European Bank Research Articles

Assessing the Impact of the ECB’s Unconventional Monetary Policy on the European Stock Markets

This study assesses the effects of the European Central Bank’s (ECB) unconventional monetary policy (UMP) on the prices of selected European stock market indices during the European sovereign debt (2010–2012) and the COVID-19 pandemic (2020–2022) crises interventions. This research employs the instrumental variables (IV) two-stage least squares (2SLS) model approach to evaluate the effects of changes in the size of the ECB’s balance sheet on the pricing of key equity market indices in Europe. The results of this study suggest that the ECB’s asset value expansion had the opposite statistically significant effects on the European stock market indices’ prices between the interventions. That is, an increase in the ECB’s balance sheet size was associated with a decrease in the prices of the indices during the sovereign debt crisis and with a rise during the COVID-19 pandemic. This research pinpoints the price sensitivity of each of the European equity indices to the ECB’s UMP and determines the different outcomes of the ECB’s quantitative easing policy between the interventions.

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.

Diffusing Risk: Bureaucratic Agency, UN Security Council Horse-Trading, and the Role of Co-Financing

Abstract Political lending is problematic for the operations of multilateral development banks (MDBs) since politically motivated aid has a greater default risk than other aid projects. MDB bureaucrats, therefore, face a dilemma. On the one hand, they want to please major shareholders by engaging in political lending. On the other hand, they want to mitigate their MDB's exposure to excessive risk. One way to solve this dilemma is to share the risk of loans with other lenders through co-financing. I expect that as countries’ share of politically motivated aid increases, these countries’ portfolios will receive more co-financed loans. Using newly collected loan-level data from the European Bank for Reconstruction and Development, I find that UNSC membership increases the number of co-financed loans by 38.5 percent and increases the share of co-financed loans in a country's European Bank for Reconstruction and Development loan portfolio by 19.1 percentage points. I demonstrate that these results are consistent with the argument that MDB bureaucrats want to mitigate risk.

The Real Equilibrium Exchange Rate of the Czech Koruna – the BEER Approach

The aim of this paper is to develop a model of the real equilibrium CZK/EUR exchange rate with all relevant explanatory variables. Emphasis will be placed on examining the longest possible time horizon, with a period of real convergence, but also economic stagnation. The model is based on the theoretical BEER approach using a cointegration or error correction model that distinguishes between short-term and long-term relationships. The results show that the Czech koruna strengthens when the productivity differential, terms of trade differential or gross fixed capital formation increase, while the koruna weakens when the VIX index representing global risk aversion increases. For the real interest rate differential, the hypothesis that the koruna strengthens in the short run during the improvement but weakens in the long run probably due to the country's risk premium, was confirmed. Moreover, it turned out that the start of the European Central Bank's quantitative easing led to strengthening of the Czech koruna, while the start of the CNB's foreign exchange interventions in 2013 led to weakening of the Czech koruna.

The Economic Impact of the COVID-19 and the Russia-Ukraine Conflict on the Eurozone and the Central Bank's Corresponding Policies

The COVID-19 pandemic and the Russia-Ukraine crisis have presented the Eurozone with serious economic challenges that have resulted in hitherto unheard-of economic shocks and the need for extensive governmental responses. The European Central Bank's (ECB) monetary policies and their success in stabilizing the economy are the main topics of this study, which looks at the economic effects of these crises on the Eurozone. The monetary policy actions of the ECB are examined using the IS-PC-MR macroeconomic model. Reports from the World Bank, European Commission, European Central Bank, and other pertinent organizations are among the data sources. In-depth analyses of macroeconomic variables like GDP, inflation rates, and employment levels before and after crises are part of the research technique. These analyses are complemented by qualitative analyses of policy papers and professional opinions. The results are intended to shed light on the efficacy of ECB policy, forecast future economic patterns, and make suggestions for improving policy measures to deal with comparable economic shocks in the future. This study is important because it offers a framework for future policy-making in reaction to economic disturbances, in addition to advancing knowledge of the ECB's role in crisis management.

