Analysis of the impact of retail structured products on the stability and risk of financial institutions and financial markets

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This research proposal focuses on structured financial products, which are tailored to the specific needs of retail investors und marketed in Germany using the term "Zertifikat". Retail investors lost an estimated EUR 700 mn of investments in such products in the course of the bankruptcy of the issuer Lehman Brothers in September 2008. This triggered a vibrant public debate in the media and in politics about retail structured products and their prudential regulation. The debate focused on how to improve transparency of the potential risks from the investors' perspective. The impact of retail structured products on the stability and risk of the issuing financial institution and on the underlying financial markets has not been discussed so far. However, this question is especially relevant with respect to potential risks in the future. This research proposal has the objective to analyze this critical relationship from a theoretical point of view as well as from an empirical perspective. The following specific research questions will be answered: Can financial institutions increase their firm value by issuing retail structured products? How do these products impact the optimal capital structure and probability of default of the issuer? How do the hedging activities of the issuers impact the underlying financial markets? How should the products and the issuers be regulated?