Eurozone Banks Research Articles

Spillover effects between energy uncertainty and financial risk in the Eurozone banking sector

Spillover effects between energy uncertainty and financial risk in the Eurozone banking sector

Climate stress test: bad (or good) news for the market? An event study analisys on euro zone banks

Climate stress test: bad (or good) news for the market? An event study analisys on euro zone banks

Negative rates and bank profit and cost efficiency: evidence for Eurozone

This paper studies the effect of Negative Interest Rates Policies (NIRP) on the performance of Eurozone Banks. To this end, we apply a stochastic frontier analysis (SFA) to a sample of 1446 banks from Eurozone countries for the time period 2010–2018 to explore how bank profit and cost efficiency are affected by NIRP. We find that NIRP has a positive effect on profit efficiency which is mainly attributed to banks’ efforts to counterbalance the squeezed interest margins by increasing their non interest income and we also demonstrate that smaller banks and banks facing higher competition are more incentivised to enhance their cost efficiency when they operate under NIRP.

IFRS 9 and earnings management in Eurozone banking: The moderating effect of gender diversity

AbstractThe present study examines the effect of adopting IFRS 9 on earnings management practices in European Central Bank‐supervised banks, considering the possible moderating effect of gender diversity in this relationship. Using a system GMM methodology, findings suggest IFRS 9 promotes transparency and contributes to a decrease in earnings management, as the new impairment model influences directors' discretion. We also find that gender diversity moderates the negative impact of IFRS 9 on earnings management. However, when the board representation of women is substantial, the adoption of IFRS 9 results in an undesirable turn, as women are more conservative and risk‐averse, which leads to measures of very early prevention of future losses.

The impact of the single supervisory mechanism on Eurozone banking: the assessment of trends in efficiency and frontier position

ABSTRACT The Single Supervisory Mechanism (SSM) was implemented as a first step towards a Banking Union in November 2014. This paper investigates the impact of the SSM on Eurozone banks’ efficiency and position of best-practice frontier. It is based on a balanced panel analysis of 931 European bank-year observations from 2011 to 2017 (133 banks, seven years). The study uses Data Envelopment Analysis and a difference-in-differences approach to explore the evolution of banking performance. We found that the SSM had a negative impact on the efficiency levels of Eurozone banks, particularly in the year after the introduction of the mechanism. Additionally, we observed that the frontier formed by non-Eurozone European Union banks is more productive than the frontier of Eurozone banks in all the years analysed. Both efficiency and frontier position show evidence of a recovery trend in more recent years for both groups. We also found that while Equity-to-Asset Ratio, Return on Average Assets and Gross Domestic Product per capita positively impacted banks’ efficiency, domestic credit provided by banks expressed as %GDP had a negative impact on efficiency.

Stuck in 2012: The hesitant geographies of European financial integration since the Eurozone crisis

At the heart of the Eurozone crisis was a dramatic divergence in interest rates between member states and a reversal of previously booming cross-border credit expansion from ‘core’ to ‘periphery’ by European banks. The resulting crisis and retreat behind national borders across the Eurozone challenged European elites’ decade-long project of producing European scale as a space for financial accumulation. The Eurozone crisis has been well-described but post-crisis geographies of financial integration have received limited attention. We chart the financial positionality of member states and the relations between them in the period 2012–2019 using a variety of metrics including intra-Eurozone cross-border bank lending. The post-crisis period is dominated by the European Central Bank’s determination to do ‘whatever it takes’ to save the Euro and its financial system. The resulting asset purchases give it a qualitatively different place in the Eurozone financial system and end the crisis period’s retreat behind national borders. But they do not restore pre-crisis dynamics, and, in addition, unevenness along national lines remains. The crisis era core and peripheral labels still hold but the data also reveal important nuances: not least that the distribution of giant banks matters and offshore financial centres cut across core/periphery boundaries. Yet, even as there is no return to booming core-to-periphery credit, German lending into the Eurozone and its counterpart, Italian borrowing, symbolizes the continuing fragility of the Eurozone banking system. European Central Bank efforts ended the crisis, but more than asset purchases will be required if we are not to remain stuck in 2012.

Multifactor Risk Attribution Applied to Systemic, Climate and Geopolitical Tail Risks for the Eurozone Banking Sector

The aim of this work is to introduce an innovative methodology for performing risk attribution within a multifactor risk framework. We applied this analysis to the assessment of systemic, climate, and geopolitical risks relative to a representative sample of Eurozone banks between 2011 and 2022. Comparing the results to the output of a bivariate approach, we found that contemporaneous tail crises generate combined equity losses exceeding partial analysis estimates. We then attributed the combined risk to each factor and to the effect of their interaction by employing our proposed frequency-based approach. For our computations, we used multivariate GARCH, Monte Carlo simulations, and a suite of Eurozone-specific factors. Our results show that total combined risk is on average 18% higher than traditional systemic risk estimates, that climate risk more than doubled in our period of analysis, and that geopolitical risk surged to over 5% of total combined risk. Our climate risk estimate is in line with the results of the 2022 European Central Bank climate stress test, and our geopolitical risk measure shows a positive correlation with the GPRD and Threats index.

