This book aims to analyse the potential choice between the raising of capital and the improving of risk management and efficiency in commercial banks in Europe. Given that capital requirement is becoming more and more important for regulatory authorities as a prudential tool and, at the same time, for supervisory authorities as a discretional tool, it is relevant to raise the question of the viability for individual banks and the banking system.
From the theoretical point of view, there is a discrepancy between the prudential view included in the regulatory measures based on Basel agreements and the discretional view included in the supervisory measures based on decisions taken by the supervisory authorities. It is by no means easy to obtain a clear understanding of this twofold approach, which reveals different and dialectically opposing views.
The regulatory and supervisory measures represent a heavy burden for commercial banks in Europe, and the discrepancy has repercussions on choices of individual banks. Is this authoritarian framework justified in the attempt to ensure sound bank management? Finding a reply is not easy. It is worth to point out that application of Basel agreements leads to a rise in costs which needs to be matched by additional revenue in order to maintain the previous economic situation at an individual bank level. At the same time, supervision requires system costs arising from the presence of supervisory authorities.
Considering the importance, the spreading effects and the time length of financial crises of recent periods, crisis resolutions involve additional costs for taxpayers in different countries. This is the case both in a bail -in and in a bail -out, as depositors are called upon to contribute in accordance with their deposits and tax position. Will banks survive as fears of systemic risk spreading throughout the system become more pressing? Who correctly estimates the level of systemic risk?
One point is very clear by comparing European banks to American banks: public tools have been called upon to deal with financial and economic crises that have been more serious and more protracted in Europe, whereas considerably shorter periods were involved in the USA. Furthermore, there have been different repercussions on financial and economic systems: American economy did recover in a few years and did continue to grow from solid foundations; European economy did spend a long time before recovering and going through a growing path. It is worth to point out the positive transmission effect from the economy in good shape to the banking system.
In this context, help for recovery from shifts and shocks has been the primary task attributed to public authorities and especially to monetary authorities in order to overcome the critical points in the economic set-up and the bank situation. Establishing strategies for instruments and business areas is of paramount importance on account of the link to cost and revenue and therefore to profit.
Identification , measurement and management of risks associated with financial instruments and business areas constitute the premises for a sound management. This is the strategic issue for banks and financial intermediaries and is the key to positive results and therefore profits orāin contrastāleads to negative results and therefore losses.
This is straightforward for achievement of efficiency in cost , revenue and profit and in scale and scope: it is a complex process which increases the soundness of individual banks by building up a solid system.
Financial crises, which have been particularly severe in Europe over a prolonged period of time starting from 2007, together with related economic crises, have given rise to non-performing loans spreading throughout European banks . This book underlines the need to address and solve the problem in question, which continues to have negative repercussions on the economic growth of the European Union, above all because it has meant lower loans to the economy and especially to small- and medium-sized enterprises.
In this context, particular attention is devoted to the introduction and spread of the so-called bad bank , which takes the bad assets and, at the same time, leaves the good assets in the previous bank in a sort of ācleaning upā of the asset side of the banksā balance sheets. The cleaning up and the full return to good banks represent the steps towards better conditions for the financing of the economy and economic growth. The greater the rates of return on investments for the good banks in the European Union, the better will be the premises for lending.
Regulation and supervision are typical aspects of the complexity and distinctive features of banks. It is worth pointing out the over implementation of rule constraints on the banking business and especially on capital levels, which are important from the point of view of covering losses but not from the point of view of a rational and sound management of banking risks and business areas. This is the critical point, especially with reference to improving risk management and efficiency . These two aspects are crucial in the development of individual banks and banking systems in different countries in Europe.
In this context, the Single Supervisory Mechanism and the Single Resolution Mechanism, which brought into operation the so-called bail -in from the beginning of 2016, are examined by focusing on weaknesses and critical aspects that involve the evolution of commercial banks and by singling out confidence risks and instability risks. Financial crises have been the cause of many critical points and instability factors as well as the application of the ābail -inā can recreate financial instability. In the past years, states spent a large amount of money for rescue purposes, which has now led to an incorrect use of state aid according to the interpretation given by the European Commission, which considers many cases as state aid when they are not, in fact, genuine state aid. This is misleading as it tends to increase the financial instability risks arising from the application of the bail-in.
This book examines risk management issues in the context of the bank and evolution of the banking business. Attention focuses on non-performing loans and on bad bank as well as the selling of loans to remove obstacles to economic growth on a European scale; at the same time, attention is also paid to rules and single supervision for the removal of excessive restrictions and their inner irrationality on a European scale: thus critical points and weaknesses are identified.
Such circumstances are of considerable importance where bank reinforcement is concerned, as well as banksā capacity to lend credit to the economy. Lending represents the point of return to satisfactory rates of economic growth in the European countries, particularly the weaker ones.
Therefore, this book aims to analyse relationships between risk management , credit risk , banking efficiency , regulatory and supervisory capital constraints, bank regulation and supervision in Europe, monetary policy, supervisory policy and economic growth in Europe, capital raising and bank performance , regulation and supervision in the USA, raising capital or improving risk management and efficiency . The contents focus on a wide range of topics and provide suggestions for the evolution of the European banking system.
This book is subdivided into 11 chapters. Chapter 1, āIntroductionā, considers a range of topics included in the different chapters and provides a guideline for the topics included.
Chapter 2, āRisk Management and Banking Business in Europeā, examines risk management issues in the context of banks and evolution of the banking business, by focusing on identification , measurement and management of all the risks linked with financial instruments and business areas in order to achieve sound management. This is a key issue in devising strategies for banks and financial intermediaries: it can lead to positive results and therefore profits or negative results and therefore losses ; in the latter case, the outcome allows identification of critical points and weaknesses.
Chapter 3, āCredit Risk Management and Banking Business in Europeā, examines credit risk and credit risk management issues in the context of banks and evolution of the banking business, focusing on non-performing loans. Such topics are of considerable importance where bank reinforcement is concerned and also influences the capacity of banks to lend credit to the economy and especially to small- and medium-sized enterprises. The latter aspect represents the point of return to satisfactory rates of economic growth in the European countries, particularly the weaker ones.
Financial crises, which have been particularly severe in Europe over a prolonged period of time starting in 2007, together with related economic crises, have given rise to non-performing loans that have spread throughout European banks . This chapter underlines the need to deal with and solve the problem in question, which still has negative repercussions on the economic growth of the European Union, above all be...