European Banking Sector Research Articles

Anti-Competition and Anti-Corruption Controversies in the European Financial Sector: Examining the Anti-ESG Factors with Entropy Weight and TOPSIS Methods

(1) Background: This research aims to investigate the impact of environmental, social, and governance (ESG) factors on European banking corruption. Thus, its novelty is based on considering anti-competitive concerns as a major component that may considerably impact fraud and bribery in corruption investigations. (2) Methods: To approach the research question, we conducted an examination of anti-competitive practices at 344 financial institutions headquartered in Europe throughout the period 2018 to 2022 using the entropy weight and TOPSIS methods. (3) Results: This study reveals that anti-competitive actions are typified by environmental debate and genuine policy competition. Analysing the results prompted us to reach this conclusion. The present study’s findings reveal that financial institutions in Scandinavian nations demonstrate the most significant anti-competitive activity. (4) Conclusions: This research is the first study to underscore the concept of anti-competition disputes and their impact on the emergence of corruption, extortion, and fraud in the European banking sector. Although anti-competitive and corrupt practices may appear to be distinct concepts, they both lead to the financial sector acquiring disproportionate control over the market.

Are ESG scores driven by financial information? Evidence from European banks

In recent years, investors' increasing focus on sustainable investments and the sustainability orientation of companies has led to parallel growth in the market for environmental, social and governance (ESG) performance and ESG rating agencies. However, even though ESG rating agencies have become very influential institutions, the literature has found that ESG performance ratings provided by different agencies often differ from each other. This causes consequences that should be considered, such as complex evaluation of companies' ESG performance and uncertainty in ESG investment decisions. Therefore, it is necessary to identify which determinants influence ESG performance. This study aims to identify the internal determinants of an ESG score using bank-specific balance sheet indicators such as capital and risk ratios. The analysis focuses on the European banking sector from 2018 to 2022. Banks mainly foster the transition to a more inclusive and sustainable economy. Moreover, after the recent financial crises, banks have increased their social responsibility practices, strengthening their credibility, trust and reputation. Generalised estimating equations with standard error robust to heteroscedasticity were used. The results reveal that the factors that most influence the ESG score provided by ESG rating agencies are bank size and liquidity risk exposure. The larger the size of the bank and the lower the exposure to liquidity risk, the higher the ESG score assigned.

CEO power and risk taking: evidence from European banks mergers and acquisitions

PurposeThis study investigates the relationship between CEO power and the risk profile (RP) of acquiring banks through mergers and acquisitions (M&A) transactions.Design/methodology/approachThe analysis is based on 214 transactions between 2010 and 2022 involving European Union-based acquirers. To assess the impact of M&A on the acquiring bank’s RP, we compare changes in the acquirer’s RP to control banks. We use linear regression with two-stage least squares instrumental variables (2SLS-IV) to examine the effect of CEO power on changes in merger-related risk.FindingsThe findings suggest that CEO power reduces the RP of the acquiring bank. Specifically, CEOs who hold both the CEO and board chair positions tend to take fewer risks. Additionally, CEOs with high ownership, CEO pay and extensive experience (measured by tenure and acquisition experience) decrease the RP. However, prestige power is positively correlated with an increase in RPs.Practical implicationsThis research examines CEO influence on bank risk post-mergers, providing insights into governance, risk and strategic choices. The findings can guide banks in CEO selection and governance to mitigate M&A risks, improving risk management and decision-making in the financial sector.Originality/valueThis study is the first empirical investigation introducing diverse executive power metrics to analyze the link between executive power and risk-taking in the European banking sector, with a specific emphasis on the impact on M&A as critical investment choices.

