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The present dissertation includes three research papers dealing with the following banking topics: (dis-) incentives and risk taking, earnings management and the regulation of supervisory boards.
„Do cooperative banks suffer from moral hazard behaviour? Evidence in the context of efficiency and risk“:
We use Granger-causality techniques to evaluate the intertemporal relationships among risk, efficiency and capital. We use two different measures of bank efficiency, i.e., cost and profit efficiency, since these measures reflect different managerial abilities. One is the ability to manage costs, and the other is the ability to maximize profits. We find that lower cost and profit efficiency Granger-cause increases in liquidity risk. We also identify that credit risk negatively Granger-causes cost and profit efficiency. Most importantly, our results show a positive relationship between capital and credit risk, thus displaying that moral hazard (due to limited liability and deposit insurance) does not apply to our sample of cooperative banks. On the contrary, we find evidence that banks with low capital are able to improve their loan quality in subsequent periods. These findings may be important to regulators, who should consider banks’ business models when introducing new regulatory capital constraints.
„Earnings Management Modelling in the Banking Industry – Evaluating valuable approaches“:
Accounting research has separately studied the field of Earnings Management (EM) for non-financial and financial industries. Since EM cannot be observed directly, it is important for every research question in any setting to find a verifiable proxy for EM. However, we still lack a thorough understanding of what regressors can add value to the estimation process of EM in banks. This study tries to close this gap and analyses existing model specifications of discretionary loan loss provisions (LLP) in the banking sector to identify common pattern groups and specific patterns used. Thereupon, we use an US-dataset from 2005-2015 and apply prevalent test procedures to examine the extent of measurement errors, extreme performance and omitted-variable biases and predictive power of the discretionary proxies of each of the models. Our results indicate that a thorough understanding about the methodological modelling process of EM in the banking industry is important. The currently established models to estimate EM are appropriate yet optimizable. In particular, we identify non-performing asset patterns as the most important group, while loan loss allowances and net charge offs can add some value, though do not seem to be indispensable. In addition, our results show that non-linearity of certain regressors can be an issue, which should be addressed in future research, while we identify some omitted and possibly correlated variables that might add value to specifications in identifying non-discretionary LLP. Results also indicate that a dynamic model and endogeneity robust estimation approach is not necessarily linked to better prediction power.
„Board Regulation and its Impact on Composition and Effects – Evidence from German Cooperative Bank“:
This study employs a system GMM framework to examine the impact of potential regulatory intervention regarding the occupations of supervisory board members in cooperative banks. To achieve insights the study proceeds in two different ways. First, the author investigates the changes in board structure prior and following to the German Act to Strengthen Financial Market and Insurance Supervision (FinVAG). Second, the author estimates the influence of Ph.D. degree holders and occupational concentration on bank-risk changes in consideration of the implementation of FinVAG. Therefore, the sample consists of 246 German cooperative banks from 2006-2011. Regarding bank-risk the author applies four different measures: credit-, equity-, liquidity-risk and the Z-Score, with the former three also being addressed in FinVAG. Results indicate that the implementation of FinVAG results in structural changes in board composition, especially at the expense of farmers. In addition, the implementation affects all risk-measures and relations between risk-measures and supervisory board characteristics in a risk-reducing and therefore intended way.
To disentangle the complex relationship between board characteristics and risk measures the study utilizes a two-step system GMM estimator to account for unobserved heterogeneity, and simultaneity in order to reduce endogeneity problems. The findings may be especially relevant for stakeholders, regulators, supervisors and managers.
In an Arrow-Debreu world of unrestricted access to perfect and competitive financial markets, there is no need for accounting information about the financial situation of a firm. Because information is costless, share- and stakeholders are then indifferent in deposits and securities (e.g., Holthausen & Watts 2001; Freixas & Rochet 2008). How-ever, several reasons exist indicating a rejection of the assumptions for an Arrow-Debreu world, hence there is no perfect costless information. Moreover, the distribu-tion of information is asymmetric, causing follow-through multi-level agency prob-lems, which are the main reasoning for the variety of financial and non-financial ac-counting standards, regulatory and advisory entities and the auditing and rating agency profession. Likewise, these agency problems have been at the heart of the accounting literature and raised the question of whether and how accounting information can help resolve these problems. ...
