Policy evaluation with sufficient macro statistics: a primer

The goal of the paper is to detect the factors that affect financial performance of the European banks and the cross – sectional differences that may exist. The European banking sector is interesting due to its special characteristics and structure. The stability of the sector is based on structural elements (competition, capital structure, regulation, etc.) and its performance. The paper addresses the issue of the banking sector performance using two different econometric approaches. In both blocks of research ROA is used ROA as a performance index for Europe’s banks. The first approach has been realized by using four econometric methods [LAD (least absolute deviations), RREG (robust regression), ordinary least squares (OLS) and Quantile regressions] and the second approach is panel data regressions (Fixed and Random Effects) and tries to find if there are differences among different panels of European banks (PIGS-not PIGS, North-South, Entity type, Corporate governance system). The independent variables used in both groups of research can be categorized into six groups of indicators: ratings (country and bank), size, ownership, corporate governance, capital adequacy or capital structure and loan growth. The data used for the empirical analysis cover the period from 2004 to 2011, is focused on the twenty seven (27) European Union countries. The statistical results show that performance of banks in Europe is dependent on predictable factors and on factors like the credit ratings. The results also show that the European banking sector is not homogenized. There are significant differences in size, spatial distribution, performance, financial structure, etc. This results are important because as performance is not homogenized and the factors that determine performance have different weight in each subsystem, the European banking system is not isomorphic. Hence, each subsystem must have a different set of rules and strategies to enhance performance. The results are especially important for policy makers and explaining the events of the recent history.

Research Question: How do ESG and financial performance indicators vary according to different classifications of European banks? Motivation: Banks’ ESG performance and its relationship with corporate financial performance represents a field of continuous interest for researchers and practitioners. The results of previous studies are still mixed, either positive, negative, or even neutral. What’s new? The novelty of this paper is represented by the statistical comparison of variables that measure the ESG and financial performance of European banks based on three classifications that we propose (i.e. the geographical regions of Europe, functional currency, and cluster analysis on GDP and population of European countries, respectively). To the best of our knowledge, there are no studies applied to the banking sector, analyzing the selected variables between groups of banks according to the aforementioned classifications. So what? We contribute to the field by extending Thomson Reuters’ grouping of banks (Emerging and Developed Europe) with three more classifications. The comparison of ESG and financial performance data contributes to practice by highlighting which parts of Europe contain the banks with the highest and respectively the lowest values of ESG and financial performance, controversies, and audit fees. Therefore, the results will help investors, policymakers, regulatory bodies, bank managers, and auditors to acknowledge the significant differences within Europe and adopt appropriate measures that could improve the financial and sustainability performance of banks. Data: We collect data from Thomson Reuters Eikon, World Bank statistics, and EuroVoc for 108 European banks (81 from Developed Europe and 27 for Emerging Europe) for 2018, the most recent year on which all information is available. Tools: We conduct a cluster analysis on the macroeconomic variables of the study: the GDP per capita and the population. We used group tests and the ANOVA test as methods in analyzing the results. Findings and Contribution: We contribute with a quantitative study that fills the gap in the literature regarding significant differences that are obtained in ESG and financial performance of banks classified as Developed Europe versus Emerging Europe; Eurozone versus non-Euro countries; Western, CEE, Northern, and Southern banks; small GDP – large population and large GDP – small population clusters. Our methodology will improve future research in adopting better and more transparent classifications of companies analyzed at an international level.

PurposeThis study aims to investigate the role of board gender diversity in explaining the effects of board members’ political connections on banking performance in the Eurozone.Design/methodology/approachThis paper analyses panel data on 83 banks supervised by the European Central Bank (ECB) for the period 2013–2017, using a generalized moment method-type estimation methodology.FindingsResults suggest that when gender diversity is high, there is a U-shaped nonlinear relationship between political connections and banking performance. Empirical evidence also indicates that differentiating characteristics of women, such as greater ethical concern and risk aversion, help mitigate the negative effects of political connections on banking performance, safeguarding the institutions’ interests from the adverse effects of personal agendas. In addition, these results also suggest that a minimum of 14% of gender diversity can contribute to greater social justice and beneficial structural change.Research limitations/implicationsThe period studied may not yet fully reflect the impact of the assessment of the board members’ suitability.Practical implicationsThe paper contributes to the growing literature on political connections and gender diversity, providing greater insight into their role as determinants of banking performance. The study also suggests the benefits and possible limitations of the regulator’s two impositions – gender diversity quotas and members’ repute (members’ political connections).Originality/valueThe effect of gender diversity on the impact of board members’ political connections on banking performance has not been studied, as these relationships have not been analysed separately for banks directly supervised by the ECB.