Greece’s 2015 Eurozone Bailout “Renegotiation”: Beware of Greeks Bearing “Unpolitics”?

In January 2015, Greece witnessed a political earthquake with the election of the populist anti-austerity/EU bailout coalition of the left-wing party SYRIZA and the far-right party ANEL. It is argued that during January–July 2015, the SYRIZA–ANEL coalition engaged in a protracted process of renegotiation of Greece’s bailout terms that were agreed between previous Greek governments and the so-called Troika (European Commission, European Central Bank, and International Monetary Fund) adopting a behaviour ruled by “unpolitics.” First, the SYRIZA–ANEL government immediately rejected formal and informal rules of EU decision-making. Second, the SYRIZA–ANEL government rejected traditional means of compromise, such as package deals and side payments. Third, when Greece’s creditors presented their last-minute bailout offer in June 2015 to avoid Greece leaving the eurozone (Grexit), the SYRIZA–ANEL government rejected the suggested solution and tried to exploit the ensuing deadlock by calling a rashly organised referendum asking Greeks to vote against the suggested deal. This period of “unpolitics” ended almost immediately after the referendum when, in a sudden and unexpected volte-face, Tsipras interpreted the referendum result as a call for compromise with the Troika and accepted the previously intolerable bailout deal.

Adapting to climate change and the European Union pursuit of a just transition

The European Green Deal was launched by the European Commission (EC) in December 2019, before being formally approved in 2020. It comprises a package of policy measures that aim to set the European Union (EU) on the path to a green transition, with the ultimate objective of achieving climate neutrality by 2050. Despite the EU’s longstanding commitment to reducing carbon emissions in support of climate change mitigation and the achievement of its net zero ambition, this paper focuses on the growing importance of climate change adaptation within its policy portfolio. With respect to the latter, the long-term vision is for the EU to become a climate-resilient society that is also fully adapted to the unavoidable impacts of climate change. Achieving climate neutrality and a climate-resilient society by 2050 will be more challenging for some EU member states and regions than for others, eg poorer regions and those highly dependent on fossil fuels or with carbon-intensive industries that employ significant numbers of people. To address such issues, the EU has introduced a Just Transition Mechanism to help level the playing field and provide financial and technical support to regions most adversely affected by the move towards a low carbon economy. The paper traces the evolution of the EU’s climate policy agenda leading up to the adoption of the Green Deal, outlines its proposed road map in pursuit of climate neutrality and a climate-resilient society by 2050, and questions the efficacy of some its intermediate targets including the adequacy and equity of its just transition aspirations. It also details and scrutinises the key role that the European Investment Bank (EIB) will play in supporting delivery of the strategy.1,2

Adapting to climate change and the European Union pursuit of a just transition

The European Green Deal was launched by the European Commission (EC) in December 2019, before being formally approved in 2020. It comprises a package of policy measures that aim to set the European Union (EU) on the path to a green transition, with the ultimate objective of achieving climate neutrality by 2050. Despite the EU’s longstanding commitment to reducing carbon emissions in support of climate change mitigation and the achievement of its net zero ambition, this paper focuses on the growing importance of climate change adaptation within its policy portfolio. With respect to the latter, the long-term vision is for the EU to become a climate-resilient society that is also fully adapted to the unavoidable impacts of climate change. Achieving climate neutrality and a climate-resilient society by 2050 will be more challenging for some EU member states and regions than for others, eg poorer regions and those highly dependent on fossil fuels or with carbon-intensive industries that employ significant numbers of people. To address such issues, the EU has introduced a Just Transition Mechanism to help level the playing field and provide financial and technical support to regions most adversely affected by the move towards a low carbon economy. The paper traces the evolution of the EU’s climate policy agenda leading up to the adoption of the Green Deal, outlines its proposed road map in pursuit of climate neutrality and a climate-resilient society by 2050, and questions the efficacy of some its intermediate targets including the adequacy and equity of its just transition aspirations. It also details and scrutinises the key role that the European Investment Bank (EIB) will play in supporting delivery of the strategy.1,2

