11th presentation of Klaus Liebscher Award

Young economists receive highest OeNB award for outstanding research on European integration.

At the 43rd Economics Conference of the Oesterreichische Nationalbank (OeNB), OeNB President Claus J. Raidl announced the winners of the Klaus Liebscher Award, which was conferred for the11th time.

This year’s two prize-winning papers, which were selected from numerous excellent submissions, address particularly topical economic policy issues and display outstanding academic quality: “Sovereign Risk and Bank Risk Taking” by Anil Ari, University of Cambridge, and “Why Are Banks Not Recapitalized During Crises” by Matteo Crosigniani, New York University Stern School of Business.

Anil Ari’s paper analyzes why undercapitalized banks in euro area countries under stress hold high volumes of sovereign bonds, why depositors move their savings deposits abroad and companies are cut off from bank financing. The author shows that banks in euro area crisis countries can, in principle, choose between two responses: (1) ensuring their solvency even in the case of a sovereign default by holding as few sovereign bonds as possible; (2) following strong incentives to opt for a risky portfolio featuring a high share of sovereign bonds and constraining corporate lending. Which strategy will serve banks’ best will depend on savers’ optimism or pessimism, respectively, depending on which the equilibrium situation will vary: if savers are pessimistic, for instance, they will hold few deposits. Banks must then offer higher interest, which in turn strengthens their incentive to take risky portfolio decisions.

Matteo Crosigniani’s paper also discusses the root causes for the sluggish banking sector recapitalization in those euro area countries that were most strongly hit by the crisis. The explanation his analysis arrives at is based on the interlinkage of incentive problems in the public and banking sectors: For undercapitalized banks, there is an incentive to invest in domestic sovereign bonds, as potential losses are then limited by the volume of invested capital. For the public sector, on the other hand, undercapitalized banks are the ideal buyers of domestic sovereign bonds. Banks’ investment in domestic sovereign bonds, however, comes at the expense of domestic lending, thereby reducing tax revenues. By exploring the link between public and private incentives, the paper explains the rising demand for domestic sovereign bonds in the euro area periphery, the decline in lending to the private sector and the persistent undercapitalization of the banking sector.

The Klaus Liebscher Award was established in 2005 on the occasion of the 65th birthday of former OeNB Governor Klaus Liebscher in recognition of his commitment to Austria’s participation in Economic and Monetary Union and to the cause of European integration. Every year, up to two papers by young economists from EU Member States or candidate countries are awarded EUR 10,000 each. Papers must be deemed excellent in scientifically discussing topics of European integration and Economic and Monetary Union. The Klaus Liebscher Award is the highest academic award the Oesterreichische Nationalbank bestows. See www.oenb.at for further details.