit the
theoretical risk associated with a possible increase in interest rates in the future (Artzrouni &
Tramontana, 2014). However, this only applies to economies that are macroeconomically stable.
The last resort in the case of a debt trap remains debt restructuring, coupled with some form of
sovereign bankruptcy and a declaration of insolvency of (part of) the liabilities, or privatisation of
state assets, if available. It is always theoretically possible to forgive part of the debts, but the
economic rationality of such steps is problematic. For the economically weaker countries in the euro
area, this may involve pressure to leave the currency union, or to leave and re-join on less favourable
exchange rate terms. However, these scenarios are extreme and are always accompanied by a
substantial reduction in living standards, so they can only be used as a last resort.
Thus, in the case of the most indebted countries with unfavourable macroeconomic parameters, such
as Greece, Portugal, Spain or Ireland, stabilisation programmes are used, organised, for example,
within the framework of the aforementioned European Stability Mechanism (ESM) (and its
5 Discussion
8i
predecessor, the EFSF). The development in these countries, in comparison to other European ones,
we can see on the following graph, which ends before Covid-19 onset. The next one shows just the
latest data for available countries, that end at Q4 2020, therefore include the impact of Covid
pandemics, and we can see that all the countries worsened their relative indebtedness again.
Their essence is the provision of loans on favourable terms (spread over time and low interest rates),
strictly and specifically conditional on macroeconomic stabilisation steps in the areas of public
finances, banking system regulation (credit policy, bank recapitalisation) and structural economic
policy (economic growth and employment). Some countries, such as Ireland, have successfully made
use of these programmes in difficult times, have stabilised their situation and do not require further
assistance.
Picture No. 7: Relative debt/GDP ratio, selected EU countries, 1996-2019
200'Vc
150%
125«
50%
25%
Italy
Belgium
France
Spain
United Kingdom
European Union
Austria
Germany
Netherlands
Slovakia
Poland
Sweden
Czech Republic
Estonia
1996 1998 2000 2002 2004 2006 2008
Source: Google Data Explorer, Eurostat, 2021. Retrieved from
https://www.google.com/publicdata/explore?ds=ds22a34krhq5p_&crype=l&strail=false&bcs=
pc_gdp&scale_y=lin&ind_y=false&rdim=country_group&idim=country_group:eu&idim=country:es:sk:de:fr:cz:el:it:u
k:se:at:be:ee:pl :nl&ifdim=country_group&hl=en&dl=en&ind=false
Picture No. 8: Relative debt/GDP ratio, selected EU countries, 2019-2020 (preliminary data)
Quarterly general government gross debt Q
{% of GDP)
2\ 1-
100
ifill
a 1•Id
# noa-
BO
fin
40-
2a-
fEU
(AT
\CZ
) EE
»FR
»DE
H I
>rr
INI
»PL
) JiK
>SE
Source: European Statistical Recovery Dashboard, 2021. Retrieved from https://ec.europa.eu/eurostat/cache/recovery-
dashboard/
In the Greece's case, the situation is more complex as the conditions of the programmes have only
been partially met and the initial debt level is high. However, if debt restructuring is not on the table,
82
what is left in practice is a long and gradual stabilisation of the economy, coupled with sustained
fiscal discipline (but not a contraction of the economy) (Vlachopoulou, 2012).
Conclusion
Three basic forms of public debt paradigm can be seen in theory: absolute debt which serves as burden
in absolute form and is expected by everyone to be repaid in the future (and in pure form need not
have positive effect on economy if we follow Barro-Ricardian way of thinking), relative debt to the
performance of economy that might be carried on and managed as economy runs in time, and ultramodern
monetary theories which see money stock and fiscal balance just as a tool to make economy
run well and without significant inflation. We followed the second paradigm in this paper, as it largely
prevails in practice of OECD countries and whatever we think about it, it is currently the one that we
work with and utilize empirically.
In summary, with sound economic policy and stable macroeconomic development, public debt, even
in its relative form, can be managed and refinanced quite well in the long term according to the current
market situation. If the government already prioritises debt increases over tax revenues as part of
fiscal policy, the funds should primarily be used for investment activities with a foreseeable return.
Of course, global risks such as financial crises or structural phenomena such as Industry 4.0 (Mertl
& Valencik, 2016) also affect a country's ability to meet its obligations, and in this sense the level of
risk associated with relative indebtedness needs to be well considered, as it is potentially more fragile
than for countries that are not overly indebted (even in absolute terms). It should be borne in mind
that the nature of debt is to spread financing over time at some cost and to dynamize the available
capacity for fiscal policy, although of course conditions can change over time for better or for worse.
Covid-19 pandemic, being an external supply-side shock to economies worldwide, vastly
complicated the planned "exit" from the framework of near-zero interest rates and very cheap money.
We saw on data from Czechia, that the attempt to achieve this goal occurred gradually since 2017,
but was stopped in 2020 facing the new, sudden economic downturn. ECB simply stayed with its
previous policy, as it was behind CNB in this regard.
The 2007-2009 crisis solution was aimed at financial and banking sector as it was the root cause. The
current situation with Cvoid-19 is more prominent in public budgets as they suffer from low revenues
and high expenditure because of covid support. Therefore, now the main effort would be to "directly"
achieve balanced budgets again, as they are not a result of bailouts or downturn caused by stock
market failure or banking sector problems, but simple classic downturn based on big supply reduction
especially in some sectors like travelling, flying, culture, restaurants etc. Comparison of handling the
"inner" crisis rooted in banking sector 2007-2009 and external supply shock in 2020, which came
before the European public budgets and central bank interest rates could fully recover from the
previous one. It is not true that nothing has been improved in financial regulation and fiscal
arrangements, actually a lot of changes and measures have been adopted, but as discussed there was
a hope that next crisis will come later and won't be that deep.
By adding one variable, the relative public debt level, to classic magic square of economic policy we
created what we call the magic pentagon. This concept reminds us, that if we take public debt as a
long-time burden, we probably ought to evaluate it together with other significant macroeconomic
variables. Especially, when in its relative form, its level is affected also by the changes in real GDP
and inflation.
83
One further research question this paper indirectly raises is also the ways how to do the measurement
of inflation for the purposes of monetary policy. We cannot be sure, if the current indices of inflation
based mainly on consumption goods are right in the sense that the prices of some assets (houses and
real estate in general, paintings, postal marks, old cars) may rapidly rise while the prices of
consumption goods need not. We are not calling for the redefinition of consumer price indices, as the
methodology behind them is solid and internationally compatible, but just raising a question (which
might be dismissed in further research or reactions to this paper) whether for monetary policy the
central banks should not look more also at those other prices' development, e.g. housing costs. Thus,
watching, if the money stock changes do not simply "spill over" to the prices of those investment
assets or even commodities, in the case of real estate harming the availability of housing to common
population that depends on their wages to pay for housing costs.
Looking at the macroeconomic variables including the debt level, European countries (and to some
extent USA, too) are in tough situation, as they resolved their downturns at the expense of public debt
twice. Within the paradigm of cheap money, this is probably sustainable in the short run, but it can
be dangerous to ride on this tiger forever, especially for countries that struggle with economic growth.
Therefore, finding a path to more standard environment, both in fiscal and monetary policy is
essential. Then monetary policy will have room for necessary adjustments again and interest rates
will start to serve better as a price of money and measure for private business projects' evaluation, as
well as for reasonable households' decision about mortgages and other types of loans.
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Contact
Ing. Jan Mertl, Ph.D.
Department of Finance
Estonská 500
101 00 Praha 10, Czech Republic
Jan.mertl@outlook.com
85
COVID-19 IMPACT ON THE EUROAREA FINANCIAL SYSTEM
AZRA MURATOVIC
Abstract
The coronavirus crisis has intensified the already existing challenges in the European banking sector.
This paper takes a turn on the financial system during the early weeks and months of the Covid-19
crisis and its impact on the banking and equity market in 2021. In the first quarter of 2020, euro area
GDP fell by 3.8 percent quarter on quarter and by 3.3 percent on a year-on-year basis. The forecasts
are also not promising at the moment, as many have believed that the vaccination process would ease
the economic crisis. As long as the economy has no real alternative than its opening, unemployment
and consumption rates will remain rather low.
Keywords
Covid-19, financial stability, banking sector, capitalization, euro-area, equity market
JEL Classification
E22, E24, E50
Introduction
In March 2020, the Corona Virus reached Europe as unprepared as possible. The whole world was
shutting its doors as an immediate reaction, but the economy had to survive somehow and was left
fearing for its existence.
One year later, although still in the hands of the virus, the first data are being published together with
some forecasts for the future. As the Covid pandemic is a quite fresh topic, the literature is quite
narrow but still diverse enough in order to compare different points of view.
In the first quarter of 2020, euro area GDP fell by 3.8 percent quarter on quarter and by 3.3 percent
on a year-on-year basis. The unemployment rates went to a historical maximum in almost a weeks'
time and the spending increased as fast as the income decreased. Such huge deviations within a
relatively short period have had to leave scars.
The paper will discuss the impact of the Covid Pandemic on the European economy, as the GDP, the
unemployment rates and the savings are expected to fluctuate extremely from one quarter to another.
Additionally, we are going to take a look at the banking and equity sector and try to find the reason
why the first is performing rather poor, while the second is booming. The aim of the paper is to present
the current stand of the literature on the Covid outcomes to the Eurozone economy together with the
data published. We seek to find out what and to what extent has happened to the European Area GDP,
unemployment rate and saving ratio as clearly being caused by the Covid pandemic. Also, we need
to find out why the stock markets are currently at a historical high. This topic, although worn out due
to the high media interest in it, is of crucial importance for the European future of the economy. It
might also have an impact on our future working environment, the way we perceive necessities and
how we have and will handle these problems in future.
86
We are going to proceed in a literature survey comparing pre-Covid GDP, unemployment and savings
rates to the current stand and trend they have, as same as picture the current stand of the banking and
equity sector while briefly explaining its current limitations. In addition to that, the data published by
the European Central Bank and Eurostat will be used as the main official data sources which will be
brought together with a literature survey on the given topics.
The European Central Bank (ECB) publishes annually a financial stability report. Other than the
previous ones, the report on the year 2020 was rather harsh and will cover the pandemic fluctuations
within the financial system in the EU. The literature on the pandemics impact on the economy has set
new levels of concern and unpredictability of the future and the financial system as well. For instance,
the IMF (2020) in its World Economic Outlook from June 2020 expects a reduction of the real GDP
for 1.2% for the Euro Area. Ehnts and Paetz (2021) argue that businesses are currently not constrained
by the supply side, but by a general lack of spending.
The paper is organized as follows. In section 2 the current state of the financial markets and its losses
will be discussed. As the financial stability has been shaken in its roots, it is necessary to take a look
at the statistics and introduce the arguments from the literature; here we take a deeper insight into the
GDP, unemployment and saving rates. In section 3, the European banking and equity sector will be
discussed as the literature has found that the banks have a weakened profitability during the pandemic,
whilst the equity market is performing rather well. The final section 4 concludes.
1 Financial Markets and its losses
After a strong start to 2020, investor-placed European securitization issuance stalled due to the
coronavirus pandemic and ended the year down by 33% at €68 billion—the lowest annual total since
2013. Issuance could bounce back from this low base to €75 billion in 2021, assuming a successful
rollout of vaccines and an associated easing of restrictions and economic recovery. European
benchmark covered bond issuance also declined 34% to €87 billion in 2020. An increase in scheduled
covered bond redemptions could support a muted recovery in volumes to €100 billion, despite issuers'
continued access to cheaper funding alternatives. (S&P Global Ratings, 2021)
Zhang et al. (2020) has found that the pandemic has had a strong influence on stock markets and that
the risk levels of all the countries has increased substantially, from an average of 0.0071 in February
to 0.0196 in March. This high increase has been argued to rather have a sentimental aspect as
Gormsen and Koijen (2020) explain and has nothing to do with a long-term expectation in the make
nor a trend. Namely, as Broadstock and Zhang (2019) argued in their research, the market responded
to the outbreak which can be quickly amplified through social media, which then stimulate trade
activities and cause extreme price movements.
In the first quarter of 2020, euro area GDP fell by 3.8 percent quarter on quarter and by 3.3 percent
on a year-on-year basis. (Eurostat, 2020) The International Monetary Fund forecasts euro area GDP
to fall by 7.5 percent this year before rebounding by just under 5 percent in 2021 (IMF, 2020b). The
current forecast for 2021 is thus significantly worse than the recession during the Great financial crisis
in 2009 when euro area GDP dropped by a shade over 4 percent. If confirmed, this would be the worst
peacetime economic deterioration since the Great Depression of the 1930s (IMF, 2020c)
87
In Figure 1 (below), the left panel portrays the E U countries more affected by the pandemic and
associated containment measures facing the sharpest GDP falls - even worse than during the Great
Recession. Italy and France, closely followed by Ireland, Spain and Portugal had the highest Covid
numbers in the first wave early to mid-2020. After the re-opening of mostly all business activities in
late spring, it has been believed that the economy will heal fast.
However, with the resurgence in new infection rates and the related reimplementation of social
distancing measures in many countries, the economic recovery in the euro area has lost momentum
more rapidly than expected. According to the ECB researchers, the forecast now shows that the euro
area economy will not exceed pre-pandemic GDP levels until 2023 (as portrayed on the right panel
in Figure 1).
Figure No. 1: GDP Growth Rates and Projections
Real GDP growth rates, and government
stringency index
<inde* annua* percentage changes)
-
I
10
a. -15
B
1
-25
Fl
LT
(*)
AT ^L-'B E
I
Bubble size: number of
corofiavinjs deaths- per
one- million inhabitants
®
50 55 60 05 70 75
Government stringency Index
GDP projections by professional forecasters
for the euro area
(2019-22 «n<Jex 2019=100)
• Apr 2020
• Oct 2020
104
102
90
2019
:o20 2021 2022
Source: ECB, Hale et al. 2020
As the report was introduced at end of November 2020, the researchers believed that the Covid
vaccines might ease the economy downfalls, as people would get vaccinated and businesses reopened.
Unfortunately, no one could have foreseen that the vaccination would last longer than a year
(Germany has not even vaccinated 8% of its population) which prolongates openings of any kind.
(ECB, 2020)
Although Eurostat has not published official numbers on the GDP rate for 2020 yet, the unofficial
numbers are near to the real ones. Namely, the GDP for the whole E U has decreased for 4% on
average compared to 2019, which is still better than the forecasted 7% decrease. However, there are
significant deviations between the countries. For instance, France has experienced a decrease in GDP
for almost 5% while Ireland has had an increase for 1% (Eurostat, 2020). The explanation might be
that Ireland is mostly self-sufficient and produces its goods rather than imports them. Additionally,
they export a lot they don't need, so the pandemic did not shock them as much as France, which was
forced to decrease its exports and businesses due to the lack of work-force (because of the closings
of the industries).
88
Closing businesses, shutting down the leisure and hospitality industry, cancellation of events does not
just mean a lower GDP, but also a huge rise in unemployment. According to the data from Statista
(2020), the unemployment in E U overall was 7.4% - where Greece was the unfortunate first place
having 16.5% unemployment rate and Chechia the fortunate last place with 3.1% - the lowest rate in
Europe. And the worse news is that the rates are expected to rise. As the main characteristics of
unemployment is the decrease in demand of work-force, it has not been a surprise that the rates went
up dramatically. Most of the EU countries have managed it equally good. For instance, Germany has
had 27,5% unemployment due to the closing of non-essential business categories (mostly the beauty
and leisure industry), while France had 35,52%6
unemployment. The southern European countries
such as Spain and Italy have already been in a bad shape even before the pandemic and yet
experienced an increase in unemployment for 25.58% in Italy and 31,64% in Spain. (EC, 2020)
According to the data from Eurostat (2021) however, the unemployment rate has increased, but not
as dramatic as many researchers have predicted. Georgiou (2021) implies that due to the Covid
pandemic during 2020, unemployment increased in E U mainly in the southern part of EU, which has
already suffered from the aftermath of the great financial depression.
Namely, compared to the great financial depression 2007/2008, until which the unemployment rate
was quite stable throughout most of the E A countries, the Covid pandemic has increased the
unemployment rate more in the southern region than in the northern one. Countries like Greece and
Spain experienced a steep increase firstly in the period right after 2008 while Germany and France
for instance have had a light tendency for about 2% increase the most. This phenomenon can be
explained easily by the fact that during the financial depression 2007/2008 mostly the demand for
workforce has diminished, while during the pandemic, the demand has stayed the same, just moved
(wherever possible) to the home-office and thus preserved the working places.
Eurostat (2021) has published the first data on spending and income of the European households for
the year 2020. Interestingly here is the deviation in between the quarters - in the first quarter of 2020,
the average income stayed stable at 3% while the consumption decreased by 1,8%. In the second
quarter though, the income decreased to -2,5% and the consumption decreased to 15%. The savings
rate went from a long-stable 0% to 1% to an all-time high of 11% in the second quarter. Due to the
unknown situation and fear of what the future might bring, people started to save more and consume
less.
6
Please note that the statistics is just a moment-in-time analysis conducted by the European Commission and does not
have to be final or real statistics for the year 2020.
89
Figure No. 2: Household Saving Rate
Year-over-year change of household saving rate,
consumption and income in the EU
(non-seasonally adjusted data)
Source: Eurostat 2021
As we can see from the above figure, the household saving rate was mostly constant over the past
few years while Income and Expenditure have light ups and downs.
Interestingly to notice here is the first quarter of 2020 where Europeans decrease their expenditure by
1.8% having their income at the same level as from the fourth quarter of 2019 being the first reaction
to the unknown virus.
In the second quarter however, the expenditure decrease to a long-time minimum of 15% while the
income also for the first time decreases for 3%. This statistic is just proving what the research has
already estimated. Christelis et al. (2020) found that the household spending has dropped by 16%
from 2019 to the beginning of 2021 and argues that at the same time the households are exposed to
shocks regarding the access to liquidity and /or personal health as risk factors.
Having seen the literature proving the statistics from the official sides brings us to look at what has
been done in order to ease the situation.
2 European Banking and Equity Sector
According to Beck and Carletti (2021), banks have been hit by the economic impact of the COVID-
19 public-health crisis, as have other sectors. But unlike during the global financial crisis, this crisis
did not start in the financial sector, nevertheless it has quickly become clear that the financial sector
(especially its banks) is critical in mitigating the impact of the crisis and in supporting the recovery
process. What has happened is that smaller firms with no real access to the capital market have been
taking on loans wherever possible in order to have a cash buffer in these uncertain times, which
implies that the demand for the banking sector is increasing.
