European Bank Research Articles

The Euro Area 12: A Comparative Assessment of Its Member States in the Period 1998–2022

The primary objectives of this research are to compare the economic performance of the Member States (MS) in the Euro Area 12 (EA-12) of the European Union (EU) that served as net contributors and net recipients of its budget during the period 1998–2022. The comparison focuses on aspects related to economic growth and the business cycle, exploring the presence of hysteresis. To achieve these objectives, a novel approach is employed, which integrates the analysis of both growth and cycles. This approach involves using the Seemingly Unrelated Regression Equations (SURE) model to estimate a translog production frontier and assess the impact of lagging output gaps on the potential output or capacity for each of the MS considered. The data used to estimate each frontier and analyze growth decomposition consist of quarterly data filtered using the Kalman filter. The results reveal that lagging output gaps, occurring one or two quarters prior, significantly affect the potential output or capacity of the EA-12 MS, thereby supporting the existence of hysteresis. However, the impacts appear to be minimal. Furthermore, the research concludes that changes in total factor productivity (TFP), mainly due to technical change, play a more crucial role in the growth of MS that are net contributors to the EU budget. Conversely, total factor accumulation (TFA), mainly physical capital accumulation, has a more pronounced impact on the growth of MS net recipients from the EU budget. Interestingly, the heterogeneity observed among the EA-12 MS extends beyond the simple division between net contributors and net recipients of the EU budget. This heterogeneity raises questions about the European Central Bank’s (ECB) ability to stabilize the economies of these various MS solely through conventional monetary policy.

An Analysis of the Banking Sectors: The effect of Ecosystem Performance on Financial Stability

With an emphasis on the effects of regional differences and the COVID19 epidemic, this study examines the link between Environmental Performance Index (EPI) ratings and the financial performance of European banks while considering the role of governance and law. Our study, which uses panel data regressions spanning five years and 71 listed banks in 21 European nations, shows a negative link between EPI scores and bank performance, which is most noticeable in Southern Europe. These results highlight the significance of taking regional variations in bank size and characteristics into account when assessing EPI performance in the banking industry.

Artificial intelligence and central bank communication: the case of the ECB

ABSTRACT We examine whether artificial intelligence (AI) can decipher the European Central Bank’s communication. Employing 1769 inter-meeting verbal communication events of the European Central Bank’s Governing Council members, we construct an AI-based indicator evaluating whether the communication is leaning towards easing, tightening, or maintaining the monetary policy stance. We find that our AI-based indicator replicates reasonably similar indicators based on human expert judgement but at much higher speed and at much lower costs. Using our AI-based indicator and a number of robustness checks, our regression results show that ECB communication matters for future monetary policy even after controlling for financial market expectations and lagged monetary policy decisions.

Generation of three isogenic, gene-edited iPSC lines carrying the APOE-Christchurch mutation into the three common APOE variants: APOE2Ch, APOE3Ch and APOE4Ch

Late-onset Alzheimer’s disease (AD) has become the paradigm of a non-mendelian complex neurodegenerative disease, for which a major genetic determinant is known, the APOE locus. A rare APOE variant named Christchurch (APOEch) yielding a missense mutation from Arginine to Serine at amino acid 136, has been suggested to exert a protective effect in an individual carrying the most penetrant form of Familial AD (Paisa mutation in PSEN1 gene, E280A). We describe here a new set of induced pluripotent stem cell (iPSC) lines, where the Christchurch mutation (Ch) has been introduced by gene editing into the APOE locus of three isogenic iPSC lines carrying the more common APOE variants (APOE 2/2, APOE 3/3, and an APOE 4/4) in homozygosity. Brain cells derived from these iPSC lines will enable a better understanding of APOE biology in general and facilitate the study of how the Christchurch variant affects the function of each APOE genotype. This set of iPSC lines are globally available via the European Bank of iPSCs, EBiSC.org.

The European energy crisis, the Dutch TTF, and the market correction mechanism: a financial markets perspective

Abstract In September 2022, the Title Transfer Facility (TTF) prices spiked at unprecedented levels. For various reasons, including the Russian invasion of Ukraine, Europe was facing an energy crisis: gas supply was significantly reduced while demand remained unchanged. Policymakers responded with a variety of measures, including regulatory interventions on the TTF market. While seeking to improve the situation in the ‘real world economy’, these measures have an important financial regulatory angle. This article investigates the potential impact of these interventions, in particular of the Market Correction Mechanism, on the wholesale gas market from a financial markets perspective. Considering, amongst others, observations from the EU Agency for the Cooperation of Energy Regulators, the European Securities and Markets Authority, and the European Central Bank, it appears that these interventions may have unintended negative consequences in light of the functioning and attractiveness of the Capital Markets Union and achieving strategic autonomy.

