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About this book

This book offers insights into the contemporary issues in banking with a special focus on the recent European regulatory reforms, governance and the performance of firms. Written by prestigious professors and expert academics in the field, the book also covers a diverse set of topics that have gained great importance in this sector such as firm financing, culture, risk and other challenges faced by banks. The book is of interest to scholars, students and professionals in banking.

Table of Contents

Frontmatter

Chapter 1. Introduction

Abstract
After the recent financial crisis, an ongoing intense debate is still being continued about the relationship between regulation, corporate governance, firm financing and other related issues. This debate is not confined to differences of opinions among academics; it brings in the interest and views of many more, including professionals of the banking industry, as well as individuals working across different spheres of the whole economy. This book covers a wide range of topics filling these debates, issues that continue to influence the global banking and financial system. The research offered here provides insights into the core contemporary issues in banking with a special focus on recent developments in European regulatory reforms, governance and the performance of firms.
Myriam García-Olalla, Judith Clifton

Regulation

Frontmatter

Chapter 2. The Impact of Recent Regulatory Reform on the Use of Supply Chain Finance: The Case of Reverse Factoring

Abstract
Short-term structured trade finance has traditionally received preferential capital treatment by regulators and financial agencies based on the premises that it was one of the safest, most collateralized, and self-liquidating forms of bank assets (Auboin M, Blengini I, The Impact of Basel III on Trade Finance: The Potential Unintended Consequences of the Leverage Ratio, Working Paper, 2014). Despite this preferential treatment, concerns have been raised as to the potential impact of the Basel III requirements on various trade finance instruments (see, e.g. Auboin M, International Regulation and Treatment of Trade Finance: What Are the Issues? WTO Working Paper 2010–2009, Geneva, 2010; Auboin M, Blengini I, The Impact of Basel III on Trade Finance: The Potential Unintended Consequences of the Leverage Ratio, Working Paper, 2014; Committee on the Global Financial System (CGFS), CGFS Papers No 50 Trade Finance: Developments and Issues, Bank for International Settlements, 2014; Lasaga M, The impact of Basel III on Trade Finance, Working Paper, 2016; Michalski TK, Ors E, Demir B, Risk-Based Capital Requirements for Banks and International Trade, Working Paper, 2016). In this chapter, we aim to deepen our understanding on how banks use trade finance compared to other forms of lending in light of the new regulations. We explore the increasing use by banks of supply chain finance in the form of reverse factoring (RF) and its impact on overall value creation in supply chains. In particular, we analyse the motives for implementing RF schemes, how such schemes compare with traditional factoring and other trade finance arrangements, and whether their regulatory treatment provides further motives for banks to expand this line of business.
Viktor Elliot, Ted Lindblom

Chapter 3. The Bank Resolution Framework in the European Union: Preliminary Evidence from Specialized and Regional Banks

Abstract
Post-crisis bank regulations have recognized the need for the creation of a formalized resolution framework which would enable the efficient resolution of troubled banks with no or limited use of public funds. However, resolution schemes are based on complex procedures which aim to balance out the interests of different stakeholders. The purpose of this chapter is to identify the key elements of a resolution framework under the single resolution mechanism (SRM) and the bank recovery and resolution directive (BRRD) and to assess its impact based on preliminary empirical evidence. In particular, the evidence on specialized (mortgage) and regional banks is analysed, with a special focus on Italy and the Netherlands. The study aims to demonstrate that the new European resolution framework addresses the issues identified during the crisis and contains sufficient instruments and arrangements to enable the efficient resolution of large banks, as illustrated by the SNS Reaal case. However, there are a number of serious economic and social issues when it is applied to smaller banks or bank networks, as illustrated by the Italian banks.
Ewa Miklaszewska, Jan Pys

Chapter 4. Market Risk Disclosure in Banks’ Balance Sheets and the Pillar 3 Report: The Case of Italian Banks

