The aim of this volume is to enrich the banking and finance literature by providing some insights into research being undertaken in the aftermath of the global financial crisis, including a variety of topics covering all the major research fields in finance and banking.
All the chapters in this book are based on research papers presented at the September 2015 Wolpertinger Conference organised by the European Association of University Teachers of Banking and Finance. The studies have been carried out by selected academics from a range of prestigious European universities and research centres.
Although today’s finance literature is specially focused on the implications of post-banking crisis developments, current research lines in banking and finance are quite broad. In this volume we aim to reflect some of these lines and have included outstanding papers dealing with interesting issues. In accordance with the book’s title, the contents consist of two main parts: Liquidity Risk and Efficiency; and New Bank Business Models.
- Liquidity Risk and EfficiencyLiquidity creation and maturity transformation are central functions of the banking industry. The Basel Committee on Banking Supervision, which began formally discussing the importance of liquidity management in 1992, is reviewed. The new Basel III liquidity regulations which aim to promote stability also prevent banks from performing these central functions. In this sense, how capital requirements could reduce risk in banking is examined. Additionally, a chapter dealing with how liquidity conditions rely on the LTRO programme is included in this volume.
- New Bank Business ModelsBank managers justify their chosen growth strategies, which are implemented through business diversification and increasing size, t their shareholders. While the literature mostly focuses on the major diversification measures of revenue mix, geographic markets and M&A deals, we also include a chapter that investigates business diversification.Furthermore, a restructure of the banking system has occurred in the aftermath of the crisis. The effects of banking restructure in terms of financial exclusion are analysed for the Spanish case using data for the metropolitan area of Madrid. The main drivers of bank value are also examined. The implications of the current debate on banks’ recapitalisation and supervision for managers and regulators are also considered. Finally, bank business models are examined to analyse how liquidity mismatches relate to the bank business model.
In Chap. 2, Magnus Willesson considers asset and liability management (ALM) as a possible avenue for regulatory arbitrage under regulatory capital constraints. The chapter presents a theory of regulatory arbitrage as a regulatory response to capital requirements in banking depending on capitalization mechanisms and empirically analyses capital risk and bank risk in European banking in terms of ALM. The results suggest a possible loophole in today’s capital regulation via ALM and the need for regulatory arbitrage as a regulatory response.
Chapter 3 by Viktor Elliot and Ted Lindblom focuses on the new liquidity constraints introduced in Basel III in an analysis of the incentives for banks to behave opportunistically to bypass liquidity constraints and even benefit from regulatory arbitrage. They present a number of examples both from an on- and off-balance sheet perspective of how banks are transferring risk to other parts of the economy that might be less well equipped to handle them.
In Chap. 4, Paola Leone, Massimo Proietti, Pasqualina Porretta and Gianfranco A. Vento focus on the regulatory framework related to counterparty risk (EMIR framework, Basel III, IAS/IFRS) and the methodologies of moving from LIBOR/EURIBOR to OIS discounting in derivatives pricing. They consider that these regulatory frameworks have some impact on financial intermediaries at organizational, procedural, measurement and collateralization levels, and on their pricing frameworks.
Chapter 5 by Claudio Zara and Luca Cerrato investigates diversification in terms of different business combinations. Retail banking, corporate banking, private banking and investment banking are considered the main business combinations in which banks operate. The authors find that the four business types are poorly correlated, as can be seen in the low correlation coefficients between variables pertaining to them, providing evidence for attempts at diversification by banks in the first decade of this century.
In Chap. 6 Marta de la Cuesta González, Cristina Ruza y Paz-Curbera and Beatriz Fernández Olit analyse financial exclusion, hypothesising that bank branch closures depended upon the vulnerability of different communities. The main drivers of branch abandonment (physical access) and branch saturation (difficulties of use) in the city of Madrid and the surrounding municipalities are analysed, adding new evidence to previous studies. The authors find that that the main socio-economic determinants of an area’s vulnerability appear to be statistically significant.
Chapter 7 by Katarzyna Mikołajczyk analyses the impact of bank size on the behaviour and performance of banks in Central and Eastern European countries, both before and after the recent financial crisis. The author investigates whether medium-sized and small banks in CEE countries have experienced comparative advantages and to what extent these advantages have been dependent on economic conditions.
In Chap. 8, Carlos Salvador Muñoz analyses the effect of rating signals (variation of rating, outlooks or watchlists) on banks’ stock market returns in European peripheral countries during the period 2002–2012. He shows that investors do respond to rating announcements. Before the financial crisis such announcements had the opposite effect to what would be anticipated based on the financial situation of the entities evaluated due to investors’ appetite for risk, while since the financial crisis banks’ rating signals have had the expected effect on stock market return. This analysis of the causal relationship between rating signals, returns on banks’ shares and the risk premium indicates that the rating agencies do not strictly follow a “through-the-cycle” strategy.
The following chapter by Josanco Floreani, Maurizio Polato, Andrea Paltrinieri and Flavio Pichler investigates the main drivers of value creation in European banks, identifying three business models. Their results suggest that provisioning policies are positively and significantly related to economic value added (EVA) through the impact on asset return volatility and equity betas after accounting for a relation between betas and growth opportunities.
The final chapter by Gianfranco Vento, Andrea Pezzotta and Stefano Di Colli seeks to implement the “liquidity mismatch index” (LMI) proposed by Brunnermeier et al. (2011; 2013) to measure the mismatch between market liquidity of assets and funding liabilities using a representative sample of Italian credit co-operative banks. The authors conclude that the LMI is a useful way to assess the liquidity of a bank under liquidity stress events. Moreover, the fact that the LMI can be aggregated across banks enables it to be used as a powerful macro-prudential liquidity parameter.
References
Brunnermeier, M. K., Gorton, G., & Krishnamurthy, A. (2011). Risk topography. NBER Macroeconomics Annual.
Brunnermeier, M. K., Gorton, G., & Krishnamurthy, A. (2013). Liquidity mismatch measurement. NBER Systemic Risk Initiative, March.