European Banking Union Research Articles

Competitive strategy selection in the European banking sector using a hybrid decision-making approach

Strategic planning is an effective tool for long-term planning and utilized by organizations and industries to achieve competitive advantage. Addressing difficulties that the European banking sector struggled during and after the global financial crisis (GFC), the purpose of this paper is to raise important questions about the sustainability of the sector and offers competitive strategy formulations for European policy makers. Empirical findings are accomplished by applying a three phase analysis of SWOT, an integrated model of DEMATEL-ANP (DANP), and fuzzy TOPSIS. Empirical findings from the SWOT analysis suggest a total of twelve factors, which are then incorporated to formulate four strategies. The DANP results illustrate that opportunities dimension has the highest impact and strengths has the lowest among others. The fuzzy TOPSIS results demonstrate that “the European Banking Union (EBU) is expected to remove divergence in the Euro area banking sector” is the most important strategy, whilst “the non-risk based leverage ratio (LR) requirement by Basel III” has the weakest importance among the strategy preferences.

Bankss Home-Bias in Government Bonds Holdings: Will the Supply of ESBies Create Its Own Demand?

The bank literature has documented theoretical and empirical evidence of a “diabolic loop” in the sovereign-bank nexus. Banks have a concentrated risk exposure in domestic government bonds. In the European banking union, this has led to a proposal to create European safe bonds, ESBies, which would facilitate geographical sovereign diversification, hence contributing to bank stability. But will a supply of ESBies create its own demand? The paper offers two new explanations for the home bias in banks’ government bond holdings: a sovereign-based rating cap on banks and the existence of a ‘bank tax’. These are complementary to the three explanations mentioned in the literature: risk shifting, a gamble for resurrection and moral suasion. Collectively, they cast doubt on a demand-led approach to developing a market for safe sovereign-bond backed securities.

EU banks after the crisis: sinners in the hands of angry markets

European Union banks were severely hit by the global fi nancial crisis in 2008 and their stock prices and returns have generally not recovered since then, differently to what has been observed in other sectors (i.e., non-financial corporations) and jurisdictions (i.e., US). In this paper, we focus on three episodes of financial turmoil in EU fi nancial markets occurring after the global fi nancial crisis (August 2015, December 2015 and January 2016, and June 2016) and, through a series of linear regressions, with and without control variables, attempt to determine the common features of those banks which stock returns declined the most. Results of the regressions tend to suggest that size has been driving the decreases in stock returns in the three episodes. Regarding asset quality, the Texas ratio has been a decisive factor in the evolution of stock returns of EU banks in the second and third periods. Interestingly, profi tability variables seem not to be statistically significant to explain the declines in stock returns, except in the third period, but only under some specifications. An evolution on the perception by fi nancial market participants on EU banks, with a larger importance on asset quality in the latter periods, can also be observed. Lastly, on the basis of these results, further policy actions would be needed to clean-up the balance sheet of banks, as a necessary step towards full recovery after the global financial crisis.

From governance to government: Banking union, capital markets union and the new EU

European banking union and Capital markets union have emerged as two of the key pillars of European integration since the post-2008 financial crisis. Neither were anticipated prior to the financial crisis, nor was the rapidity of their construction. Both imply the same critical shifts in Europe’s institutional political economy. The first relocates national oversight and authority to supranational institutions (a political shift), while the second increases the power and responsibility of market actors by reducing national controls (an economic shift). If banking union aims to break the hold of national governments over banking entities to foster a less fragmented and more efficient European union banking market, capital markets union aims to remove national-level impediments to a single market for capital in which jurisdictional differences are minimized, investor freedoms maximized and business gains access to a greater range of financial resources.

Identification of EU Bank Business Models

This paper proposes a standardised classification of business models of the European Union (EU) banks. Our work is based on a rich and unique dataset collected for the first time for the full population of EU banks at individual level. The proposed approach to classification combines both a qualitative and a quantitative component, which is a new approach compared with relevant literature in business model identification and classification. The qualitative component is based on an expert knowledge of the supervisory authority, which is confirmed or challenged by quantitative indicators. Our findings are that banks’ classification through this mixed approach allows better and more granular identification of banks’ business models than the clustering methodology, which is more commonly used in the literature. The business model categorisation can provide the supervisory and regulatory authorities with a benchmark for classifying institutions for a more structured and consistent approach to regulatory impact assessment, analysing trends and risks, proportionality, and supervsion, ensuring the continuity and comparability of results over time.