Quantitative Easing, Bond Risk Premia and the Exchange Rate in a Small Open Economy

We assess the impact of large-scale asset purchases, commonly known as quantitative easing (QE), conducted by Sveriges Riksbank and the European Central Bank (ECB) on bond risk premia in the Swedish government bond market. Using a novel arbitrage-free dynamic term structure model of nominal and real bond prices that accounts for bond-specific safety premia, we find that Sveriges Riksbank’s bond purchases raised inflation and short-rate expectations, lowered nominal and real term premia and inflation risk premia, and increased nominal bond safety premia, suggestive of signaling, portfolio rebalance, and safe asset scarcity effects. Furthermore, we document spillover effects of ECB’s QE programs on Swedish bond markets that are similar to the Swedish QE effects only after controlling for exchange rate fluctuations, highlighting the importance of exchange rate dynamics in the transmission of QE spillover effects.

The Temporal Structuring of Corporate Sustainability

AbstractResearch on corporate sustainability has started to acknowledge the role of temporality in creating more sustainable organizations. Yet, these advances tend to treat firms as monolithic and we have little understanding of how different temporal patterns throughout an organization shape perceptions of and actions toward sustainability. Building on studies highlighting how the temporal structures of work shape employee engagement with different organizational processes and issues, we seek to answer: How does the temporality of work practices structure perceptions of corporate sustainability throughout the firm? Using data from an ethnography of a small European sustainable bank, we provide an account of the variety of ways in which employees in different departments perceive the bank and how they engage with sustainability. We then go on to show how the temporal structures of work practices within different departments help explain some divergence in perceptions of sustainability. Our study highlights the variegation of temporal structures in organizational processes of meaning-making and its role for a better understanding of the efforts to make corporations more sustainable.

Model-based financial regulations impair the transition to net-zero carbon emissions

AbstractInvestments via the financial system are essential for fostering the green transition. However, the role of existing financial regulations in influencing investment decisions is understudied. Here we analyse data from the European Banking Authority to show that existing financial accounting frameworks might inadvertently be creating disincentives for investments in low-carbon assets. We find that differences in the provision coverage ratio indicate that banks must account for nearly double the loan loss provisions for lending to low-carbon sectors as compared with high-carbon sectors. This bias is probably the result of basing risk estimates on historical data. We show that the average historical financial risk of the oil and gas sector has been consistently estimated to be lower than that of renewable energy. These results indicate that this bias could be present in other model-based regulations, such as capital requirements, and possibly impact the ability of banks to fund green investments.

The Development of the Cooperative Banking Sector in Selected Central and Eastern European Countries

The study assesses the development of the cooperative banking sector in selected Central and Eastern European (CEE) countries against the average statistics of the segment in those countries. It also compares it to the largest European cooperative banking group in Germany. The article presents the results of an analysis of the cooperative banking sectors between 2016 and 2021 in Poland, Bulgaria, Romania, Hungary and Germany, all of which are members of the European Association of Cooperative Banks (EACB). The selection criterion was based on the availability of detailed data on cooperative banks published by the EACB on a temporal and spatial basis.
 The empirical basis for the issues addressed in the article is a review of the reference literature and the comparative analysis of the development of the cooperative banking sector using a synthetic development indicator for the period 2016–2021. According to the theoretical and empirical analysis, Romania demonstrates the lowest level of development of the cooperative banking segment. In turn, the Polish and Bulgarian cooperative banking sectors represents a higher level of development than the Romanian one. Hungary has reached the highest level of development in the group of Central and Eastern European countries. While comparing the CEE countries to the German cooperative banking sector, their development was almost one and a half times lower and, in the case of Romania, three times lower.

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%).

Banking on resilience: EU macroprudential policy and systemic risk

This study examines the effectiveness of macroprudential policies on banking systemic risk for 172 European banks across 20 EU countries from 2000 to 2017. Using a dynamic panel framework, it assesses the effectiveness of policy on two dimensions of systemic risk: banks' contribution to aggregate systemic risk (ΔCoVaR) and their vulnerability in stressed markets (Exposure-ΔCoVaR). Results show policy actions reduce bank systemic risk, especially in terms of Exposure-ΔCoVaR. However, this effect varies between tightening and loosening measures. Interestingly, the analysis indicates that policies don't significantly affect banks' contribution to systemic risk as measured by ΔCoVaR. Borrower-based policies and exposure limits in particular enhance bank resilience. This study has important implications for policymakers regarding the calibration and evaluation of macroprudential measures.