Abstract
Market risk has taken on growing importance in banking in recent years. Risk disclosure has strategic importance for the efficiency of financial markets and overall financial stability. It plays a pivotal role in strengthening market discipline and building trust in stakeholder relationships.
The aim of this chapter is to investigate market risk disclosure in banking. The author employs content analysis to conduct an empirical study on a sample of the ten largest Italian banks. The study provides evidence that banks differ in their market risk reporting, even though they are subject to similar regulatory requirements and accounting standards. It also shows that there is room to improve various aspects of risk disclosure and provides some useful insights for further research.
The structure of this chapter is as follows. Section 1 introduces market risk disclosure in banking. Section 2 provides the theoretical foundations of risk disclosure. Section 3 analyses the specific nature of market risk and provides a regulatory and accounting perspective. Section 4 presents a hybrid scoring model based on analytical grids of risk disclosure parameters to assess market risk disclosure. Section 5 analyses and discusses the main research findings, as well as the potential implications, while Sect. 6 presents the conclusions drawn.
Enzo Scannella

Chapter 5. Central Banks’ Communication Strategies: Just Words?

Abstract
This chapter assesses the communication strategies of the Federal Reserve (FED) and the European Central Bank (ECB), as well as their respective effectiveness. We explore the multi-dimensional aspects of the information embedded in more than 800 statements released by the heads of the EU and US central banks. Using tools from computational linguistics, we analyse the information released by these central banks on the state of economic conditions, as well as the guidance they provide about future monetary policy decisions. First, this chapter looks at some dimensions of the communication (tone, growth, ambiguity). Subsequently, we pay attention to the scenario’s impact on the communication strategies of the ECB and FED, assessing whether these strategies are influenced by certain variables that depict the scenario of the financial and real economy. Our results confirm the title of this chapter: most of the time, there is no significant difference between the communication strategy of the FED or the ECB, whether or not there is an improvement in the economic variables under consideration. We found that changes in communication strategy are mainly linked to changes in the health of the financial system.
Vincenzo Farina, Giuseppe Galloppo, Daniele A. Previati

Chapter 6. Complaining in Consumer Credit: Evidence from the Italian Financial System

Abstract
In many countries, Banking Authorities have adopted an Alternative Dispute Resolution (ADR) procedure in order to manage complaints that customers and financial intermediaries cannot solve by themselves. As a consequence, banks have had to implement complaint management systems in order to answer the requests of the customer. The growth rate of customer complaints has been increasing in the last years. This does not seem to be only related to the quality of financial services or to the lack of compliance of banking output. This chapter analyses the characteristics of complaints submitted directly to financial intermediaries by consumers regarding credit services. Subsequently, the analysis is extended to the characteristics of complaints received at the Banking Financial Arbitrator (BFA) and related to consumer credit. The analysis refers to the period 2013–2016, and it uses both confidential data collected by Assofin and public data collected by BFA. The aim of this chapter is to highlight how the behaviour of consumers submitting a complaint to a bank or an appeal to the BFA has changed over the years and to highlight the role of the current ADR approach and its main critical issues with specific concerns to consumer protection.
S. Cosma, F. Pancotto, P. Vezzani

Corporate Governance and Performance

Frontmatter

Chapter 7. Bank Boards in Europe: Trade-Offs in Size, Composition, and Turnover

Abstract
This chapter is a survey on papers reporting different results regarding the importance of bank boards for corporate governance in a highly regulated industry. The analysis focuses on three variables related to bank boards, namely, their size, composition, and the trade-offs effected within them. Furthermore, a descriptive analysis is carried out of boards of directors in European banks with regard to these variables and their evolution at two specific times, before and after the financial crisis.
Eleuterio Vallelado, Myriam García-Olalla

Chapter 8. The Impact of Internal Corporate Governance Mechanisms on Corporate Social Performance in the Banking Industry

Abstract
The purpose of this chapter is to explore the relationship between corporate governance (CG) and corporate social responsibility (CSR) by analysing the effect of internal governance and monitoring mechanisms on the corporate social performance (CSP) of banks. To carry out our analysis, we propose to regress both a fixed-effects and a random-effects model using an unbalanced panel composed of 118 banks from 19 countries. The overall period of analysis runs from 2002 to 2014, although it has been divided into two different sub-periods before and after the banking system crisis: period 1 (2002–2007) and period 2 (2008–2014), in order to analyse the existence of a structural change with different impacts on the CG-CSR relationship. This research shows that some internal governance and monitoring mechanisms, namely, those related to controlling ownership and the structure of the board of directors, have an important influence on the social performance of banks, although these mechanisms were only relevant during the crisis period (2008–2014).
José L. Fernández Sánchez, María D. Odriozola, Manuel Luna