9p|
However, Schularick et al. (2020) argues that banks need sufficient capital not only to deal with the
loan losses coming from the deep recession but also to support the recovery. A well-capitalized
banking sector is crucial for a fast economic recovery from the COVID crisis.
Additionally, Jorda et al. (2020) demonstrates in his research that on a macro level, the speed of
economic recovery depends on the capitalization of the banking sector. Insufficiently capitalized
banks slow down economic recoveries from recessions, mainly because undercapitalization
negatively affects loan supply, leading to a much slower recovery of debt-financed growth.
A closely related paper by Acharya et al. (2020) studies the consequences of the undercapitalization
of European banks after the Financial Crisis 2007/08. In particular, they look at the effects of
regulatory forbearance and guarantees as an alternative to recapitalization. Fiscally constrained
governments in Europe often opted for such form of support for the banking sector. The economic
costs were substantial. Weakly capitalized banks loaded up on securities and especially on
government debt. Importantly, shrinking their corporate loan books banks did not support the
recovery of private investment and became a drag on the recovery. (Acharya et al., 2020)
Beck and Carletti (2021) argue that at the same time as banks across the globe thus play key roles in
economic recovery, in Europe, the banking sector itself is in urgent need of restructuring. Unlike
banks in the US, European banks had, on average, not recovered their pre-2008 market valuations
before the outbreak of the pandemic. Schularick et al. (2020) found too that since the crisis, the
Eurozone economy underperformed relative to the US economy by about 10%. For a rapid recovery
from the COVID-19 economic shock, Europe needs a well-capitalized banking system.
The IMF (2020) has found in its study that the adverse impact of the COVID-19 shock on banks was
rather long-lasting than on the corporates as well as other non-bank financial 28 institutions, revealing
the expectation that banks are to absorb at least part of the shock to the corporate sector. Furthermore,
their study found that larger banks, public banks, and to some extent better capitalized banks suffered
greater reductions in their stock returns, reflecting their greater anticipated role in dealing with the
crisis while banks with lower pre-crisis liquidity and oil sector exposure also suffered greater
reduction in returns, consistent with their greater vulnerability to such a shock. (Demirguc et al.,
2020).
Having in mind this bad situation of the banks, many researchers had a rather negative forecast for
the equity market as well. However, as we know today, the capital markets are in a well suited position
and are far from a crash. Again, this rather tends to be a sentiment forecast done in early 2020 when
remembering how fast the Financial Crisis 2007/08 has spilled over to almost all sectors.
According to Suarez (2020), the European capital markets have continued to operate well following
the outbreak of COVID-19, with liquidity ranging from very good to mixed, depending on the sector.
In fact, there have been record volumes of new issuance in certain sectors.
As we can see from the chart below, the D A X (the German index) has reached a historical high.
9i
Figure No. 3: DAX Index
Tag Woche 1 Monat 6Mon. 1 Jahr Max.
B.aoo.ooJun
2019 Jul 2020 Jul 2021
Source: Deutsche Börse Frankfurt
The greatest loss in the past three years has been at the same beginning of the crisis in March 2020
due to insecurity in the market. Same as for the unemployment ratio, the capital market was predicted
to experience high losses, taking into account the last Financial Crisis. However, this pandemic has
not decreased the demand for work force nor were its origins in the financial sector (which ensured
an ongoing supply of capital) - and this is why this pandemic has other characteristics.
Frank Häusler, an asset manager from Vontobel, explained why the indices worldwide are in a high
rise. He argues that the indices are mirroring the world picture in a momentum; as the gold and barrel
prices are high, we can expect their indices to be high. Furthermore, he implies that the stock market
needs to "catch up" the lost time during the first few weeks of the pandemic in Europe. His forecast
- until the end of 2021 the stock market will be back on track and produce stable prices and indices.
Conclusion
This paper was focusing on the financial outcomes from the Covid pandemic on the Eurozone
economy. The main part was to determine the GDP, unemployment and saving rate fluctuations. In
addition to that, I have provided a brief picture of the current stand of Eurozone banking and stock
market and tried to explain why the stock market is in such a good shape, while the banking sector
stays behind.
I have presented the official numbers provided from the ECB, IMF and Eurostat and additionally
researched the literature on these given topics I was focusing on. The key findings are a smaller GDP
than last year, but a stable (and high) stock market; a rather low expenditure ratio, but not a
skyrocketing number of unemployment. To conclude, the outcomes of the pandemic were putting the
economy to its knees, but far better than forecasted when remembering the Great Financial Crisis.
Further studies on this topic could include the NPLs, which are forecasted to hit the banks beginning
in June this year. This would mean that the banking profitability outlook would remain unstable.
9A
References
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Cash in the midst of COVID, COVID Economics (10), 44-61.
Aldasoro et al. (2020). Effects of Covid-19 on the banking sector: the market's assessment. At: BIS
Bulletin No 12: Effects of Covid-19 on the banking sector: the market's assessment.
Brandenburg D., M. Toiano, P. Lambert, N. Hardy, C. Romano, A. Dominguez, A. Boratti and A.
Hansen. (2020): 2021 European Banking Outlook. First real-life stress test since post-GFC sector derisking,
at: 2021 European Banking Outlook: First real-life stress test since post-GFC sector derisking
(scoperatings.com).
Broadstock, D. and D. Zhang. (2019). Social-media and intraday stock returns: The pricing power of
sentiment. At: Social-media and intraday stock returns: The pricing power of sentiment -
ScienceDirect.
Christelis, D., D. Georgarakos, T. Japelli and G. Kenny. (2020). The Covid-19 Crisis and
Consumption: Survey Evidence from Six EU Countries. At: wp590.pdf (csef.it)
Deutsche Börse Frankfurt. D A X Index, (online). Available from: https://www.boerse-
frankfurt.de/index/dax
Demirguc-Kunt, A., M . Pedraza, E. Alvaro and C. Ruiz Ortega. (2020). Banking Sector
Performance During the COVID-19 Crisis (English). Policy Research working paper; no. WPS
9363; COVID-19 (Coronavirus) Washington, D.C.: World Bank Group. At:
http://documents.worldbank.org/curated/en/209481597431651590/Banking-Sector-Performance-
During-the-COVID-19-Crisis
Earnshaw et al. (2020). COVID-19 conspiracy beliefs, health behaviors, and policy support. At:
COVID-19 conspiracy beliefs, health behaviors, and policy support (nih.gov)
Ehnts, D. and M . Paetz. (2021). COVID-19 and its economic consequences for the Euro Area, at:
COVID-19 and its economic consequences for the Euro Area | SpringerLink
Eich, F., T. Küspert and P. Schulz. (2020): The Corona crisis and the stability of the European
banking sector. A repeat of the Great Financial Crisis? at:
The_Corona_crisis_and_the_stability_of_the_European_banking_sector.pdf (bertelsmann-
stiftung.de)
European Banking Federation (2020): Banking in Europe: EBF Facts & Figures 2020. At:
EBF_043537-Banking-in-Europe-EBF-Facts-and-Figures-2020.pdf
Eurostat (2020): GDP down by 3.8% in the euro area and by 3.5% in the EU, at:
https://ec.europa.eu/eurostat/documents/2995521/10294708/2-30042020-BP-EN.pdf/526405c5-
289c-30f5-068a-d907b7d663e6
Georgiou, M . (2021). COVID-19 ON UNEMPLOYMENT RATE. At: SSRN:
https://ssrn.com/ab stract=3 801700
Gormsen, N . and R. Koijen. (2020). CORONAVIRUS: IMPACT ON STOCK PRICES A N D
GROWTH EXPECTATIONS. At: w27387.pdf (nber.org)
Hale, T., N. Angrist, E. Cameron-Blake, L. Hallas, B. Kira, S. Majumdar, A. Petherick, T. Phillips,
H. Tatlow and S. Webster (2020). Oxford COVID-19 Government Response Tracker, Blavatnik
School of Government.
Häusler, F. (2020). Warum die Aktienkurse weiter steigen werden. At: Trotz Coronavirus: Warum
die Aktienkurse weiter steigen werden (faz.net)
IMF. (2020). A crisis like no other, an uncertain recovery. IMF World Economic Outlook Update,
June 2020.
International Monetary Fund (2020b): April 2020 World Economic Outlook, at:
https://www.imf.org/en/Publications/WEO/Issues/2020/04/14/weo-april-2020
93
International Monetary Fund. (2020c): The Great Lock-down: Worst Economic Downturn Since the
Great Depression, at: https://blogs. imf.org/2020/04/14/the-great-lockdown-worst-economic-
downturn-since-the-great-depression/
S&P Global Ratings 2021. European Structured Finance Outlook 2021: In Short Supply | S&P Global
Ratings. Accessed 18.03.2021
Schularick et al. (2020). Bank capital and the European recovery from the COVID-19 crisis, at:
1702864596.pdf (econstor.eu)
Statista (2020). At: https://www.statista.com/statistics/1115276/unemployment-in-europe-bycountry/
Accessed 18. 3. 2021
Suarez, J. (2020). Initial Impact of COVID-19 on European Capital Markets. At: Initial Impact of
COVID-19 on European Capital Markets | AFME
The World Bank. (2016). https://www.worldbank.org/en/publication/gfdr/gfdr-
2016/background/financial-stability. Accessed 18. 3. 2021
Vlieghe, Gertjan. (2020). Monetary policy and the Bank of England's balance sheet (Speech given
by Gertjan Vlieghe, External Member of the Bank of England's Monetary Policy Committee, Bank
of England, 23 April 2020), at: https://www.bankofengland.co.uk/-
/media/boe/files/speech/2020/monetary-policy-and-the-boes-balance-sheet-speech-by-gertjan-
vlieghe.pdf?la=en&hash=D76269239470F000514B5F6AA76500590254DBDC
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Contact
Azra Muratovic - Corporate Actions
DekaBank Frankfurt
Hahnstraße 55
60528 Frankfurt am Main, Germany
Azra.Muratovic@deka.de
941
THE BREXIT PHENOMENON
VLADISLAV PAVLAT
Abstract
The paper highlights the complexities of the so-called Brexit process conditioned by many factors.
The purpose of the interpretation is to highlight the growing current need for scientific research into
this process, which may affect the position of the European continent in the long run. The research
study focuses on the complexities of the current development in Europe. It starts from the first idea
of the British Kingdom withdrawal from the European Union and continues up to the current
proposals for the departure of Scotland from the EU. As a background of the research, the literature
review demonstrates the development stages of academic literature (especially in terms of theories of
international economic integration) and the results of real-life practice. The analysed time period is
presented in the form of an eight-year timeline with the events split into four phases (stages). The
interpretation of the Brexit development process is complemented by an assessment of the future
development projections of the EU, assuming its preservation, including various modifications. The
selected methodological approach combines a qualitative approach with a quantitative one, i.e., mixed
research. The interpretation is highly structured: after the introduction (among other things,
containing the definition of work objectives and methods), the most important technical terms used
by the author in this article are discussed, along with comments on their different concepts in the
discussions of experts in relevant disciplines. In the following explanation, the author examines the
current discourse embodied in selected opinions. E.g., they concern, among other things, the length
of forecasts and projections along with their plausibility and applicability. The literature review
implicates fragmentation of different authors' opinions belonging to various interest groups as well
as openness towards the further development of different approaches and research results. Due to the
limited space of the article, opinions are selected, to the best of the author's knowledge and belief,
based on their importance for future EU development.
Keywords
Brexit, Brexit timeline, Brexit classification of phases, impact of Brexit, EU future
JEL Classification
F02, F51
Introduction
The paper highlights the complexities of the so-called Brexit process conditioned by many factors.
The purpose of the study is to demonstrate the growing current need for scientific research into this
process, which may affect the long-run position of the European continent. The research study focuses
on the complexities of the current development in Europe.
The study is divided Introduction, three Chapters and Conclusion. At the beginning of each part of
the Study, the author formulates its specific partial aim and content; partial research results based on
selected literature reflect the author's view and serve as arguments supporting the Conclusion.
95
As a background of the research, the literature review demonstrates the development stages of
academic literature (especially in terms of theories of international economic integration and
international trade theory) and the results of real-life practice. The eight-year timeline of the analysed
period divides the relevant events of the whole process into several phases (stages).
The COVID-19 research and legal problems were not included into the analysis of the "Brexit
Phenomenon;" they will be dealt separately in other publications.
1 Basics
This chapter contains basic information on the origin of the word Brexit and its different use. The
scope of research draws mainly on economic academic literature of the research object (i.e., the
analysis of events connected with one or more partial stages of the whole Brexit development
process).
1.1 Brexit characteristics and definitions
In the vast world of professional literature, the word "Brexit" is a "newcomer", a newly coined
word, connected with theoretical and applied research. In this subchapter 1.1 - Brexit Story starts
from the first idea about the British Kingdom potential withdrawal from the European Union and
continues up to the current proposals for the departure of Scotland from the EU.
One can imagine that researchers are able to use any part of real economy as a starting-point of
research into the Phenomenon Brexit. To be able to reach meaningful results, the research object has
to be analysed, characterized and defined.
At present, w-number of different Brexit characteristics and/or usable definitions are available. The
word "Brexit" is one of the "immortal" professional words (such as "tunnelling" etc.). It was not
invented as a result of academic scientific debates as many people still "take for granted" {Definition
of Brexit \ Dictionary.com 2021). The question is if it is possible to accept fading out memories of a
couple of state functionaries and/or political professionals at the end of endless discussion about
European integration to be common currency. (Balassa, 1994). If it were so easy, then the question
of the neologism ,Brexit' would be solved once for ever.
However, this story is true. Let us present several definitions of "Brexit" as examples of the nascent
new theory. The following eight attempts of explaining the new phenomena of Grexit and Brexit
show that similar "events" were not approved by all EU-member states. Let us briefly go through
the credibility of some of the used arguments. Different dictionaries present philological explications.
This was the easiest way how to satisfy the bid without breaking the rules.
• ORIGIN OF BREXIT. First recorded in 2012; (originally also spelled Brixit, referencing
Britain's possible withdrawal); Br(itain) or Br(itish) + exit1
; probably patterned on Grexit,
which dates from earlier that year (Definition of Brexit | Dictionary.com 2021).
• British exit. Definition: It is an abbreviation for the "British exit", similar to "Grexit" that was
used for many years to refer to the possibility of Greece leaving the Eurozone. Brexit refers
to the possibility of Britain withdrawing from the European Union (EU), (Úřad vlády ČR,
2020).
961
• Government Explanation "What is Brexit?" (2017): "Brexit' is the name given to the United
Kingdom's departure from the European Union. It is a combination of 'Britain' and 'exit'
(Zaken, 2018).
• Lexico.com. Brexit. The withdrawal of the United Kingdom from the European Union
{BREXIT | Definition of BREXIT by Oxford Dictionary on Lexico.com also meaning of
BREXIT'2021).
• Clear explanation of BREXIT by Clarke et al. can be found in their comprehensive study of
Brexit. The study offers ideas on the Brexit process which are accessible to general readers,
students and academics, combining theoretical and methodological rigour with clear
storytelling (Clarke, Goodwin, Whiteley, 2017).
• Brexit is a portmanteau of the words "British" and "exit" coined to refer to the U.K.'s decision
in a June 23, 2016 referendum to leave the European Union (EU). Brexit took place at 11 p.m.
Greenwich Mean Time, Jan. 31, 2020 (Hayes, Scott. 2021).
• European Parliament. 9. Future timetable Key events February / March 2021: European
Parliament consent vote on the Trade and Cooperation Agreement. There is some uncertainty
about the timing of events in this section and some are indicative only.
If the first item (of 2012) is compared with items published in 2017, it is clear that during the
following 4 - 5 years "Brexit" became a real event; therefore, it was worthwhile to study this
new phenomenon.
AUTHOR'S COMMENTARY
To be able to understand the real content of Brexit (as a specific historical period), it is necessary to
analyse the reasons why the United Kingdom (Britain) finally decided to withdraw from the European
Union. Although the "Brexit phenomenon" has been studied by researchers of different sciences for
many years, it cannot be said that "everything" from its real history would be successful proven. The
literature shows that the reasons of many historical events were perfectly documented, but other
reasons not. (Brexit: Why Britain Voted to Leave the European Union \ Hub Page 2021; (Clarke,
Goodwin, Whiteley, 2017))
1. One of the research question No. 1: "What is BREXIT? Almost all answers were very simple: the
word BREXIT means "The withdrawal of the United Kingdom from the European Union", or „The
possibility of Britain withdrawing from the European Union." Most answers were brief and
rudimentary. The word Brexit has been added to the Oxford English Dictionary (OED). It defines
Brexit as "the (proposed) withdrawal of the United Kingdom from the European Union, and the
political process associated with it". It continues: "Sometimes used specifically with reference to the
referendum held in the U K on 23rd June 2016, in which a majority of voters favoured withdrawal
from the EU." (BBC News, 2016).
One of the famous answers published by British media: „Prime Minister Theresa May has stated that
"Brexit means Brexit" (BBC News, 2016).
2. In most sources, the above brief statement contained complementary data about this surprising
event as well. In most cases, the principals of selection (or citation) were not analysed.
97
3. Minority of academic sources published only „philological" explanation of the neologism „Brexit"
(for example, pronunciation of the word Brexit in national European languages). Majority of
academic sources were trying to find out the "real content" of the process called "Brexit." Some of
the relevant subjects started to publish interesting facts and pose new research questions.
4. Chapter 2 deals with the methodology of the "Brexit Research". The analysis of research was
becoming a crucial question. It opened the door to further research on a larger scale (Walker, 2021).
1.2 Selected questions of methodology
This Subchapter 1.2 deals with selected questions of methodology that are relevant to the research on
Brexit.
The general aim of this article is to explain the origin of the word "Brexit", to comment on a series
of historical events connected with its use in theory and practice, and to evaluate the future of the
Brexit phenomenon (see Chapter 3).
Methodology is one of the new items on the list of research activities. Up till now, it has become one
of the substantial parts of the family of sciences.
During historical development of science (or sciences), the leading position of any method/discipline
on the top of the triangle was primarily due to the development speed of research activities in the
modern human society that needs a recognized set of research rules binding all researches. Today, no
serious scientific journal would publish any article presented by any subject without examining the
used methodology. And vice-versa, no serious researcher would try to publish any result of his/her
research without revealing methods used by its birth.
Subchapter 1.2 deals with several questions enumerated in the introduction of Chapter 1 and
comments on selected views of different subjects involved in research of the new word "Brexit."
Majority of the above enumerated questions have been discussed in a numerous academic literature
(see References) with different results. Some questions remain unanswered (i.e. without any definite
answer). The frequent reason is the same (or similar): a relevant answer has its roots in different
theoretic backgrounds.