Comparative Perceptions Influence Actions on Climate Change Between Eastern and Western Europeans

Climate change is an important issue that countries worldwide are aware of and campaign to reduce. All parties must cooperate, whether the government, the private sector, individuals, etc. Many perception surveys have met the public's understanding and knowledge about climate change. Despite the odds, previous research supported environmental protection and sustainability in surveys, polls, and past research. However, the existing literary gap between intentions and actions and awareness and implementation has recently widened. The objectives of this research include comparing perceptions and climate change mitigation actions between Eastern and Western European countries because both regions are different, as well as searching for and comparing perceptions influencing climate change mitigation actions between them. The research adopts a quantitative methodology, emphasizing exploring secondary data from the European Investment Bank (EIB) climate change survey 2022–2023. It analyzed the data to compare the perceptions and actions of the two regions in mitigating climate change. The statistical tests included a t-test and stepwise multiple regression analysis to predict the influence of perceptions and actions on reducing climate change. The results showed that respondents' perceptions of climate change in Eastern and Western Europe were not significantly different. However, there was a significant difference in the number of reduction actions taken by Western Europeans compared to Eastern Europeans. Perceptions of climate change catastrophes and serious government mitigation actions positively influenced actions in Eastern Europe. This study found that businesses' attention to mitigation and their perception of the catastrophic effects of climate change positively influence mitigation actions in Western Europe. The recommendations guided governments, policymakers, and businesses to take action to reduce climate change, motivating people's adequate perceptions and actions. Stakeholders communicating climate change's impacts on catastrophe should present true information with honesty and transparency. Doi: 10.28991/HEF-2024-05-03-03 Full Text: PDF

Stabilizing financial networks via mergers and acquisitions

A bi-level model is proposed to explore efficient policies for supporting negotiations on financial crisis resolution. In a principal–agent framework, this model minimizes the welfare loss function of a central authority (social planner, SP) through the simultaneous choice of subsidy levels and potential pairs of banks to merge. The SP’s choice of mergers needs to be incentive-compatible with the autonomous choices of banks, and the evaluation of the financial network must adhere to standard accounting principles. Incentive compatibility is enforced by two options for conditions, based on stable matching or competitive bidding. For the evaluation of the financial network, we employ an extended Eisenberg-Noe clearing payment equilibrium by considering bankruptcy costs and the seniority levels of liabilities. Additionally, liabilities are not cleared among solvent banks, and corporate bonds may be used for clearing payments. The bi-level model specifies conditions for the clearing equilibrium. For demonstration, we use major European banks, and a scenario linked to the adverse economic conditions used in the 2016 EU-wide stress testing.

Strategic risk management in financial institutions: Ensuring robust regulatory compliance

Strategic risk management in financial institutions is a critical component for ensuring robust regulatory compliance and maintaining financial stability. This review explores the multifaceted nature of strategic risk management and its importance in the dynamic regulatory landscape of the financial sector. It delves into the fundamental components of risk management, including risk identification, assessment, mitigation, and monitoring, highlighting how these processes help institutions navigate the complexities of regulatory requirements. The discussion encompasses various types of risks faced by financial institutions, such as credit, market, operational, liquidity, and compliance risks, illustrating the need for comprehensive risk management frameworks. The review also reviews key regulatory frameworks, including Basel III, the Dodd-Frank Act, and guidelines from the European Banking Authority, emphasizing their impact on capital requirements, liquidity standards, and governance expectations. A robust risk management framework integrates compliance efforts with business strategy, ensuring that institutions are not only adhering to regulatory mandates but also aligning their risk appetite and tolerance with their strategic objectives. The role of technology, particularly in data analytics, real-time risk monitoring, and cybersecurity, is examined as a crucial enabler for effective risk management and compliance. Best practices for enhancing regulatory compliance are outlined, including continuous monitoring, regular audits, and scenario analysis. Challenges such as evolving regulations, financial product complexity, and globalization are addressed, with recommendations for adaptive strategies and industry collaboration. Through case studies, the review provides insights into successful risk management implementations and lessons learned from compliance failures. The review underscores the importance of strategic risk management in fortifying regulatory compliance and suggests future trends, such as advanced AI and machine learning, which could further revolutionize the approach to risk management in financial institutions. Keywords: Strategic Risk, Financial Institution, Regulatory, Compliance

