European Financial Institutions Research Articles

ESG-driven ecopreneur selection in European financial institutions: entropy and TOPSIS analysis

PurposeThis is the application of the Entropy and TOPSIS model to assess the eco-efficiency of European financial institutions using environmental, social, and governance (ESG) strategies. The aim is to categorize financial institutions based on key factors such as environmental training and management and to examine the alignment between ideal ESG performance and eco-efficiency.Design/methodology/approachThe study uses environmental, social, and governance (ESG) strategies to identify and categorize eco-entrepreneurs in European financial institutions. The study utilizes data to examine the structure between environmental training, effective management practices, and the green performance of financial institutions.FindingsThe study shows that European financial institutions exhibit varying degrees of eco-efficiency as assessed using the Entropy and TOPSIS model applied to ESG strategies. Surprisingly, the study found that institutions with a high ESG performance do not always match those with the highest eco-efficiency.Research limitations/implicationsThey emphasize the need for financial institutions to align their operations with sustainable practices. This research provides insights to increase eco-efficiency and improve the ESG performance of financial institutions. It also informs policy and decision-making in these institutions in relation to environmental training and management practices, contributing to the wider dialogue on sustainable finance.Originality/valueThis indicates a discrepancy between ESG ratings and actual eco-efficiency, emphasizing the need to reassess the ESG framework. The study findings are crucial for aligning financial institutions with sustainable practices and improving the effectiveness of the ESG framework, especially for institutions at the lower end of the eco-efficiency spectrum.

The mediating role of corporate social responsibility in good corporate governance and firm value relationship: evidence from European financial institutions

PurposeThis paper aims to investigate the direct and indirect links between good corporate governance (GCG) and firm value using corporate social responsibility (CSR) as a mediating variable.Design/methodology/approachThe data used in this research was collected from the Thomson Reuters Eikon ASSET4 database, involving 108 financial institutions belonging to 12 European countries listed on the stock exchange between 2007 and 2019. A multivariate linear regression analysis was conducted to test the hypotheses of this study.FindingsOur results show that GCG has a positive effect on the firm value and CSR practices. Interestingly, the results indicate that CSR positively influences firm value. The results also reveal that CSR partially mediates the relationship between GCG and firm value.Originality/valueThis study contributes to the literature by providing evidence on how GCG increases firm value with the mediation mechanism of CSR in the link between GCG and firm value. To the best of our knowledge, it is the first research work documenting that GCG leads to better CSR, which ultimately results in increasing firm value of companies from the financial sector by bridging the information gap for this critical industry in the context of a developed market like Europe.

Cybersecurity in European Financial Institutions: New Grounds for Corporate Governance Reform

Cybersecurity, digital resistance to incidents, errors and cyberattacks attracted the attention of the European Union legislator, initially, from a public policy perspective. Today, cybersecurity concerns are dealt with as a part of EU Internal Market strategies, including those more closely linked to the financial sector. These pages focus on the new EU legislation to achieve Digital Resilience in the financial sector as well as on their impact upon the Corporate Governance of financial institutions. Compliance with corporate duties of cyber-governance, management of cyber risks, testing, continuous improvement, as well as reporting, communication, and transparency shape the new corporate governance landscape of the financial institutions in the European Union. Within and beyond what is already being legislated and proposed, Corporate Governance is called to play a fundamental role in facing the challenges of digital security. Cyber security, digital operational resilience, cyber risk management, financial sector, large ict supported infrastructures, critical ict providers, corporate governance reform, digital corporate governance, board duties, board commissions

Artificial Intelligence risk measurement

Financial institutions are increasingly leveraging on advanced technologies, facilitated by the availability of Machine Learning methods that are being integrated into several applications, such as credit scoring, anomaly detection, internal controls and regulatory compliance. Despite their high predictive accuracy, Machine Learning models may not provide sufficient explainability, robustness and/or fairness; therefore, they may not be trustworthy for the involved stakeholders, such as business users, auditors, regulators and end-customers.To measure the trustworthiness of AI applications, we propose the first Key AI Risk Indicators (KAIRI) framework for AI systems, considering financial services as a reference industry. To this aim, we map the recently proposed regulatory requirements proposed for Artificial Intelligence Act into a set of four measurable principles (Sustainability, Accuracy, Fairness, Explainability) and, for each of them, we propose a set of interrelated statistical metrics that can be employed to measure, manage and mitigate the risks that arise from artificial intelligence.We apply the proposed framework to a collection of case studies, that have been indicated as highly relevant by the European financial institutions we interviewed during our research activities. The results from data analysis indicate that the proposed framework can be employed to effectively measure AI risks, thereby promoting a safe and trustworthy AI in finance.