In different documents, there are formal answers without any material or logical content. For
example: "What is Brexit"? Answer 1: "Brexit is Brexit". Answer 2: "Brexit is impossible."
There are two answers to the same (or similar) questions. Question 1: "What is the substance of the
word Brexit?" Answer 1: "Brexit is an Agreement." Question 2: "What is the substance of the word
Brexit?" Answer 2: "Brexit is a period of time."
1.3 Selected questions
The new mutual relations between the U K and the E U that have to petrified by a new Agreement
depend on the willingness of both subjects (i. e. the UK and the EU) to find a solution acceptable for
9 8
both parties. Representatives of both parties have a difficult task to prove that the proposed
arrangement is - at the given time - the best one for population of both parties. Both subjects have to
find a suitable way how to explain the advantages of the proposed Agreement by acceptable
arguments. It is very difficult to achieve such result as soon as possible without hurting national
emotions and without hurting the logic. It is clear that quasi-bilateral negotiations need a necessary
time to be successful. Both subjects have the similar disadvantage: representatives of the E U need a
"qualified" consent of all E U members and representatives of the U K need a tacit consent of its
"united" partners of the UK. The final positive result of EU-UK negotiations is surprising, because
the obstacles against the Agreement seemed to be unsurmountable. In the history of modern
diplomatic negotiations, the Brexit Agreement is a real diplomatic "Meisterstueck" (masterpiece).
In fact, to the last moment nobody expected the final success of Brexit, and - at the same time - even
the successful negotiators were aware of additional difficulties that followed after the last signature.
It was necessary to negotiate additional partial arrangements to be sure that some "details" would not
destroy the whole Construction (the case of fishery etc.).
As for economics, it will be difficult to elaborate a credible "proof of success" of the Brexit "story."
The economic map of Europe has been permanently changing; it will be difficult to present a balance
of "profits and losses" caused by the absence of UK in European business. It is no wonder that many
economists calculate the "plusses and minuses" very carefully to prove that profits were greater than
losses. Reliable data on the "Brexit period" are still missing. To be able to achieve an acceptable
"guess", it would be necessary to answer some theoretical questions. For example, it would be
necessary to define the length of the Brexit period - its beginning and its end; to decide which data
should be taken in consideration, if some statistical pattern would be elaborated etc. There are doubts
whether and how the data about the E U and U K economic growth during the given period are
measurable and comparable. Anyway, it would be interesting to compare a set of selected data in
2021 with a similar set of - say - 2014.
2 Brexit development process
All preceding parts of this study about Brexit suppose that the new word "Brexit" identifies a specific
period of the real European historical development process. It has its "beginning", followed by a
shorter or longer list of historical "events" and - as every dynamical process - its "end". In democratic
units of human society, researchers are (theoretically) free to study any "new event" that emerges and
influences the life of human society according to rules invented and approved by its (elected) leaders.
Subchapter 2.1 describes the Brexit Development Process (BDP) and Subchapter 2.2 presents the
author's discussion about the Brexit events (general remarks and specific remarks from the point of
view of real results/achievements vs. (economic) theory.
2.1 Brexit timeline
This Subchapter 2.1. Brexit Timeline explains selected key words used in academic literature about
Brexit. It describes some important components of the real E U economy that are in play during the
period of Brexit implementation.
99
In order to imagine the complexities of the Brexit process, the author has prepared a synoptic timeline
with eight milestones representing the crucial decisions made between 2016-2020.
Figure No. 1: Brexit timeline in 8 milestones
BREXIT TIMELINE IN 8 MILESTONES
MILESTONE 1
In a referendum, the
majority of those who
voted chose to leave
the European Union.
MILESTONE 3
The Government sought
permission from the EU
to extend Article 50 and
agree a later Brexit date.
MILESTONE 2
Donald Tusk, the Prime
Minister, formally triggered
Article 50 and began the twoyear
countdown to the UK
formally leaving the EU
(commonly known as 'Brexit').
MILESTONES
EU Ambassadors agreed a
further Brexit extension
to 31 January 2020,
following the previous
extension till 31st October
2019
MILESTONE A
EU 27 leaders agreed
to grant an extension.
MILESTONE 7
The UK left the EU and
entered a transition
period, based on the Royal
Assent of the European
Union (Withdrawal
Agreement) Act 2020
MILESTONE 6
Boris Johnson won
a majority in the UK General
Election and reaffirmed his
commitment to 'get Brexit
done' by 31 January 2020
MILEST0NE8
The transition period ended
and the United Kingdom
left the EU single market
and customs union..
Source: own elaboration based on (Walker, 2021)
The paper written by Walker provides a timeline of the major events leading up to the E U referendum
and subsequent dates of note, including Brexit Day itself (Walker, 2021).
The author of this study is fully convinced that the term 'Brexit' should be exclusively used to depict
the historical period between 23r d
June 2016 and 31s t
December 2020, i.e., the referendum in 2016
and final exit of UK from the E U single market and customs union. It would be helpful to set up a
list of economic events corresponding to the above "political" milestones.
io
2.2 Evaluation
This subchapter formulates views of the author about the innovative parts of Brexit events and
terminology.
(1) The seven-year time-line is more general than the last new British semi-official list published in
April 2021.
A number of British authors apply different criteria. At present, considerable number of authors
explain the content and forms of time-line in manifold ways. The construction of time-line
accentuates the range of different actions, they are descriptive (positivist approach), they do not try
to find out the main causes. They do not take into account theoretical conceptions that represent the
base of practical decisions and measures. They mainly put stress on the British negotiation positions
and do not satisfactorily react on the standpoints of the EU.
Presented classification is a general classification; its base is primarily the recognized theory of
(economic) integration and - partially - the theory of international trade as well.
(2) In the author's opinion, the most credible base of the economic and political decisions of the
leading representatives of integration groupings and of EU member states as well is the original
English version of the Brexit Treaty. Other versions' reliability, i.e., translations into EU-member
states' languages, is limited.
(3) Modern methods of statistics, prognostics, econometrics etc. are undoubtedly very interesting and
their use is recommendable. However, it would be misleading and dangerous to rely only on some of
these disciplines and not to confront results produced by application of quantitative methods with
results of qualitative methods. The "mixed" approach is by many researchers - unfortunately rejected
as "unsuitable" or "unreliable" instruments.
3 Commentaries on Brexit future
If the word "Brexit" means a specific time period, no "Brexit Future" is possible. It definitely ended
in 2020. After this date, a new period time probably will have its new "name" derived from
characteristic of new events. At present, results of published prognoses are not very reliable
(Intereconomics, 2021).
The previous research selected results about Brexit Future will have to be summarized and briefly
commented:
1. Recent dynamics observed in the development of societies has demonstrated that predictions were
inaccurate or even beside the point.
2. Especially with societal changes, nobody wants to be a false prophet. With long-term predictions,
the situation can be even harder.
3. The underlying unpredictable factor is technology that influences all spheres of human activity
(Lederman, 2021).
l O l
4. Maximum 5-to-10-year partial predictions have a chance to be implemented, i.e., credible. This
period corresponds to the existing political and economic system. Partial obstacles could be probably
eliminated. A deeper analysis of British political and economic systems is necessary.
Conclusion
The Phenomenon Brexit undoubtedly belongs to research objects that are very attractive for academic
researchers of many sciences: it is a unique part of modern history of mankind with a vast innovative
potential. The aim of this article - defined at its beginning - to analyze a complex of new events and
their interconnections on the field of technique, technology, economy, law and social sciences from
different points of view was partially implemented. The narrow scope of this article given by the
conference rules does not allow for explicit arguments.
In the Conclusion, selected comments to the Introduction and to the three following questions (based
on the References) are presented to underpin the autor's research recommendations:
1. It is recommended to enlarge the research scope to be able to analyze the basic interdisciplinary
relations between the three research areas, i.e. technic, technology, applied economy, law and social
sciences as a compact system revealing the present role and future role of its parts in more detail. It
is probable that the innovative leading role of technics and technology in the system as a whole will
continue and be dominant; this dominancy will enable a rapid progress of all other parts with an
accent on economy and social sciences.
2. It is desirable to support a more flexible interaction between the abstract science disciplines and
the block of economy and other social sciences to make the whole system less rigid.
3. On the field of practical international policy, it is desirable to support the role of interdisciplinary
co-operation between the worldwide institutions to be able to achieve a real practical solution of
projects crucial for the progress of mankind.
4. The UNO (and its connected organizations) does not fulfil the obligations defined by its Statute in
a satisfactory way. Only technological progress (digitalization, artificial intelligence and new
weapons) "goes its own way." Unfortunately, a considerable part of it is misused to the detriment of
mankind. At present, for different reasons, it is (not yet? if ever?) impossible to predict the mankind's
future. Many present guesses are just science fiction.
5. The discussion about the main aim of mankind still is going on. There are doubts whether a final
solution of worldwide problems recommended by UNO - under existing conditions over the world is
possible. Many of these problems are controversial. Some of them are not supported by political,
religious and/or social reasons.
The presented analysis of the term ,Brexit' and related issues has brought important insight into the
topic which has far-reaching consequences. The dynamism of technology development represents a
crucial phenomenon in the development of future mutual relations between the U K and other
countries in economy, trade and finance areas.
At present, no credible universal outlook into the future of mankind really exists. In fact, there are
only two ways of progress: the long-term way of an optimistic positively oriented continuous
international discussion in the UNO framework, and implementation of realistic policy of peace, or
as risky continuation of philosophy of rule, violence and wars. It is necessary to supress this second
way by all means as soon as possible.
References
BALASSA, Bela. 1994. The Theory of Economic Integration: An Introduction. In: NELSEN, Brent
F. and STUBB, Alexander C-G. (eds.), The European Union: Readings on the Theory and Practice
of European Integration [online]. London: Macmillan Education UK. p. 125-137.
[Accessed 2 July 2021]. ISBN 978-1-349-23984-9. Available from: https://doi.org/10.1007/978-l-
349-23984-9_15
BBC NEWS. 2016. Brexit added to Oxford English Dictionary. BBC News [online]. 15 December
2016. [Accessed 8 July 2021]. Available from: https://www.bbc.com/news/uk-england-oxfordshire-
38326516
BREXIT I Definition of BREXIT by Oxford Dictionary on Lexico.com also meaning of BREXIT,
2021. Lexico Dictionaries | English [online]. [Accessed 24 June 2021]. Available from:
https://www.1exi co. com/definiti on/brexit
Brexit: Why Britain Voted to Leave the European Union | Hub Page. 2021. Cambridge University
Press [online]. [Accessed 24 June 2021]. Available from:
https://www.cambridge.org/gb/academic/brexit-why-britain-voted-leave-european-union
CLARKE, Harold D., Matthew J. GOODWIN and Paul WHITELEY. 2017. Brexit: why Britain voted
to leave the European Union. Cambridge, United Kingdom; New York, NY: Cambridge University
Press. ISBN 978-1-107-15072-0.
Co je Brexit? - Brexitinfo. 2020. [online]. [Accessed 2 July 2021]. Available from:
https://www.brexitinfo.cz/cs_cz/vystoupeni-velke-britanie-z-eu/
Definition of Brexit | Dictionary.com. 2021. www.dictionary.com [online]. [Accessed 24 June 2021],
Available from: https://www.dictionaty.com/browse/brexit
GRAUWE, Paul De. 2016. What Future for the E U After Brexit? Intereconomics [online]. 2016.
Vol. 2016, no. 5, p. 249-251. [Accessed 24 June 2021]. Available from:
https://www.intereconomics.eu/
HAYES, Adam. 2021. Brexit. Investopedia [online]. 2021. [Accessed 24 June 2021]. Available from:
https://www.investopedia.eom/terms/b/brexit.asp
HAYES, Adam and Gordon SCOTT. 2021. Brexit. Investopedia [online]. 2021.
[Accessed 2 July 2021]. Available from: https://www.investopedia.eom/terms/b/brexit.asp
INTERECONOMICS. 2021. Intereconomics. Intereconomics [online]. 2021.
[Accessed 8 July 2021]. Available from: https://www.intereconomics.eu/
Intereconomics is an academic journal that publishes articles by experts on current economic and
social policy issues affecting Europe.
LEDERMAN, Simong. 2021. BBC Radio London - Brexit and technology. BBC [online]. 2021.
[Accessed 24 June 2021]. Available from: https://www.bbc.co.uk/programmes/p054hljk
ÚŘAD VLÁDY ČR. 2020. Co je Brexit? - Brexitinfo. [online]. 2020. [Accessed 24 June 2021].
Available from: https://www.brexitinfo.cz/cs_cz/vystoupeni-velke-britanie-z-eu/
WALKER, Nigel. 2021. Brexit timeline: events leading to the UK's exit from the European Union,
[online]. 2 July 2021. [Accessed 2 July 2021]. Available from:
https://commonslibrary.parliament.uk/research-briefings/cbp-7960/
i o 3
This paper provides a timeline of the major events leading up to the E U referendum and subsequent
dates of note, including Brexit Day itself.
ZAKEN, Ministerie van Buitenlandse. 2018. What is Brexit? - Government.nl. [online]. 30 August
2018. [Accessed 24 June 2021]. Available from: https://www.government.nl/topics/brexiťquestion-
and-answer/topics/brexit/question-and-answer/what-is-brexit
ZÍDEK, Bohumír. 2016. Euro byla chyba, tvrdí novopečený nobelista Oliver Hart - Novinky.cz.
[online]. 2016. [Accessed 24 June 2021]. Available from:
https://www.novinky.cz/ekonomika/clanek/euro-byla-chyba-tvrdi-novopeceny-nobelista-oliver-
hart-40018798
Contact
Associate Professor Ing. Vladislav Pavlát, CSc.
The University of Finance and Administration
Faculty of Economic Studies
Department of Finance
Estonská 500
101 00 Prague 10, Czech Republic
vladislav.pavlat@mail.vsfs.cz
IMPACT OF TOKENIZATION ON THE ECONOMICS OF
CROWDFUNDING INVESTMENTS THROUGH A CHANGE OF
INVESTMENT BEHAVIOUR
MICK PIRGMANN
Abstract
The author analysed data from two crowdfunding investments with a similar underlying asset
regarding investments size, gender, and age of the investors regarding the impact of the change of
structure from a classical investment to a tokenized investment structure. The results showed no
impact from tokenization on the structure of the investors gender and only minor impact on the age
of the investors. But the findings also showed that lowering the minimum investment from € 1000 in
the classical investment for marketing reasons and because it is technically feasible to € 1 after
tokenization diminishes the profit margin for the initiator substantially. Because every investor comes
at a cost, only a certain number of loss-making small investments in relation to profitable high
investments can be compensated. Because it is not possible to precisely determine the density
distribution of investment sizes in advance to placing a new investment, it is highly recommended
give up the minimum investments size € 1 to avoid the risk of attracting too many investors at a
deficit, hence diminishing the profit margin of the funds.
Keywords
Tokenization, Crowdfunding, Real Estate Crowd Funding, Asset Tokenization
JEL Classification
G24, G41
Introduction
The financial industry currently encounters the combination of two phenomenon which each have the
potential to change the traditional way money is invested. Crowdfunding, which gives retail investors
access to asset classes which were predominantly reserved for institutional and quasi-institutional
investors and Tokenization which can be used to digitize any real-world asset.
The idea of crowdfunding is simple and compelling: To fund a project or a venture, someone seeking
for financing raises money from a large number of people or companies instead of a traditional money
source like a bank.
Nowadays these projects are always funded through internet platforms to being able to manage the
many participations in an efficient way. The platforms predominantly act as intermediaries between
the money source and the project and typically collect a fee for the service. Since the early 2000s,
when internet-based crowdfunding started with an altruistic approach and was needed to finance
charity projects, it became a proliferating form for financing projects and assets, especially in recent
years. In 2017 the European market volume for the first time exceeded € 10b (€ 3.37b excluding the
UK) with double digit growth rates (63% for 2017 and 35% in 2016). More than 300 platforms entered
105
the market in the E U until 2017 with models in consumer lending, invoice trading, business lending,
real estate crowdfunding and others. With lending to consumers and businesses as well as invoice
trading representing the majority of the volume in 2017, real estate crowd funding is moving up the
charts with more than € 250m invested (CCAF, 2020).
Crowdfunding for investment purposes biggest advantage is the efficient access for retail investors to
certain asset classes which are dominated by institutional or quasi-institutional investors. Being able
to participate in larger investments, f. e. in real estate transactions, with amount as low as € 100 or
even lower can lead to higher diversification and a better risk/reward ratio for the investors. During
the investment process, the investors' money will be invested into the equity or the debt position of a
project, giving them some sort of share of the outcome in return.
But these models come with one big downside for the investors. Like most of the underlying assets,
they are typically not liquid. And that is where Tokenization comes into play.
Tokenization is a form of digitization of ownership rights over an asset using the distributed ledger
technology (DLT), such as blockchain. A distributed ledger is essentially an asset database that does
not have a single administrator but is shared across a network of participants (in case of asset
tokenization, the investors, issuers, and custodian as the main actors) where all participants have their
own identical copy of the ledger. Any changes to the ledger are reflected in all copies within a very
short timeframe, ideally within minutes or seconds. From equity issuance to capital raising for
companies of any size through Initial Coin Offerings (ICOs) or Security Token Offerings (STOs), to
post-trade processes, and settlement of securities. The DLT has the potential to transform financial
markets affecting the current infrastructure and all market participants. Basically, all assets from the
real world could be tokenized (OECD, 2020).
The whole structure of crowdfunding combined with asset-tokenization has striking advantages
compared to conventional forms of investments. It is efficient and allows asset fractionality in a
transparent and secure process.
The first company to issue such a security token with real estate as the underlying asset in Europe
was the Exporo AG7
, which is based in Hamburg, Germany. The market leader in Germany for real
estate crowd funding started in 2014 as one of the first platforms in Europe to finance real estate
developments through crowd investors. Since then, Exporo has placed more than € 750m in equity
from more than 30.000 investors among 400 Projects. In mid of 2019 Exporo issued the first tokenbased
bond on the Ethereum blockchain technology in Europe. A volume of € 3m was placed among
private investors within hours (finanzen.net, 2020). Until September 2020 the company issued 18
more projects with over €150m in equity converted into security tokens.
7
Please see www.exporo.de for information.
Despite the obvious advantages for tokenized real-world investments, it is crucial for an initiator of
these investment products to analyse whether the tokenization pays off in the end and how to structure
the offer of tokens regarding minimum investment size.
No relevant literature could be found regarding this topic, so a research gap is proposed. This paper
aims to research the provided data for two investments with the same underlying asset before and
after tokenization.