Corporate governance mechanisms and income smoothing: the case of European Union banks

Corporate governance mechanisms and income smoothing: the case of European Union banks

Corporate governance mechanisms and income smoothing: the case of European Union banks

It is the usual policy of Inderscience to retract from publication any paper if, subsequent to publication, it becomes a matter of dispute about intellectual property, publishing ethics or legal issues. Each case is judged on individual circumstances. In this case, the authors have requested withdrawal of their paper since it has a number of similarities with another paper by them. The IJCM paper has therefore been retracted.

Playing the creation of the European banking union: what union for which Member States?

The article explores the main competing visions of a fully-fledged European banking union. Building on a historic overview of principal choices related to the previous European banking policy reforms, it identifies four ‘ideal’ models of the new institutional framework: full, corrective, preventive and incomplete. The empirical analysis of national preferences on key policy options related to the recent banking policy overhaul reveals that in the final stages of negotiations the majority of Member States and EU institutions strongly preferred the ‘full’ banking union model, defined by a full scope of supranational supervision and a high degree of bank risk sharing. However, the results of the EU bargaining process show that recent agreements better correspond to the ‘preventive’ banking union form. The article adds a new perspective to the existing accounts on the creation of the banking union, suggesting how an open-ended definition of European initiatives contributes to deepening integration.

The Structure – Conduct – Performance Paradigm in the European Union Banking

The Structure – Conduct – Performance Paradigm in the European Union Banking

How Does Regulation Affect the Organizational Form of Banks' Presence in Developing and Developed Countries?

Using a unique hand-collected dataset of 1,251 European Union banks and their 20,850 foreign affiliates hosted in 154 countries, this paper investigates how both host country and home country regulation affects their decision on how to go abroad to both developed and developing countries. Controlling for various factors, we find that host country banking regulation is an important factor in explaining organizational form (subsidiaries versus branches), but that such a factor is strongly influenced by the level of development of the host country. While banks are very careful in limiting their expansion to the relatively safest world countries, they are more likely to open branches rather than subsidiaries in countries with stringent activity restrictions and capital requirements; especially when they are relatively less efficient. Additionally, retail-oriented banks tend to prefer to operate subsidiaries in the most developed countries and competitive markets.

Does regulating remuneration affect the market value of European Union banks? Large versus small/medium sized banks

AbstractThe aim of this paper was to analyze equity market reactions to the mandatory European Union regulation of remuneration policies in financial institutions. Using event study methodology, we investigated market reactions to the first European Directive on compensation policies after the financial crisis using a sample of 124 banks operating in the European Union. We divided the sample into two groups according to bank size considering four criteria: the US Dodd‐Frank Act 2010, the Liikanen Report 2012, Global Systemically Important Banks 2011, and the European Central Bank 2014. We found strong evidence of an average negative market reaction to compensation regulation. Moreover, this negative reaction is stronger for large banks than for small/medium sized banks.

The European system of financial supervision – regulatory impact assessment

Complexity and uncertainty in the application of the regulations of the European system of financial supervision are due to the fact that its particular elements were implemented over a period of time. First, it was a system of European financial supervision authorities i.e. the European Banking Authority (EBA), the European Insurance and the Occupational Pensions Authority (EIOPA) and the European Securities and Markets Authority (ESMA), whose main objective was to coordinate national actions. Then there were established the European Banking Union, including the Single Supervisory Mechanism (SSM), the Single Resolution Mechanism (SRM), as well as the European Stability Mechanism (ESM), which constitutes also a part of the system of support for endangered banks. Legal interpretation problems are a result of differences in the scope of competences of these entities. For example, there is uncertainty whether the regulations refer to the eurozone or the whole European Union and if they refer to banks only or to other financial institutions as well. An analysis of the SSM, the SRM or the ESM does not always offer a clear answer to questions such as: who, when and using what tools should act; when, for example, the ECB may and should correct the decisions of national supervisors; what is the role of the ESRB, if we take account of the enhanced competences of the ECB in the banking union; if and when banks may question supervisory decisions concerning, for example, establishing a buffer or classifying an institution as SIFI, etc. Similarly, the role of the EBA or the ESM is unclear in the context of the establishment of the banking union, the SSM, the SRM, the ESM and the delegation of power of the ECB and the European Commission to regulatory agencies (Meroni doctrine) or the practice of establishing regulatory agencies outside the bounds of the treaty (Pringle doctrine). Therefore the regulatory landscape in this context requires impact assessment.