Previous articleNext article FreeEvolving Perceptions of Central Bank Credibility: The European Central Bank ExperienceLinda S. Goldberg and Michael W. KleinLinda S. GoldbergFederal Reserve Bank of New York and NBER Search for more articles by this author and Michael W. KleinTufts University and NBER Search for more articles by this author PDFPDF PLUSFull Text Add to favoritesDownload CitationTrack CitationsPermissionsReprints Share onFacebookTwitterLinked InRedditEmailQR Code SectionsMoreI. IntroductionWhat are the preferences of a central bank over inflation and output-gap stabilization objectives, and what is its preferred long-run inflation rate? While statements of priorities and goals are important, the credibility of such statements and the market perception of the policy reaction function of a central bank play a key role in determining economic outcomes. This point, early on described as the "credibility" of central bank policies, is a standard theoretical result with recent interpretation in the New Keynesian paradigms.1 It is also received wisdom among practitioners.The importance of the market perception of the central bank's acceptable trade-offs between inflation and output goals as well its specific targets naturally leads to the question of how the market acquires this perception and whether and how it evolves over time. One view is that establishing an appropriate institutional structure is the key element in insulating the monetary authority from political pressure and thereby convincing markets that a central bank has a strong and unvarying aversion to inflation. A second, more dynamic, view focuses on the role that actual policy conduct plays in building the reputation of a central bank. These two different views have distinct implications for the relative importance of the institutional structure of a central bank, as compared to its conduct, for attaining and maintaining its credibility.2A survey of the heads of central banks and prominent monetary economists reflects a belief that the credibility of a central bank is based more on its past actions than on institutional structures that afford it independence by insulating it from political concerns, although there is also a consensus that structure matters (Blinder 2000). Empirical research has found that institutional features related to central bank independence are associated with economic performance in cross sections of countries, perhaps because these features indicate the ability of an institution to "tie its hands" and commit to a policy that may cause short-term pain in the pursuit of longer-run gain.3 There is less evidence, however, as to whether and how the credibility of a particular central bank's policy stance evolves over time in response to the conduct of policy and other related decisions. This is a particularly timely issue. Questions were raised about the commitment of the Federal Reserve to price stability after its response to the financial crisis of 2007–9. Even more recently, similar concerns were raised about the European Central Bank (ECB) to its primary mandate of price stability after it introduced a Securities Markets Program to purchase euro area debt securities to "ensure depth and liquidity in those market segments which are dysfunctional" in May 2010.These episodes raise a relevant question of how to determine whether market perceptions of central bank policies are changing. We show how high-frequency data from asset markets can be used to address this by providing a methodology for tracking the evolution of related market perceptions. Our analysis focuses on the experience of the ECB during its early years of operation, which is a natural experiment for this issue.The ECB offers an example of both structure and conduct aimed toward achieving policy credibility. Its architects were mindful of lessons from economic theory concerning the importance of a structure that provided independence from political considerations.4 The role of conduct was also clearly apparent. At its inception, the directors of the ECB were acutely aware that their policies were closely scrutinized for indications of general tendencies. This is, of course, a specific example of a more general tendency for relatively large updating of market priors when there is the establishment of a new central bank, an adoption of new policies (such as inflation targeting or extraordinary emergency lending at the time of a crisis), or a change in leadership (Blinder 2000).5We begin by developing insights about the response of asset prices to inflation news in Section II. The key point is that these responses reflect market perceptions of the policy reaction function of the central bank, as shown in the work of Gürkaynak, Sack, and Swanson (2005) and Gürkaynak et al. (2007).6 Their calibration exercises demonstrate the responses of short interest rates, long interest rates, and the yield curve to output and inflation shocks. We build on their work by demonstrating that the patterns in these calibrations are closely tied to the public's perception of the policy reaction function. In particular, we use this model to illustrate the change in the relationship between economic news and the term structure of interest rates with changes in the perceived anti-inflation stance of the policy reaction function parameters. These results also hold for changes in the perceived inflation target.7In Section III we propose and implement a novel method for measuring the market's view of evolving central bank "credibility." The method applies newly developed econometric tests for persistent time variation in regression coefficients (from Elliott and Müller [2006]) to high-frequency financial market data.8 Specifically, we use these tests to explore the evolution of the effects of news announcements on the yield curve for euro area countries for the period beginning January 1999, the time the ECB began its operations, through mid-2005, using hourly data on the term structure of bonds of euro area countries and the United States, as well as the euro-dollar exchange rate. These econometric techniques are especially informative in this context since they allow for a gradual evolution of estimated parameters rather than an abrupt change at a single moment. This evolution will capture the consequences of an ongoing updating by market participants of their views of the central bank reaction function. This type of updating can occur as market participants gradually learn through observing central bank actions and communications.The results in Section IV show significant and persistent parameter instability in the effects of economic news on European term structures and on the euro-dollar exchange rate. The identified patterns are consistent with market participants updating their views of the policy reaction function of the ECB. Additional support for our updating hypothesis is provided by considering the smoothed time path of the estimated parameters of the coefficient on the news announcement, estimated through another new, and related, econometric technique (Müller and Petalas 2010). Parameter values evolved in a manner consistent with the perception of an increasing aversion to inflation by the ECB as it tightened its monetary policy or, alternatively, as consistent with a perceived decline