Chapter 9. Bank Ownership and Firm-Level Performance: An Empirical Assessment of State-Owned Development Banks

Abstract
The goal of this chapter is to investigate state-owned development banks and to analyse their performance vis-à-vis to other state-owned and private-owned banks. We use firm-level evidences from Europe to analyse the performance of state-owned development banks and the difference compared to state-owned commercial banks and private banks. Analysing the performance of development banks is a relevant issue. First: assessing development banks’ performance is important to determine their financial sustainability. Second: extant empirical literature on bank ownership and performance has always considered state-owned banks as belonging to the same type, whereas they do not. Our results point to clear differences between development and commercial state-owned banks, with the former performing better than the latter in terms of efficiency. They recognize that state-owned banks are not a monolith and that development banks have specific features and operate in a way not completely examined in the extant literature.
Marco Frigerio, Daniela Vandone

Chapter 10. Non-financial Rating and Socially Responsible Investment Reaction to Financial Turmoil

Abstract
The academic debate regarding the ability of socially responsible investments (SRIs) to outperform traditional investments has not yet concluded. SRIs’ outperformance (or underperformance) seams driven by many factors, such as the specificity of markets, timing, and types of investments (Wu et al., Manag Decis Econ 38:238–251, 2017; Revelli and Viviani, Bus Ethics Eur Rev 24(2):158–185, 2015). The aim of this chapter is thus to contribute to the academic debate investigating whether the Environmental, Social, and Governance (ESG) rating can be a proxy of companies resilient during financial turmoil. The methodology applied is the event study. The considered events are the recent Brexit announcement and the bankruptcy of Lehman Brothers. The SRI sample consists of 250 European socially responsible companies, while ESG ratings are from the Thomson Reuters ESG rating. This study contributes to the literature by showing that higher ESG ratings can be an expression of more resilient companies, especially during severe financial shocks. This finding is also useful for practitioners involved in portfolio investment selection.
Helen Chiappini, Gianfranco A. Vento

Chapter 11. What Determines Interest Margins? The Case of Chinese Banks

Abstract
In this study, a sample of 116 Chinese domestic banks, comprising state-owned banks (SOBs), joint-stock banks (JSBs), city commercial banks(CCBs) and credit cooperatives, is used to investigate the interest margins of China’s banking industry. The results indicate that the credit risk is the major factor in enhancing the profitability of the Chinese domestic banks. On the other hand, the banks require high interest margins to compensate for the liquid, default and credit risk exposures. Following the liberalization of the banking industry, domestic banks do not hold as many liquid assets and loan loss provisions as before.
Ming Qi, Jiawei Zhang

Firm Financing and Valuation

Frontmatter

Chapter 12. How Do Banks and Investment Funds Affect Family Risk-Taking? Evidence from the Financial Crisis

Abstract
We study the risk-return relationship for an international sample of family and non-family firms in the period 2007–2014. According to prior studies and following the prospect theory, we obtain a nonlinear risk-return relationship and a target level of profitability for family firms in order not to assume an excessive level of corporate risk-taking. This relationship is more prominent in companies from countries with lower protection of creditors and less aversion to uncertainty. We also find evidence that institutional investors exert pressure on family firms to increase corporate risk-taking, even when the return is lower than the target, with the negative consequence of reducing profitability and going to bankruptcy, as occurred during the years of financial crisis. Furthermore, as major shareholders, banks reduce risk as a result of trying to maintain their financial relationship with family firms. This conservative role has a positive influence on the profitability of the firm for values lower than the return target.
David Blanco-Alcántara, Jorge B. Farinha, Mauricio Jara-Bertín, Óscar López-de-Foronda, Marcos Santamaría-Mariscal

Chapter 13. Does Bank Regulation Spill Over to Firm Financing? SME Financing, Bank Monitoring, and the Efficiency of the Bank Lending Channel