Does the New European Banking Regulation discourage Earnings Management?

In the recent past, the financial crisis has shown important lacks in the EU regulation relating to the banking sector, making the introduction of a unified regulatory framework necessary. Since June 2009 the European Council has recommended a “Single Rulebook”, that is a unique and harmonizing discipline applicable to all financial institutions in the Single Market, become effective on January 2014. This prudential discipline requires much more minimum capital, liquidity and information transparency and it defines format and minimum standards of contents.The aim of this research is to investigate the relation between the new mandatory disclosure and earnings management policies in banking sector realized through Loan Loss Provisions (LLP), the component of income statement mainly subject to manipulations, especially in form of earnings smoothing. Because the new integrated regulatory framework requires a more transparent disclosure, we expected that accruals manipulation (basically LLP) could be discouraged. The empirical analysis is based on a sample of 116 listed European banks over the period prior (2011-2012-2013) and after (2014-2015-2016) the effective date of the Single Rulebook. The evidence confirm our hypothesis suggesting that this banking reform discourages earnings manipulation and improves earnings quality, making financial reporting more useful for investors. The results are important to the regulatory institutions (such as European Union and European Central Bank) supporting more stringent discipline introduced by Basel III.

European Union Bank Resolution Framework: can the objective of financial stability ensure consistency in resolution authorities\u2019 decisions?

The Bank Recovery and Resolution Directive (BRRD), agreed in 2014 and transposed into national law by now, equipped EU resolution authorities with a number of tools and powers to deal with EU failing institutions. To use these tools and powers, and to act swiftly prior to institutions reaching the state of insolvency, resolution authorities must undertake appropriate planning (resolution planning) in accordance with a number of rules and processes under the Directive.Resolution planning should enable authorities to “handle situations involving both systemic crises and failures of individual institutions”. The resolution plan must take into consideration the resolution scenarios “including that the event of failure may be idiosyncratic or may occur at a time of broader financial instability or system wide events”. The protection of financial stability has a central place in the BRRD, albeit in some instances it should also be balanced against other considerations, for example the other ‘resolution objectives’. The term ‘financial stability’ is not defined in the Directive; it is further qualified, however, in the context of a number of assessments that the resolution authorities must undertake.The paper discusses the notion of ‘financial stability’ through the lenses of a number of tasks that EU resolution authorities must perform. It argues that although the financial stability objective should be necessarily broad to provide discretion to resolution authorities, it is hard to ensure consistency in resolution decisions and actions.

BANKING UNION IN EUROPE: HOW MUCH CENTRALISATION IS NEEDED?

ABSTRACTWe examine the efficiency of banking regulation in a federation with two tiers of government and highly integrated banking systems. We assume that policy makers have incomplete information about banks’ true health, and banking sector turmoil can generate cross‐border spill‐over effects. We show that, in such an environment, the decentralisation of policy responsibilities for the regulation of banks can achieve the first‐best allocation and ensure financial stability. While national governments design banking regulations, the federal policy maker authorises inter‐regional income redistribution payments throughout the federation. Our results suggest that strengthening national responsibilities in banking regulation and supervision in the course of the further development of the European banking union may be advisable.

Reforms to the European Union Financial Supervisory and Regulatory Architecture and Their Implications for Asia

European Union (EU) countries offer a unique experience of financial regulatory and supervisory integration, complementing various other European integration efforts following the Second World War. Financial regulatory and supervisory integration was a very slow process before 2008, despite significant cross-border integration, especially of wholesale financial markets. However, the policy framework proved inadequate in the context of the major financial crisis in the EU starting in 2007, and especially in the euro area after 2010. That crisis triggered major changes to European financial regulation and to the financial supervisory architecture, most prominently with the creation of three new European supervisory authorities in 2011 and the gradual establishment of European banking union starting in 2012. The banking union is a major structural institutional change for the EU, arguably the most significant since the introduction of the euro. Even in its current highly incomplete form, and with no prospects for rapid completion, the banking union has improved financial supervision in the euro area and increased the euro area’s resilience. Asian financial integration lags well behind Europe, and there is no comparable political and legal integration. Nevertheless, Asia can draw useful lessons from European experiences in multiple areas that include the harmonization of the microprudential framework, proper macroprudential structures, and participation in global financial authorities.

