Search results

In this chapter we study the intra-group transactions between the parent bank and its foreign subsidiaries in European Union (EU) countries during the crisis. We use hand-collected data from annual statements on related party transaction and find that they may create a serious problem for the stability of the foreign banks’ subsidiaries. Moreover, as some of those subsidiary banks were large by assets in some of the member states the related party transactions with the parent bank created a serious threat to the host countries’ financial system stability. We attribute this transaction to the weak governance in foreign subsidiaries. We suggest improvements in governance as well as greater disclosure of related party transactions in bank holding companies in Europe.

The economic and financial crisis, especially the sovereign debt crisis, discovered many deficiencies and weaknesses in the banking sector in the European Union (EU). The need for special surveillance and supervision of cross-border banking cooperation and termination of the toxic link between sovereign debt and banking sector have accelerated the process of forming and establishing a Banking Union (BU). An integrated financial framework has been established in which the European Central Bank (ECB) through the Single Supervisory Mechanism (SSM) has a key role and the responsibility for the overall supervision of the banking sector of the euro zone. The Single Resolution Mechanism (SRM) and schemes of the Single Deposit Guarantee Mechanism (SDGM) are under the national supervisory authorities while the European Banking Authority (EBA) is responsible for developing the Single Rules. From the new architecture is expected the preservation of the single market and a common currency, breaking “toxic connections” between sovereign debt and banks, mitigation and removal of financial instability and economic growth. The research shows that the BU together with the ECB in a certain sense, also contributes to the normalization of credit and financial conditions in the single mark. Estimates through SSM, conducted by the ECB and the EBA, during, 2014 and 2015 on 107 banks in 21 countries indicate progress toward solvency and resilience of the banking system of the euro area. Despite some initial success the entire project BU seems to have missed on opportunities, resulted in late reactions, and was too complex to be feasible. The political will of national governments to give up sovereignty over its banking sector and transfer competencies to the supranational institutions is a key factor in the success or failure of a BU. It seems so but past experience indicates that there is no political willingness to solve problems. Mainly most of the government avoids cleaning a hidden “skeleton in closets” due to lack of means for recapitalization while some are trying for loans from the ECB to help their banks. The ECB plays a key oversight role at the EU level and has too much power, which can cause risks caused by conflicting goals. The ECB is losing the role of the final refuge of liquidity, which is the main disadvantage of a BU. The SSM is susceptible to criticism due to difficulty in operation because of slow incorporation of European legislation into national law. Slow implementation carries risks of fragmentation of the market, regardless of the responsibility of the ECB. The financial capacity of the temporary agreement with the SRM is insufficient in solving the crisis of more banks while procedural application is complex and time-consuming. Planned backstop with a centralized resource is a resolution that is insufficient for solving the failure of big systemic banks, which are too big to bail. The heterogeneity of the existing Deposit Guarantee Schemes (DGS) and the banking systems of the member states of the euro zone caused controversy in terms of setting of common insurance schemes. The procedures for the recovery and resolution of critical banks are problematic.

This chapter aims the research whether the application of European Directive, Markets in Financial Instruments Directive (MiFID), had any significant effects on the European Capital Markets and the progress of the European Integration. This new regulation specifies the tasks and responsibilities of the supervisory authorities of the Member State of origin and the host Member State, in order to enhance the certainty of effectiveness of cross-border transactions supervision and to reduce the risk of imposing unnecessary legal reforms from the host Member State on investment firms which perform cross-border transactions. It has been concluded, among others, that the aligning of the national regulatory approaches to a common European regulatory system is quite necessary. It is finally concluded that MiFID will contribute to reduce problems at country level as the previous experience of the Investment Services Directive, where the European investments and economies of Member States were based mainly on the level of ‘country’ and not of the ‘sector’. An effective capital entrepreneurship market is a strategically important element in the development of new and innovative businesses, encouraging entrepreneurship, increasing the productivity and maintaining high economic growth rates in Europe. Currently, European venture capital market is much less effective than that of the US market, for example. Therefore, in this area, should be specified the priorities that will lead to new initiatives.

In the last decades, many of the most talented and promising young graduates in the developed economies have joined the financial industry. Simultaneously, ill-designed incentives’ schemes have favored the development of a culture in which excessive greed, free-riders’ behavior, unreasonable appetite for risk, and short-term decision making have endangered the economy and, potentially, have laid the foundations for financial, economic, social, and environmental crises.

In this chapter, we review current challenges in the financial industry from the lens of human and social capital. We examine some of the factors that allowed unethical behavior and a short-term financial focus in the financial sector, examining how compensation and an extremely competitive culture became key elements that favored greedy and manipulative behavior and ultimately generated socially harmful human and social capital in the financial sector. Finally, we discuss the emergence of a number of game-changers (namely, Brexit, FinTech, the growing relevance of ethical standards, and the increasing participation of women and millennials in the industry) that might represent potential promotors of change and help restructure and reshape the financial industry.