in the inflation target of the ECB. These results on time-varying consequences of economic news for the yield curve are complemented by results of discrete structural break tests (Andrews 1993) that demonstrate the robustness of our findings.Overall, these empirical results support the view that actions, and not just institutional structure, influence market perceptions of the policy stance of a new central bank. Benchmark test results for the term structure of U.S. interest rates present no evidence of persistent parameter instability in the response of the U.S. term structure to news, a result consistent with stable perceived weights in the Fed's reaction function over this same interval.9 The results demonstrate that the tools introduced can capture evolving views of central bank preferences and credibility.II. Central Bank Policy Reaction Functions and Market Responses to NewsIn this section we present a model in order to demonstrate the effects of changing perceptions on the actual response of interest rates to economic news.10 The insights from this model inform our interpretation of the empirical results on the evolution of the response of the yield curve to news that are presented in Section IV. The basic argument is that market perceptions of a central bank's stance on policy have an important impact on the performance of an economy and the consequences of policy decisions. While these market perceptions are, by nature, unobservable, we argue that actions such as changing views of the relative weight a central bank places on inflation versus the output gap in its monetary policy reaction function should be identifiable through analysis of the high-frequency response of asset prices to economic news.The model that we use to frame our analysis follows from Gürkaynak et al. (2005). This standard New Keynesian approach allows for a significant fraction of backward-looking agents (who, equivalently, can be assumed to act in a rule-of-thumb manner) and also allows for forward-looking agents.11 The model consists of six basic equations:The first two equations represent the macroeconomic structure of the economy. Equation (1) specifies current inflation, πt, as a function of expected future inflation and lagged inflation, which contributes to inflation persistence through the lag function Aπ(L). The parameter μ describes the balance of these forward-looking and backward-looking pressures. Current inflation also depends on yt, which captures the stance of current output relative to its potential (i.e., the output gap). Equation (2) describes this output gap as also having a forward-looking component and a persistent lagged effect. The output gap (if negative) declines as monetary policy is more expansionary, as reflected in declining real interest rates. The latter are introduced via the difference between the nominal rate it and inflation expectations over a comparable maturity horizon.Shocks to inflation and output are represented by and in equations (1) and (2), respectively. The source of these shocks may be either domestic or foreign in origin. Owing to international transmission, either foreign or domestic shocks could be a source of domestic inflation and lead to policy reactions (Clarida, Galí, and Gertler 2002).12Equation (3) specifies the policy reaction function of the central bank. The equation augments concerns about the output gap, which enters with weight b, and inflation, , relative to its target, , which enters with weight a, with policy rate smoothing. Greater values of the parameter c indicate a relative unwillingness of the central bank to deviate sharply from the prior period's policy rate. Equation (3) also affords a role to recent inflation history with representing a 4-quarter moving average of inflation and includes , an independently and identically distributed shock.Equations (4) and (5) describe updating of views of the central bank inflation target, , by the central bank (eq. [4]) and by private agents as denoted by the hat notation of equation (5). As shown by Erceg and Levin (2003) and Gürkaynak et al. (2005), the inflation target of the central bank has a tendency to rise when inflation goes above the prior target, with this effect depending on the size of the θ parameter, and can be subject to exogenous changes captured by . Private-sector agents infer such changes by observing the deviation of it from their prior expectation for policy and update their view of the target according to the strength of a Kalman gain parameter κ and when the observed policy rate is higher or lower than what they would have expected given the prior perceived target. This approach provides a mechanism for central banks to update their policy reaction function and for the private sector to assess and learn about this change. The model also imposes the expectations hypothesis, as in Gürkaynak et al. (2007), in which long interest rates of maturity m, it(m), are the cumulated sum of short interest rates captured by 1-year forward rates j years ahead, fj(i, 1).Consider the consequences of varying values of a and b for the long rate, the short rate, and the slope of the yield curve (i.e., the difference between the long rate and the short rate). The impulse examined is news about inflation, which occurs through a realization of either or .13 The experiment explores the effects of this news over time and the changes in the effects under parameterizations of the central bank reaction function. In particular, suppose that there is an increase in a relative to b in equation (3), which Fuhrer and Hooker (1993) describe as greater central bank credibility in fighting inflation. There are marked differences in the response of interest rates to news with changes in the perceived values of a and b. Indeed, when a and b are varied, the entire time path of adjustment to shocks is altered in the model.14 Clarida and Waldman (2008) show that the larger the weight on the output gap, the slower the economy's convergences to the central bank's output and inflation targets.The graphs presented in figure 1 present the impact effects on the long interest rate, the short interest rate, and the difference between the two (i.e., the slope of the yield curve) to a positive shock to inflation, (in the top three graphs), and a positive shock to output, (in the bottom three graphs), for a wide set of pairs of the parameters a and b. The surfaces in the third graph in each of the two rows show that an increase in the relative importance of the weight the central bank places on fighting inflation (a) versus the weight it places on stabilizing output (b) decreases the yield curve slope (i.e., short rates rise by more than long rates rise) after an inflationary shock. The central bank moves more aggressively to combat inflation, placing less importance on output and employment goals. Under higher a (or lower b), there still are consequences for both and , since a positive realization of either shock will have a smaller positive effect on the long rate than on the short rate. Indeed, the model's quantitative result is that the yield curve response is negative for all cases except when output stabilization has a very high weight compared to inflation stabilization in the central bank's objective function. Another set of quantitative results also can be