In order to do so, the available data and the assumptions will be described in detail. After that, the
methods for the analysis will be described and the available data will be analysed with the methods
of descriptive statistics. In the end the results will be presented and discussed before drawing a
conclusion on the research.
The following hypotheses are proposed:
HI: The age of the investors of a tokenized investment is significantly lower than the age of investors
of a standard investment product with a similar underlying investment.
H2: There is a strong correlation between age and investment amount and no difference in
correlations between gender and investment amount before and after tokenization.
H3: The sizes of the investment amounts after tokenization are significantly lower than before
tokenization.
To research the hypotheses will be a contribution to issuers of tokenized investments to appraise their
return on their investment in the process of tokenization.
1 Data and Assumptions
The available data consists of two crowd-funding investor groups A and B which invested into
different funds-like structures. Group A and group B both consist of male and female investors above
the age of 18 which are domiciled in Germany. There were no further personal criteria for investors
to fulfil. Both groups invested into fractionalized unsecured real estate construction loans with a
suggested interest rate of 5.5% p. a. and a lifetime of 3 years. All shares were funded through the
internet-based crowd-funding platform of Exporo in 2020 with a similar real estate as underlying
asset. The difference between both groups is that group A invested via a classical structure by buying
shared interests with a minimum investment of EUR 1,000 while Group B invested into a tokenized
investment via a security token offering (STO) with a minimum investment of EUR 1. The data
labelled as representative and non-confidential was kindly provided by Exporo in March of 2021 via
an Excel Sheet and then imported by the author into R Studio for analysis.
icy
Table No. 1: Summary of the available Data
Number of
investors
Total fund
volume (in Euro)
Number of male
investors
Number of
female investors
Fund A 743 1,802,000 636 (85.6%) 107 (14.4%)
Fund B 949 2,107,320 780 (82.2%) 169 (17.8%)
Source: R Studio
To later interpret the data, we also need to look at some of the Key Performance Indicators (KPI) of
the funds, on the income and expense side and put them into perspective to the data received.
The gross profit margin (GPM) for an initiator of these kind of investments is roughly 5% of the fund
volume. This margin can be used to cover costs, e. g. for marketing purposed8
.
To attract an investor, an initiator has Customer Acquisition Costs (CAC), which in case of these
crowdfunding products are around € 250 per investor for third party costs (e. g. for buying leads) plus
€100 for further costs associated with each investor (e. g. Know Your Customer (KYC), account set
up feed, custodian fees etc). So, for our analysis we assume that the total CAC is € 350 and that this
price is fixed, independent of the number of investments an investor might make9
. The CAC are
unrelated to the remaining cost structure of the fund and cost structure for the initiators business
operation. Obviously with a fixed marketing budget and a variable cost per investor the goal is to
fully place a fund with the least number of investors, hence with investors investing amounts as high
as possible.
On the income side we look at the revenue we can generate with each customer. Since there is an
obvious proximity of first-time investments to future investments regarding investment size of the
same investor (though the experience shows that investment sizes usually increase after the first
investment when the investment goes like planned and the investor gains more confidence) we look
at the Relative Income Per Customer (RTPC). In this case we assume that the RIPC is in average a
multiple of 5 times the investors first investment into an initiators fund10
. We are also assuming that
this multiple of 5x applies to all investors in Funds A and B, hence it is irrelevant when the investors
invested into which fund of the same issuer. The multiple of 5 brings down the total CAC from € 350
to a CAC of € 70 for each investor per fund.
Further we are assuming that the data provided is representative for all similar structured funds and
the industry in general.
8
The GPM of 5% is based on the authors experience in the industry.
9
A total CAC of € 350.00 is - for confidentiality reasons - not the exact number for these two Funds but an assumption
of the author based on his experience with earlier crowdfunding projects of the same initiator.
1 0
This multiple is - for confidentiality reasons - not an exact number for these two funds but a close assumption by the
author made based on correspondence with the same initiator in April 2021. The number is close enough not to have an
impact on the outcome of the analysis of the provided data.
2 Methods
The data was analysed via descriptive statistical methods in R Studio (RStudio Team, 2015) using the
tidyverse package ver. 1.3.0 (Wickham et al., 2019). The data was not altered in any way and all data
was used to create data-frames for the analysis.
For the analysis we look at the 3 variables Age, Gender and Investment Amount for each fund and
compare the data to see whether there is a change from the classical product to the tokenized
investment which could have an impact on the economics of the funds. The following descriptive
statistical methods were used for the analysis:
1. Summary function to get the highest and lowest amount invested, median, mean, first and third
quantile of both funds separately.
2. Violin function to get a compact image of the continuous density distribution of the investment
amounts of both funds.
3. Histogram to get an illustration of the age distribution of both funds compared with each other.
4. Boxplot to get an image of the density distribution and the median of the amounts invested
separated by gender for both funds.
5. Simple Regression to see a possible correlation between age and the invested amounts for both
funds.
3 Results
The summary function shows a mean of EUR 2425 for fund A and EUR 2221 for fund B. The median,
which cuts the number of datasets in each data frame in half, shows the same median of EUR 1000
while the first quantile for fund A is EUR 1000, opposed to EUR 500 of the fist fund showing a lower
amount for 25% of the data. The third quantile is the same for both funds at EUR 2000.
Violin Function of Investment Amounts
A visualization with the below violin function (Figure 1) shows a more detailed picture. The mirrored
density functions for the investment amounts for Fund A and Fund B show a clear difference in the
total investment amounts confirming the above data that the overall shape above the third quantile is
similar while the lower part of the violin is shifted towards the 1 EUR mark. Fund A has the most
investments in the area of the minimum investment amount of EUR 1000. Fund B shows a different
picture, showing a larger amount of investments below the EUR 1000 mark which is not surprising
as the minimum investment for Fund B was set to EUR 1.
Figure No. 1: Violin Diagram of the Investment Amount Distribution of Fund A and B
E
<
<
<
L_ JL
Fund
• -
Fund
Source: Autor
Histogram of the Age Distribution
The analysis of age structure in both funds show, that the investors in the tokenized fund tend to be a
little older than in the standard investment. A histogram (Figure 2) shows a good picture of the age
distribution in Fund A versus Fund B. The histogram shows that the investors in Fund A were born
later than in Fund B. The summary function of the histogram shows that the mean in Fund A was
born in 1971 while the mean in Fund B was born in 1967.
Figure No. 2: Histogram of the Age Distribution of Fund A and B
Fund
Year of Birth
Source: Autor
l l O
Figure No. 3: Boxplot of Investment Amounts depending on Genders for Fund A and B
25000g
15000-
E
<
I
> 10000-
5000-
Sex
female
male
I
J I — • — I [ =
I
I
I
Fund
Source: Autor
Boxplot of the investment amounts depending on the genders.
The analysis of the distribution in investment amounts of both funds depending on Gender show an
evenly distributed picture. No relevant impact of the tokenization on either gender could be found.
Regression of investment sizes depending on the age of the investors.
The simple regressions with the variable Investment Amount depending on the independent variable
Age show that the older investors of both funds tend to invest significantly more than the younger
investors (figure 4, please note that for better visibility the investment amount is on a logarithmic scale).
The low p-values of 4.71"11
for Fund A and 4.885"11
for Fund B show that the null-hypothesis should
be rejected. The test with the Spearman's rank correlation coefficient shows results of -0.22 for Fund
A and -0.38 for Fund B with p values of 2.8"16
for Fund A and 2.2"16
for Fund B, confirming the
significance of the results.
Ill
Figure No. 4: Simple Regression of Investment Sizes depending on Age (on a logarithmic scale)
32768"
8"
1940 1960
Yean
Source: Autor
4 Discussion and Conclusion
The goal of the analysis of the funds data was to get a better understanding regarding the composition
of the investors and economics of the difference between un-tokenized and tokenized investment
vehicles.
The analysis of the data shows the following results:
1. The age distribution shows that the tokenized product has older investors than the standard fund,
so HI that a tokenization attracts younger investors than the standard product is void.
2. The regression analysis showed that older investors in both funds tend to invest more than younger
investors, so the first part of H2 could be validated. Hence, efforts to attract more mature investors
could increase the margin.
112
3. There is no correlation of the investors gender and the invested amount in either fund. Hence, the
second part of H2 is also correct, and no gender group needs to be specifically targeted. The
analysis showed that the efforts to influence the composition regarding gender would not influence
the overall profitability.
4. The mean for the standard product is higher at EUR 2425 for Fund A vs. EUR 2221 for Fund B,
thus generating a lower margin in the tokenized product overall. Hence H3 could be validated.
5. The summary function and the violin figure clearly show that investors take advantage of the
possibility to invest as little as EUR 1 in the tokenized product. There is a high density of investors
in Fund B investing below the minimum investment of Fund A. It is to mention that most investors
tend to choose even amounts like 2,000, 3,000 etc. for their investment.
It is the intent of an initiator to maximize the profits generated from each fund, so it is the goal to
archive the full placement of a fund with the least number of investors possible. Because the overall
relative CAC per investor per fund is set at € 70 (based on the assumption that investors invest 5x
their initial amount, lowering the initial CAC from € 350 to € 70 for each investment), the GPM of
5% would theoretically allow marketing expenses of € 90,100 for Fund A and € 105,366 for Fund B.
Hence, the maximum number of investors could be 1,287 for Fund A (while the actual number is
743) and 1,505 for Fund B (while the actual number is 949). Obviously, giving up the total margin is
not a valid business model and should be avoided.
The GPM and the CAC are the same for both funds, so the average investment per investor to breakeven
is the same for both funds at approximately € 1,400 (total fund amount / max numbers of
investors limited by the possible margin).
When an initiator opens a fund for investment with a set minimum amount for an investment it is
impossible to predict the final composition of investors and their investment behaviour.
All predictions are based on past performance data. So, the smaller the fund amount, the higher is the
risk to acquire an unusual high percentage of small investors diminishing the margin for the initiator.
At a set average investment size of € 1,400 to break even and only knowing roughly the density
function in advance placing a new fund, it is highly recommended to increase the minimum
investment from € 1 rather towards the € 1,000 mark to generate a profit margin.
The exact number cannot be determined with the underlying data because changing the eligibility
criteria for investors would also lead to a shift of the other parameter and change the investment size
density function of the funds. For example, targeting more sophisticated investors would increase the
CAC and lower the fund costs due to a smaller number of investors.
This analysis can only give and idea about the challenges an initiator faces when lowering the
minimum fund amount.
The weakness of this analysis is clearly the small sample of data which was assumed to be
representative for the industry. Some results like the age distribution seems counter-intuitive and
ii3
needs to be validated by further analyses. Further research should be done with more underlying data
on a larger number of funds to get more representative results.
References
CCAF. (2020). 'The Global Alternative Finance Market Benchmarking Report', (April), p. 228.
Available at: https://www.jbs.cam.ac.uk/faculty-research/centres/alternative-
finance/publications/the-global-alternative-finance-market-benchmarking-report/
Finanzen.net. (2020). Paradigmenwechsel im Segment Immobilien - Interview mit Johannes
Moormann von Exporo \ Nachricht finanzen.net. Available at:
www.finanzen.net/nachricht/fonds/werbung-paradigmenwechsel-im-segment-immobilieninterview-mit-johannes-moormann-von-exporo-9595004
(Accessed: 13 December 2020).
OECD. (2020). 'The Tokenisation of Assets and Potential Implications for Financial Markets', OECD
Blockchain Policy Series. Available at: http://www.oecd.org/finance/The-Tokenisation-of-Assetsand-Potenti
al-Implications-for-Financi al-Markets.htm
RStudio Team. (2015). RStudio: Integrated Development for R. RStudio, Inc., Boston, M A URL:
http://www.rstudio.com/
Wickham, H, M . Averick, J. Bryan, W. Chang, L. McGowan, R. Francois et al. (2019). "Welcome to
the tidyverse". J Open Source Softw. 2019 Nov 21;4(43):1686.
List of abbreviations
STO - Security Token Offering
KPI - Key Performance Indicator
CAC - Customer Acquisition Costs
CLV - Customer Lifetime Value
GPM - Gross Profit Margin
Contact
Mick Pirgmann
University of Finance and Administration
Estonska 500
101 00 Prague, Czech Republic
pirgmann@parsecinvest.com
THE CUM-EX CASE IN GERMANY
BASTIAN SCHULZ
Abstract
This paper focuses on a particular form of stock-market trades around ex-dividend days, socalled
"cum-ex" transactions, which have resulted in major revenue losses due to illegitimate
tax refunds in Germany and other European nations. Until 2012, the loophole in the German
withholding tax scheme made it possible for cum-ex traders to receive withholding-tax
certificates without prior withholding-tax payment. Because a certain category of investors
might use the tax certificates to gain a tax exemption, this opened up the prospect of a particular
form of tax arbitration. It was not until 2018 that a cross-border investigation team called the
Cum-Ex Files revealed the scandal to its full extend.
This paper will solely focus on the cum-ex scandal in Germany since the literature on the topic
is very limited.
Keywords
tax fraud, dividend taxes, cum-ex trading, tax evasion, withholding tax
JEL Classifications
H26, G12
Introduction
A wide body of public economic literature has researched tax evasion and has recognized that
restrictions such as withholding taxes and reporting by third parties will significantly mitigate
tax evasion (e.g., Kleven et al., 2011; Slemrod and Gillitzer, 2014). Yet, as noted by Slemrod
(2008), non-compliance under withholding taxes is seldom debated amid the 'paramount value
of withholding'. A theoretical study that investigates determinants of tax avoidance under
payroll taxes is given by Yaniv (1988). Yaniv (1992) reveals that tax avoidance will simply rise
rather than decrease under tax withholding, allowing for collusion between employer and
employee. Both parts might make some secret arrangement on how to avoid the tax and divide
the tax evasion among themselves.
Madzharova (2013) claims that the tax on business benefit decreases the employer's ability to
partake in such collusion. Kleven et al. (2016) offer an agency model where there is less
possibility of collusion between boss and employee as the scale of the company increases. As
a result, companies have a role as 'fiscal intermediaries' in promoting the recovery of revenue.
A feature of withholding taxes is that the remitter is not the statutory tax holder. This results in
a decreased motive to escape taxation as it is not the remitter who does personally profit from
avoidance. Notwithstanding, the use of withholding taxes transfers the burden of noncompliance
to the sender (Slemrod, 2008) it may happen that taxes are neither deferred nor
remitted to the tax authorities. Another issue exists when withholding taxes is normally
combined with a refundable tax credit. Since no taxes have been deferred, the tax refund results
in negative taxes. In addition, illegal tax refunds often exert major negative externalities such
as distortions of competitiveness, inequity and transfers of money to organized crime, (de la
Feria, 2018).
One situation, when withholding tax is connected with tax evasion is called cum-ex. In the case
of cum-ex dealing, the seller fundamentally does not necessarily own the stocks. Instead, the
seller sells the stocks briefly. If the seller has agreed to borrow the stocks or has entered into an
arrangement with a third party confirming that the stocks are eligible for settlement when they
are due, this type of short selling is permitted. However, because the short selling is not accepted
as such by the depository bank of the purchaser (or the original owner), a tax certificate is also
issued, resulting in double tax refunds. The buyer sells the stocks back to the initial owner in a
final move. Then, the proceeds from the extra tax returns are split by the parties. (Wagner and
Wei, 2020)
This discrepancy has created a lack of clarity in the withholding tax process that has rendered
it susceptible to tax fraud. In order to offer withholding tax certificates without previous
withholding tax payment, a new cum-ex trading method has been developed (to be explained
in chapter 2). However, since they gave the owner the right to a tax refund, those tax certificates
were in fact cash-equivalent. Therefore, for cum-ex trades, their worth opened up fresh lucrative
arbitration possibilities. Although such tax certificates were given without a prior withholding
tax payment, the value of the certified withholding tax was directly due to the public's income
losses. (Holzmann et al. 2017)
The nature of cum-ex trade is disheartening, not only because it joins a lengthy list of
controversies and wrongdoings in the finance market, but in particular because it has been wellknown
and neglected by regulators and government authorities for many years, causing
taxpayers' funds to be plundered. Yet, it took a cross-border investigation team called the CumEx
Files in 2018 to blow the whistle on the scandal to start getting to the core of the problem
and making it a public discussion that could not be ignored anymore. The cum-ex scandal in
Germany started in 2001 and was shut down by Germany authorities in 2012. (European
Parliament, 2018)
1 Cum-ex
Chapter two focuses on the cum-ex case in Germany. The cum-ex transactions in Europe are
explained first, before moving to the main focus that lies on the cum-ex transactions in
Germany.
1.1 Cum-ex transactions in Europe
In the form of so-called 'cum-ex trades', withholding tax non-compliance has recently gained
media interest. A loophole in European countries' tax codes has allowed a wide network of
banks, traders, hedge funds and law firms to receive numerous withholding tax refunds on
dividends paid only once and costed European treasuries € 55bn. (Deutsche Welle, 2018) The
cum-ex practise entails exchanging stocks rapidly around the ex-dividend date with (cum) and
without (ex) dividend rights to hide who the real owner of the securities is. (Spilker, 2017;
ii6
Spengel, 2017) Tax officials are unlikely to follow the transition of ownership as a function of
the underlying business microstructure and settlement process in operation. Cum-ex trade
typically entails a variety of actors. This involves the initial owner of the shares, banks or traders
buying and short selling the shares and another person acquiring the shares right before the exdividend
date (often using loan facilities provided by the banks to lever the trades). In most
defense contracts, the termination time is two to three business days, referred to as T+2 or T+3.
The payment must be collected and the stocks transferred to the customer on the settlement
date. For instance, if a contract happens two days prior to the ex-dividend date, the settlement
could coincide with the ex-dividend date resulting in the acquisition of stocks cum dividend yet
ex-dividend delivery (Wagner and Wei, 2020).
This includes short-trading during ex-dividend days, where the stock is traded 'cum-dividenď
before the dividend record date, but delivered after, i.e. 'ex-dividend'. Even if the subsequent
tax payment has not been remitted, cum-ex trades are expressly designed to obtain dividend
withholding tax refunds. These transactions have been registered in numerous countries, among
them Germany, Austria and Switzerland (Special Investigative Commission, 2017).
The avoidance of tax evasion essentially requires European governments to create adequate tax
and regulatory systems that eradicate the possibility of tax arbitrage. Since flaws linked with
transnational transactions are very difficult to spot, policymakers should implement compulsory
monitoring of cross-border tax planning agreements by taxpayers and intermediaries in order
to enhance compliance (e.g., Baker, 2015). However, if the above theory would apply, despite
also rigorously adjusting and supervising the capital markets, taxing officials will need to take
more steps to make it harder to collude merchants (Buettner et al. 2020).