A compositional analysis of systemic risk in European financial institutions

Systemic risk is a complex and multifaceted phenomenon that needs to be addressed from different perspectives. In this work we propose a Compositional Data (CoDa) approach to analyze the distribution of relative contributions to systemic risk associated with major European countries during the period 2008–2021. We represent systemic risk measures corresponding to those countries as percentage shares, or parts, of a compositional dataset and we perform a multivariate statistical analysis using specific CoDa procedures. The proposed approach sheds new light on some variability patterns and cross-country relationships that appear to be linked to the composition of systemic risk parts in the system.

Illicit and Corruption Mitigation Strategy in the Financial Sector: A Study with a Hybrid Methodological Approach

In recent decades, experts from all around the world have been increasingly interested in illegal conduct and corruption in financial organizations. Utilizing the illegal and corruption hypothesis, we investigate the core traits and trends of this phenomenon in European financial institutions. We also examined how specific aspects are incorporated into financial firms’ anti-corruption strategies. The current study makes an effort to comprehend the afore-mentioned challenges using the tools of scientometrics and data analysis. More precisely, our empirical analysis was based on 336 European financial institutions for the years of 2018–2020, and our study also employed bibliographic data from 687 scientific documents indexed in the Scopus database in 2010–2021. The R language’s Bibliometrix tool was applied to analyze the body of the existing literature. A binary logistic regression approach was used to analyze the data. While the goal of our empirical study is to unveil the factors causing or mitigating illegal activity and corruption in the financial sector, the bibliographic analysis revealed the determinants validated in previous work. Our results highlight the need of policy makers to implement measures to limit illegal activity and reduce corruption in financial institutions to improve reputations and customers’ fidelity, which are necessary for the achievement of the sustainable development goals concerning financial institutions. Another conclusion is the emergence of a new source of corruption, which South Africa’s experience has confirmed. Our findings also support two components of the contemporary approach for reducing corruption and illicit activity, namely, the usage of new technology specialists and the incorporation of ESG factors.

Interaction between ownership structure and systemic risk in the European financial sector

This empirical study examines the interaction between systemic risk and corporate governance in European financial institutions. Specifically, we investigate how two corporate governance issues, ownership concentration, and institutional investors’ presence, affect systemic risk. We use the conditional value-at-risk (CoVaR) approach (Adrian & Brunnermeier, 2016) to measure systemic risk and analyze balanced panel data of 96 listed banks from 19 European countries during the period 2011–2020. We choose the European context of its corporate governance’s heterogeneity, the presence of a high level of institutional ownership, and the financial turmoil it has been through over the period analyzed. Our findings reveal that ownership concentration decreases systemic risk, while the high presence of institutional investors increases it. This study contributes to the existing literature by shedding light on the relationship between corporate governance and systemic risk, and how it varies across different ownership structures and institutional contexts. Furthermore, this study provides valuable insights for regulators and policymakers in designing effective corporate governance frameworks that can mitigate systemic risk in financial institutions.

High and Low Credit Risk in SME Portfolios: Evidence from Regulatory Risk Grade Dissemination

Purpose: SME sector credit risk has received attention in research from several dimensions of the financial system. SME sector’s funding is mainly supplied by financial institutions and SME sector is both diversified and large sector in both well developed and less developed economies. Specific research on assessing SME as Financial Institution’s (FI’s) individual counterparties and SMEs as portfolios have developed from a theoretical and empirical perspective. To supplement current research on the area, we approach SME risk from perspective of FIs own risk assessments and compare it to how SME risk rating and measurement compares to other counterparties. Design/methodology/approach: We use published risk rating data from large financial institutions in Europe including globally operating FIs and compare shares of credits in different risk grades and overall portfolio risks within an institution’s own risk classification system and risk measurement system. The data consists of 89 comparable portfolios with over 25 million credits. Findings: Our results show that comparison to households and large corporates originates from higher default rate estimates for SME, which shows as smaller share of credits in the investment grade. SME risk is further raised as even within speculative grades SME’s receives higher default estimates in comparison to households and large corporates. An equally notable finding is that the other relevant parameter for risk calculation, loss given default (LGD), does not differ between SME’s and other counterparties. A part of SME credits is found to be in a low-risk regime in portfolio credit risk estimation. Research limitations/implications: Coverage and detail of data restricts to a specified geographical coverage and aggregated data on SME-companies is not as exact as unit level data. The data represents mostly European institutions as it is collected from institutions which have a head quarter in Europe and are applying Basel regulation in a single rule book environment for banking regulation. In a global scopethere may be differences between jurisdictions or between geographical areas. Data published by institutions is an aggregated data on a rating grade level a and not on a unit level data that institutions have for their exact calculations. Comparison methods for SME sector are selected accordingly so that methods apply to class level instead of unit level data. Originality/value: Higher capital requirements for SME’s may restrict the price and availability of finance. According to our results there can be separated a low-risk SME finance without higher capital requirements compared to peers. Results may also be used to support counterparty level default risk model results showing higher risk for SME’s which can be seen in smaller shares of investment grade credits and in a higher default rate for speculative grade credits.