Weather-related disasters and inflation in the euro area

This article investigates the impact of weather-related disasters on inflation in the euro area over the period 1996–2021. Using a panel structural vector autoregression approach, we explore whether weather-related disasters have a significant and persistent effect on inflation, as well as the role that demand-side and supply-side channels play as drivers of inflation. We also analyse the heterogeneous effects of inflation on different product categories. Our results suggest that weather-related disasters have a positive, non-persistent effect on inflation. This reflects the prevalence of negative supply shock channels and positive demand shock channels over negative demand shock channels. We also find that weather-related disasters have more pronounced effects on the inflation of product categories that represent a higher proportion of the spending of low-income households, implying that disasters reinforce inflation inequality. Overall, our results suggest that, as the climate crisis deepens, it might become increasingly challenging for the European Central Bank to control inflation and its inequality effects.

Inferring Dealer Networks in the Foreign Exchange Market Using Conditional Transfer Entropy: Analysis of a Central Bank Announcement.

The foreign exchange (FX) market has evolved into a complex system where locally generated information percolates through the dealer network via high-frequency interactions. Information related to major events, such as economic announcements, spreads rapidly through this network, potentially inducing volatility, liquidity disruptions, and contagion effects across financial markets. Yet, research on the mechanics of information flows in the FX market is limited. In this paper, we introduce a novel approach employing conditional transfer entropy to construct networks of information flows. Leveraging a unique, high-resolution dataset of bid and ask prices, we investigate the impact of an announcement by the European Central Bank on the information transfer within the market. During the announcement, we identify key dealers as information sources, conduits, and sinks, and, through comparison to a baseline, uncover shifts in the network topology.

The impact of formal and informal credit institutions on entrepreneurship

Purpose How do informal lending institutions affect entrepreneurship? This paper aims to investigates the role of formal and informal credit market institutions in the decision to become an entrepreneur over the life cycle. Design/methodology/approach The author developed a dynamic Roy model in which a decision to become an entrepreneur depends on the access to formal and informal credit markets, nonpecuniary benefits of entrepreneurship, career-specific entry costs, prior work experience, education, unobserved abilities and other labor market opportunities (salaried employment and nonemployment). Using detailed Russian panel microdata (the Russia longitudinal monitoring survey) and estimating a structural model of labor market decisions and borrowing options, the author assesses the impact of the development of informal and formal credit institutions. Findings The expansion of traditional (formal) credit market institutions positively impacts all workers’ categories, reduces the share of entrepreneurs who borrow from informal sources and incentivizes low-type entrepreneurs to switch to salaried employment. The development of the informal credit market reduces the percentage of high-type entrepreneurs who borrow from formal sources. In the case of default, a higher value of the social network or higher costs of losing social ties demotivate low-type entrepreneurs to borrow from informal sources. The author highlights the practical implications of estimates by evaluating policies designed to promote entrepreneurship, such as subsidies and accessibility regulations in credit market institutions. Originality/value This study contributes to the literature in several ways. Unlike other studies that focus on individual characteristics in the selection for self-employment [Humphries (2017), Hincapíe (2020), Gendron-Carrier (2021), Dillon and Stanton (2017)], the paper models labor and borrowing decisions jointly. Previous studies discuss transitions between salaried employment and self-employment, taking into account entrepreneurial earnings, wealth, education and age, but do not consider the availability of financial institutions as a driving factor for the selection into self-employment. To the best of the author’s knowledge, this paper shows for the first time that the transition from salaried employment to self-employment is standard and consistent with changes in access to financial institutions. Another feature of this study is incorporating both types of credit markets – formal and informal. The survey by the European Central Bank on the Access to Finance of Enterprises (2018) shows 18% of small and medium enterprise in EU pointed funds from family or friends. Therefore, the exclusion from consideration of informal credit markets may distort the understanding of the role of the accessibility of credit markets.