This book produces three main results. First, from publicly available statistics, it can be inferred that the interest rate risk from on-balance sheet term transformation of banks in Germany exceeds the euro area average and is bound to increase even further. German banks push for shorter-term funding and hardly counteract the increased demand for longer-term loans. Within Germany, savings banks and cooperative banks are particularly engaged. Second, the supervisory interest rate shock scenarios are found to be increasingly detached both from the historic and the forecasted development of interest rates in Germany. In particular, German banks have been exposed to fewer and smaller adverse changes of the term structure. This increasingly limits the informative content of mere exposure measures such as the Basel interest rate coefficient when used as risk measures as is common practice in banking supervision and economic research. An impact assessment further supports the conclusion that the least that is required is a more comprehensive set of shock scenarios. Third and finally, there is a reasonable theoretical rationale and there is strong empirical evidence for banks' search for yield in interest rate risk. In addition to the established positive link between the term spread and the taking of interest rate risk by banks an additional negative link can be explained theoretically and there is significant empirical evidence for its existence and relevance. There is even a threshold of income below which banks' search for yield in interest rate risk surfaces openly.
Banks perform important functions for the economy. Besides financial intermediation, banks provide information, liquidity, maturity- and risk-transformation (Fama, 1985). Banks ensure the transfer of liquidity from depositors to the most profitable investment projects. In addition, they perform important screening and monitoring services over investments hence contributing steadily to the efficient allocation of resources across the economy (Pathan and Faff, 2013). Since banks provide financial services all across the economy, this exposes banks (as opposed to non-banks) to systemic risk: the recent financial crisis revealed that banks can push economies into severe recessions. However, the crisis also revealed that certain bank types appear far more stable than others. For instance, cooperative banks performed better during the crisis than commercial banks. Different business models may reason these performance-differences: cooperative banks focus on relationship lending across their region, hence these banks suffered less from the collapse of the US housing market.
Since cooperative banks performed better during the crisis than commercial banks, it is quite surprising that research concerning cooperative banks is highly underrepresented in the literature. For this reason, the following three studies aim to contribute to current literature by examining three independent contemporaneous research questions in the context of cooperative banks.
Chapter 2 examines whether cooperative banks benefit from revenue diversification: Current banking literature reveals the recent trend in the overall banking industry that banks may opt for diversification by shifting their revenues to non-interest income. However, existing literature also shows that not every bank benefits from revenue diversification (Mercieca et al., 2007; Stiroh and Rumble, 2006; Goddard et al., 2008). Stiroh and Rumble (2006) find that large commercial banks (US Financial Holding Companies) perceive decreasing performance by shifting revenues towards non-interest income. Revenues from cooperative banks differ from those of commercial banks: commercial banks trade securities and derivatives, sell investment certificates and other trading assets. Concerning the lending business, commercial banks focus on providing loans for medium-sized and large companies rather than for small (private) customers. Cooperative banks rely on commission income (fees) from monetary transactions and selling insurances as a source of non-interest income. They generate most of their interest income by providing loans to small and medium-sized companies as well as to private customers in the region. These differences in revenues raise the question whether findings from Stiroh and Rumble (2006) apply to cooperative banks. For this reason, Chapter 2 evaluates a sample of German cooperative banks over the period 2005 to 2010 and aims to investigate the following research question: which cooperative banks benefit from revenue diversification?
