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"Banks and banking Austria History."
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The Austrian banking crisis of 1931: a reassessment
The current literature on the causes of the Austrian financial crisis in 1931 emphasises both foreign and domestic factors. This article offers new data to analyse this issue. Its findings reinforce the importance of a domestic factor in bringing about the crisis: universal banks’ exposure to industrial enterprises, which were the universal banks’ main borrowers and creditors. During the 1920s, these industrial enterprises failed to perform well, rendering the universal banks insolvent. The Credit-Anstalt, which became an ‘acquirer of last resort’ for three other universal banks during the 1920s, was insolvent as early as 1925. The bank, however, could have avoided bankruptcy had it been spared the burden of Unionbank's non-performing assets.
Journal Article
Entrepreneurial ignition of the business cycle: The corporate finance of malinvestment
This paper provides an extension of the Austrian Business Cycle Theory (ABCT) framework by integrating corporate capital structure, the monetary policy transmission channel, and capital budgeting analyses. In this manner, the paper presents the business cycle as being exogenously set up by central bank authorities, but endogenously set off by commercial banks and enterprises making use of central bank-distorted market signals. The cyclical boom is modeled as a gradual process where both latitudinal and longitudinal investment expansions are possible with either internal or external finance. Bank credit creation, although a necessary condition for igniting the boom, is diversely transmitted to the economy because of heterogeneity in entrepreneurial misjudgment, corporate capital structure strategies, and the class of projects available to the enterprises.
Journal Article
Securitization and regulatory arbitrage within the ABCT framework
This paper discusses the consequences of securitization and how it links to the Austrian Business Cycle Theory (ABCT). The argument that securitization is behind fiduciary credit expansion preceding the 2008 crisis is incomplete. Consolidated balance sheet analysis demonstrates that securitization per se actually sterilizes the inflationary effect of previous fiduciary credits by transforming them into credits backed by voluntary savings. This sterilization stage is subsequently followed by new fiduciary credits issuance as securitization creates excess reserves and excess capital for banks. However, when securitization is used as a tool to implement arbitrage strategies of the Basel prudential rules, it enables banks to create more fiduciary credit while time preference remains unchanged. This creates the conditions for business cycle amplification.
Journal Article
Austria : 2014 Article IV Consultation-Staff Report; Press Release; and Statement by the Executive Director for Austria
KEY ISSUES Context: Austria did not experience a severe boom-bust cycle and came through the crisis relatively well. The main impact was on the banking sector and public debt. With cyclical slack low and the recovery taking hold, this is the time to resolve crisis legacies and address long-standing structural issues. Outlook and risks: The recovery is taking hold, driven by a pick-up in exports. The most acute risks are mainly geopolitical and could in particular lead to financial spillovers. Financial sector policies: Bank restructuring should now be rapidly completed and bad asset disposal accelerated. Large internationally active banks should stand ready for further capital increases, and the EU banking union framework needs to be swiftly transposed at the national level. Public expenditure reforms: More decisive expenditure reforms in key areas such as pensions, health care, subsidies, and fiscal federalism would generate savings that could be used for both an accelerated debt reduction and lower labor taxation. Boosting potential output growth: Enhancing IT adaptation, improving the performance of the education system, facilitating access to financing for innovative start- ups, and reducing administrative barriers for new businesses would raise potential growth and labor productivity.
eBook
An Austrian Defense of the Euro and the Current Antideflationist Paranoia
In this paper I defend the euro from the point of view of Austrian economics. Following Mises and Hayek I will try to demonstrate the euro is finally acting as a proxy of the gold standard disciplining politicians and putting a limit to the growth of the welfare state. In order to accomplish this task I will divide my presentation in four different parts: first, I will explain the ideal monetary system according to Austrian economists, and why they have traditionally defended, as second best, a system of fixed exchange rates against monetary nationalism and flexible exchange rates; second, I will analyze the euro is acting as a “proxy” for the gold standard, and why the champion of the free market should support the euro while the only alternative is a return to monetary nationalism; third, I will make some comments on the diverse anti-euro coalition; and fourth, I will analyze the true cardinal economic sins of Europe and especially the fatal error of the European Central Bank, finishing with some concluding remarks comparing the euro vs. the dollar, as well the traditional positions of Hayek vs. Keynes.