Digitalisation and high-growth enterprises in Europe

ABSTRACT The profound implications that digital technologies have for business dynamism and the competitive environment have raised the attention of policy makers and scholars. This paper examines the link between digitalisation and firm growth, and investigates whether high-growth enterprises (HGEs) invest and adopt digital technologies differently than non-HGEs. Using the European Investment Bank Investment Survey and Generalised Least Squares as well as random-effects probit models, we find strong complementarities between different digitalisation indicators. Furthermore, firms investing in digitalisation are more likely to exhibit rapid employment, sales and labour productivity growth. Our results also highlight the heterogeneous nature of the digitalisation process and its relationship with firm performance.

Green and global? A policy frame analysis of the European Investment Bank’s re-branding from 2018–2023

ABSTRACT This article examines the European Investment Bank’s (EIB) positioning and response to reforms in the European development financing landscape. These reforms aimed to enhance the role of Development Finance Institutions in promoting external investment, threatening the EIB’s privileged access to EU budgetary resources. The EIB responded by creating “EIB Global” and rebranding as the European climate bank. Through framing analysis, this article studies the EIB’s discourse supporting these reforms. It concludes that in striving for institutional survival, the EIB has unintentionally created a situation in which its development and green finance mandates now compete for attention.

Technological catch-up, nonmonotonicity, and convergence: Parametric evidence from the BRICS and European banking systems

IT-driven productivity growth offers banks an intriguing opportunity to differentiate their offerings in a monopolistic market, introduce attractive products, enhance customer service, streamline back-office processes, and ultimately achieve the twin goals of cost minimization and profit maximization. However, there has been no convincing explanation for the observed divergence in the IT-productivity literature, raising doubts about whether IT can significantly improve performance in contemporary banking markets. The article examines the role of IT-led productivity growth in governing the direction and magnitude of intra-industry and inter-country convergence by investigating the potential nonmonotonicity of IT in influencing frontier-based efficiency of the BRICS and European banking markets. Findings reveal U-shaped associations between IT and cost (profit) efficiency, suggesting that excessive investment in IT may explain the productivity conundrum for BRICS nations. IT capital is not a significant driver of cost efficiency for European nations. Nevertheless, R&D spending significantly influences frontier efficiency, reinforcing that European banks can achieve frontier-level performance by investing in innovative solutions. Inter-regional comparisons reveal that BRICS banks are converging with their European counterparts by leveraging IT solutions, while diminishing marginal benefits for the latter reinforces the presence of a catch-up effect. Intra-industry comparisons reveal that size, age, and R&D intensity drive technological catch-up and convergence.

Analyzing the Determinants of Banking Profitability in European Commercial Banks: Do COVID-19 Economic Support Measures Matter?

Analyzing the Determinants of Banking Profitability in European Commercial Banks: Do COVID-19 Economic Support Measures Matter?

Risk culture and cost of capital – Insight from European banks

This study examines the impact of risk culture on the cost of capital (i.e., WACC, Cost of equity and cost of debt) in European banks. We measure risk culture using comprehensive textual analysis approach. Based on 134 banks from 2005 to 2022, findings reveal that risk culture is negatively associated with all cost of capital measures. This indicates that robust risk culture reduces information asymmetry and boosts investor confidence, leading to lower costs of capital. Our findings reflect the importance of aligning risk management practices with regulatory requirements and investor expectations.

Fall of dwarfs: micro and macroeconomic determinants of the disappearance of European small banks

Based on a wide sample of banks headquartered in 27 European countries over the period 2005–2022, this paper tests the influence that microeconomic and macroeconomic variables have on the probability of small banks exiting the market, evaluating the predictive power of the explanatory models employed. Our approach to the determinants of small banks’ exit proves that even the macroeconomic and socio-demographic reference context can have a predictive effectiveness similar to that of the accounting variables, especially when contagion effects at the local level are taken into account.