Results show that findings from Stiroh and Rumble (2006) do not apply to cooperative banks. Revenue concentration is positive related to risk-adjusted returns (indirect effect) for cooperative banks. At the same time, non-interest income is more profitable than interest income (direct effect). The evaluation of the underlying non-interest income share shows that banks who heavily focus on non-interest income benefit by shifting towards non-interest income. This finding arises due to the fact, that the positive direct effect dominates the negative indirect effect, leading in a positive (and significant) net effect. Furthermore, results reveal a negative net effect for banks who are heavily exposed to interest generating activities. This indicates that shifting to non-interest income decreases risk-adjusted returns for these banks. Consequently, these banks do better by focusing on the interest business. Overall, results show evidence that banks need time to build capabilities, expertise and experience before trading off return and risk efficiently with regard on revenue diversification.
Chapter 3 deals with the relation between credit risk, liquidity risk, capital risk and bank efficiency: There has been rising competition in the European banking market due to technological development, deregulation and the introduction of the Euro as a common currency in recent decades. In order to remain competitive banks were forced to improve efficiency. That is, banks try to operate closer to a “best practice” production function in the sense that banks improve the input – output relation. The key question in this context is if banks improve efficiency at a cost of higher risk to compensate decreasing earnings. When it comes to bank risk, a large strand of literature discusses the issue of problem loans. Several studies identify that banks hold large shares of non-performing loans in their portfolio before becoming bankrupt (Barr and Siems, 1994; Demirgüc-Kunt, 1989). According to efficiency, studies show that the average bank generates low profits and incorporates high costs compared to the “best practice” production frontier (Fiordelisi et al., 2011; Williams, 2004). At first glance, these two issues do not seem related. However, Berger and DeYoung (1997) show that banks with poor management are less able to handle their costs (low cost-efficiency) as well as to monitor their debtors in an appropriate manner to ensure loan quality. The negative relationship between cost efficiency and non-performing loans leads to declining capital. Existing studies (e.g. Williams, 2004; Berger and DeYoung, 1997) show that banks with a low level of capital tend to engage in moral hazard behavior, which in turn can push these banks into bankruptcy.
However, the business model of cooperative banks is based on the interests of its commonly local customers (the cooperative act: § 1 GenG). This may imply that the common perception of banks engaging in moral hazard behavior may not apply to cooperative banks. Since short-term shareholder interests (as a potential factor for moral hazard behavior) play no role for cooperative banks this may support this notion. Furthermore, liquidity has been widely neglected in the existing literature, since the common perception has been that access to additional liquid funds is not an issue. However, the recent financial crisis revealed that liquidity dried up for many banks due to increased mistrust in the banking sector. Besides investigating moral hazard behavior, using data from 2005 to 2010 this study moves beyond current literature by employing a measure for liquidity risk in order to evaluate how liquidity risk relates to efficiency and capital.
Results mostly apply to current literature in this field since the empirical evaluation reveals that lower cost and profit-efficiency Granger-cause increases in credit risk. At the same time, results indicate that credit risk negatively Granger-causes cost and profit-efficiency, hence revealing a bi-directional relationship between these measures. However, most importantly, results also show a positive relationship between capital and credit risk, thus displaying that moral hazard behavior does not apply to cooperative banks. Especially the business model of cooperative banks, which is based on the interests of its commonly local customers (the cooperative act: § 1 GenG) may reason this finding. Contrary to Fiordelisi et al. (2011), results also show a negative relationship between capital and cost-efficiency, indicating that struggling cooperative banks focus on managing their cost-exposure in following periods. Concerning the employed liquidity risk measure, the authors find that banks who hold a high level of liquidity are less active in market related investments and hold high shares of equity capital. This outcome clearly reflects risk-preferences from the management of a bank.
Chapter 4 examines governance structures of cooperative banks: The financial crisis of 2007/08 led to huge distortions in the banking market. The failure of Lehman Brothers was the beginning of government interventions in various countries all over the world in order to prevent domestic economies from even further disruptions. In the aftermath of the crisis, politicians and regulators identified governance deficiencies as one major factor that contributed to the crisis. Besides existing studies in the banking literature (e.g. Beltratti and Stulz, 2012; Diamond and Rajan, 2009; Erkens et al., 2012) an OECD study from 2009 supports this notion (Kirkpatrick, 2009). Public debates increased awareness for the need of appropriate governance mechanisms at that time. Consequently, politicians and regulators called for more financial expertise on bank boards. Accordingly, the Basel Committee on Banking Supervision states in principle 2 that “board members should remain qualified, individually and collectively, for their positions. They should understand their oversight and corporate governance role and be able to exercise sound, objective judgement about the affairs of the bank.” (BCBS, 2015). Taking these perceptions into consideration the prevailing question is whether financial experts on bank boards do really foster bank stability?