constructed for exchange rates, as analyzed more broadly in Engel and West (2005), Clarida and Waldman (2008), and much earlier by Hardouvelis (1988).Fig. 1. Impact effects of inflation and output news. Note: a represents the weight on the inflation gap, and b represents the weight on the output gap.View Large ImageDownload PowerPointEmpirically, however, it has long been recognized that there is excess sensitivity of the long end of the yield curve to news, as discussed in Ellingsen and Söderström (2001). While Gurkaynak et al. (2005) provide a range of explanations for this excess sensitivity in the data, the implication is that the unexplained excess sensitivity of the long end of the yield curve would shift up the contours shown in the far right graphs of figure 1, potentially locating that plane in more positive space. For our purposes, the main point is not whether quantitatively there is a net positive or a net negative impact effect of news for a given set of values of a and b. Rather, the key issue is that an increase in central bank credibility results in an inflationary shock moving the economy to a different point on the contour, so that credibility improvements reduce the response of the long interest rate to a greater degree than they reduce the response of the short rate. In particular, an increase in credibility alternatively could be interpreted as a decrease in the expected inflation target of the central bank, as in Erceg and Levin (2003) and Gürkaynak et al. (2005). Our approach can be viewed as complementary, although it is noteworthy that the pattern of yield curve response to news does not vary substantively with the κ or θ parameters indicating updating of the perceived central bank inflation target, .III. Empirical ApproachA. Testing StrategyThe model presented in the previous section provides a framework interpreting a time-varying response of the immediate effect of economic news on the term structure of interest rates. An empirical application requires a method for testing for instability in this relationship. In this section we discuss the method we use to test for persistent variation in the immediate response of the term structure to news.We use a linear specification linking the surprise component of news to the change in an asset price, as is standard in research on the high-frequency response of asset prices to news (see, e.g., Andersen et al. 2003). The specification for the effect of news on any asset price qt, allowing for the possibility of a time-varying coefficient on the news variable, iswhere is the change in the term structure over the short period of time between t−, just before an announcement, and t+, just after that announcement (i.e., ); represents the announced value of a variable, which is known at time t+; represents the expected value of that variable before the announcement (so is the surprise component of the announcement); and is a white-noise error term. This parsimonious specification is most appropriate when the time horizon between t− and t+ is short, for example, when it is measured in minutes rather than in days, and when news about the variable x does not become available at the same time (i.e., within the span t− to t+) as announcements about some other relevant variable.In our application, we define the term structure as , with L and S denoting long-term and short-term interest rates, respectively. Our theoretical motivation argued that a significant evolution in the response of the difference between 10-year and 2-year European interest rates would be expected for a central bank with changing market perceptions of its policy reaction function priorities.The challenge, in this context, is that there is not a single, widely recognized dramatic change in policy that was clearly a watershed that led to a change in the public's perceptions of the ECB. Thus, we cannot perform a simple Chow test over γi. Moreover, it is unlikely that there was a discrete change in expectations, in response to either a single event or a small number of events. Rather, it is more reasonable to think of perceptions changing gradually as market participants learned about the ECB through its pronouncements and, especially, its actions.15 Thus, we would like to test for persistent change in the estimated parameter γi.16Elliott and Müller (2006) have developed a test for the presence of persistent time variation in one or more regression coefficients. Their quasi local level (qLL) statistic provides asymptotically equivalent tests for a large class of persistent breaking processes against the alternative of structural stability. The test does not require the specification of an exact breaking process, such as breaks that occur in a random fashion, serial correlation in the changes of coefficients, or a clustering of break points.17 This feature of their test makes it well suited for our purposes since we do not need to test for a particular type of updating by market participants of their views on central bank inflation aversion. The qLL statistic takes a negative value, and a value smaller (i.e., more negative) than the critical value implies a failure to reject time variation in one or more coefficients for the entire sample period. This procedure tests for persistent time variation over the entire sample and, as such, does not identify a particular date as the one most likely to represent a discrete break point.18As will be shown below, we do, in fact, find evidence that there has been persistent time variation in the slope coefficient in term spread regressions for Germany, France, and Italy, but not for the United States. We also find that there is significant parameter instability in the response of the bilateral euro-dollar exchange rate to news.19 We interpret this combined finding of parameter instability for European rates and the euro-dollar rate and parameter stability for U.S. rates as reflecting an evolving view of the inflation aversion of the ECB rather than as some structural change common to financial markets across all four of these industrial countries.The Elliott and Müller qLL statistic says nothing about the direction of change of γi. Yet, following from the results presented in Section II, a decrease in γi can be interpreted as an increase in the perceived relative inflation aversion of the central bank. For this purpose, we rely on methods from Müller and Petalas (2010), who show how to calculate the smoothed time path of γi. We present these estimated time paths. For robustness, the results from these smoothed estimates are supported by the sup-Wald tests for parameter stability (see Andrews 1993, 2003), which offer a break date for γi that roughly corresponds to the peak value of the estimated smoothed time path.As will be shown, we find that γi decreases over the sample period for the cases in which there is evidence of a significant persistent change in γi (i.e., for the three European yield curves and for the euro-dollar exchange rate). Even more tellingly, the reduction in γi tends to occur in the wake of monetary tightening by the ECB. It is unlikely that other candidate explanations for changes in the responsiveness of the slope coefficients that are not linked to the perception of the ECB policy stance would map as closely to actual ECB policy changes.B. DataThe