Board gender equality and ESG performance. Evidence from European banking sector

PurposeThe purpose of this paper is to investigate the relationship between board gender equality and environmental, social and governance (ESG) performance in the European banking sector. The study examines whether and how the presence of women on the board of directors (BoD) influences ESG dimensions.Design/methodology/approachThe authors analyzed a sample of 72 European Union banks for the period 2015–2021 and developed an econometric model applying unbalanced panel data regression with firm fixed effects and controls per year. To test the research hypotheses, the authors considered gender equality in terms of female participation on the BoD and measured ESG dimensions by using the ESG score provided by Refinitiv.FindingsThe findings suggest a significant positive relationship between the number of women on BoD and the ESG performance of European banks only up to a certain threshold of female directors (at least three women). The study also explores how the proportion of women on BoD influences the individual ESG pillars. The results show that the percentage of female directors has a positive and statistically significant impact on the social dimension of the ESG framework.Research limitations/implicationsThe investigation is highly relevant to investors considering ESG issues in their decision-making process. The overall findings support policymakers and regulators on how to improve ESG performance through the design and the application of corporate governance (CG) mechanisms. From a managerial perspective, the study suggests that managers and CEOs should focus their efforts on establishing the right gender combination of directors on bank BoDs.Originality/valueThis paper offers an in-depth examination of the CG practices of banks, and it attempts to bridge the gap in prior literature on the determinants of ESG issues in the European banking industry. To the best of the authors’ knowledge, this study is the first that investigates the relationship between the representation of women on BoDs and the ESG dimensions measured by the Refinitiv Eikon score. The use of critical mass theory adds a fresh perspective to the literature on ESG in Europe since the influence of board gender diversity on ESG performance of the European banks is still unaccounted for. This study addresses this pressing research issue drawing on resource dependence, agency and legitimacy theories.

Understanding Regulatory Changes: Deep Learning in Sustainable Finance and Banking

This paper examines the regulatory impact on the European Banking Sector using advanced deep learning techniques to analyze the relationship between Sustainable Finance guidelines and the SX7P Index from January 2012 to December 2023. Utilizing Long Short-Term Memory Auto-encoder (LSTM-AE), Variational Autoencoder (VAE), and Convolutional Neural Network (CNN) for anomaly detection, the study compares anomalies and investigates their correlation with European Banking Authority (EBA) events and Sustainable Finance guidelines from January 2020 to December 2023. Through the analysis of 43 pertinent EBA documents, the research identifies patterns and variations in anomalies, assessing their association with regulatory changes. The results reveal significant anomalies aligning with regulatory events, indicating a potential causal relationship. Notably, the VAE methodology shows the strongest correlation between EBA Sustainable Finance events and anomalies. This research advances the understanding of deep learning applications in financial markets and offers valuable insights for policymakers and financial institutions regarding regulatory shifts in Sustainable Finance.

Ten Years of the Single Supervisory Mechanism: Looking into the Past, Navigating into the Future

ABSTRACT In November 2024 European banking supervision will have been operational for 10 years. The Single Supervisory Mechanism (SSM) has evolved from a start-up to a mature, well-established, and respected supervisor. Harmonized and transparent supervisory practices have been implemented, whilst the European banking sector has proved to be resilient. Nevertheless, whilst acknowledging the progress that has been made, Europe should not rest on its laurels. As the global financial landscape is continuously evolving, the European framework must also evolve. Growing geopolitical tensions, the rise of FinTech and BigTech companies, the ongoing digital transformation, and climate change not only impact banks but also add more complexity to the work of supervisors. This is due to unexpected and difficult-to-model events, the creation of new business models, products, and services, as well as the emergence of cultural, behavioural, and ethical considerations that should be taken into account. To address these challenges, supervisors should enhance their competencies, approaches, and tools to stay ahead of evolving market dynamics and to remain aligned with the rapid evolution of technology and the risks that climate change poses. Equally important, ensuring thorough and efficient supervision requires fostering and strengthening collaboration and information sharing between all relevant authorities.

Liquidity Risk Exposure and Earnings Management—Results on an Unexplored Relation in the European Banking Sector

ABSTRACT This study investigates the relation between liquidity risk exposure and earnings management in banks. We use a dynamic panel-data one-step system generalized method of moments estimation and measure exposure to liquidity risk from balance sheet positions. We detect earnings management through income-increasing and -decreasing strategies. We find that the higher the exposure to liquidity risk due to higher liquidity creation, the greater is upward earnings management. Our findings suggest that banks use earnings management to opportunistically conceal high liquidity risk exposure. These findings should be useful for investors and users of financial statements interested in analyzing earnings quality and financial statement reliability. Data Availability: Data are available from specific sources cited in the text. JEL Classification: G21; G30; G32; M41.