This chapter aims to investigate this question by referring to the study from Minton et al. (2014). In their study, the authors investigate US commercial bank holding companies between the period 2003 and 2008. The authors find that financial experts on the board of US commercial bank holding companies promote pro-cyclical bank performance. Accordingly, the authors question regulators view of more financial experts on the board leading to more banking stability.
However, Minton et al. (2014) do not examine whether their findings accrue due to financial experts who act in the interests of shareholders or due to the issue that financial experts may have a more risk-taking attitude (due to a better understanding of financial instruments) than other board members.
Supposed that their findings accrue due to financial experts who act in the interests of shareholders. Then financial experts on the board of banks where short-term shareholder interests play no role (cooperative banks) may prove beneficial with regard on bank performance during the crisis as well as in normal times. This would mean that they use their skills and expertise to contribute sustainable growth to the bank. Contrary, if this study reveals pro-cyclical bank performance related to financial experts on the board of cooperative banks, this finding may be addressed solely to the risk-taking attitude of financial experts (since short-term shareholder interests play no role). For this reason, this chapter aims to identify the channel for the relation of financial experts and bank performance by examining the following research question: Do financial experts on the board promote pro-cyclical bank performance in a setting where short-term shareholder interests play no role?
Results show that financial experts on the board of cooperative banks (data from 2006 to 2011) do not promote pro-cyclical bank performance. Contrary, results show evidence that financial experts on the board of cooperative banks appear to foster long-term bank stability. This suggests that regulators should consider ownership structure (and hence business model of banks) when imposing new regulatory constraints for financial experts on the bank board.
Im Rahmen dieser Arbeit wird ein Modell entwickelt, welches auf Basis von länderübergreifenden Forderungs- und Verbindlichkeitsstrukturen die internationale Vernetzung der Banken abbildet. Die Analyse offenbart, dass systemische Risiken im Allgemeinen von wenigen Instituten ausgehen. Zudem wird aufgezeigt, dass solche Risiken vornehmlich in Banken aus Volkwirtschaften auftreten, in denen die Finanzindustrie eine exponierte Stellung einnimmt. Auf der anderen Seite sind die Institute aus diesen Ökonomien auch überproportional anfällig gegenüber systemischen Schocks und somit erhöhten Ansteckungsgefahren ausgesetzt. Systemische Risiken gehen nicht nur von Großbanken aus, sondern auch der Ausfall mittelgroßer oder gar kleiner Institute kann erhebliche Konsequenzen für das Gesamtsystem nach sich ziehen. Darüber hinaus ist ersichtlich, dass höhere systemische Risiken von Banken ausgehen, die einen hohen Verflechtungsgrad innerhalb des Bankensystems haben. Die potentiellen Schäden für das Gesamtsystem sind umso höher, je mehr signifikante Geschäftsbeziehungen eine Bank zu anderen Banken aufweist. Systemische Risiken können nicht grundsätzlich innerhalb eines nationalen Bankensystems isoliert werden, denn ein Großteil der Folgeausfälle erfolgt länderübergreifend. Die Analyse bringt zudem zu Tage, dass seit dem Jahr 2006 systemische Risiken im Allgemeinen zurückgingen.