three types of data used in our analysis are various asset prices, where the assets are government bonds and foreign exchange, inflation announcements, and related market expectations of inflation. We begin this subsection with a discussion of the five different asset prices used as dependent variables in our estimation. We then describe our construction of inflation surprises.Asset price data. Five different dependent variables are used in the regressions. In each case, the dependent variable, , represents the change in q between 30 minutes before and 30 minutes after each monthly inflation announcement over the period January 1999 to June 2005. The changes in the term spread between 10-year and 2-year interest rates for French, Italian, German, or U.S. government bonds are four of the dependent variables, with a robustness section (Sec. IV.D) considering the 2-year and 10-year rates separately.The fifth dependent variable is the case in which represents the change in the logarithm of the euro-dollar exchange rate 30 minutes before and 30 minutes after the news announcement. Through short-run interest rate parity, the exchange rate move should reflect the relative effects of news on interest rates in the euro area versus in the United States (see the appendix). In this case, a positive value of rather than indicating an increase in the premium of the long rate relative to the short rate indicates a depreciation of the euro. Evidence that γi decreases over the sample period in the exchange rate specification is consistent with a situation of more of an increase in the perceived anti-inflation stance of the ECB, as compared to the U.S. Federal Reserve.Inflationary announcements and expectations. To capture the economic news ηt that lead to asset price updating, we restrict our attention to inflation announcement measures. Candidate data releases for our study potentially include indicators of consumer price inflation for the full euro area, for individual countries in the euro area, and for the United States. The construction of the "news" variable, which is the appropriate variable to be employed in the specification, also requires measures of market expectations for the full sample period. While some earlier studies use vector autoregressions to generate measures of sho

The paper provides new evidence on the relation between corporate governance practices, legal rights and European banks’ performance during the post-crisis period. Using a sample of 935 banks in 30 European countries, the results reveal that at a high level of legal protection European banks are more able to follow the international recommendations and codes of corporate governance practices and vice-versa.Additional analysis shows that all the corporate governance variables have the same impacts on the banks’ performance. At low, middle and high levels of legal protection, the results reveal positive impacts of committees’ number (such as remuneration, nomination and audit committee) and independent members of banks’ boards.The other dimensions of corporate governance (ownership concentration, executive pay and CEO duality) do not have any impact on bank performance. Only at the low level of legal protection the results show a negative impact on board size on European banks’ performance.

Democracy, Translucidity and Accountability: The Eurozone vs. The Democratic Right to Know

This study aims to review the policy responses of the European Central Bank (ECB) during the global economic crisis and subsequent Euro crisis, and sheds light on the logic and backgrounds related to these responses. The ECB used increasingly non-conventional measures, such as the purchase of sovereign bonds, which was unexpected before the crisis. In this context, the study raises the following question: is the increasing use of non-conventional measures temporary one in response to an unprecedent crisis or is it a sign of structural change in ECB's role? The ECB has features in common with most central banks of advanced countries, but it differs from them in three aspects. First, the ECB has a mandate only with respect to price stability. it has a very high level of institutional and political independence. Third, the ECB and the national central banks of the Eurosystem are forbidden to finance governments (monetization). These salient features of the ECB are very similar to those of the German Bundesbank. Given the role of Deutsche Mark and the Bundesbank in the European monetary integration, it seems that the ECB would include features that are legacies of the Bundesbank. As the Euro crisis spread over the entire eurozone starting from the European peripheries, responses by the ECB have been increasingly active. In order to keep financial markets stable, it has intervened with non-conventional measures. For the first time, it made large-scale purchase of sovereign bonds from the secondary market and provided long term liquidity to financial institutions with low interest rates. In addition, its Governing Council declared the outright monetary transaction (OMT), which means that the ECB will purchase unlimited quantity of sovereign bonds in case of a crisis. Its willingness and determination toward market intervention played an important role in mitigating the crisis. However, these measures, particularly the purchases or plans to purchase sovereign bonds, caused a dispute between different actors and principles. They were conceived and implemented amidst tension between member states, particularly Germany and France and between ECB's mandate (price stability) and financial stability (response to the euro crisis). During the crisis, the ECB made it clear that its priority and mandate are in maintaining price stability and emphasized that non-conventional measures were implemented to secure a 'transmission channel' of monetary policy. Eventually its measures contributed to mitigation of tensions in the sovereign market, but it emphasized repeatedly that these measures were conducted as a part of its monetary policy. Besides, its president underlined that the ECB excluded completely all political influences in its policy consideration. Regarding the future change in ECB's role, it is necessary to note and consider three aspects. First, the Euro crisis provided occasions for reflecting upon the role of the central bank as the 'lender of last resort'. As the crisis deepened, the role of ECB has been up for discussion. This means that all debates regarding its role during the crisis could become a starting point for its institutional change, albeit small. Second, the role of the ECB will be impacted significantly by the level of economic integration in the EU. Considering that the EU does not have any authority to impose taxes and conduct fiscal policy, it is hardly expected that the ECB provides credit to any European institutions and governments. Third, the ECB has now a supervisory authority over the commercial banks in Eurozone under the ongoing banking union. This means that the ECB has to follow two simultaneous objectives, price stability and financial stability. While the ECB declared that two objectives will be treated individually according to the 'principle of separation', the political and economic dynamics that the ECB has to encounter will be more complicated than before.