Comparing the Efficiency of European Banking Sectors from the Financialisation Perspective Using the DEA Method

Research background: The importance of the financial sector for the real economy has increased as there has been a transition from industrial capitalism to financial capitalism in recent years. The increasing importance of the financial sector is referred to as financialisation, and it is undoubtedly associated with finance, financial operations, or an increase in the importance of profits generated by financial activities. Financialisation is a long‑term process characterised by the growth of the banking sector. Purpose of the article: This article compares the effectiveness of banking sectors in the European Union (EU) countries from the financialisation perspective.
 Methods: The study determined the efficiency of the banking sectors for the 28 EU countries using an input‑oriented, non‑radial BCC model in 2017 and assessed changes in the efficiency of the entities studied using the Malmquist index between 2008 and 2017.
 Findings & value added: With certain outlays and effects, the banking sectors of seven countries were effective in 2017 from the financialisation perspective: Cyprus, Denmark, France, Luxembourg, Malta, Sweden, and the United Kingdom. The effectiveness of individual inputs for the banking sectors from each country was then determined, and benchmark leaders were identified. The analysis of the dynamics of changes in the efficiency of the banking sectors showed that Sweden had the highest values of the Malmquist index between 2008 and 2017 (where efficiency increased by 37.7%).

Regulatory and contextual factors influencing earnings and capital management decisions: evidence from the European banking sector

This study investigates whether some regulatory and contextual features influenced Euro Area listed banks decisions to manage earnings and regulatory capital through discretionary provisions in the period 2013–2018. The new regulation factors are the pressure to increase high-quality regulatory capital (Basel III) and more timely recognition of loan losses (IFRS 9). The contextual features are the intensified banking competition at a national level, and the significant money market pressure. Results demonstrate that the pressure to increase high-quality regulatory capital for banks with lower Common Equity Tier 1 capital (CET1) in year t − 1 is negatively associated with upward earnings and capital management in year t. The more timely recognition of loan losses in year t compared to year t + 1 is negatively associated with upward earnings and capital management in year t. The strengthening of banking competition is positively associated with upward earnings management, but not associated with upward capital management. The increasing money market pressure is negatively associated with upward earnings management, but not associated with upward capital management. This study should be helpful to standard-setters, regulators, investors and academics interested in incentives and constraints to earnings and capital management by providing evidence regarding how listed banks reacted to the regulatory, accounting, and contextual factors, observed holistically during a unique historical period (i.e., 2013–2018) and regulatory setting (i.e., European banking sector).

Climate change and the European banking sector: the effect of green technology adaptation and human capital

PurposeClimate change poses effect on banking sector’s risks and profitability through adaptation of green technology. This study aims to incorporates green technology adaptation in three sectors: green banking, green entrepreneurial innovation (EI) and green human resource (HR), in a model of bank’s performance. And determines the impact of climate change on bank risk and profitability.Design/methodology/approachAn assessment of profitability and risk profile of commercial banks is done for 27 European countries for 2013–2022, employing a two-step difference system-generalized method of moments estimation technique with a moderate effect of climate change by including interaction between climate change and green technology adaptation.FindingsThe results indicate that green banking increases profitability, reduces credit risk and increases liquidity risk. The results also show that green human resource increases profitability and becomes a source of credit and liquidity risks for the banks. Green EI increases credit risk and liquidity risk, while the effects of green EI on profitability vary with the use of two proxies: Green patents increase profitability and environment, social and corporate governance (ESG) scores decrease profitability.Practical implicationsSupportive government initiatives, including subsidies and tax rebates to green borrowers, may take the burden of green transition off the banking sector.Originality/valueThis paper observes the impact of green technology adaptation in three sectors: banks, EI and HR, moderated by climate change, adding substantially to the existing literature in conceptual framework and methodology.