In der vorliegenden Arbeit werden zunächst regulatorische Instrumente zur Reduzierung systemischer Risiken für alle Banken vorgestellt. Es lässt sich konstatieren, dass Eigenkapitalerhöhungen die Widerstands- und Verlustabsorptionsfähigkeit der Banken maßgeblich stärken würden. Auch können durch geeignete Großkreditvorschriften Risiken für das Gesamtsystem reduziert werden. Um das System entscheidend zu stabilisieren, müssten diese Instrumente allerdings erheblich von den aktuellen Bestimmungen abweichen. Die Untersuchungen zeigen, dass eine Eigenkapitalausstattung der Banken von 12% der risikoungewichteten Bilanz (Leverage Ratio) oder Großkreditvorschriften für Exposures zu einzelnen Gegenparteien von höchstens 18% des haftenden Eigenkapitals maßgeblich zu einer adäquaten bzw. notwendigen Finanzmarktstabilität beitragen können.
Diese Arbeit befasst sich ferner mit möglichen regulatorischen Ansätzen zur Reduzierung systemischer Risiken speziell für systemrelevante Banken. Eine mögliche regulatorische Alternative könnte eine Kombination sowohl höherer Eigenkapitalvorschriften als auch verschärfter Großkreditvorschriften darstellen. Durch eine Leverage Ratio von mindestens 9% für nicht-systemrelevante Institute und eine höhere Quote von 11% für systemrelevante Banken, kombiniert mit einem maximalen Exposure zwischen zwei Vertragsparteien von 23% sowie zu systemrelevanten Banken von maximal 18%, ließe sich das systemische Risiko im Bankensystem entscheidend senken.
In der Dissertationsschrift wird der Einfluss von Kosten, Steuern und Sterblichkeit auf die Vorteilhaftigkeit der Riester-Rente aus einzelwirtschaftlicher Perspektive modelltheoretisch untersucht. Die Arbeit ist dabei zweigeteilt. Während sich der erste Teil insbesondere mit den Auswirkungen von Kosten in der Ansparphase der Riester-Rente und damit auf die Investitionsentscheidung eines Riester-Sparers beschäftigt, wird im zweiten Teil im Speziellen die Auszahlungsphase unter besonderer Berücksichtigung von Sterblichkeitsaspekten behandelt.
Im Detail lassen sich die wichtigsten Ergebnisse der Hauptkapitel im jeweils gewählten Modellrahmen wie folgt thesenartig zusammenfassen:
Aufgrund der staatlichen Förderungen und der Reglementierung bezüglich der Verrechnung der Abschluss- und Vertriebskosten im AltZertG erweisen sich eine klassische Riester-Rentenversicherung sowie ein Riester-Banksparplan auch bei Einbezug von Kosten direkt vergleichbaren, ungeförderten Anlagealternativen überlegen (Kapitel 3).
Die Doppelbelastung mit Einmalkosten im Zeitpunkt des Vertragsabschlusses sorgt dafür, dass der Wechsel eines Riester-Anbieters nur bei entsprechend hohen Kostenentlastungen beim Neuanbieter vorteilhaftig ist (Kapitel 4). Bei einer klassischen Riester-Rentenversicherung sind hierfür prozentual gesehen wesentlich höhere Entlastungen erforderlich als bei fondsgestützten Anlageprodukten. Die Einführung eines Kostenkoeffizienten unterstützt den Anleger bei der Wechselentscheidung nur in der Produktart der klassischen Rentenversicherungen, den fondsgestützten Produkten lässt sich aufgrund der Wechselwirkung zwischen übertragenem Vermögen und Kosten kein eindeutiger Koeffizient zuordnen.
Unter der Annahme vollständiger Sicherheit auf Seiten des Anlegers kann ein kritischer Kapitalmarktzinssatz berechnet werden, oberhalb dessen eine schädliche Verwendung des angesparten Riester-Vermögens einer rentenförmigen Auszahlung vorgezogen wird (Kapitel 7). Eine Verwendung des geförderten Vermögens für die Altersvorsorge ist somit letztlich nicht garantiert. Je jünger dabei der Anleger im Zeitpunkt des Vertragsabschlusses ist, desto geringer fällt der kritische Kapitalmarktzins aus.