Post 2008, the market-to-book ratios of European and US banks have diverged markedly. We use panel regressions to investigate the determinants of the M/B ratios of 112 European and US banks. We show that the underperformance of European banks is mainly driven by non-performing loans and by the negative impact of policy rates on bank interest margins. The higher US bank valuations are mainly driven by higher profitability and better cost efficiency. Our results for European banks stress the importance of timely NPL resolution and imply that low-for-long monetary policy may harm bank health.

Banks are profit making institutions and their performance is critical to their survival. Competition within the banking sector has seen most of these institutions adopt performance management tools that will enable them manage their performance. Many borrowers make a lot of effort to repay their loans, but do not get rewarded for it because this good repayment history is not available to the bank that they approach for new loans. On the other hand, whenever borrowers fail to repay their loans banks are forced to pass on the cost of defaults to other customers through increased interest rates and other fees. Put simply, good borrowers are paying for the bad borrowers and this is making new borrowers more and more hesitant to borrow credit. The ministry of finance, the Central Bank of Kenya and the Kenya Bankers Association have been at the forefront in the introduction of Credit Information Sharing (CIS) to the credit market. The reason for introducing this mechanism was because there was a need to access reliable information on their customers in order to make lending more efficient. Today we have a working CIS that enables all commercial banks to share their credit information through licensed Credit Reference Bureaus (CRBs).The aim of this study was to investigate credit reference bureau and its influence on the performance of banks in Eldoret, Kenya during the period 20052011.The study was guided by the following research questions; What is the number of defaulted loans three years before and after the introduction of the CRB model?, How have debts outstanding at the time of default been classified?, How has the financial performance of the banks been three years before and after the introduction of the CRB model? And what is the relationship between the loans default and the financial performance of the banks. This means that the study was assessing the performance of the loan portfolio within the banking sector and how this could have affected the financial performance of the banks. The study targeted a population of 179 respondents from which 97 respondents was sampled comprising of 31 branch managers, 31 credit managers and 35 credit reference bureau employees. The study consequently employed simple random sampling and census sampling technique to select the respondents and data was collected using secondary sources such as the data collection sheets and primary sources such as the interview schedules. Analysis was done through descriptive statistics where findings were presented in form of charts, graphs and tables. ANOVA was used to test the significance the study’s hypotheses. The study found that there was high number of defaults in the year 2008 and the lowest in the year 2010 with only 15.9% being defaulted. From the study, it was also found out that, most of the secured loans, that is, the loans with collateral were the long-term loans at 96%. More so, wholesalers were found to be the greatest defaulters with a default rate of 41.6% while mining companies and electricity, gas and water supply companies both had the least default rate of 0.9% each. The findings further shows that 1 year after a default occurs on average 48% of the sample’s exposure at default was recovered, 2 years after a default on average 62% of the sample’s facility exposure was recovered. On average the biggest portion of recovery was gathered in the first year after a default and is decreasing each year. It is the recommendation of this study that lenders should appreciate the need for strategic control systems and consequently be able to develop other strategic control measures while enhancing effectiveness of CRB. It is also the recommendation of this study that lenders should identify strategic control measures that match their institution’s objectives and thus will ensure high performance of such firms. Key Terms: Credit Reference Bureau, Financial performance, Strategic Control . Credit Reference Bureau (CRB) As A Strategic Control Measure And Its Influence On The... DOI: 10.9790/0837-20514464 www.iosrjournals.org 45 | Page

The European Monetary Union has been in operation since 1 January 1999. The paper offers an interim assessment of the operations of the European Central Bank (ECB) during this period. It describes how the ECB defined its monetary strategy and carried out its policy. The evaluation offered in the paper is largely positive, the principal objects of criticism being found to stem from the constitution which defines the position and principal objective of the ECB. This constitution embodies an extreme version of Central Bank independence and creates a 'democratic deficit' in consequence. Albeit the operating record is not without some blemishes, for example in regard to the ECB's communication policy. So far, the ECB has benefitted from a favourable macroeconomic conjuncture. This has changed and a more testing time may now be in store.