Hydrocarbon price spillover to banking performance in Eurozone

AbstractThe current study investigates the impact of real oil price shocks on the Eurozone banking sector from February 2009 to February 2022, using the Structural Vector Autoregressive method to distinguish the reaction between Eurozone bank indices and three structural indicators in the oil market shocks. The shocks include global oil demand, supply shock, and specific oil market shocks. Our findings show that the banking sector in the Eurozone responds positively toward an oil‐specific demand shock (oil price) in the short run, but it responds negatively in the medium and long run that lasts for a long time. The banking sector, on the contrary, does not react to supply shocks, which provide a significant policy implication for regulators and policymakers.

The effect of bank diversification on the capital, risk, profitability and efficiency of the eurozone and the US banks in the aftermath of the global financial crisis

This paper investigates the influence of bank diversification on bank capital, risk, profitability and efficiency in a dynamic panel estimator. We also examine: 1) how the influence differs depending on the type of diversification (asset, income, non-interest income diversification); 2) whether diversification affects the eurozone banks differently than the US banks; 3) which banking type (commercial, cooperative and savings banks) is more benefited from diversification. Our findings indicate that income diversification has substantial benefits when compared to other types of diversification. Whereas non-interest income diversification has the most unfavourable results for the reported groups. Additionally, the impact of asset diversification is mixed for the dependent variables and it is contingent on whether a bank belongs to eurozone or to the USA. Finally, our survey highlights how different bank types (commercial, cooperative or savings banks) are influenced by bank diversification.

Political connections and remuneration of bank boards’ members: moderating effect of gender diversity

This study investigates the impact of political connections of members of banks’ Boards of Directors on these boards’ remuneration, and the influence of gender diversity on this impact. Using a panel of observations on 69 eurozone banks supervised by the ECB for the period 2011 to 2019, and the generalized method of moments (GMM), our empirical results indicate that political connections negatively impact average remuneration. In our view, directors with political connections prefer other types of benefits, aiming at future political positions and not wanting to be associated with high remunerations. Meanwhile, gender diversity accentuates this negative effect, a finding that may be related to the fact that, by including female directors, shareholders try to reduce the level of opportunistic behavior associated with political connections. Overall, we find that our results are robust across different choices of measures of gender diversity.

The effect of earnings management on bank efficiency: Evidence from ECB-supervised banks

This study investigates the impact of earnings management on the efficiency of Eurozone banks, examining its chronological evolution until the implementation of International Financial Reporting Standard 9. Using data on 70 banks, we find that earnings management, defined as discretionary loan loss provisions, negatively affects efficiency. Meanwhile, when we also include non-discretionary provisions (those required by legal obligations), we estimate a positive impact of loan provisions on allocative efficiency—contrarily to a negative effect of discretionary provisions. This finding helps stress the importance of adequately defining earnings management, namely for the purpose of analyzing its effect on banking efficiency.

Assessing the credit creation process under the Basel III framework: Some evidence from the Eurozone

This paper re-examines the exogeneity/endogeneity debate regarding the credit creation process for the Eurozone banking system under the Basel III framework. A two-stage theoretical approach is employed to assess an equity/credit multiplier model and a credit creation model. The results reveal the existence of a mixed outcome (driven by aggregate demand and Basel III factors) regarding the credit creation process for the sample countries and the period under examination. The active but limited effectiveness of the Basel III factors upon the Eurozone banking system is revealed, providing important information for policymakers.

Board Members’ Educational Background and Financial Performance: Evidence from Eurozone Banks

Abstract This study examines the impact of the quality of board members’ educational background on the financial performance of a group of Eurozone banks. Return on average assets (ROAA), Return on average equity (ROAE), and Tobin’s Q are used as measures to assess bank financial performance. Three indices are used as proxies for board members’ educational qualifications: Eduindex, for all academic qualifications in areas such as business or economics; Eduversal, for all qualifications from business schools ranked by Eduniversal; and EduFT, for all qualifications from business schools ranked by the Financial Times. Our study results offer relevant policy implications. Generally, there is a significant negative effect from Eduversal and EduFT qualifications on bank financial performance. This effect can be explained by the fact that some well-qualified board members use their expertise for their own interest, which, in most cases, is not favourable for bank financial performance. The implication is that the European Central Bank needs to implement more rigorous measures than those currently imposed to control bank board member behaviour and reduce agency problems.