Institutions underpin the operation of national economies. These differ significantly between countries reflecting varying historical paths, policy choices and national cultures. Moreover, they need to be understood systemically as an ensemble of relations between their component parts: financial systems, corporate governance, industrial relations, patterns of state intervention, etc., have evolved together so that their operation and effects tend to reinforce each other. Different countries faced by common exogenous changes will tend to evolve along different lines rather than converge. National institutions matter: they significantly affect economic performance and distribution.

This paper aims to demonstrate how the European regulatory structure of the financial markets has changed after the financial crisis. Drawing from these findings, it discusses how the regulatory system might change and be adapted to a post-Brexit financial market.

The paper takes a systematic/legal approach. First, it analyses the recent reform against the background of European law and corresponding research. In a second step, it discusses the implications of Brexit by examining policy and legal contributions.

The changes to the European regulatory and supervisory structure of the financial markets have proven to be a pacemaker for European administrative and treaty law. Long-standing principles have fundamentally changed. Brexit, on the other hand, even though equally severe might not lead to similar results.

The paper proposes a limited reform to the existing regulatory structure to consolidate developments, ease constitutional frictions and enable the regulatory authorities to react quickly to volatile markets via rule making.

The paper draws attention to an almost unnoticed development in European law. It also illustrates the effects of Brexit on the European financial markets.

This paper aims to compare the cost efficiencies across bank‐and market‐based EU countries for the different groups of commercial, savings and co‐operative banks; and between listed and non‐listed banking institutions. In addition, it attempts to determine any potential implications for bank efficiency originating from differences in financial structure.

Efficiency scores are estimated using the Battese and Coelli's time‐varying stochastic frontier approach. The classification of bank‐ and market‐based financial systems is based on the World Bank's Financial Structure Database.

On the whole the results reject the agency theory hypothesis that managers of privately‐owned banks are more cost efficient than those of mutual banking institutions because of capital market devices as it is found that mutual banks operating in EU‐15 countries are significantly more cost efficient than commercial banks. Furthermore, results are mixed concerning the financial structure hypothesis that in developed financial systems bank efficiency should not be statistically different across bank‐vs market‐based economies.

The analysis suggests that differences in cost efficiency across bank types can often be explained by the prevailing financial system in each economy.

The evidence illustrates the national diversity of corporate governance systems in Europe and can be important to policy makers who are concerned with the full integration of the European financial system.

To the best of the authors’ knowledge, there are no previous similar empirical works for the EU banking sector. Such a study has important policy implications especially due to the fact that the EU banking sector is experiencing profound structural changes and a full integration has not yet been achieved.

This paper aims to investigate the drivers of systemic risk and contagion among European banks from 2007 to 2012. The authors explain why some banks are expected to contribute more to systemic events in the European financial system than others by analysing the tail co-movement of banks’ security prices.

First, the authors derive a systemic risk measure from the concepts of marginal expected shortfall and conditional value at risk analysing tail co-movements of daily bank stock returns. The authors then run panel regressions for the systemic risk measure using idiosyncratic bank characteristics and a set of country and policy control variables.

The results comprise highly significant drivers of systemic risk in the European banking sector with important implications for research and banking regulation. Using a set of panel regressions, the authors identify bank size, asset and income structure, loss and liquidity coverage, profitability and several macroeconomic conditions as drivers of systemic risk.

Analysing the tail co-movement of security prices excludes a number of “smaller” institutions without publicly listed securities. The other shortfall is that we do not assess the systemic impact of non-bank financial institutions.

Regulators have to consider a broad variety of indicators for assessing systemic risks. Existing microprudential-oriented rules are less effective, and policymakers may consider new measures like asset diversification to mitigate systemic risks in the banking system.

The authors contribute to existing empirical analyses in three ways. First, they propose a method to identify systemically important banks (SIBs). Second, they develop two measures to assess their potential negative impact on the system. Third, they contribute to the closing of the research gaps by analysing which macroprudential regulations for SIBs are most effective without hampering free market forces.

The development of banking in Africa followed the demand of exchange networks from traditional indigenous economies to colonial exchange with the European world. The establishment of European banking institutions reflected the needs of the capitalist economy introduced by colonialism. The banking management of late nineteenth century and early twentieth century European banks adhered to the interests of shareholders. This chapter shows the emergence of well-managed banks in Africa, but after decolonization the political economy of African independence resulted in state capturing of financial institutions in most African countries. The South African banking system developed in close adherence to the British model. State-owned post-independence banks in Africa failed to deliver the development envisaged. The chapter shows the adverse impact of global economic developments on Africa, resulting in high debt levels. Structural adjustment of African economies and new market-oriented policies allowed the development of locally owned private banking institutions. The high-cost structure of the formal banking system from the dominant South African banks incentivised the mobile money innovation, an arena where African entrepreneurs lead global markets. Financial inclusion remains low in Africa.