The activity persisted and was so prevalent that some banks have set up subsidiaries expressly
providing cum-ex trading to high net-worth or institutional customers, despite early warnings
and testimony from informants as early as 1992. Eventually, a cross-border investigation team
called the Cum-Ex Files, helped to put this practice to the fore in 2018 (Cum-Ex Files, 2018,
Wagner and Wei, 2020).
The practice mentioned has largely emerged from the manner in which withholding tax is
collected. Usually, a dividend-paying corporation withholds tax on dividends and remits it to
the treasury, while the shareholder's depository bank issues a reimbursement tax certificate (if
applicable). Intuitively, the tax scheme under which the remitter and the issuer of the tax varies
should boost the tax enforcement, since the remitter would not personally benefit from the
misconduct. Nonetheless, Slemrod (2008) highlights the issues with such a tax scheme and
reveals that regulation and the expense of tax administration vary with the name of who actually
pays the tax. (Wagner and Wei, 2020) More broadly, Slemrod (2008) claims that the normative
economic perception of those who pay tax responsibility is unrelated to the success of a
contemporary tax regime does not hold in the presence of tax avoidance or evasion. Buettner et
al. (2020) draw on the same tax-remittance economy and analyze the rationality of noncompliance
with withholding tax. Centered on a stylised model, they claim that, as compared
to carrying out a form of arbitrage to hedge the normal price decline on the ex-dividend day,
cum-ex trade is specifically aimed at leveraging current tax laws with collusive elements. Tax
ii7
officials and policymakers have refused to respond too slowly on multiple notices or to take
action.
After taking a short look at the situation for European countries the author will now focus on
Germany, as it is the European country that is at the root of the scandal and stands out both
because of the extent of the loss of income and because of the duration of the time during which
such transactions were possible. (Buettner et al. 2020)
1.2 Cum-ex transactions in Germany
The shortfall of tax revenue from cum-ex trades in Germany accumulated to a whopping € lObn
just between 2001 and 2012. (European Parliament, 2018) The estimate was also claimed to be
optimistic (Flood, 2018) and it is unclear if it is anywhere near justifying the actual severity of
the crisis. Hundreds of entities reportedly engaged in various illegal transactions have since
been found in criminal proceedings, while funds have been frozen around the world and
multiple prosecutions have either began or are underway at the time of writing. (Jensen and
Lassen, 2019) One reason for the vast volume of non-compliance with dividend withholding
taxes is that traders searching for arbitrage opportunities simply exploited the tax loophole or,
more precisely, the technical error in the way in which the withholding tax was levied and
applied. In many media coverage, this perspective has been featured and is intuitive, as the
search for arbitration opportunities by traders can be seen as a kind of exploration mechanism
that senses all sorts of lucrative transactions. Alternatively, gains associated with illegal tax
refunds enable traders to seek withholding tax non-compliance as a deliberate act of tax evasion.
Buyers and sellers meet, set up arrangements to receive illegal tax refunds, and conceal their
transactions from tax authorities. (Buettner et al. 2020)
Germany, for example, who is at the root of the scandal, did not amend and reform its
regulations until 2007. The new rules allowed depository banks to withhold and remit dividend
taxes instead of dividend-paying businesses. However, this only applies to domestic depository
banks. As a result, only investors with domestic bank accounts were prohibited from receiving
illegal tax certificates. After that (at the latest), cum-ex trade went worldwide. The issuing of
withholding-tax certificates by depository banks for dividend compensation payments without
direct withholding-tax payments is a result of a serious loophole in the withholding tax regime
at the period. The key issue is that the withholding tax scheme has established separate parties
for the withholding tax (a dividend-paying corporation) and the issuing of a tax certificate
(depository banks). Consequently, whether the underlying exchange was a cum-ex deal
(without prior withholding tax payment) or an ordinary transaction was not clear for depository
banks (with previous tax payment). The depository banks received withholding-tax certificates
in both cases. This backdoor was used by cum-ex dealers. (Holzmann et al. 2017)
The German dividend withholding tax scheme was radically reformed in January 2012 in order
to discourage cum-ex-trading. More than two decades after the authorities became aware of
these trades, that new laws were enforced and the loophole was eventually locked. (Spengel,
2016) Most notably, the difference between 'the party withholding the dividend tax' and 'the
party awarding the tax certificate' was removed. After 2012, German depository banks have
been responsible both for levying the dividend withholding tax and for issuing a certificate of
n8
withholding tax. Germany's familiarity with cum-ex trades, though, did not lead them to alert
other nations (Spengel & Schick, 2018). Since then, it has been the responsibility of all banks
(domestic and foreign) to withhold and remit dividend taxes, as well as to issue relevant tax
refund certificates. As we will see in the future, the consolidation of all roles under one agency
seems to be successful in stopping this dishonest conduct. (Wagner and Wei, 2020)
After a short theoretical description of the cum-ex transactions in Germany the author will now
have a look at the cum-cum transactions in Germany.
2 Methodology
Based on the theoretical analysis, the empiric analysis examines trends in stock markets and the
number of transactions around the date of the dividend. One or two days prior to the ex-dividend
day, cum-ex trades are expected to turn up in high trading numbers. Notwithstanding, a
significant body of literature indicates that tax-motivated selling and dividend capture
techniques may justify higher trading practices during ex-dividend dates. (Lakonishok and
Vermaelen, 1986; Karpoff and Walkling, 1990; Michaely and Vila, 1995; Dhaliwal and Li,
2006; Akhmedov and Jakob, 2010; Haesner and Schanz, 2013; Hartzmark and Solomon, 2013;
Henry and Koski, 2017). In order to differentiate these reasons from cum-ex effects, we are
effectively dependent on difference-in-difference calculations. These leverage adjustments in
the administration of withholding tax over time as well as variations in the tax treatment of
dividends.
The variations over time are the product of a reform in the handling of the withholding tax in
January 2012. Cum-ex transactions may have resulted in fraudulent tax credits and repayment
of unpaid withholding taxes in the period up to 2011. In the period from 2012 to 2015 and 2015-
2018, this is not the case because the tax administration was amended.
Under German tax law, dividends earned from the current income of companies are subject to
a withholding tax of 26.4 percent. Dividends paid out of company capital funds are excluded
from tax. These variations in the tax treatment of dividends enable one to test if there are no
differences between the shares with taxable dividends in the cum-ex era relative to the shares
with tax-exempt dividends in the post period.
3 Results
Descriptive data on the time trend of trades is given in figure 1. As stated in the XETRA
statistics, this figure indicates the daily average total number of stocks exchanged. Dividends
paid out of existing income are subject to withholding tax (taxable dividends) and are thus ideal
for cum-ex trading. Dividends from capital savings are excluded from tax (tax-free dividends)
and are thus not appropriate for cum-ex trading. Trading amounts are presented separately for
taxable dividend shares (black lines) and tax-free dividend shares (gray lines), both for the
cumulative period from 2009 to 2011 (solid lines) and for the postulated period from 2012 to
2015. (dashed lines). Prior to the ex-dividend day, the vertical dotted lines mark a two-day
window. About the ex-dividend day, the vertical straight lines mark the 21 -day trading window.
It indicates, as reported in the XETRA data, the daily average total number of stocks traded
over a 131-day period over the ex-dividend dates, which are normalized to zero. The trade
volumes are seen separately for taxable dividends (black lines) and tax-free dividends (gray
lines) stocks, both for the cum-ex era (solid lines) and for the post-period period (dashed lines).
In the case of taxable dividends for the cum-ex cycle, the figure shows that, in the last two days
prior to the ex-dividend date, the overall total amount of stocks exchanged rose significantly by
nearly 200 per cent and subsequently dropped down to usual levels after the ex-dividend date.
Interestingly, in the cum-ex period and not in the post period, this pattern occurs. For events
with tax-exempt dividends, no significant rises are indicated (Buettner et al. 2020).
Figure No. 1: Daily average total number of stocks traded
-60 -50 -40 -30 -20 - 0 . 20 30 40 50 60
Days to ex-dividend date
Cum-ex, tax-free dividend • Cum-ex. taxable dividend
Post, tax-free dividend Post, taxable dividend
Source: (all German stock exchanges, 2009-2015 (Buettner et al. 2020)
The following figures should help explain the first figure in more detail. The time period 2015-
2018 is also added to give a better overview over the topic and to show if the regulations,
introduced by the German government, did really help stop the cum-ex schemes.
It is not surprising, that in view of the cum-ex scandal, that Germany has the highest European
coefficient for the entire century. The amount traded over the ten-year period on the two days
before the ex-date is, on average, 1.0382 standard deviations above regular volume. For the rest
of the European countries, the average coefficient is 0,33 standard deviations. The average
trading trend in Germany is shown in figure 2 for dividend events between 2009 and 2018. For
dividend events between 2009 and 2018, figure 2 shows the average trading pattern in Germany.
As the figure reveals, abnormal trading volume on T-l is primarily driving the cum-ex window
coefficient. Whilst the average volume on T-l is roughly 1.5 standard deviations above normal
volume, the volume on T-2 is not substantially high (Jensen and Lassen, 2019).
1 2 0
Figure No. 2: Average standardised trading volume in Germany on days around the exdate
for the whole ten-year period (2009-2018). The vertical dashed lines mark the normal
cum-ex window (T-2 and T-l)
Days Around the En-date
Source: Jensen and Lassen, 2019
Figure 3 indicates a deviation from the average trading value of the same duration in order to
analyze this abnormality in terms of value. The tremendous increase in value of T-l is striking,
as estimated. On average, the disparity in the allocation of dividends between 2009 and 2018
from the average market value of T-l alone corresponds to approximately EUR 110 million
(Jensen and Lassen, 2019).
Figure No. 3: Average difference from average trading value in Germany on days around
the ex-date for the whole ten-year period (2009-2018). Trading value is denominated in
Euros. The vertical dashed lines mark the normal cum-ex window (T-2 and T-l)
120 000000 = =
-20 000000
Days Around the Ex-date
Source: Jensen and Lassen, 2019
It is essential to bear in mind that cum-ex transactions are only expected to occur in the three
years from 2009 to 2011, as cum-ex was allegedly stopped in Germany in 2012. It is also not
121
shocking because, when looking at the individual coefficients for and subperiod, it is obvious
that these exact years are the driving force behind much of the overall abnormal exchange. The
coefficient for the first period (2009-2011) is 1,6763. The coefficient for the second period
(2012-2015) is 0,8236. Lastly the coefficient for the third period (2016-2018) is 0,7621 (Jensen
and Lassen, 2019). Figure 4 below shows the trend for different cycles with uniform trading
volumes.
Figure No. 4: Average standardised trading volume in Germany on days around the exdate
for the separate subperiods. The vertical dashed lines mark the normal cum-ex
window (T-2 and T-l)
Source: Jensen and Lassen, 2019
The coefficients and the figure clearly demonstrate a drop in the irregular trading rate between
both cycles (first and second). This is in accordance with the results of Buettner et al. (2018)
and indicates that the administrative reform introduced in 2012 had an impact. It is, however,
important to bear in mind when looking at the variations above that figure 4 is showing
differences in uniform volumes. Looking at standardized variables is helpful, since it makes for
relative similarities between nations, but it may also provide a biased view of the absolute
challenge, provided that both big and small businesses are similarly weighted. This is illustrated
in figure 5, where the gap between the average trading value for the different times is shown.
The graph shows that, in terms of economic benefit, the fall in tax-motivated trade is, in effect,
far more important than what one would get from looking at uniform amounts.
1 2 2
Figure No. 5: Average difference from average trading value in Germany on days around
the ex-date for the separate subperiods. The vertical dashed lines mark the normal cumex
window (T-2 and T-l)
•1< -12 -JO -a -6 A -2 8
* * I • 1 ( 1
Days Around the Ex-date
Source: Jensen and Lassen, 2019
It is surprising, though, that the erratic exchange patterns in the second and third periods are as
high as they are. In particular, for the second and third subperiods, the coefficients, which are
equal to 0.82 and 0.76, are the second highest coefficients for the European-wide nation in their
period (Jensen and Lassen, 2019). This indicates that Germany has still remained one of the
countries most influenced by tax-motivated trade, long though cum-ex was supposedly halted.
One potential explanation for this is that trade in cum-cum may trigger huge volumes. Since
Spengel (2016) claims that cum-cum transactions are often carried out through share loans, it
is possible that a substantial number of cum-cum transactions are also carried out through
repurchase agreements. Purchase of T-l agreements will also serve as a cause for spikes. The
problem with this theory, though, is that very few, let alone any, difference between the second
and third periods can be seen. This is not in accordance with the introduction of the latest
German legislation to fight cum-cum in 2016. In reality, according to the CumEx-Files
(CumEx-Files, 2018), cum-cum trade still takes place in Germany in a less violent manner.
The spikes only constitute a fraction of the real problem, if Spengel (2016) is right in saying
that cum-cum is mainly carried out in Germany by share lending and if the spikes as shown in
figure 5 are really triggered by cum-cum in 2012-2015 and 2016-2018. Still, even if the spikes
are not quite as high in the second and third periods, the trends are worryingly identical to the
cum-ex phase trend.
The likelihood, that the cum-ex criminals have invented a new cum-ex system that will make it
easier to bypass the administrative reform made in 2012, cannot however be precluded. In any
case, it is concerning that Germany, as a nation that has taken steps to tackle both cum-ex and
cum-cum, is evidently so influenced by tax-driven trade.
Conclusion
This paper analysed a major tax system loophole in the case of dividend withholding taxes,
called cum-ex. The cum-ex transactions in Europe were explained first, before moving to the
main focus that lied on the cum-ex transactions in Germany.
Cum-ex trades caused European treasuries a net loss of around €55bn and German treasuries a
net loss of around €10bn between the year 2001 and 2012, using irregular trading activity
around the ex-dividend date. This calculation is based on market statistics and a frequently used
method of cum-ex trading involving short selling and rapidly repurchasing stock around the exdividend
date, although the full scope of this activity will possibly never be understood. It was
not until January 2012 that the German dividend withholding tax scheme was radically
reformed in order to discourage cum-ex-trading. More than two decades after the authorities
became aware of these trades that new laws were enforced and the loophole was eventually
locked. Additionally did it take until 2018, that a European cross-border investigation team
called the Cum-Ex Files to blow the whistle on the scandal to start getting to the core of the
problem and making it a public discussion that could not be ignored anymore.
On a variety of levels, the cum-ex case is significant. First and foremost, the amounts extracted
from German accounts are substantial. The allocation of these funds represents a subtraction
from the funds allocated to the government for the procurement of public goods. Adequate and
balanced public finances are required to accomplish this aim. Second, the transactions involved
are relatively simple and trivial. Perpetrators have been able to take advantage of the longestablished
resources created by the law to carry out transactions. Contrary to existing
stereotypes, large-scale tax evasion does not appear to rest, at least often, on arcane knowledge
and the ability to orchestrate impenetrable sophistication. Third, and considering this, the
regulatory loopholes that make it possible for the systems to be effectively introduced are
equally clear and banal.
Remedies are easily accessible. Increased and timely knowledge exchange, convergence
bridges between contiguous regulatory realms and sufficient regulatory capability would help
to deter the recurrence of similar practices. Private networks of offenders have been able to pool
resources from a wide variety of fields and collaborate across organisations. It is necessary to
enable public networks of regulators to do the same. Apparently, the fact that Germany, which
has adopted regulations aimed at countering cum-ex, is already one of the country's most highly
impacted, may also mean that the European tax authorities are unable to deal with the ingenuity
of lawyers and other tax specialists whose goal is to manipulate the system's loopholes.
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126
Contact
Bastian Schulz
University of Finance and Administration
Estonska 500
101 00 Prague, Czech Republic
37212@mail.vsfs.cz
127
FINANCIAL SUSTAINABILITY IN GERMANY DURING
THE COVID-19 PANDEMIC
KATRIN STEYER
Abstract
Every crisis changes the economy and society. The political tones and decisions of the acting
politicians also change. This paper examines the impact of the covid pandemic on German
public finances. In doing so, this paper takes up the opinion of experts on stabilisation measures
and describes the effectiveness and evaluates the future prospects of the decisions on measures
taken. The result is that the fiscal policy measures are quantitatively sufficient. Nevertheless, it
should be noted that the stimulus package helps many affected by the Corona crisis, but not all.
In the pandemic, the rise in unemployment and the increase in underemployment could not be
avoided despite generous financial aid, such as the instrument of short-time work. Nevertheless,
the German labour market has remained comparatively robust overall. The costs of the crisis
are sustainable and can be financed. In this regard, the majority of experts recommend a return
to the consolidation course.
Keywords
Monetary policy, fiscal policy, public debt, corona effect, German government measures
JEL Classification
E62, E63, G28, H12
Introduction
The Corona pandemic has had a far-reaching impact on life and the economy in both 2020 and
2021. The demand from people and entrepreneurs to politicians was to find ways out of the
crisis through government measures and to maintain economic stability. For many affected
people, government measures became an anchor of hope. This paper examines how experts
evaluate the expansionary fiscal policy by the German government in the Covid 19 pandemic.
It is done from the perspective of both economic development and financial stability. The
qualitative analysis focuses on research reports of the Institute for Employment Research (LAB),
as well as the expert reports of the German Council of Economic Experts. In parallel,
quantitative data from data sources of the Federal Statistical Office, the Federal Ministry of
Finance and the Federal Employment Agency are assessed and analysed.
Macroeconomic interactions could amplify the negative effects of events such as the Corona
pandemic. Guerrieri et al. (2020) show that Corona-induced supply-side constraints can trigger
an even sharper decline in demand. The policy response should thus secure sufficient liquidity
for businesses and banks with the aim of averting economic damage, unemployment and widespread
loan defaults. Measures taken by the federal government here included guarantees, KfW
128
loans and the emergency and bridging aid, but also tax measures and direct participations. The
possible utilisation of the funds was clearly undercut. This suggests that the stimulus package
is helping many, but not all. During the pandemic, the rise in unemployment and the increase
in underemployment could not be avoided despite generous financial aid. Nevertheless, the
German labour market remained comparatively robust overall. After the easing of measures for
the pandemic, the labour market recovered later in the year, but number of unemployed
averaged 2.65 million for the year, 429,00 higher than in 2019. Underemployment also
increased. A major reason for this is that labour market policy measures were not possible or
only possible to a limited extent due to the lockdown. With the start of the lock down in March,
short-time work rose to an all-time high. The peak in April includes almost 6 million short-time
workers, which corresponds to 18% of all employees subject to social insurance contributions
(statistics of the Federal Employment Agency, 1/2021). With an average work loss of about
38%, the use of short-time work has arithmetically secured jobs for about one million
employees and prevented their (temporary) unemployment (Institute for Employment
Research/IAB). The costs of the stabilisation and compensation policy are sustainable and
financeable. The course of budget consolidation is indispensable for the future.