Comment

Article 101 EC Overdraft facilities or any other type of credit facility with the European Central Bank or with the central banks of the Member States (hereinafter referred to as ‘national central banks’) in favour of Union institutions, bodies, offices or agencies, central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of Member States shall be prohibited, as shall the purchase directly from them by the European Central Bank or national central banks of debt instruments.

The aim of the article is to analyze the foreign exchange reserves of the European Central Bank in connection with the concept of sustainable development. The concepts of sustainable development are described in literature broadly and, for example, it is worth pointing to international and European concepts for sustainable development. The challenge for the international community has become the need to secure the environment for both present and future generations (implementation of the principle of intergenerational justice). As a result of the study, it was proven that, when implementing the foreign reserve management policy, the European Central Bank and national central banks should pursue the objectives of the current monetary policy for future generations. The interdisciplinary character of the articles implies different research methods: the importance and impact of sustainable development on a given country / region can be analyzed using a variety of methods, including statistical, surveys or dogmatic law. The analysis carried out as part of the study indicates that management of foreign exchange reserves of ECB has impact on the sustainable development and intergenerational justice.

Previous articleNext article FreeCommentVeronica GuerrieriVeronica GuerrieriUniversity of Chicago and NBER Search for more articles by this author PDFPDF PLUSFull Text Add to favoritesDownload CitationTrack CitationsPermissionsReprints Share onFacebookTwitterLinked InRedditEmailQR Code SectionsMoreA classic theme in monetary economics is the crucial role of the credibility of central banks for the effectiveness of monetary policy. This raises two important questions. First, can we measure the evolution of the credibility of a central bank? Second, how can a central bank establish credibility? Goldberg and Klein propose a novel empirical analysis to test the evolution in credibility of the European Central Bank (ECB) between January 1999 and mid-2005. The nice feature of their work is that they use market responses to elicit information about the ECB credibility. Their main conclusion is that over this time period, the credibility of the ECB has increased whereas the credibility of the Federal Reserve Bank has been relatively stable. Moreover, looking at the history of policies implemented by the ECB in the same time period, they argue that the ECB credibility increase was linked to its policy actions.First, they present a standard New Keynesian model, following Gürkaynak, Sack, and Swanson (2005), to analyze the effect of an increase in the central bank’s credibility on the response of the yield curve to news. Then, they use high-frequency asset price data to test the time variation in the response of European and American yield curves to inflation news.In particular, they focus on term spreads between 10-year and 2-year interest rates for German, French, Italian, and U.S. government bonds and on the euro-dollar exchange rate. They look at the change in these term spreads and in the exchange rate 30 minutes before and after each monthly release of the U.S. core consumer price index (CPI). The news component is defined as the difference between the actual release value and the markets’ prior expectation of this release. Owing to data restrictions, the authors cannot use inflation news for each specific country, but they argue that the U.S. core CPI also contains news about inflation in euro area countries.Using these data, Goldberg and Klein show that there has been a significant persistent time variation in the response of the European term spreads to inflation news, but not in the response of the term spread for the United States. Their interpretation of these results is that the credibility of the ECB has increased over time after its foundation, whereas the credibility of the Federal Reserve Bank has been relatively stable between 1999 and 2005 under the Greenspan presidency. Finally, following a methodology developed by Müller and Petalas (2010), Goldberg and Klein estimate the path of the response of the European term spreads over time and compare it to the pattern of ECB policies and announcement, concluding that they were critical for the increase in credibility of the ECB.Main mechanism. Let me first present a stripped-down version of the model to clarify the main mechanism behind the effect of news on the yield curve. The model can be represented by the following two equations:The first equation represents the monetary policy rule, which is a simplified version of a Taylor rule: the central bank responds only to inflation. In particular, ϕ captures the responsiveness of monetary policy to inflation and represents the central bank’s type. A central bank is more credible when the agents in the economy believe that it is more aggressive in response to inflation, that is, when they believe that ϕ is higher. The second equation is a simple version of a Phillips curve with a backward-looking component. That is, current inflation is negatively related to the current interest rate (because of the negative relation between interest rate and demand) but positively related to past inflation. Finally, εt is an independently and identically distributed shock to inflation.Combining (1) and (2), we can write the interest rate asso that the higher ϕ is, the more the short-term interest rate reacts to an inflation shock. Moreover, we can write the process for inflation asThis shows that if a central bank has a higher ϕ, not only does inflation respond less to a shock to current inflation because of the response of the interest rate but also its response is less persistent.Next, we can calculate the forward rateand the two-period maturity interest rateWe can then define the term spread, which is equal to the slope of the yield curve, asIn this simplified model, the yield curve is on average flat (as πt fluctuates around zero), which is not typically the case in the real world, but it is possible to extend the model to introduce risk premia and/or liquidity premia so as to have a positively sloped yield curve. In any case, the object