Sustainability reporting in view of the European sustainable finance taxonomy: Is the financial sector ready to disclose circular economy?

AbstractThe European sustainable finance taxonomy requires financial and nonfinancial companies to provide investors with information about the environmental performance of their assets and economic activities. For financial institutions, making socially and environmentally responsible investments visible through a common label that guarantees specific standards for the entire European Union is crucial. Against this background, this study analyzes the evolution of sustainability reporting practices and their assurance in a sample of European financial institutions. To this end, we used a double qualitative methodological approach, based on (a) an external analysis of nonfinancial information and its relationship with the main economic‐financial variables of the sample companies, and (b) a case study of a bank carried out through semi‐structured interviews. This study provides an external measurement analysis of nonfinancial information in entities from different countries, which can contribute to broadening the scope and level of sustainability and circular economy accountability.

It Is Time for Anti-Bribery: Financial Institutions Set the New Strategic “Roadmap” to Mitigate Illicit Practices and Corruption in the Market

The financial sector is characterized by complexity due to the management of a large volume of transactions, which can lead to the difficulty of considering, identifying, and monitoring them. The lack of mechanisms in monitoring and control transactions can contribute to the development of illegal practices within a company, such as fraud, corruption, bribery, and money laundering. These phenomena can affect financial institutions negatively. Therefore, the development of an appropriate corporate governance system can ensure to members of the board and executives in a company that any illegal practice can be detected. This study aims to highlight the factors that contribute to the development of illegal practices within European financial institutions. This can help executives to plan and mitigate the illicit practices that may emerge. For this purpose, a binary logit regression analysis on panel data from 2018 to 2020 was applied to 336 European financial companies. The findings of this research emphasize the crucial role of corporate governance in the prevention of the development of illicit issues within European financial institutions, while human resources can be characterized as a pathway to corruption. Both factors, corporate governance and human resources, are main pillars of environmental, social, and corporate governance (ESG), which indicates the need of the financial sector in Europe for the elaboration of anti-corruption strategies. Thus, companies within the sector can improve their ESG score.

Use of Derivatives and Market Valuation of the Banking Sector: Evidence from the European Union

(1) Background: This paper aims to investigate whether the derivatives usage by the banking sector in the European Union has impacted its market valuation in the aftermath of the financial crisis. (2) Methods: Our analysis takes 120 European financial institutions listed on the European Union stock exchange over a period of 14 years into account (2008–2021). We use the generalized method of moments (GMM) to assess whether the use of derivatives allows financial intermediaries to increase their market value. Control variables, such as size, profitability, expectations of the market, bank risk, liquidity performance, and financial condition, are also taken into consideration. (3) Results: Our main findings suggest that market value is affected negatively by derivative asset accumulation. (4) Conclusions: The results are in line with the studies that investigated the impact of financial derivatives on the market value and found a negative connection between the two, justified by the suboptimal hedging or the higher volatility of the earnings.