The Relationship between ESG Scores and Firm-Specific Risk of Eurozone Banks

This paper investigates the relationship between corporate social responsibility and the idiosyncratic risk of Eurozone banks. Idiosyncratic risk represents firm-specific risks for banks, and the Carhart four-factor model is used for 31 Eurozone banks from 2002 to 2019 to determine the idiosyncratic risk. Thomson Reuters ESG scores are used to determine the ESG scores of these banks during the same period, and the effects of the environmental, social, and governance dimensions are investigated separately. The quantile regression method reveals a relationship between ESG and idiosyncratic risk over different risk levels. A significant negative relationship has been found between the overall ESG scores and the idiosyncratic risk of banks for medium- to high-risk levels. The effect becomes stronger as the riskiness of the banks increases. Similar to the overall ESG score, the governance and environmental dimensions have a negative impact on banks with medium- to high-risk levels. No significant relationship could be identified between the social dimension and the idiosyncratic risk of banks.

Correction to: Heterogeneous decision-making and market power: an application to Eurozone banks

Correction to: Heterogeneous decision-making and market power: an application to Eurozone banks

A principal–agent approach for estimating firm efficiency: Revealing bank managerial behavior

We consider agency-theory-based structural and reduced form models of bank performance. In the structural models, we take into account the managerial decision-making processes, and reveal underlying managerial efforts and thereby managerial behavior. In an empirical application, we estimate performance of Eurozone banks using our novel structural and reduced form approaches by Markov Chain Monte Carlo techniques. Our findings show, for the first time, that bank underperformance persists in the Eurozone whereas considerable variability across Member States exists. Our agency-theory-based structural modeling would favor cooperation of all interested parties and towards higher financial integration.

EUROZONE SOVEREIGN DEBT CRISIS AND ITS IMPACT ON INDIA'S CROSS-BORDER CREDIT MARKET

This study examines the impact of the Eurozone's sovereign debt crisis on cross-border credit to India, addressing: (i) Causes of subsided lending, (ii) India's loan demand, (iii) Influence of Eurozone banks' home countries on credit, and (vi) Identification of the banking system responsible for the falloff. Results indicate that a 1% change in India's sovereign debt to GDP ratio is linked to a $1013m increase in cross-border lending from the Eurozone. A 1% change in the Eurozone's ratio is associated with a $556m increase in cross-border credit to India. A 1% rise in India's real GDP growth rate is associated with a $164m increase in cross-border bank financing to India. The results indicate that global banks propagate financial shocks from their country of origin. The implications suggest that the concentration of cross-border credit in advanced economy financial systems puts emerging economies like India at risk of country- or region-specific financial shocks.

Heterogeneous decision-making and market power: an application to Eurozone banks

Heterogeneous decision-making and market power: an application to Eurozone banks

Impacts of sovereign risk premium on bank profitability: Evidence from euro area

We analyse the effects of low and negative interest rates and sovereign risk premium on bank profitability among 154 Eurozone banks during the period 2005–2019. In contrast to some of the results in the previous literature, we find that the euro area banks have not suffered too much from the extremely low and negative interest rate era regarding their net interest margins. However, the overall profitability has lowered clearly during the sample period, and the sovereign risk premium has a robust negative effect on all the overall profitability measures, both with risk-adjustment and without it, but it seems to have an increasing effect on the degree of wholesale funding and loan loss provisions. Hence, the profitability puzzle can be explained by a shift towards low-cost wholesale-based funding. Banks have also exercised more loan loss provisions because of the increment in overall risk of the economy. However, if the negative interest rate era still prevails for long, the banking sector faces serious problems based on our results.

Regulatory reform and banking diversity: reassessing Basel 3

We investigate whether and how strongly Basel 3 chief innovations jointly affected in different ways individual Eurozone banks’ stability (z-score) across six business models (BMs). We study this issue in the initial years when adaptation was most intense (2011–2014) and the Eurozone underwent a phase with sovereign crises abated by ECB policies easing financial conditions. In parallel, we run this exercise over 2000–2010 data, a time frame over which Basel 3 did not apply yet to see through the eyes of the regulator. Irrespective of BMs, we identify the leverage ratio as the most effective driver of banks’ stability. However, the impact on z-score of Basel 3 chief drivers does not seem to differ significantly on 2011–2014 vs. 2000–2010. Next, interactions with banks’ BMs suggest that Basel 3 innovations improve z-scores the most at traditionally focused banks (cooperative and savings banks), vis-à-vis diversified banks. Our results suggest Basel regulatory decisions were questionable. First, the front loading of the increased minimum capital requirements vs. the backloading of the leverage ratio phasing in may have lured banks from credit to financial assets. Second, our findings support the desirability of revising the current “one-size-fits-all” European prudential framework, which disregards BMs.