How is the ECB’s quantitative easing transmitted to the financial markets?

PurposeOver the last few years, the European Central Bank (ECB) has adopted unconventional monetary policies. These measures aim to boost economic growth and increase inflation through the bond market. The purpose of this paper is to study the impact of the ECB’s quantitative easing (QE) on the investor’s behavior in the stock market.Design/methodology/approachFirst, the authors theoretically identify the transmission channels of the QE shocks to the stock market. Then, the authors empirically assess the financial market’s responses to QE shocks in a data-rich environment using a factor augmented VAR (FAVAR).FindingsThe results show that the ECB’s unconventional monetary policy positively affects the stock market. A QE shock leads to an increase in stock prices and a drop in the realized volatility and the implied risk premium. The authors also suggest that the ECB’s QE is transmitted to the stock market through five main channels: the liquidity, the expectation, the portfolio reallocation, the interest rates and the risk premium channels.Practical implicationsThe findings help to better understand the behavior of stock market assets in a data-rich economic context and guide investors and policymakers in the presence of unconventional monetary tools. For instance, decision-makers and investors should consider the short-term effect of the QE interventions and the changing behavior of the financial actors over time. In addition, high stock market returns can increase risk appetite. This can lead investors to underestimate the market risk. Decision-makers and market participants should take into consideration the impact of the large injection of money through the QE, which may raise the risk of a speculative bubble in the financial market.Originality/valueTo the best of the authors’ knowledge, this is the first study that incorporates a theoretical and empirical analysis to explore QE transmission to the stock market in the European context. Unlike previous studies, the authors use the shadow rate proposed by Wu and Xia (2017) to quantify the effect of the ECB’s QE in a data-rich environment. The authors also include two key risk indicators – the stock market risk premium and the realized volatility – to capture investors’ behavior in the stock market following QE shocks.

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).

Disclosure Compliance with Different ESG Reporting Guidelines: The Sustainability Ranking of Selected European and Hungarian Banks in the Socio-Economic Crisis Period

As the relevant European Union directives require in-depth sustainability reporting from large institutions, banks are among the concerned with disclosure obligations. Several institutions prepare self-structured recommendations by which companies are indirectly fostered to make their operation more sustainable through reporting and to help compliance with the upcoming Corporate Sustainability Reporting Directive (CSRD) regulations. However, in the preparation period, differences can be found in the actual sustainability disclosure practices across Europe (primarily by a western–eastern European relation). To examine this issue, this study aimed to investigate if there was any variation in the reporting compliance with aspects (key performance indicators—KPIs) of three reporting guidelines (Global Reporting Initiative—G4, Financial Services Sector Disclosures—GRI; Alliance for Corporate Transparency—ACT; ISO 26000:2010—ISO) between top European and Hungarian banks according to their 2021 sustainability/ESG reports, using content analysis-based disclosure scoring. The results revealed no significant differences among the general (aspect-pooled) scores for different guidelines, while the differences were significant for each guideline between the two bank groups. In the aspect-level evaluation, the European banks had higher scores in most cases, with the Hungarian banks receiving higher scores in 4 of 49 GRI, 1 of 16 ACT, and 2 of 37 ISO aspects. Significant correlations were indicated in disclosure score values between the two bank groups, which suggested similar preferences for the aspects demonstrated; however, elaboration levels differed. These findings showed that the European and Hungarian banks could be differentiated by their sustainability disclosure patterns. The results suggest a better CSRD-level preparedness of the top European banks than of the Hungarian ones, with the latter being introduced as a model group of the region. This reflects the need for more efficient adoption of best practices by financial institutions in the eastern parts of Europe.

Embedding past, present and future crises: time and the political construction of the Covid-19 pandemic in the EU

ABSTRACT This paper investigates the construction of the COVID-19 pandemic crisis by EU elites. It addresses the puzzling relationship between the spread of the new virus with a large-scale reconfiguration of economic governance in the EU which was unimaginable a few months earlier. Drawing from a constructivist approach to political economy, we argue that the discursive construal and framing of this crisis was instrumental to embed the emergency of the pandemic with broader levels of conjunctural, historical, and even civilizational temporal references. Providing a frame analysis of public statements by the heads of the European Commission, the European Council, and European Central Bank during 2020, we show how the sudden outbreak of COVID-19 was framed as a catalyst for tackling the EU’s historical crisis of purpose, the socio-economic imbalances left over from the euro crisis, as well as the predicament of the climate crisis.