At present, the Corona crisis is not yet over. The economic recovery in Germany, after the 5.1%
drop in GDP in 2020 compared to the previous year, is not yet complete and depends on the
further course of the pandemic. In June 2020, the German government launched an economic
stimulus package that, according to the German Council of Economic Experts, should increase
economic output by 0.7% to 1.3%.
In this context, the next section provides an overview of the stabilisation measures in the
pandemic. Here it is discussed whether expansionary policies were the right and effective
starting point to save the German economy.
The following section deals with the current investment policy with its challenges for the future.
Here, examples and arguments are used to show what is relevant for future financial stability.
1 Expansionary fiscal policy saves the German economy
1.1 Monetary, fiscal and prudential measures are quantitatively and qualitatively
sufficient
The policy makes it possible to increase liquidity for companies and banks with the aim of
averting economic damage, unemployment and loan defaults.
Studies in the economic literature suggest that macroeconomic interactions amplify the negative
effects of the Corona pandemic. Guerrieri et al. (2020) show that the Corona-induced supply-side
constraints can trigger an even stronger decline in demand. A macroeconomic decline
in demand is triggered by income losses in particularly affected sectors. This effect is amplified
because some households are unable to compensate for falling income due to a lack of reserves.
In turn, the drop in consumer demand among firms makes access to credit more difficult. Firms
with liquidity constraints reduce investments. This can exacerbate the recession and prolong it
beyond the duration of the quarantine measures (Pfeiffer et al., 2020). Bayer et al. (2020) analyse
the economic consequences due to increased uncertainties. Less household income leads
households to reduce consumption and increase liquid savings instead.
The German government has responded to the Covid 19 crisis with massive fiscal measures,
during which the European Central Bank has massively eased monetary policy. In the first
phase of the pandemic, the task of stabilisation policy was to help entrepreneurs and citizens to
bridge the period of restricted economic activity. Monetary policy provided the banking system
with plenty of liquidity at favourable terms, and lending was strengthened. On the part of the
ECB, safety margins for refinancing operations were loosened, the interest rate was lowered
into the minus range and securities purchases were massively increased. In the opinion of the
Ger-man Council of Economic Experts, the ECB has thus averted a banking crisis and ensured
price stability.
The responsibility of the Federal German government was to adapt the fiscal policy in the area
of responsibility to the circumstances. Measures taken by the federal government here were, for
example, guarantees, KfW loans and the emergency and bridging aid, but also tax measures
and direct participations.
Examples of fiscal assistance
Corona aid from the federal and state governments is made up of the Economic Stabilisation
Fund (WSF), tax measures, guarantees, KfW loans, and emergency and bridging aid. By the
end of the third quarter, around 71 billion euros in grants and loans had been awarded (BMF,
2020a).
Table No. 1: So far, only a small part of the Corona aid has been used
Verfügbares Volumen-; 500
Abgerufenes Volumen:
Garantierahmen
angepasst3
Garantierahmen
angepasst3
Wlrtschafts-
stabillslerungsfonds
(WSF)
Soforthilfe für
Klelnstunternehmen
und Solo-Selbständige
Überbrückungs-
hilfen
KfW-Sonderprogr
amine
r
Bürgschaften
Kapitalmaßnahmen
und Bürgschaften für
große Unternehmen
Zuschüsse In Höhe
von 9 000 bzw.
15 000 Euro für
Unternehmen brs
10 Beschäftigte
Zuschüsse zur Kompensation
von Umsatzrückgangen
für
Unternehmen b«s
249 Beschäftigte
KfW-Kredite und
Schnellkredite mit
Rrsikoübernahme
zwischen 80
und 100%
GrotJbürgschaften
und Bürgschaften
der Bürgschafts-
banken
1 - Stand: 27. Oktober 2020. 2 - Beim Wirtschaftsstabilisierungsfonds sind 100 Mrd Euro für die mögliche Refinanzierung bewilligter KfW-Kredite
nicht berücksichtigt. 3 - Dazu hat die Bundesregierung im ersten Nachtragshaushalt den Gewährleistungsrahmen um 357 Mrd Euro auf 822 Mrd
Euro erhöht (Deutscher Bundestag 2020a).
Quellen: BMF. BMWi. KfW. Verband deutscher Bürgschaftsbanken o s « M m M « i n i » W 3
Source: German Council of Economic Experts' Annual Report 2020/21.
The potential utilisation of the funds has been significantly undercut. With the Economic Stabilisation
Fund (WSF), the federal government is helping large companies in particular. 100
bil-lion euros are available for capital measures and 400 billion euros for guarantees. The WSF
pro-vides companies across all sectors with stabilisation measures to strengthen their capital
base and overcome liquidity bottlenecks. The WSF is aimed at companies in the real economy
whose survival as a going concern would have a significant impact on Germany as a business
location or on the labour market. The WSF provides for two stabilisation instruments (combined
applica-tion possible): Federal guarantees to secure loans, including credit lines, and capital
market products in the debt capital sector and second recapitalisations to directly strengthen
equity capital.
Standardised conditions apply in the WSF for guarantees and other guarantees for bank loans,
guarantees for bonds and recapitalisations (silent participations, subordinated loans). Another
100 billion euros are earmarked for the possible refinancing of KfW programmes. By the end
of Au-gust, the WSF had provided 6.6bn euros for equity investments in Lufthansa and TUI
Deutsch-land. In the case of Lufthansa, this consists of a silent partnership of 4.7bn euros, a
sharehold-ing of 0.3bn euros and a further silent partnership of lbn euros. In addition, KfW has
provided loans of 3 billion euros (BMWi and BMF, 2020a). In the case of TUI, in addition to
KfW loans, there is a convertible bond of €150m held by WSF. M V Werften received a bridging
loan of 193 million euros from the WSF.
Total public budget expenditure increased by 12.1% to €1 678.6 billion in 2020 compared to
2019. At the same time, revenues fell by 3.5% to €1 489.4 billion. As the Federal Statistical Office
(Destatis) further reports, this results in a cash financing deficit of €189.2 billion as defined
by the financial statistics. Due to the pandemic, no positive budget balance can be achieved in
2020. The upper graph of Figure 3 shows that revenues, especially for taxes and social contributions,
will decrease. The development shows the impact of the pandemic. The increase in expenditure
in the general public budget (+166.21 billion euros compared to the previous year)
shows the investment policy (lower graph of Figure 3). The item of subsidies, which is below
expenditure, is clearly above the previous year's figures with 39.92 billion euros (previous year
14.38 billion) in the first half of the year and 47.23 billion (previous year 16.42 billion) in the
second half of the year. This expenditure accounts for 5.1% (previous year 2.0%) of total expenditure.
The expenditure graph also shows an increase in expenditure on monetary social
benefits of45.66 billion euros. Both selected figures show that the expansionary policy is clearly
increasing in selected positions, even though subsidy expenditure remains in the single digits.
To classify the debt burden, it is important to know this classification.
Table No. 2: Crisis year 2020: falling revenues, rising expenditure - the forecast is confident
Einnahmen
1 12018 äna
Einnahmen insfjeserrlt
_
Ausgaben
Bfp
n l ^^^^^^^ ^
fiEaO've ~;=nn |»--
' ^».4u3|flCE|i |ri£gi=sn>C
• VDrtei=ione,en
_ _ _ _ _ - AntwiwishrYiereiiEgEJte
, •Jaeleetets \ e.-r--5s_™==ir*omme'-.i Zinse
V Sübventinn-en
rennetsre Sozisil=istufigen
_i HOTieiE Set4".lesjungem
Bruttoi^vvesa'tionen
9 ?ir,stiee A^^ÖE^
Source: Statistisches Bundesamt for the German Council of Economic Experts' Annual Report 2020/21
1.2 The economic stimulus package helps many but not all
The Corporate insolvency risk not transparent
The number of corporate insolvencies filed for in the period from January to July this year fell
by around 10 % compared to the same period last year, despite the economic slump (Federal
Statistical Office, 2020a). The German Council of Economic Experts assumes that the suspended
obligation to file for insolvency played a role. The probable claims of creditors have risen
from about €10bn in HI 2019 to almost €17bn in HI 2020 (Statistisches Bundesamt, 2020b).
In particular, according to calculations by the IWH (2020), three times more employees in larger
companies were at risk of insolvency in July than in January 2020. The government aid
measures and the suspended insolvency filing obligation could lead to an increase in lowincome
companies, called zombie companies in the literature (Creditreform, 2020; VIE), 2020),
which still do not have a viable business model after the pandemic has subsided. These are often
identified in studies as companies that have interest coverage ratios of less than one for several
consecutive years and have a minimum age of ten or more years (Schwartz et al., 2018). While
low interest rates might reduce the financial pressure on low-income firms and thus favour their
staying in the market, the empirical evidence on the relationship between low interest rates and
the share of low-income firms is not clear. Banerjee and Hofmann (2018) find a statistically
sig-nificant negative relationship in a panel study for 14 advanced economies, but Cella (2020)
for Sweden, the Danish National Bank (2019) for Denmark and the Deutsche Bundesbank
(2017) for Germany do not.
Politically, the prevailing opinion in the ruling party is that the self-cleansing process of the
market must not be eliminated. Companies that are not healthy and have no economic perspective,
regardless of Corona, must leave the market. Firms can weaken the productivity growth
of an economy when resources tied up in them could be used more efficiently elsewhere
(Caballero et al., 2008; Andrews et al., 2017; Banerjee and Hofmann, 2018). Another
government party, on the other hand, argues that companies struggling valiantly through the
Corona pandemic should not be allowed to give up prematurely (Johannes Fechner/ SPD).
According to the Fed-eral Ministry of Finance, a significant increase in insolvency figures in
the four-digit, possibly low five-digit range is to be expected for 2021. According to IMF
calculations, the state support measures adopted by the federal government would have saved
one in nine companies from in-solvency.
The suspension of the obligation to file for insolvency is likely to have mitigated short-term crisis
effects, but a further extension would run the risk of delaying many inevitable insolvencies.
As a result of the discussion, I therefore endorse the recommendation of the Research Institute
of the Federal Employment Agency that in the case of imminent insolvencies, however, the
prospect of a recovery of the business after the crisis should be examined in a targeted manner
and, accordingly, liquidity assistance or the granting of loans or participation from the public
side for a sustainable reorganisation should take place. In the case of unavoidable business closures,
skilled workers who have been made redundant represent an opportunity for growth in
prospering companies by hiring these skilled workers.
Unemployment rises, short-time work prevents mass unemployment
In the pandemic, the rise in unemployment and the increase in underemployment could not be
avoided despite generous financial aid. Nevertheless, the German labour market remained comparatively
robust overall. After the relaxation of measures for the pandemic, the labour market
recovered in the further course of the year, but the annual average unemployment rate of 2.65
million is 429,00 higher than in 2019. Underemployment also increased. A major reason for
this is that the labour market policy measures were not possible or only possible to a limited
extent due to the lockdown.
With the start of the lockdown in March, share of short-time work rose to an all-time high. The
peak in April includes almost 6 million people on short-time work, which corresponds to 18%
of all employees subject to social insurance contributions (statistics of the Federal Employment
Agency, 1/2021). With an average work loss of about 38%, the use of short-time work has
arithmetically secured jobs for about one million employees and prevented their (temporary)
unemployment (IAB).
2 Expansionary fiscal policy does not shake Germany's financial
stability
The German Council of Economic Experts expects a general government net lending of -123.5
billion euros (-3.5% of GDP) for 2021.
Table No. 3: Trend reversal in net lending/borrowing: expenditure exceeds revenue in
2020/2021
2019 20202
20212
2020s
20212
Mrd Euro
Veränderung
zum Vorjahr in %
Einnahmen 1.610,6 1.539,6 1.616,3 - 4,4 5,0
Ausgaben 1.558,1 1.724,3 1.739,7 10,7 0,9
Finanzierungssaldo 52,5 - 184,7 - 123,5 X X
Source: Statistisches Bundesamt for the German Council of Economic Experts' Annual Report 2020/21
Taking into account government credit programmes and government participation in the
Corona pandemic, which are included in gross debt but not in general government net
lending/net borrowing, the debt-to-GDP ratio is projected to increase to 72.1% in 2020. In 2021,
it will be similarly high. This development results from the expansion of public tasks due to the
pandemic and a strong decline in tax revenues. For the unscheduled new borrowing, Germany
has largely issued short-term bonds and few long-term bonds.
If the debt brake exemption is used, a repayment plan must be adopted in accordance with
Article 115 (2) sentence 7 of the Basic Law. This repayment plan adopted by the Bundestag for
the supplementary budgets of 2020 provides for linear-proportional repayment over 20 years
beginning in 2023 (Deutscher Bundestag, 2020a). Annual payments of around €5.94 billion
will thus be due for redemption by 2042, provided that the credit authorisations are fully
utilised. The Federal Government plans to comply with the requirements of the debt brake again
as of the 2022 budget. To this end, it plans to completely reduce the reserve built up in recent
years, which according to its own forecast should amount to 48.2 billion euros by the end of
2021, by 2024. The next Figure illustrates these performances in a compact form.
Table No. 4: Rapid debt reduction enables cushion for future negative impacts
Mrd Euro
100
8 0 -
ee-
4 0 -
2 0 -
2021 2022 2023 2024
Struktu rko m po ne n te
Ko nj j nhtu rkom po ne n te
Saldo finanzieller Transaktionen
Maximal zulässige Nettokreditaufrahme (Bund)
Nettokreditaufnarime (Geplant)
Maximal zulässige Nettokreditauf rahme
[Gesamtstaat nach EU-Fiskalregeln)
Quellen: BMR BMWl Europäische Kommission, eigene Berechnungen
©Sachverstandigen rat | 20-552-6
Source: German Council of Economic Experts' Annual Report 2020/21
The extent to which the consolidation of the national budget prescribed by the debt brake requires
concrete revenue or expenditure measures naturally depends on the development of actual
revenues and expenditures in the coming years. For example, a swift recovery followed by
sustained high growth would increase revenues while reducing the deficit and debt ratios. If the
low interest rate environment persists for a long time, interest savings by the government would
continue to support consolidation. For instance, Blanchard et al. (2020) and the EVIF (2020a)
as-sume that interest rates will remain below the GDP growth rate for a longer period of time
and thus make a substantial contribution to reducing the debt ratio. However, there are some
risks, for example that the interest rate growth ratio or the economic upswing will be slowed
down by demographic developments or that a certain decline in globalisation will have negative
effects.
The fiscal consolidation strategy is not supported by everyone. Achim Truger, for example, is
of the opinion that against the background of the risks of the debt brake, the stabilisation policy
requires a fundamental reform (Truger, 2016; Expertise 2007; JG2019 para. 562 ff, M V Schnabel
and Truger).
Conclusion
The Corona pandemic will accompany the German and global economy for a long time to come.
From my point of view, the Federal Government has so far succeeded in significantly supporting
the economy in overcoming the crisis through high investments.
The fiscal policy measures are sufficient in quantitative terms. Qualitatively, in my view, there
is the shortcoming that the intended use is not always sufficiently defined.
The economic stimulus package helps many, but not all. The suspension of the obligation to
file for insolvency may have mitigated short-term crisis effects, but a further extension would
delay many inevitable insolvencies. In the pandemic, the rise in unemployment and the increase
in underemployment could not be avoided despite generous financial aid. Nevertheless, the
German labour market has remained comparatively robust overall. The facilitation of the receipt
of short-time allowance and the extended period of receipt can be assessed as an effective
instrument.
The costs of the crisis are sustainable. The future course of stabilisation policy should include
conclusions from the current crisis. The course of budget consolidation is indispensable in the
future.
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Contact
Katrin Steyer
Siedlung 16a
08340 Schwarzenberg, Germany
Katrin.steyer.szb@gmail.com
VOLUNTARY PENSION ARRANGEMENTS THROUGH
THE OECD PRISM
JAROSLAV VOSTATEK
Abstract
Not even the extreme fiscal stimulation of supplementary pension saving schemes has led to
them playing a significant role in the provision of financial security for the elderly. The OECD
recommends that we should introduce occupational pensions or reform the pension saving
schemes in line with the neoliberal model, while at the same time making use of "soft
compulsory" instruments. The Ministry of Finance has proposed the introduction of long-term
investment accounts. The basic Czech pension pillar is de facto dominated by a flat pension,
supplemented with a small earnings-related pension. There is general agreement on separating
these two completely different schemes in the interests of making the pension system
comprehensible. This confirms the combination of a liberal and a social-democratic model. This
paper analyses these proposals with the objective of optimising Czech pension policy, including
the introduction of tax-free individual savings accounts.
Keywords
Czech pension reform; pension welfare regimes; voluntary pension schemes; occupational
pension schemes; individual savings accounts
JEL Classification
G20, H44, P51
Introduction
The Ministry of Finance ordered an analysis of the pension system from the OECD in response
to the "Architecture of the new pension system" presented by the Ministry of Labour and Social
Affairs (MoLSA). The proposal from the MoLSA and the OECD review are based on the
division of the public old-age pensions into 2 pillars/components: a flat pension in the amount
of 30% of the national average wage and an earnings-related pension. This will enable a
substantial increase in the transparency and therefore also the comprehensibility of the system
and it may become a springboard to further reform steps. "Voluntary private pensions should
be better designed to boost their capacity to complement public pensions" (OECD, 2020).
1 Key OECD recommendations
The OECD (2020) recommends strengthening the role of the "voluntary funded pension
arrangements":
• "Strengthen the role of the funded system in the overall pension system by introducing a
new, occupational pension scheme, or by improving the design of the existing
supplementary pension schemes.
• Improve the performance of pension funds by encouraging or nudging participants to switch
to participating funds as they have more flexibility to pursue growth investment strategies
because they do not have to provide an annual non-negative return guarantee, and by
promoting the access to an appropriate default investment strategy.
• Better align fees charged to participants with the costs incurred by the pension management
companies by analysing the cost of investing in different asset classes and applying a
regressive scale for management fees to pass on economies of scale to participants as assets
under management grow.
• Encourage participants to contribute more by redesigning some elements of state financial
incentives, setting up a mechanism where contributions increase automatically up to a preset
maximum, promoting employer contributions, and providing information about
expected benefits from the entire pension system.
• Lengthen contribution periods by increasing the minimum saving period to withdraw
retirement benefits and keep the state financial incentives.