of interest in the paper is not the average term spread but its response to an inflation shock, that is,It is easy to check that dqt/dεt is decreasing in ϕ; that is, the response of the term spread to inflation shocks is smaller when ϕ is higher. This is the key implication of the model behind the empirical strategy of Goldberg and Klein. The central finding of the paper is that dqt/dεt for the euro area has declined between November 1999 and October 2000. In light of the model, the authors interpret this as the result of an increase in ϕ (or in the ϕ perceived by the market); that is, the ECB has become more credible over that time period. The authors link this increase in credibility to the fact that between November 1999 and October 2000, the ECB increased the interest rate seven times. However, it is important to notice that dqt/dεt is the difference between two elements, dit,2/dεt and dit/dεt, and it is less clear that in the data they separately behave as they should. The theory predicts that when the central bank is more aggressive (ϕ increases), the response of the short-term interest rate should increase and the one of the long-term interest rate should decrease because inflation is less persistent. Figure 4 in their paper shows that while the response of the 10-year interest rate decreases in that time period for all three European countries, the response of the 2-year interest rate increases significantly only in Germany, slightly increases in France, and decreases in Italy.Interpretation of empirical findings. Let me now turn to the interpretation of the main empirical result in the paper. As described above, the authors find persistent time variation in term spreads for European bonds in contrast to no significant variation for the U.S. bonds. In terms of the model outlined above, this would be consistent with an increase in ϕ over time. However, it is not clear how such a pattern should be interpreted.A simple story behind an increase in ϕ could be that the ECB has changed type over time; that is, it was less aggressive when it was founded, but it gradually became more responsive to inflation shocks. However, this does not seem the interpretation that the authors have in mind. The story that they pursue is that the central bank has always been aggressive, but agents did not believe that it was at the beginning of its activity. However, observing its policies, agents have gradually learned that the ECB was an aggressive type; that is, the ECB credibility has increased over time.I think that Goldberg and Klein’s interpretation is very appealing, and it would be nice to deepen the analysis in that direction. The model considered in the paper, as the simple model sketched above, does not allow to separate the agents’ beliefs about the central bank’s type from the truth. One could develop a model along the lines of the one outlined above in which the central bank mechanically follows a simple Taylor rule with a fixed ϕ, but the agents in the economy do not know the value of ϕ and start with a prior below its true value. To avoid agents learning ϕ in one period, the model should be enriched with monetary shocks that make learning more gradual. This would probably imply what the authors suggest: as the agents’ beliefs about ϕ increase, the response of the term spread decreases.Finally, it would be interesting to explore a richer model of reputation in which the central bank behaves strategically. What I have in mind is a simple signaling model in which the central bank has a fixed type that is unknown to the agents. A central bank with a higher type cares more about inflation. Hence, to form beliefs about inflation, agents have to form beliefs about the bank’s type. My guess is that there may be a separating equilibrium in which a high-type bank at the beginning would behave even more aggressively just to signal its type, whereas a low-type bank would never sacrifice too much output to gain in lower inflation. This suggests that if the ECB policy was initially more aggressive than later, this may be due to the desire of building up credibility. It would be nice to estimate a simple Taylor rule to see if indeed the residual at the beginning of the ECB life were positive.ReferencesGürkaynak, Refet, Brian Sack, and Eric Swanson. 2005. “The Sensitivity of Long-Term Interest Rates to Economic News: Evidence and Implications for Macroeconomic Models.” American Economic Review 95, no. 1 (March): 425–36.First citation in articleGoogle ScholarMüller, Ulrich, and Philippe-Emmanuel Petalas. 2010. “Efficient Estimation of the Parameter Path in Unstable Time Series Models.” Review of Economic Studies 77, no. 4 (October): 1508–39.First citation in articleGoogle Scholar Previous articleNext article DetailsFiguresReferencesCited by Volume 7, Number 12011 Article DOIhttps://doi.org/10.1086/658317 Views: 92 © 2011 by the National Bureau of Economic Research. 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PurposeThis research investigated whether corporate social responsibility (CSR) can alleviate the negative effect of non-performing loans (NPLs) on bank performance.Design/methodology/approachThe research employed a sample of European banks over the 2008–2017 period. To resolve endogeneity and heterogeneity problems, the system generalized method of moments (SGMM) model was employed.FindingsFirst, bank NPLs were negatively and significantly associated with bank performance as measured by the Q-Tobin ratio and the return on assets (ROA). Second, CSR scores exerted a negative and significant effect on the level of NPLs. Finally, the results indicated that bank performance could benefit from the interactional effect of CSR and NPLs.Research limitations/implicationsThis study fills the gap in the debate over the mediating role of CSR in the NPLs – bank performance interrelation. In addition, our SGMM analysis yielded more robust and efficient results while resolving endogeneity and heterogeneity problems concerning CSR and bank performance or risk in corporate finance.Practical implicationsCSR practices can play an essential mediating role in the NPLs–bank performance relationship. CSR activities in the European context may reduce the level of NPLs and increase bank performance.Originality/valueTo the best of the authors’ knowledge, studies of the implications of CSR activities on the banking sector are very limited. Indeed, this paper shows that CSR mediates the relationship between CSR practices and NPLs. The results suggest that bank performance could benefit from the interactional effect of CSR and NPLs.