Wird ein risikoneutraler Anleger unterstellt, dessen individuelle Sterblichkeit dem vom Statistischen Bundesamt prognostizierten Bevölkerungsdurchschnitt entspricht, so ist die Riester-Rente aufgrund der langen Förderungsdauer besonders für junge Anleger der Unterlassensalternative überlegen (Kapitel 8). Allerdings zieht die Mehrzahl der untersuchten Anleger, deren Sterblichkeit im Bevölkerungsdurchschnitt liegt, eine schädliche Verwendung des Riester-geförderten Altersvorsorgevermögens einer gesetzlich vorgeschriebenen, rentenförmigen Kapitalisierung vor.
Sozioökonomische Faktoren beeinflussen in Abhängigkeit von der tatsächlichen Ausprägung der Sterblichkeitsdifferenzen entscheidend die Vorteilhaftigkeit der Riester-Rente (Kapitel 9). Neben der geringeren finanziellen Bildung und der Anrechnung der Rentenleistungen aus der Riester-Anlage auf die Grundsicherung im Alter kann dies als Erklärungsansatz dafür herangezogen werden, dass Gering-verdiener in der Grundgesamtheit der Riester-Sparer eher unterrepräsentiert sind.
The present dissertation analyzes whether bank debt lending influences certain managerial decisions of borrowers, and if so, how. More precisely, the thesis investigates the influence of bank debt lending on the cost of debt and capital structure of firms, and on the accounting behavior of borrowers prior to borrowing new bank debt. The major aim of the dissertation is to deliver empirical evidence that central managerial decisions of companies are not only made by managers and equity owners but also driven by important debt investors. The objects of discussion are German small and medium-sized enterprises (SMEs). These firms are particularly suitable for this analysis, as they commonly have high bank debt proportions.
The dissertation comprises three separate empirical analyses, which investigate selected aspects in the above mentioned context. Section 3.1 inspects the impact of the Basel II Capital Accord and the financial crisis on the cost of debt of German SMEs. Basel II formalized the credit assessment of debtors. This might have led to higher costs and a higher risk awareness of banks. Banks might have tried to refinance those additional costs by imposing tighter credit terms on debtors. Especially SMEs might face a higher cost of debt, as they tend to have comparably high proportions of bank debt, low equity ratios, and consecutively lower ratings than big companies. The results presented in Section 3.1 indicate a significant rise of the cost of debt since 2007. Unfortunately, the amendment of Basel II was followed by the financial crisis. It is difficult to separate the effect of the reform and the one of the crisis on the costs of debt capital of German SMEs. The presented analysis controls for several possible interdependencies be-tween credit costs, credit shortage and the insolvency risk of companies. However, none of the analyzed facts indicates a significant change in the extent of bank credit granting to SMEs during the financial crisis that would justify higher costs of debt capital. The results might point out that banks made use of the special situation of the financial crisis and raised credit standards for SME loans.
Section 3.2 examines whether bank debt financing drives certain accounting choices of Ger-man SMEs. At least since Basel II, banks have to base their credit assessments on objective, quantitative ratings, which commonly rely on financial statement data. As loan interest rates account for a significant proportion of the cost of capital of SMEs, their incentive to optimize loan conditions is obvious. Under the assumption that SMEs are aware of the importance of financial statements data in credit assessments, they might have an incentive to direct their financial statements at banks. More precisely, SMEs might strive to exploit their asymmetric information advantage over banks by manipulating earnings with the intention to achieve decent credit terms. The results presented in Section 3.2 show that SMEs have significantly higher total accruals in the period prior to borrowing new bank debt than in other periods. Moreover, a higher bank debt proportion is accompanied by higher total accruals. Hence, particularly bank-dependent firms seem to alter their accounting behavior prior to the important corporate financing event of bor-rowing new bank debt. Finally, the study investigates whether earnings manipulation is detected by banks or whether it is effective and influences the cost of debt of German SMEs. Empirical results in Section 3.2 indicate that SMEs, which report positive discretionary accruals are re-warded in terms of a lower cost of debt. This might imply that banks do not see through earnings manipulation.