Cultural and gender diversity for ESG performance towards knowledge sharing: empirical evidence from European banks

PurposeThis study aims to investigate the effects of board cultural diversity (BCD) and board gender diversity (BGD) of the board of directors on environmental, social and governance (ESG) performance in the European banking sector using resource-based view (RBV) theory. In addition, this study analyses the linkages between BCD and BGD and knowledge sharing on the board of directors to improve ESG performance.Design/methodology/approachThis study selected a sample of European-listed banks covering the period 2021. ESG and diversity variables were collected from Refinitiv Eikon and analysed using the ordinary least squares model. This study was conducted in the European context regulated by Directive 95/2014/EU, which requires sustainability disclosure. The original population was represented by 250 banks; after missing data were excluded, the final sample comprised 96 European-listed banks.FindingsThe findings highlight the positive linkages between BGD, BCD and ESG scores in the European banking sector. In addition, the findings highlight that diversity contributes to knowledge sharing by improving ESG performance in a regulated sector. Nonetheless, the combined effect of BGD and BCD negatively impacts ESG performance.Originality/valueTo the best of the authors’ knowledge, this is the first study to measure and analyse a regulated sector, such as banking, and the relationship between cultural and gender diversity for sharing knowledge under the RBV theory lens in the ESG framework.

ESG controversies and profitability in the European banking sector

This paper empirically investigates the relationship between Environmental, Social, and Governance (ESG) Controversies and bank profitability. We analyze an unbalanced panel sample of European banks between 2015 and 2022, implementing the GMM-SYS version of the Arellano-Bond estimator for dynamic panels. The study results indicate that banks featuring more ESG controversies perform better in terms of Return on Assets (ROA), Return on Equity (ROE), and Net Interest Margin. This sheds light on the potentially opportunistic behavior of credit institutions, which appear to prioritize profitability over ESG Controversies.

Foreign Bank Origins and Efficiency in the Central and Eastern European Banking Sector

Foreign Bank Origins and Efficiency in the Central and Eastern European Banking Sector

The interconnectedness of European Banking and Shadow Banking for sustainable development goals: Insights from a network GVAR model

The goal of this study is to examine the interdependencies between the banking sector and shadow banking sector in selected European economies through the lens of sustainable development. Using a node-theoretic structure and a network GVAR model, we investigate the relationship between these sectors in a Sustainable Development Goals (SDGs) framework. With this in mind, we examine the interlinkages between the various economies, using a network GVAR model so as to examine the potential dominance of some entities in the system. We conclude that in Europe there are two important financial systems operating simultaneously: one is the European system, where Germany plays a leading role, and the other is the United Kingdom. Analytically, a shock to the banking sector of the European economies will have an impact on the shadow banking sector of the other European economies, whereas shocks to the shadow banking assets of the individual European economies will not have a statistically significant impact on the banking assets of the other European countries. Moreover, shocks in the British banking system significantly impact the European shadow banking assets, while shocks in the shadow banking assets of European member states do not significantly affect the British GDP, suggesting the importance of cross-border collaborations in SDG efforts. By exploring the interdependencies between European banking and shadow banking sectors, this study contributes to the understanding of how financial systems can influence sustainable development. The findings emphasize the significance of fostering innovation across borders and leveraging international interactions to achieve the SDGs.

Banking sector openness, a path to social responsibility? Evidence from Southern European banks

Since the global financial crisis of 2008, the practices of the European banking sector have come under public scrutiny.Considered as a source of external shocks, the opening of European banking markets is particularly questioned.Following this trend, this article aims to provide an original study by examining the effect of banking sector openness onbanks' social responsibility. It focuses on the case of Southern European banks, which are the most vulnerable in theEuropean system. The study highlights a significant effect of banking sector openness on banks' social performance.However, the financial performance of banks moderates this effect.

Exploring the Impact of Blockchain Technology on the Financial System: A Case Study of Decentralized Finance (DeFi) in the European Banking Sector

This paper explores the transformative impact of blockchain technology on the European banking sector, with a specific focus on the dynamics of Decentralized Finance (DeFi). Beginning with an overview of the emergence and evolution of blockchain, the study delves into the integration of blockchain in European banking, examining its current landscape, opportunities, and challenges. A comprehensive exploration of DeFi principles, smart contracts, and cryptocurrency significance follows, highlighting European banking initiatives in this realm through case studies. The paper assesses the broader impact of blockchain and DeFi on financial services, emphasizing transparency, security enhancements, cost reduction, and advancements in financial inclusion. The regulatory framework and legal considerations in Europe provide a crucial backdrop, with a detailed analysis of smart contract legality and the delicate balance required for consumer protection and privacy in the DeFi landscape. A case study evaluates the implementation of DeFi in selected European banks, scrutinizing blockchain integration, impact assessment, and strategies to overcome challenges. The journey concludes with a comprehensive examination of the interconnected elements, emphasizing the transformative potential of blockchain and DeFi in reshaping the financial landscape.