• Consider introducing automatic enrolment into an occupational pension plan or a
participating fund, with appropriate default contribution rates and investment strategies.
• Extend the take-up of products providing lifelong retirement income by discouraging the
lump sum pay-out option and increasing the attractiveness of life annuities through
additional product features (e.g. guaranteed period, survivor option, or profit sharing)"
(OECD, 2020).
Several countries have seen the development of occupational pensions on the basis of a
voluntary choice or collective bargaining between the employers and the trade unions which
has resulted in a compulsory or quasi-compulsory system which may be distinctly reminiscent
of a social insurance system. Some countries apply behavioural economics here and this leads
to the "soft compulsion" of this security provision. In Czechia, occupational pension insurance
is de facto prohibited by the law regulating this insurance, by means of which an EU directive
aimed at creating a single market for funded occupational pensions within the E U has been
(formally) implemented. Occupational supplementary pension insurance was rejected by Prime
Minister Klaus on purely ultraliberal ideological grounds and this public policy still de facto
applies today. The OECD recommendations are aimed at the neoliberal modifications to
occupational pensions in the United Kingdom. In this regard, the author "only" recommends
lifting the ban on occupational pensions only.
One of the fundamental OECD recommendations involves motivating the participants of the
transformed funds to transition to the "participating funds" with no guarantee of an annual nonnegative
nominal yield. This should lead to a greater return, while the investment risk is fully
borne by the client. At the same time, "3/5 of people's money in participating funds has been
placed in conservative funds... These provide a lower yield than transformed funds...
According to pension company representatives, the interest in unprofitable conservative funds
is given by several factors: in general, this is due to the more cautious approach of Czechs to
140
investments. The risk of a loss is more significant to them than the possibility of higher earnings
in more dynamic funds which also invest in equities. A significant role is also played by the
fact that Czechs often conclude supplementary pension savings schemes after the age of fifty
when there is no longer any time for more courageous investments" (Hovorka, 2019).
The conspicuous preference for savings without risk is not a specifically Czech characteristic.
This has been borne out by, amongst other things, a selective survey undertaken in 10 European
countries: 73% of respondents preferred the safety/certainty of pension savings schemes over
the yield. Safety is the number one priority for 60% of respondents. Other significant priorities
include the option of interrupting the payment of contributions (33%), legacy (32%) and
liquidity (regular access to the savings, 32%). On the other hand, the yield/performance ranks
among the least significant priorities for pension saving schemes along with the transferability
of the savings within the E U (Insurance Europe, 2020). Behavioural economics have reached
the conclusion that the absolute majority of clients has no ability or need to choose a pension
product or fund.
The main purpose of purchasing Czech supplementary pension insurance does not involve
individual security in old age. The purpose is to divest excess liquidity and the tax optimisation.
The construct of supplementary pension insurance was also of fundamental significance to a
large number of participants: it was a simple bank savings product with a high degree of state
support in the form of state contributions (originally up to 50%!) with a guaranteed nonnegative
nominal yield. The fiscal illusion that the state support was free also played a
significant role here. „...the third pillar is not really a pension scheme. It is akin to a taxadvantaged
savings account. The system should not be presented to the public as a source of
meaningful future replacement income" (World Bank, 2017). „Personal pensions have
relatively wide take-up in only a few Member States (over 60% coverage in Czechia, over 30%
in ... Germany) while in most Member States take-up is moderate and fragmented, and in some,
nearly non-existent" (EC, 2017). „Pillar 3 (voluntary retirement savings) should not receive
... subsidies, which are regressive and also have not been shown to have any significant effect
on private saving" (Willmore, 2000). The third pension pillar has practically no significance for
most people throughout the world.
The vision of the OECD experts with regard to the need to develop state support for the 3r d
pension pillar in Czechia is derived from an international comparison of state support for private
pension schemes compiled by the OECD (2018). According to this comparison, Czechia is
"only" above average in its fiscal stimulation for the main private pension plans; this is given
by the processing method: the OECD study ranked supplementary pension savings paid by
participants as the main Czech pension plan here; the calculation presupposes savings at the
amount of 5% of the gross wage throughout the entire active life. In reality, the participants'
average saving in this country is at the level of a mere 2.3% of wages which means a state
contribution at the amount of 24.3% of the participants' contributions). As such, the state
support for higher contributions on the part of the participants, as modelled by the OECD, is
relatively low here. Moreover, a typical Czech client in 2018 had only saved for 8 years; the
OECD presupposes the payment of contributions for a period of 45 years. The OECD
calculation is marked as Czechia (OECD) in the Figure 1, while the real value of the fiscal
i4i
stimulation is marked as Czechia (Author): 65.1% of the employer's contribution - the highest
value among all the countries. Almost all other countries have occupational pensions, which
are of considerably greater significance than personal pensions, as their main pension plan; in
our country, the occupational pensions have merely been "substituted" by the employers'
contributions to the personal pensions.
Figure No. 1: Financial incentives of the main private pension plans in 2018 (% of the
pension contributions of an average earner)
Source: OECD (2018), Author
The OECD recommendations for the reform of the 3 pension pillar unilaterally prefer the
neoliberal pension policy which would lead to its transformation into a so-called 2n d
pension
pillar according to the World Bank typology. The interest of, for example, Czech pension
companies in such reform is understandable, but it is at odds with the standard task of the 3r d
pension pillar in the OECD countries. The task of any occupational pension funds should be
derived from the interests of the trade unions and the employers. There is a certain amount of
room available for their existence ("pension gap") and public policy may also focus on a socialdemocratic
policy: to strengthen the social pension insurance. Voluntary supplementary
pension insurance of this type could also be considered.
2 Proposed reform
Next to the supplementary pension savings, we also have the so-called private life insurance
which has an analogous tax support as supplementary pension savings, albeit without the state
contribution provided to the contributions of participants in supplementary pension savings
schemes up to the amount of 12,000 CZK per annum. Any other participant contributions up to
the amount of 24,000 CZK per annum are subject to a tax deduction (with a flat 15% rate). In
the case of the so-called private life insurance, the participants are only entitled to the tax
deduction of up to 24,000 CZK per annum. By contrast, employer contributions towards both
products are subject to the same tax regime!
An associated Czech problem involves all-purpose so-called building saving schemes. The
greatest absurdity lies in the provision of a state contribution on fictitious building savings when
concluding a so-called bridging loan; the higher interest on this type of loan then draws off the
majority of the state contributions! (The volume of bridging loans is 6 times higher than the
volume of so-called loans from building savings that are provided after the completion of the
saving period.)
The government's draft bill which changes some of the laws associated with the development
of the capital market also includes the introduction of long-term investment accounts held by
entities authorised to keep records of investment instruments or entities authorised to receive
deposits from the public in the "savings products for old age" (Babis et al., 2020). The proposal
for the introduction of "long-term investment accounts" is a result of lobbying by interested
market entities that have pointed to the uneven taxation of various investment products. In this
regard, the Czech National Bank has also pointed to the advisability of undertaking a thorough
discussion as to the effectiveness of the 3r d
pension pillar in association with its tax support.
The OECD report also includes a strongly reserved attitude towards long-term investment
accounts.
A fundamental reform of the existing (supplementary) pension insurance, pension savings,
private life insurance and building savings is essential. A liberal policy would be the simplest
one from the technical point of view: cancel all state support for financial products and reduce
taxation. A social-democratic policy could have a wider focus: the cancellation of support for
financial products may be combined with an increase in public pensions - for example with the
argument that the relative amount of old age pensions in our country is (slightly) below the
OECD or E U average ("pension gap"). A conservative (Christian-democratic) policy could
involve a transition to the exclusive application of a tax deduction whereby the pay-out of any
pension savings would be fully subject to personal income tax (EET tax regime). This is the
most common practice abroad; it is mainly beneficial for higher income groups. Under the
conditions of essentially single income tax rate, this system is equivalent to the TEE tax regime
where savings or investments are made from taxed income and capital incomes are tax-free. In
our country, the TEE regime is applied to investments made in mutual and investment funds.
Over the last decade, the TEE tax regime has been increasingly recommended throughout the
world, to the detriment of the EET regime, because it is substantially simpler and also more
equitable (an equal approach to all income groups); and that is without mentioning the fact that
there is a significant risk when applying the EET system that the tax rates might change in the
future (when, for example, the entire pension savings are taxed). For Czechia we may
unequivocally recommend the TEE tax regime, if a state support is to be preserved. The state
contribution to supplementary pension savings and building savings must be cancelled. (For
totally unclear reasons, the aforementioned government draft bill has ignored state
contributions despite the fact that this involves groundless preferential treatment for
supplementary pension savings!)
Technically, annuities are ideal products for old-age security. However, this suits relatively few
clients when they must purchase an (expensive!) annuity using their own money. Annuities are
therefore a problem for the private sector as has been borne out by recent British and German
experience: the compulsory annuitization of pension savings has been cancelled. Pension
savings themselves are a rather imperfect replacement for an annuity, which is borne out by,
amongst other things, the fact that these savings are often modified with the option of, for
example, purchasing a home or taking out a loan from the savings. Moreover, housing is
increasingly a more advantageous investment for old age. The option to withdraw savings
prematurely is also used quite frequently; this applies to 30-40% of "pension" savings in the
US.
Not only the Ministry of Finance has referred to foreign individual savings accounts (ISA) in
context to the proposed "long-term investment account". Products such as the new British
individual savings account (ISA) or the Canadian tax-free savings account (TFSA) may
constitute an optimal solution for the Czech third pension pillar. Their fundamental behavioural
trick lies in the fact that the client is limited in the amount of annual or life-long
deposits/investments that can be made (for example, up to 60,000 CZK per annum under our
conditions), but unlimited with regard to the time and amount when making withdrawals from
the savings. "The TFSA is a long-term investment vehicle. Its best use is for saving for
retirement!" (Kasper, 2019). These products are subject to the TEE tax regime; it is simple and
does not require the agendas of state contributions and tax deductions. Tax-free
savings/investment accounts also open an equal business opportunity for all the appropriate
financial companies; the superfluous companies fall back. The exemption of any yields from
taxation can also be supported by the argument that the interest/appreciation (for people) is low,
inflation is around 3% and therefore any tax mainly taxes inflation.
Conclusion
The Czech 3r d
pension pillar requires fundamental reform simply because it essentially does not
perform its general basic function - it is not a tool to secure people in their old age. It does not
thoroughly perform this role anywhere in the world, because its compulsory output is not a
pension (annuity). Not even state support can help in this regard, albeit that the state support in
our country is relatively the largest one in the world - in the case of employer contributions to
supplementary pension savings and private life insurance. The fundamental defect of this Czech
pension pillar lies in the unconstitutionality of the state support - different fiscal approaches to
comparable products and their providers. The solution is the public choice of one of the basic
pension social models. The Christian-democratic model, oriented towards public and
occupational pension insurance, can be ruled out under the existing Czech conditions. We also
do not recommend the neoliberal model which is oriented towards hard or soft compulsory
private pensions due to their insufficient yields and the transfer of the investment risk to the
clients.
The OECD recommends an expansion of neoliberal elements in the Czech 3r d
pension pillar.
This may lead to the introduction of occupational pension insurance which is generally
considered to constitute the 2n d
pension pillar throughout the world. Tax-free individual
saving/investment accounts are the best long-term investment vehicle for saving for retirement.
References
Babiš, A. a kol. (2020). Novela zákonů v souvislosti s rozvojem kapitálového trhu předložena
Poslanecké sněmovně. Shrnutí závěrečné zprávy RIA. [online]. Praha: Ministerstvo financí ČR.
Available from: https://www.mfcr.cz/cs/soukromy-sektor/kapitalovy-trh/podnikani-na-
kapitalovem-trhu/2020/novela-zakonu-v-souvislosti-s-rozvojem-k-39356
EC (2017). Commission Staff Working Document accompanying the Proposal for a
Regulation of the European Parliament and of the Council on a pan-European Personal
Pension Product (PEPP). [online]. Brussels. Available from:
https://data.consilium.europa.eu/doc/document/ST-10654-2017-ADD-l/en/pdf
Hovorka, J. (2019). Horší než penzijní připojištění. Proč většina lidí v nových fondech
nevydělává? [online]. Available from: https://www.penize.cz/doplnkove-penzijni-
sporeni/406471-horsi-nez-penzijni-pripojisteni-proc-vetsina-lidi-v-novych-fondech-
nevydelava.
Insurance Europe (2020). What do Europeans want from their pension savings? Pension
Survey - Key Findings, [online]. Available from:
https://www.insuranceeurope.eu/sites/default/files/attachments/What%20do%20Europeans%2
0want%20from%20their%20pension%20savings.pdf.
Kasper, R. (2019). The New 2020 TFSA Explained. Money after Graduation, [online].
Available from: https://www.moneyaftergraduation.com/tfsa-explained/
OECD (2018). OECD Pensions Outlook 2018. [online]. Paris: OECD Publishing. Available
from: https://doi. org/10.1787/pens_outlook-2018-en.
OECD (2020). OECD Reviews of Pension Systems: Czech Republic, [online]. Paris: OECD
Publishing. Available from: https://doi.org/10.1787/e6387738-en.
Willmore, L. (2000). Three Pillars of Pensions? A Proposal to End Mandatory Contributions,
[online]. United Nations DESA Discussion Paper No. 13. Available from:
https://www.un.org/esa/desa/papers/2000/esa00dpl3.pdf
World Bank (2017). Capital Market Assessment / Market Development Options: Czech
Republic. [online]. Washington: The World Bank. Available from:
https://www.mfcr.cz/cs/soukromy-sektor/kapitalovy-trh/podnikani-na-kapitalovem-
trhu/2017/zprava-svetove-banky-o-kapitalovem-trhu-29766.
Contact
prof. Ing. Jaroslav Vostatek, CSc.
University of Finance and Administration
Estonská 500
101 00 Prague 10, Czech Republic
jaroslav.vostatek@vsfs.cz
CYBERTERRORISM: A GLOBAL THREAT TO FINANCIAL
INSTITUTIONS
MARTIN ZUBKO
Abstract
Cyber threats have emerged to the most sophisticated, devastated, and unpredictable attacks on
financial institutions affecting integrated financial systems worldwide. In 2018,
Cobalt/Carbanak syndicate was a model example of global cyber-crime resulting in stealing
more than €1 billion from over 100 financial institutions in 40 countries. Most of the cyber
security concern concentrates on technical parameters or criminal aspects of such incidents.
Nevertheless, cyberterrorism remains in the shadows. Therefore, the paper examines a thin line
between cyber-crime and cyberterrorism related to financial institutions from an
interdisciplinary perspective of international relations and finance. The aim of the article is to
reflect on the latest cyberterrorism trends leading to a necessity of a much deeper
interdisciplinary cooperation to produce better educated cyber security personnel able to predict
a role of terrorism in financial cyber-attacks and determine the responsibility of governments.
Keywords
Cyberterrorism, Financial Institutions, Terrorism, Cyber-crime, Cyber Threats, ISIL
JEL Classification
F52, N20, 033
Introduction
Since 2020, the COVID-19 pandemic has fast-forwarded the digitalisation of financial sector
across the industry. New technologies, remote tools and cyber adjustment to financial products
were implemented to help people to manage their finance remotely (mainly using their
electronic communication devices, mostly mobile phones). Payment methods have shifted from
cash-oriented to electronic by contactless methods (mobile phones, electronic watches,
contactless cards). Thus, people see physical currency, coins, and notes much less frequently
than before.
As finance has advanced to a cyberspace using digital numbers to express a value on a banking
account instead of a safe box full of notes, coins, or gold bullion; criminals, hackers and
terrorists have followed that path, too. The world has been witnessing unprecedented challenges
with an unpredictable human behaviour causing relevant security concerns. In fact, do people
differentiate between their behaviour in cyberspace and when entering a bank building?
Usually, they claim that a physical bank building represents some sort of 'guarantee' that
nothing can happen to their deposits, loans, or other financial instruments.
This originates in the philosophy of national states and maintaining the order within them. In
particular, the majority of states implement two principles of rules: "(1) a set of constitutive
rules that establish the rights and obligations of the constituent entities and (2) a set of
proscriptive rules that outlaw certain types of behaviors" (Brenner, 2004). However, these
thoughts assume territorial boundaries as a space of execution. Nevertheless, cyber-crime and
cyberterrorism have neither physical boundaries nor global law enforcement regulations.
As people tend to think within physical boundaries, they often overlook cyberspace. This leads
to an inability to focus on different methods of securing financial operations and instruments.
Moreover, to detect those cyber-crimes (frauds) and prosecute the criminals. Finally, when
talking about financial crimes, detected and undetected, it is particularly challenging to track
the money through sophisticated schemes. Therefore, cyberterrorism and terrorism should be
on the table as viable options to determine the level of security risk when approaching cyber-
crimes.
Hence, the paper offers three lenses through which it analyses the topic. First, it reveals some
fundamental characteristics and taxonomy of cyber-crime to portrait a foundation for potential
cyber-terrorist attacks. Second, it elaborates on cyberterrorism and finance to get a complex
picture of how those criminals might related to terrorism. Third, the essay analyses the areas of
a relevant cooperation based on the interdisciplinary approach of two disciplines: finance and
international relations.
1 Theoretical Framework
The paper deals with cyber-crime, cyberterrorism, and terrorism linked to financial institutions.
Therefore, the foundation for the theoretical approach is based on constructivism. As Alexander
Wendt1 1
once gave an example of 500 British nuclear warheads and 5 North Korean ones, those
5 warheads represented much bigger threats to the United States. So, "constructivists go beyond
the material reality by including the effect of ideas and beliefs on world politics. This also
entails that reality is always under construction, which opens the prospect for change." (Theys,
2018). This provides a solid foundation for cyberterrorism. It is even possible to compare those
5 North Korean nuclear weapons with one or two laptops that might lead to a collapse of a bank
or a regional financial market.
So, a material structure is not irrelevant, but only when scholars provide ideational structure to
those two laptops, then they become plausible threats. A cybercriminal needs an action to
produce some outputs. Therefore, as Adler pointed out that constructivists' view is "the manner
in which the material world shapes and is shaped by human action and interaction depends on
dynamic normative and epistemic interpretations of the material world" (Adler, 1997).
Applying this lens to cyberterrorism and terrorism, it is important to focus on "collectively held
or intersubjective ideas and understanding on social life" which takes place in the most of
decision making processes in those spheres (Finnemore and Sikkink, 2001). Ruggie came up
1 1
Wendt, A. (1995) 'Constructing International Polities', International Security, 20(1), pp. 71-81.
doi: 10.2307/2539217.