Section 3.3 contains results of a comprehensive survey of German SMEs, which intends to further analyze the research questions posed in Section 3.1 and 3.2. First, the survey aims to verify or falsify the results concerning the impact of Basel II on the cost of debt and the re-quirements to obtain a loan for SMEs since 2007. A large proportion of survey respondents complained about a higher effort needed to obtain a new bank loan since 2007. Moreover, for the majority of survey participants both the collateral demanded by banks and the strictness of covenants increased since Basel II. In addition, almost half of surveyed SMEs experience higher costs of bank debt since the amendment of the reform. The second part of the survey aims to investigate whether SMEs apply measures of earnings manipulation in the period prior to bor-rowing new bank debt. The majority of SMEs admit that they would use both certain means of real activities and accrual manipulation in order to achieve decent credit terms in the subsequent debt contract negotiation.
Taking these empirical results into consideration, the dissertation shows that certain manage-rial decisions of German SMEs are influenced by debt holders. Results in Sections 3.1 and 3.3 indicate that SME bank lending was affected by Basel II and the financial crisis. The cost of debt of German SMEs is significantly higher since Basel II, even after controlling for potential influences of the financial crisis. These higher costs of debt might have additional side effects on further corporate financing and/or investment decisions. Furthermore, results in Sections 3.2 and 3.3 indicate that bank debt lending influences accounting choices of German SMEs, particu-larly in the period before borrowing new bank debt. SME use both means of real activities and accrual management in order to achieve decent credit terms. This change of accounting behavior might be accompanied by effort, additional effects on other corporate contracts, and notable economic costs.
This dissertation provides both empirically and theoretically new insights into the economic effects of housing and housing finance within NK DSGE models. Chapter 1 studies the drivers of the recent housing cycle in Ireland by developing and estimating a two-country NK DSGE model of the European Economic and Monetary Union (EMU). It finds that housing preference (demand) and technology shocks are the most important drivers of real house prices and real residential investment. In particular, housing preference shocks account for about 87% of the variation in real house prices and explain about 60% of the variation in real residential investment. A robustness analysis finally shows that a good part of the variation of the estimated housing preference shocks can be explained by unmodeled demand factors that have been considered in the empirical literature as important determinants of Irish house prices. Chapter 2 deals with the implications of cross-country mortgage market heterogeneity for the EMU. The chapter shows that a change in cross-country institutional characteristics of mortgage markets, such as the loan-to-value (LTV) ratio, is likely to be an important driver of an asymmetric development in the housing market and real economic activity of member states. Chapter 3 asks whether monetary policy shocks can trigger boom-bust periods in house prices and create persistent business cycles. The chapter addresses this question by implementing behavioral expectations into an otherwise standard NK DSGE model with housing and a collateral constraint. Key to the approach in chapter 3 is that agents form heterogeneous and biased expectations on future real house prices. Model simulations and impulse response functions suggest that these assumptions have strong implications for the transmission of monetary policy shocks. It is shown that monetary policy shocks might trigger pronounced waves of optimism, respectively, pessimism that drive house prices and the broader economy, all in a self-reinforcing fashion. The chapter shows that in an environment in which behavioral mechanisms play a role an augmented Taylor rule that incorporates house prices is superior, because it limits the scope of self-fulfilling waves of optimism and pessimism to arise. Chapter 4 challenges the view that the observed negative correlation between the Federal Funds rate and the interest rate implied by consumption Euler equations is systematically linked to monetary policy. Using a Monte Carlo experiment based on an estimated NK DSGE model, this chapter shows that risk premium shocks have the capability to drive a wedge between the interest rate targeted by the central bank and the implied Euler equation interest rate, so that the correlation between actual and implied rates is negative. Chapter 4 concludes by arguing that the implementation of collateral constraints tied to housing values is a promising way to strengthen the empirical performance of consumption Euler equations.