Institutional and Legal Aspects of the European Banking Union: Status Quo and the Way Forward

The aim of this paper is to briefly present and assess the institutional framework governing the (and some main legal aspects related to the) European Banking Union (EBU), as in force, and the proposals made or suggested in order to enhance it. The paper is structured in three (3) Sections: (1) A brief historical overview of EU institutional arrangements pertaining to the stability of the banking system in the European Union before the establishment of the EBU and the conditions that led to its establishment as a response to the current fiscal crisis in the euro area are the subject matter of Section 1. (2) The following Section 2 provides a brief description of the current content of the main pillars of the EBU and their link to the (underlying) single rulebook (the status quo). (3) Finally, Section 3 contains an overview, with some assessments, of the Commission’s current reform agenda on the EBU, the two elements which the author considers as the “uncompleted agenda” and the link between a (more) robust Economic and Monetary Union (EMU) and a well-functioning and (hence) financial stability-enhancing EBU. The cut-off date for information contained in this study is 23 December 2017.

Banking Overleveraging and Macro Instability: A Model and VSTAR Estimations

Abstract:Overleveraging of the banking sector has been considered one of the main causes of the 2007–09 financial crisis and the subsequent great recession. It was also of major concern for the subsequent BIS regulatory policies resulting in Basel III and its request for higher capital requirements. It has now become highly relevant for the planned European banking union. Overleveraging of the banking sector exposes the financial sector and the macroeconomy to vulnerabilities, but also, as critics state, seems to constrain credit flows to the private sector. We present here a measure of overleveraging, defined as the difference between actual and sustainable debt, conduct an empirical study on overleveraging for 40 banks in Europe, and study the vulnerabilities and credit contractions that can arise subsequently. Before the year 2004 overleveraging had not been a serious problem as leverage was on a sustainable level. However, in the run-up to the financial crisis, actual and optimal debt spread apart and the banking sector began to suffer from overleveraging. We use a non-linear Vector STAR model to evaluate the hypothesis that periods of increasing debt levels are accompanied by more severe credit constraints than periods of low leveraging. We demonstrate this for country groups across Europe.

Constitutional and Administrative Pluralism in the EU System of Banking Supervision

This Article examines the relationship between the developing European Union (EU) system of banking supervision and the theories of constitutional pluralism. It questions the remaining epistemic, explanatory, and normative value of these theories with regard to the EU system of banking supervision. The argument is broken down into three parts. First, the Article briefly describes the system of banking supervision in the European Union and the pluralist challenges that it spurs. Second, it schematically maps out the leading theories of constitutional pluralism to test, by way of their application to the field of EU banking supervision, their epistemic, explanatory, and normative value. Finally, to the extent that this value has diminished, the Article offers another pluralist theory, not a constitutional one, which could supplement the identified epistemic, explanatory, and normative gaps. This is a theory of administrative pluralism.

Monnet's Error or Intergovernmental Triumph: Examining the Formation of the European Banking Union

Are the grand theories of integration still relevant today and capable of describing integration in the European Union? Have the general principles of the grand theories lost their ability to accurately describe European integration? For policy makers and scholars that rely on theories, the answer to these questions are of axiomatic importance. Since 2012, steps towards a banking union provide the most contemporary and far reaching manifestation of European integration making the area ripe for studying these questions. Focusing on the member states of the Eurozone adds relevance to the discussion, because the grand theories should apply more adeptly to this more highly integrated group. To discern whether a single grand theory can account for present empirical findings, this paper relies upon a case study of the European banking union to test whether intergovernmentalism or neofunctionalism can properly account for evinced integrative outcomes. The grand theories will be tested to see if they are capable of explaining the entirety of the integration process within their own logical confines. Instead of an exhaustive approach that describes the preferences of each member state, coalitions will be curated to discern group negotiating preferences and taken alongside the actions of supranational actors to test the relevance of the grand theories of European integration.