The Determinants of the Environmental Performance of EU Financial Institutions: An Empirical Study with a GLM Model

Within the last few decades, the issue of the environmental performance of European financial institutions has become a significant feature of their strategic plans. Financial institutions can contribute through their own activities and investments, and also through their relationship with economic sectors and consumers, in decreasing environmental footprint. The purpose of this research is to investigate the determinants that affect the environmental performance of European financial institutions. Financial markets have been selected as the main research field for this study, as it presents an opportunity for environmental policy and is useful in view of the need for a wider range of policy instruments. Moreover, on a more practical level, financial institutions can interact with the environment in several ways, such as investors, innovators, valuers, powerful stakeholders, and polluters. The study is based on a mixed methodology approach, which integrates: (i) bibliometric analysis based on R package and (ii) panel data analysis with the assistance of a generalized linear model (GLM). Findings show that socioeconomic, governance, and technology factors positively affect the environmental performance of European financial institutions. Moreover, the incorporation of alternative energy sources, such as renewable energy in the corporate function, is a requirement for greening the financial institutions. The above can guide financial institutions to develop the appropriate strategies for decreasing their environmental footprint, improving their operational efficiency, and becoming more attractive and competitive in the market.

Sustainable Development Goals Disclosure Practices through Integrated Reporting: An Empirical analysis on European Financial Institutions

The goal of the study is to investigate the state of the Sustainable Development Goals (SDGs) disclosure in European financial institutions’ Integrated Reports. As a research approach, manual content analysis was adopted. The study developed a disclosure index as a research tool comprised of the 17 SDGs. The empirical analysis shows that the most disclosed goals were SDG13 (Climate Action), where all the reports disclosed the measures taken by the companies to achieve this goal, followed by SDG7 (Affordable and Clean Energy), as 10 reports disclosed detailed information on this goal. Also, the results provide evidence that SDG2 (Zero Hunger), SDG14 (Life Below Water), SDG15 (Life on Land), and SDG16 (Peace, Justice, and Strong Institutions) came in the last place, respectively. Practically, the study encourages companies in all sectors to adopt the SDGs in their integrated strategy to create better value for stakeholders.

The role of shadow banking in systemic risk in the European financial system

We study how the characteristics of different financial institutions relate to systemic risk using the ΔCoVaR measure of Adrian and Brunnermeier (2016). We contrast traditional banks with shadow entities, such as Money Market Funds and Finance Services, using a sample of 476 European financial institutions between 2006 and 2015. We find that systemic risk increases significantly in the size of large financial institutions, particularly Money Market Funds, while it is insensitive to the size of Finance Services. We also find that Finance Services are particularly sensitive to proxies for market risk. For traditional banks, their reliance on short term wholesale funding is a key determinant of their contribution to systemic risk.

Corporate governance and firm value: a study on European financial institutions

PurposeThe purpose of this paper is to examine the impact of the characteristics of two corporate governance mechanisms, namely, board of directors and ownership structure, on the firm value of European financial institutions.Design/methodology/approachUsing the market-to-book ratio calculated by the Thomson Reuters Eikon ASSET4 database, this study measures the firm value of 111 financial institutions belonging to 12 European countries listed on the stock exchange during the period 2007–2019. Multivariate regression analysis on panel data is used to estimate the relationship between corporate governance attributes, such as board size, board independence, board gender diversity, ownership concentration and CEO ownership, and the firm value of European financial institutions.FindingsThe empirical results reveal that board gender diversity and CEO ownership are positively related to the firm value, whereas board size and ownership concentration are negatively related. Furthermore, the findings suggest that board independence is insignificantly correlated with the firm value. Regarding the control variables, the results show that financial institutions' size, age and legal system are significant factors in changing the firm value. Nevertheless, financial institutions' leverage and activity sector are not significantly correlated with their value.Originality/valueThis research contributes to the literature by providing the significant links between some corporate governance mechanisms and the firm value of companies from the financial industry, by addressing the information gap for this critical industry in the context of a developed market like Europe.

A Matrix-Variate t Model for Networks.

Networks represent a useful tool to describe relationships among financial firms and network analysis has been extensively used in recent years to study financial connectedness. An aspect, which is often neglected, is that network observations come with errors from different sources, such as estimation and measurement errors, thus a proper statistical treatment of the data is needed before network analysis can be performed. We show that node centrality measures can be heavily affected by random errors and propose a flexible model based on the matrix-variate t distribution and a Bayesian inference procedure to de-noise the data. We provide an application to a network among European financial institutions.