It’s (not only) the economy, stupid: examining the European Central Bank’s marginal attention to the human and social implications of austerity during the euro-area crisis through the lens of organizational culture

ABSTRACT Since the global financial crisis central banks expanded their roles and responsibilities and their impact on the economy and society grew significantly. Thus, during the euro-area crisis, the European Central Bank (ECB) engaged in decisions with profound human and societal implications while turning a blind eye towards them. The Bank’s dismissive approach is remarkable given EU institutions duty to respect fundamental rights, and EU’s identity as a human rights protector. Building on literature and interviews with ECB officials, this work suggests that organizational cultural features, i.e. mainstream economic thinking and narrow mandate interpretation steered the Bank towards overlooking the impact of its policies on EU citizens’ rights. While much has been written about central banks and organizational culture, the two spheres have rarely been connected in research. This research addresses the intersection between the two and calls for broader perspective to consider a wider range of factors influencing economic policies.

„Niekończąca się opowieść” – refleksje na temat uprawnień Europejskiego Banku Centralnego

Since the financial crisis of 2007–2008, we have been dealing with a special dialogue between the European and German courts at the level of the European Union. The subject of this dialogue is the decisions of the European Central Bank on the programme for the purchase of public sector assets on secondary markets. The ECB’s activity, as well as the involvement of the national central banks of the Eurosystem in the implementation of these decisions has been met with dissatisfaction by German politicians, culminating in the title judgment of the Constitutional Court of the Federal Republic of Germany. In the paper, the author analyses the judgment and passes critical commentary on the Weiss II judgment.

The ECB’s Monetary Policy Review: A Post-Keynesian Twist?

ABSTRACT In 2021, the European Central Bank (ECB) decided to adjust its monetary policy strategy. Three major changes were initiated: the main objective was reformulated, but also the structure of the institution’s analyses of the economic situation and how it will communicate in the future was adjusted. Can these changes be considered as being based on a Post-Keynesian view or do they still follow the ‘New Consensus’ model largely based on standard neo-classical theory? Our main conclusion will be that the adjustments made by the ECB are not necessarily based on Post-Keynesian analysis. To justify this statement, we have developed what we consider the basic elements of a Post-Keynesian monetary policy, then we analysed what a Post-Keynesian monetary rule could be as well as the monetary policy instruments used by the ECB. Subsequently we looked at the strategy changes made by the ECB from a Post-Keynesian point of view and concluded that some of these changes can be considered as being close to Post-Keynesian theory, but other facts explain why the ECB’s monetary policy is still close to the ‘New Consensus’ model.

Optimizing Ensemble Learning to Reduce Misclassification Costs in Credit Risk Scorecards

Credit risk scorecard models are utilized by lending institutions to optimize decisions on credit approvals. In recent years, ensemble learning has often been deployed to reduce misclassification costs in credit risk scorecards. In this paper, we compared the risk estimation of 26 widely used machine learning algorithms based on commonly used statistical metrics. The best-performing algorithms were then used for model selection in ensemble learning. For the first time, we proposed financial criteria that assess the impact of losses associated with both false positive and false negative predictions to identify optimal ensemble learning. The German Credit Dataset (GCD) is augmented with simulated financial information according to a hypothetical mortgage portfolio observed in UK, European and Australian banks to enable the assessment of losses arising from misclassification costs. The experimental results using the simulated GCD show that the best predictive individual algorithm with the accuracy of 0.87, Gini of 0.88 and Area Under the Receiver Operating Curve of 0.94 was the Generalized Additive Model (GAM). The ensemble learning method with the lowest misclassification cost was the combination of Random Forest (RF) and K-Nearest Neighbors (KNN), totaling USD 417 million in costs (USD 230 for default costs and USD 187 for opportunity costs) compared to the costs of the GAM (USD 487, USD 287 and USD 200). Implementing the proposed financial criteria has led to a significant USD 70 million reduction in misclassification costs derived from a small sample. Thus, the lending institutions’ profit would considerably rise as the number of submitted credit applications for approval increases.

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.