What drives discretionary loan loss provisions? The role of banks' business model, listing status and COVID-19 crisis in the European banking sector

Purpose: This study examines whether banks' business models and listing sta-tus drive the discretionary use of loan loss provisions (LLPs) under the Interna-tional Financial Reporting Standard (IFRS) 9 "Financial Instruments". Design/methodology/approach: Ordinary least squares regression is per-formed on a sample of 5,147 listed and unlisted European banks for the 2018-2021 period. Findings: The main results show that after Expected Credit Loss (ECL) im-plementation, banks are prone to manage their earnings via LLPs. In detail, origi-nate-to-hold and listed banks use LLPs to manage their earnings more strongly than originate-to-distribute and unlisted banks. Further, during the financial crisis due to the COVID-19 pandemic, European banks tended to manage earnings more than during the pre-crisis period. Originality/value: This study contributes to the existing literature by expand-ing research on LLPs and highlighting ex-ante factors that might influence banks' provisioning behavior, such as their listing status and business model. Practical implications: This study provides useful insights for regulators and accounting setters in making informed decisions regarding provisioning policies, even during periods of turmoil.

Value relevance of IFRS 9: The influence of country factors and heterogeneous strengths in the European banking sector

AbstractThis study focuses on investor reactions to financial instrument recognition and measurement in the banking sector under the new International Financial Reporting Standard (IFRS) 9, Financial Instruments. The research tests the combined value relevance of accounting numbers before and after the mandatory transition to IFRS 9 in Europe. Furthermore, we verify the influence of country factors and heterogeneous strengths on the value relevance of the aforementioned standard. To this end, we adopt a sample consisting of 215 banks listed in Europe, for the years 2015–2020. We find a significant change in the explanatory power of value‐relevance regressions in 2015–2017 compared to 2018–2020. In addition, we find that accounting numbers have incremental value relevance in countries characterized by “good” governance indicators and high heterogeneous strength, namely investors pay attention to the strength of the bank authority. This study makes three main contributions to the literature. First, it complements the IFRS 9 literature by providing new evidence. Second, its insights can be used to support investment decisions. Last, the findings help regulators and standard‐setters to verify the impact of the new measures delineated by the standard.

Sovereign creditworthiness and bank foreign ownership. An empirical investigation of the European banking sector

This paper documents that sovereign creditworthiness could be a new dimension that explains foreign ownership in the banking sector. We employ consolidated financial results of the European Union (EU) member states over the period 2007–2021 and show that better sovereign credit ratings lead to an increase in foreign investments in the host country’s banking sector, as they may be linked with greater financial stability. Additional data on cross-country regulatory and supervisory practices show that this effect is mitigated in countries with tighter restrictions on banking activities and more independent supervisors. Results are robust to a wide range of cross-country banking, macroeconomic, and institutional conditions, and to alternative estimation methods that account for endogeneity. These findings bring new insights to the policy debate on banks’ foreign ownership and document new channels that may influence supervisors’ strategies regarding banking foreign direct investments.

Blockchain Technology And Its Impact On European Bank’s Cyber Security And Data Integrity

Cybersecurity Ventures anticipates that the worldwide expenses of cybercrime would increase by 15 percent yearly over the course of the next five years, reaching USD 10.5 trillion annually by 2025, which is an increase from USD $3 trillion in 2015. It’s imperative to investigate the implementation of new technologies and their outcome in raising the threat to the banking industry. Using CFA and EFA statistical analysis and gathering the data from N=291 respondents from the managerial level, blockchain consultants, and cybersecurity experts. The findings confirm that the implementation of blockchain technologies has efficiently reduced customer cyber security risks and enhanced the European banking sector's data integrity.