Journal Article
THE CREDITANSTALT CRISIS OF 1931 AND THE FAILURE OF THE AUSTRO-GERMAN CUSTOMS UNION PROJECT
This article reveals that the diplomatic and financial history of 1931 was even more turbulent than believed to date. New documents found at the Bank of England show that an intricate system of cross-deposits was set up by the Austrian Central Bank covertly to direct funds to the Creditanstalt via American and British banks – to compensate it for taking over the bankrupt Bodencreditanstalt – suggesting that the received accounts of the collapse of the Creditanstalt need to be revised. Further, documents have come to light which show that France exacerbated the 1931 run on the Austrian schilling in order to force Austria to abandon the Austro-German customs union project of that year. This article considers the relationship between the collapse of the Creditanstalt and the abandonment of the Austro-German customs union, incorporating the new evidence to provide a novel interpretation of the financial diplomacy of that year.
Journal Article
Monetary Policy in Austria–Hungary, 1876–1913: An Econometric Analysis of the Determinants of the Central Bank’s Discount Rate and the Liquidity Ratio
This paper presents a model to explain the official discount rate of the Central Bank of Austria-Hungary from 1876 to 1913. The discount rate is assumed to depend on the liquidity ratio of the Bank, defined as the ratio of its stock of metals to banknotes issued, and on changes in foreign discount rates. The paper also presents an equation explaining the liquidity ratio. We use \"not equally spaced chronologically ordered data,\" referring to the 50 discount rate changes enacted. The regressions confirm that the liquidity ratio was the main determinant of the discount rate and that Germany (and not Great Britain) played a significant role in determining the Austro-Hungarian discount rate and the liquidity ratios, supporting the view that the classical gold standard was a decentralized multipolar system rather than a system fully dominated by London as suggested by Keynes. The regressions also suggest that, although Austria-Hungary had an inconvertible paper currency (1879-1892) and fluctuating exchange rates (1876-1895) and formally joined the gold standard only in 1902, it \"shadowed\" the behaviour of gold standard Central Banks with such consistency that the stability of the estimated regressions was relatively unaffected by the frequent institutional changes. [PUBLICATION ABSTRACT]
Journal Article
Using ARIMA Forecasts to Explore the Efficiency of the Forward Reichsmark Market: Austria-Hungary, 1876-1914
We explore the efficiency of the forward Reichsmark market in Vienna between 1876 and 1914. We estimate ARIMA models of the spot exchange rate in order to forecast the one-month-ahead spot rate. In turn we compare these forecasts to the contemporaneous forward rate, i.e., the market's forecast of the future spot rate. We find that shortly after the introduction of a \"shadow\" gold standard in the mid-1890s the forward rate became a considerably better predictor of the future spot rate than during the prior flexible exchange rate regime. Between 1907 and 1914 forecast errors were between a half and one-fourth of their pre-1896 level. This implies that the Austro-Hungarian Bank's policy of defending the gold value of the currency was successful in improving the efficiency of the foreign exchange market.
Journal Article
Using Psychology to Reinforce the Austrian Argument for Freedom: The Case of Loan Decisions
The emphatic statements of F. A. Hayek, and other members of the Austrian school of economics, in advocacy of a free society have produced much misgivings among the economics profession. The paper aims to make the Austrian views more intelligible by tracing them back to a theory of the mind that Hayek develops in The Sensory Order. More generally, the paper argues that Austrian economics would greatly benefit from extending itself from a pure logic of choice toward psychological analysis. The argument is illustrated throughout the paper by examples taken from the loan decision process of a banker.[PUBLICATION ABSTRACT]
Journal Article