147
with an interesting statement of "human consciousness and its role in international life" as a
foundation of constructivism. So, despite more views on constructivism, this theoretical
approach provides a solid foundation for researching cyberterrorism; mainly from a
philosophical perspective (human behaviour, social engineering, legal norms, security of the
weakest link of the chain).
In terms of methods used to conduct the research, the author relies mainly on a critical discourse
analysis and systematic analysis of relevant documents/sources. The main impact is on
connecting the ideas of the socially constructed world and insights of current practises from
experts on financial crime to both, physical and cyberspace.
In terms of legal guidance and philosophical perspective on cyberspace, the key document is
the work of Susan W. Brenner, Toward a Criminal Law for Cyberspace: Distributed Security.
It provides fundamental methodological instruments on how to explore cyberspace in the
context of international law and regulations.
The ideological framework is formed in three steps: a) understanding and identifying drivers
behind cyber-crime in terms of social engineering and taxonomy; b) describing the links
between cyber-crime and cyberterrorism; c) articulating the meaning of an interdisciplinary
approach to cyberterrorism as a viable threat to financial institutions.
2 Cybercrime
Cyber-crimes in financial sphere have attracted criminals from all over the world as there are
no physical boundaries between an attacker (criminal) and target (financial
institution/customers). In other words, how many times can a criminal rob a bank before the
authorities identify or arrest him/her? Contrary, how many times can a cybercriminal rob a bank
using his laptop, sitting somewhere in the world, and being concealed behind various IP
addresses? These elementary questions open the Pandora's Box of cyber security dimension. It
involves, if the quantum computing is excluded, unlimited possibilities on both sides, security
system and penetrating criminals.
A model example is Cobalt/Carbanak syndicate that stole more than €1 billion globally. There
are tonnes of papers written about this case, however, most of them deal with technical
questions, operational procedures, and implications for the future computer systems. However,
the focus should also be on a missing link, the weakest element of each security system, a
human being.
In fact, cyber criminals did not break security systems of banks, but security thinking of people
using "social engineering to convince the user click a link to download a malicious macro"
(CBR Staff Writer, 2018). Thus, cyber-crime vulnerabilities should not be determined by
measuring the capabilities of technical instruments only, but also by recognizing social
construction of human thinking operating in a complex scheme of social engineering. In other
words, developing the strongest computer security based on artificial intelligence and
sophisticated elements would be a great 'firewall' against penetrators, however, only if
administered by non-humans. As soon as a human being enters this equitation, the situation will
change - a human being becomes the weakest security point of the system.
Therefore, it is not a coincidence that Kevin Mitnick, a world-famous hacker, mentioned 'social
engineering' 16 times in his book Ghost in the Wires. In particular, the book contains one of
the most pragmatic and semantically accurate definition of social engineering referring to as
"the casual or calculated manipulation of people to influence them to do things they would not
ordinarily do. And convincing them without raising the least hint of suspicion." (Mitnick and
Simon, 2011). Thus, since people have progressed further into an online dimension, from
ordering the food to international financial transactions, it is necessary to provide trainings to
the staff of financial institutions about the phenomenon of social engineering misused by cyber
criminals. Certainly, cyber criminals might bypass humans by hacking the security system,
however, looking at the level of cyber security in these days worldwide, it is an extremely
demanding task in comparison with using a human being as the weakest security element of a
particular financial institution.
As cyber crime benefits of a low risk of being detectable as cyber criminals are well
camouflaged behind various layers of anonymity, de facto operating in a safe environment, and
having virtually limitless options where to strike next, the role of human psychology is turning
into a major driving force behind both, attacks, and counter measurements. To put it differently,
social engineering works only if people behind it understand human psychology.
Experts cannot come up with effective solution against cyber-crime unless they perceive that
"our psychological weaknesses and needs, coupled with our faulty memory and flighty attention
span, leave us highly vulnerable to deception and emotional manipulation." (Conteh and Royer,
2016). Three years after catching the head of the Cobalt/Carbanak syndicate, financial
institutions certainly invested millions into cyber security, making their security system more
resilient against cyber-crime. According to LexisNexis research group "every $1 of fraud now
costs U.S. retail and ecommerce merchants $3.60 which is 15% higher than the pre-Covid study
in 2019 which was at $3.13." (The True cost of Fraud™ Study, 2021). As banking is a global
industry, similar expenses will be in other countries.
So, three major (none technically related) points that humanity should learn from the
Cobalt/Carbanak cyber-crime are: a) cyber-crime affecting financial institutions will be rising
due to a relatively secure environment of conducting it, b) the role of social engineering will
play the crucial factor as people's ability to distinguish between a real world and augmented
reality will decrease, c) understanding human psychology will be the major advantage of
tackling the cyber crime in the future.
These aspects push the topic to the next section of understanding the taxonomy of cyber-crime.
Marcus Rogers developed his categorisation of hackers with the help of works of Furnell and
Gordon1 2
describing the following categories (Rogers, 2006):
1 2
Furnell, S. (2003) 'Cybercrime: Vandalizing the Information Society', in Lovelle, J.M.C. et al. (eds) Web
Engineering. Berlin, Heidelberg: Springer Berlin Heidelberg (Lecture Notes in Computer Science), pp. 8-16.
doi: 10.1007/3-540-45068-8 2. Gordon, S. (2000) Virus Writers: The End of The Innocence? IBM Thomas J.
1. Novice
2. Cyber-punks
3. Internals
4. Petty Thieves
5. Virus Writers
6. Old Guard hackers
7. Professional Criminals
8. Information Warriors
9. Political Activist
Based on this classification, ten years later, Monica Lagazio formed an updated classification
adding some current trends in cyber security (Lagazio, 2016):
1. Script kiddies, newbies, novices
2. Hacktivists, political activists
3. Cyberpunks, crashers, thugs
4. Insiders, user malcontents
5. Coders, writers
6. White-hat hackers, old guard, sneakers
7. Black-hat hackers, professionals, elite
8. Cyber terrorists
Although some would dispute this classification as being generalised and dated considering the
year of 2021, there are at least three important implications to acknowledge. First, accessibility
to computers and information technologies has been enormous in the recent years, multiplying
the number of potential cyber adversaries. Second, what used to be a domain of armed robbery
or sophisticated criminals has been taken over by cyber criminals of professional grade. Third,
cyberspace has been attracting terrorist organisations with a newly emerged way of causing
damage, for example, to attack energy infrastructure, financial institutions, or medical facilities.
Taken into consideration the Cobalt/Carbanak syndicate, looking at the development of cybercriminal
taxonomy and enforcing these findings in the post-COVID-19 world; it is evident that
cyber criminals will occupy much more of the security forces time than ever before.
In terms of financial institutions, the most dangerous groups are insiders (people working in a
particular institution with direct access to the security system), professionals (criminals aiming
for the money), and cyber terrorists (people who based their acts on an ideology causing
tremendous damage to regional, international, and global systems). Even though motives are
different, financial losses are massive. However, cyber-crimes linked to financial institutions
are not entirely about financial losses. Reputation, trust, future plans, and innovation are
uniformly affected. Nevertheless, there is one group that should get a greater attention Watson
Research Center. Available at:
https://citeseerx.ist.psu.edu/viewdoc/dowri
i<50
terrorists. There is a thin line between cyber-crime and terrorism. Therefore, cyberterrorism as
a threat should be incorporated in financial institutions' security system prospects.
3 Cyberterrorism
Cyberterrorism is a relatively new domain for terrorists, and it probably remains as a top
terrorist instrument in the future (believing that the post-COVID-19 world will be much more
about a cyber space). The European Union (EU) published 'Systemic Cyber Risk' document in
which there are three classifications of cyber threats (European Systemic Risk Board, 2020):
Table No. 1: Cyber risk: threat actors, motivations and goals
Threat Actor Motivation Goals Examples
Nation-states, geopolitical, disruption, permanent data corruption
proxy groups idealogical destruction,
damage,
theft, espionage,
financial gain
targeted physical damage
power grid disruption
payment system disruption
fraudulent transfers
espionage
Cybercriminals enrichment theft/financial gain cash theft
fraudulent transfers
credential theft
Terrorist groups, ideological, disruption leaks, defamation
hacktivists, discontent distributed denial of service
insider threats (DDoS) attacks
Source: Author's interpretation according to European Systemic Risk Board, 2020.
The Table 1 highlights that cyber-crime and terrorism have entered the official discourse of
cybersecurity experts. Certainly, there are many reasons behind this shift. However, there is an
alarming statistic providing a base for even further investigation. From "February to April 2020,
amid the COVID-19 surge, cyberattacks against the financial sector increased by 238 percent"
(Kellermann and Murphy, 2020). As COVID-19 accelerates cyber-attacks, it also raises many
questions about a destination of the money looted from those financial institutions or a
description of impact of cybercriminal activities. In other words, when reading about
Cobalt/Carbanak syndicate, it is not necessary to figure out an exact number of how much
money was stolen, but to determine how much of that money ended up in the hands of terrorists.
According to the latest report of United Nations Office of Counter-Terrorism from January
2021, "Financial disruptions caused by the pandemic appear to have increased terrorist groups'
reliance on criminal activities, including electronic fraud and cybercrime." (Twelfth report of
the Secretary-General on the threatposed by ISIL (Da 'esh) to international peace and security
and the range of United Nations efforts in support of Member States in countering the threat,
2021). That means that terrorists have entered cyber space as an additional dimension to classic
ways of obtaining funds for their activities (smuggling, trafficking, frauds, counterfeit products,
local people's contribution). Therefore, as Vladimir Voronkov, undersecretary-General for
Counter-Terrorism and the head of the United Nations Office of Counter-Terrorism, said: "We
must defeat ISIL in the cyberspace."(ISIL Must Be Defeated in Cyberspace, Under-SecretaryGeneral
Tells Security Council, as Terrorist Group Takes Advantage of Pandemic-Related
Disruptions, 2021).
However, what is a close connection between financial institutions and cyberterrorism? First, a
direct connection is related to cyber-crime itself - is it possible to exclude that the stolen money
ended up in terrorist groups? Second, a private data security - is it possible to exclude that the
stolen private data can allow terrorists to get access to financial resources?
It is certainly difficult to answer both questions with 'No' as a cyber world is incredibly
complex. So, what happens if ISIL cyber terrorist groups are added to this analysis?
According to a research report of SITE Intelligence Group, there are three main hacking/cyberterrorist
groups within the ISIL structure, the "Caliphate Cyber Army" (CCA), the "Islamic
State Hacking Division" (ISHD), and an umbrella group by the name "United Cyber Caliphate"
(UCC)." (Kill lists from pro-is hacking groups, 2016). Except hacking activities, these groups
intentionally break into databases to get personal private data of employees. Then, they create
so-called 'kill lists' for the ISIL followers.
A good example is a case of Ardit Ferizi, 'a terrorist hacker' and his collaboration with ISHD.
"As alleged in the criminal complaint, Ferizi, also known by his hacking moniker
"Th3Dir3ctorY, " is believed to be the leader of a Kosovar internet hacking group called
Kosova Hacker's Security (KHS). Ferizi hacked into the computer system of a victim
company located in the United States and stole the PII13
of thousands of individuals. He
thenprovided the PII of over 1,000 U.S. service members andfederal employees to ISIL
to be used against those employees. Between June and August 2015, Ferizi provided
unlawfully obtained PII to ISIL member Junaid Hussain, aka Abu Hussain al-Britani.
On Aug. 11, 2015, in the name of the Islamic State Hacking Division (ISHD), Hussain
posted a tweet titled "NEW: U.S. Military AND Government HACKED by the Islamic
State Hacking Division!" which contained a hyperlink to a 30-page document. " ("ISILLinked
Hacker Arrested in Malaysia on U.S. Charges," 2015).
This example indicates that although cyber criminals can use various instruments to shield
themselves, financial institutions should concentrate on links to possible terrorists. Was Ferizi
a terrorist or professional cybercriminal? The definitive answer is difficult to enunciate.
However, this example shows a thin line between financial crime in cyberspace and terrorism.
Moreover, there are three implications worth of re-thinking.
First, through cyber operations targeting the financial sector or private data of people, terrorists
can strengthen their financial reserves and spend the money for anything they like. Second,
penetrating to financial institutions, directly or indirectly (through private data breaches),
terrorists feed their propaganda among potential followers (also targeting young people who
Personally Identifiable Information (PII).
might support or join cyber operations worldwide). Third, there is a strong educational factor
influencing understanding of terrorists among potential followers/fighters.
In the past, the Western media portrayed a terrorist as a simple man with an old Kalashnikov
dressed in some traditional suit fanatically following Islam. As cyber space allows various
operations to target infrastructures, important security systems and facilities providing life
support; the notion of a terrorist is changing. In fact, what's about a sketch of a young man
dressed in a hoodie with a second-hand laptop learning Kali Linux while working as a junior
security officer in a local bank? So, a picture of a cyber-terrorist is certainly neither defined nor
understood by the general public and security forces. A much more research focus is required
in this unexplored area. Especially, to vary between terrorism and state-sponsored terrorism in
correlation to finance to better track the terrorist money.
4 Interdisciplinary cooperation
Critics would argue that it is hopeless to track cyberterrorism because it is practically
undetectable. There would be a partial agreement among security experts, however, also a
challenge by interdisciplinary scholars. Since cyberterrorism is a complex issue, it requires
expertise from diverse fields.
To learn top-notch cybercriminal skills (hacking, penetration of security systems, online
frauds), terrorists need some time to acquire those skills. In fact, a previous generation had
almost no needs to learn those techniques. However, the COVID-19 pandemic has moved lots
of people's work to cyberspace and home offices, making them much more exposed to cyber
threats, including terrorism. Terrorists will follow the trend and world should expect more
cyberattacks in the future.
Therefore, expert groups should form an interdisciplinary cooperation targeting cyberterrorism
in the financial sector. As "the capacity for deviant behavior is a constant across human
populations" (Brenner, 2004), security experts need data from numerous fields to determine
(and develop) the most advanced regulations based not only on the past experience, but also on
the future behaviour of people. The most noteworthy is to foresee 'creativity' of cybercriminals
and terrorists.
This opens the door to a close partnership of security experts from finance and international
relations who can produce relevant scenarios with an objective of tackling cyberterrorism and
financial crimes. Coming back to social engineering, taxonomy, experience of the past and
knowledge of human behaviour, cybersecurity should not neglect the latest trends in
geopolitics, international relations, diplomacy, and artificial intelligence development.
On one hand, specialisation of institutions serves adequately as a source of knowledge.
However, the forthcoming world will be about connectivity and ability to develop conclusions
while engaging in online space. Therefore, interdisciplinary knowledge and research will be
indeed more relevant in the future.
A good example is a special report generated by McKinsey & Company predicting the future
correlation of cybersecurity in financial institutions.
A traditional way of dealing with financial frauds and cybersecurity is based on "collaboration".
An ongoing implementation of new methods is being based on "partial integration". The future
processes in financial institutions tackling financial crimes will be based on "complete
integration" (Hasham et al., 2019). As the report pointed out, financial institutions are generally
privately owned and have a solid foundation of cybersecurity experts. However, the problematic
is a view of regulators that have no capacity to catch up with the latest trends. Consequently,
the rules are changing very slowly. Thus, a more holistic approach is desired to balance the
private sector with the state-controlled regulators to accelerate required changes.
The current ineffective way of tackling financial crime and cyber threats has many critics. Since
"most financial-crime A M L practitioners will say that their focus is on ticking boxes for
regulatory compliance rather than investigating leads and intercepting proscribed movements
of funds," it is truly difficult to connect various experts and set up an interdisciplinary approach,
data sharing and data analytical frameworks (Murphy et al., 2020). Even major financial crimes
like Cobalt/Carbanak, North Korean cyber-crime targeting North American banks or security
breach in the central bank of Bangladesh with untraceable $101 mil still missing have
contributed little to some better solutions. This does not mean that an international collaboration
is not functioning.
So, despite that fact that an interdisciplinary approach involves many proponents, lots of work
needs to be done on an international arena to address specific goals. For example, a better
integration of expertise groups, more relevant regulatory policies developed by regulators, a
stronger academic cooperation between various disciplines dealing with finance, terrorism, and
behavioural science. However, it is not solely about a better integration but also about
appropriate ways how to come up with conclusions and predict that a cyber incident will
happen.
Especially, international relations could strengthen the recognition of financial cybersecurity
experts, as they have trackable research dealing with terrorism based on various points of view.
Contrary, finance has never been as global as now. So, this provides an opportunity that many
pertinent topics overlap.
The biggest hope in an interdisciplinary approach is to find out the answer to the following
statement: "the assessment that a major cyberattack poses a threat to financial stability is
axiomatic — not a question of if, but when. Yet the world's governments and companies
continue to struggle to contain the threat because it remains unclear who is responsible for
protecting the system." (Maurer and Nelson, 2021). That means that experts should think in
much more advanced scenarios. Who is going to prosecute those criminals and under which
jurisdiction? This question cannot be resolved by regulators or experts, it demands an
interdisciplinary approach with a global reach, so most countries support the notion in
multilateral discussions developing strong frameworks to make lives of cybercriminals as
complicated as possible, if not eliminating them at all.
Conclusion
Cyberterrorism has developed into a genuine threat to financial institutions stimulated by the
COVID-19 pandemic when more human work, including the financial sector, moved online.
Cyber-crime has been established in that online space in a 'comfortable' position, seeking a
high degree of anonymity and safety for adversaries.
There are, therefore, three tasks for experts and scholars to tackle cyberterrorism in financial
institutions worldwide. First, to understand taxonomy and motives behind cyber-crimes.
Categorisation of cybercriminals, from people trying to follow some YouTube videos about
system penetration to cyber-terrorists, helps to develop more effective security frameworks in
financial institutions and guidance for better cybersecurity. Then, understanding direct and
indirect links to terrorists clarifies what specific security instruments should financial
institutions use in cooperation with other security forces (private/governmental). Behavioural
science, international relations, financial transaction knowledge and other disciplines can
substantially improve the understanding behind the connectivity of finance and terrorist
organisations. The paper, therefore, concludes that although experts have many relevant
research papers and ideas to tackle cyber-crimes in finance with possible cyber-terrorist's links,
a much deeper integration and output evaluation are needed to develop effective security
frameworks not only in financial institutions but also on a global scale of financial transaction
and money tracking. Consequently, the major task is to analyse and predict where the money
ends up after detecting cyber-crimes in the financial sector.
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Contact
Martin Zubko
Metropolitan University Prague
Dubecska 900/10
100 00 Praha 10, Czech Republic
zubkmOax@student.mup.cz
Tel: +420 721 710 118
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