Buildings’ Energy Efficiency and the Probability of Mortgage Default: The Dutch Case

We investigate the relationship between building energy efficiency and the probability of mortgage default. To this end, we construct a novel panel data set by combining Dutch loan-level mortgage information with provisional building energy ratings provided by the Netherlands Enterprise Agency. Using the logit regression and the extended Cox model, we find that building energy efficiency is associated with a lower probability of mortgage default. There are three possible channels that might drive the results: (i) personal borrower characteristics captured by the choice of an energy-efficient building, (ii) improvements in building performance that could help to free-up the borrower’s disposable income, and (iii) improvements in dwelling value that lower the loan-to-value ratio. We address all three channels. In particular, we find that the default rate is lower for borrowers with less disposable income. The results hold for a battery of robustness checks. This suggests that the energy efficiency ratings complement borrowers’ credit information and that a lender using information from both sources can make superior lending decisions than a lender using only traditional credit information. These aspects are not only crucial for shaping future energy policy, but also have implications for the risk management of European financial institutions.

Corporate governance and CSR disclosure: evidence from European financial institutions

The present work aimed to empirically examine the association between corporate governance mechanisms and the extent of corporate social responsibility (CSR) disclosure in European financial institutions. The corporate governance variables, particularly board size, board independence, the proportion of female directors, chief executive officer (CEO) duality, ownership concentration and CEO ownership, were used. The sample of this empirical research consisted of 115 financial institutions belonging to 12 European countries from 2007 to 2017, and panel data regression was used for analysis. The results indicate that board size, board independence, the proportion of female directors and the CEO ownership have positive associations with the extent of CSR disclosure, while CEO duality and ownership concentration have no significant associations with the extent of CSR disclosure. This study is important due to following reasons: First, it focused on the financial sector which is often excluded from CSR studies due to its specific legal regulations and its little environmental impact. Second, this study provides empirical evidence that some governance mechanisms are important determinants of CSR disclosure in the financial sector. Third, it uses the environmental, social and governance score, which has not been widely used in CSR studies, especially in financial institutions. Finally, the research states the crucial implications for the financial sector and regulatory bodies.

Compliance evolution toward the IIRF in the case of European financial institution: public vs. private organization

Financial organizations are playing an essential role in our societies. The economic crises brought a loss of confidence by citizens, had repercussions in government budgets as aid was provided to save financial organizations. Today after ten years of unfortunate events, stakeholders are more interested in the activity of similar organizations than ever. The increasing need for information brought financial organizations to adopt different non-financial reports to communicate their activity toward their stakeholders, including the latest trend in corporate reporting: “Integrated Report.” Therefore, the present paper analyses the compliance evolution toward the International Integrated Reporting Framework and contraposes the results in the context of the public-owned institution and private-owned institutions. The results of the study outline an increasing compliance toward the framework and it demonstrates State Owned Enterprises predilection toward content that help them in explaining their existing reasons.

ДИНАМІКА ФОНДОВИХ РИНКІВ ПРОВІДНИХ КРАЇН ЄС ТА УКРАЇНИ В УМОВАХ СВІТОВОЇ ПАНДЕМІЇ COVID-19

The article analyzes the stock markets of the leading EU countries - France, Germany, Poland and Ukraine. The article presents the results of the analysis of the dynamics of indexes of represented stock markets, such as DAX in Germany, CAC 40 in France, WIG 20 in Poland and PFTS in Ukraine. The main enterprises included in these indexes of stock exchanges were identified. The impact of Covid-19 on the major indices of Europe's largest markets and, moreover, how they recovered from this economic crisis was assessed. It should be stated that all four countries are quite successful in overcoming the crisis. Among the surveyed countries for the period from 2017 to 2022, the largest growth was recorded in the stock markets of France and Germany, the least - in Poland. Higher growth rates in France and Germany are due to the policy of the European Central Bank, which, like the US Federal Reserve, during the global pandemic significantly increased the money supply, which led to rising stock prices for almost all assets The trend of all four indexes, in the long run, is growing, even with the global economic crises presence. Ukraine is the youngest country in Europe. Though, it should be stated that the Ukrainian stock market is developing slowly, but surely. The article identifies the factors of development of the Ukrainian stock market, the need for further reform and offers recommendations based on the analysis of stock markets in neighboring countries, including Poland, which has retained its national currency, despite participation in the European Union. Ukraine is a strategically important partner for the European Union. Given the fact that Ukraine has clearly defined the vector for Euro-Atlantic integration, a developed stock market is a necessity for its effective interaction with the European Union and the world community in general. An important positive step in the development of the national stock market was the adoption of the regulatory framework for European Union securities in Ukraine. This is a significant incentive for further development of the stock market of Ukraine and its integration into European financial institutions.