Abstract
This chapter analyses spillover between banks and firms when required bank capital is regulated. We contribute to the existing literature by addressing different regulatory responses with an impact on the supply and demand of bank lending. The chapter contributes to the growing literature addressing the unintended consequences of regulatory policy development. The study empirically compares the regulatory responses of Swedish banks and how these responses affect lending to Swedish small and medium-sized enterprises (SMEs). The theoretical framework and methodology employed in this chapter make it possible to study theories related to bank monitoring, regulatory arbitrage opportunities, and the risk-return trade-off. The main results indicate that banks’ regulatory responses are associated with increasing lending margins, either by (1) increasing the margin on the loan portfolios, spilling over the regulatory costs through higher prices, (2) lower acceptance of lower return customers, or (3) regulatory arbitrage through balance sheet adjustments.
Viktor Elliot, Magnus Willesson

Chapter 14. Earn-outs in Debt Restructuring Plans: Economics and Valuation

Abstract
This topic is of particular relevance within the more general issue of troubled debt restructuring and option pricing methodologies. In general terms, earnouts are linked to the company’s performance. They are often structured as long-term long or short options (often, European call options) in which the underlying option is related to certain financial margins, ratios, or cash flows (revenues, EBITDA, operational cash flows, free cash flow, return on investments, or return on assets).
This chapter first aims to provide insight into the rationale behind earnout provisions for financially distressed firms that agree upon debt restructuring plans with creditors. Moreover, the study investigates the basic principles of the economic valuation of earnouts. After discussing the main implications of earnout value estimation in the light of the existing literature on corporate restructuring and option pricing-related issues, we propose a valuation methodology based on a Monte Carlo simulation approach which allows the representation of a variety of projections of a few relevant financial variables, along with the related probability distribution. Besides obtaining an assessment of economic values, our model enables a probabilistic representation (not necessarily under a risk-neutral environment) of the wide spectrum of the restructured debt pay-offs, for both the company and the bank.
Josanco Floreani, Maurizio Polato, Maurizio Massaro

Chapter 15. Book and Market Values of European Banks: Country, Size, and Business Mix Effects

Abstract
In the years since the outbreak of the crisis, the financial markets have persistently reduced the market value of European banks as a consequence of macroeconomic, regulatory, and structural factors. Even though these factors have affected the European banking industry as a whole, the market valuation of banks have shown differences across country, size, and business mix profiles. In line with the existing literature on bank market valuation, this study tests for the difference between the market-to-book ratios of the large European banks using a variety of indicators typically affecting bank market value. To verify our research questions, we first regress the market-to-book ratio over performance measures, risk indicators, and growth patterns. Then, in a second step, we test whether bank business or country characteristics affect bank market valuation. Our panel consists of all large publicly traded bank holding companies at the European level. Large publicly traded banks comprise all listed banks with consolidated assets exceeding € 50 billion in 2015. The results highlight the relevance of the country context for the consequences on bank performance and stability.
Riccardo Ferretti, Andrea Landi, Valeria Venturelli

Contemporary Issues

Frontmatter

Chapter 16. Assessing and Measuring Banking Culture

Abstract
A crucial lesson to be learned from the latest financial crisis is the importance of the strength of the banking system. A strong banking system needs appropriate prudential regulation that requires institutions to have a level of capital that is high enough to absorb the losses they may suffer due to the risks they take. However, this is no longer enough. The crisis has shown that it is necessary to analyse the soundness of an entity including aspects related to banking culture as a fundamental driver of excessive risk-taking, misconduct and compliance risks. The pre-crisis banking culture was characterized by very poor standards of conduct, which not only led to putting the solvency of financial institutions at risk but also to manipulating the market and improperly marketing banking products and services, resulting in economic harm to clients and serious risk to the stability of the financial system as a whole. Having learned from this lesson, post-crisis banking regulation and supervision now promotes new practices and methods of forward-looking prudential supervision. This chapter reviews the evolution and current state of the issue, paying special attention to the possible methods that may be applied to the assessment and measurement of banking culture.
Beatriz Fernández Muñiz, José Manuel Montes Peón, Camilo José Vázquez Ordás

Chapter 17. A Multidimensional Approach to Equity Crowdfunding: Bridging the Equity Gap and Boosting Social Capital

Abstract
Drawing inspiration from microfinance and crowdsourcing, equity crowdfunding has become a valuable source of fundraising for entrepreneurs and small and medium-sized enterprises (SMEs). Crowdfunding facilitates access to finance for those companies that would otherwise have great difficulty in accessing it and is viewed as a potentially revolutionary application of social networking with direct consequences for supporting sustainability and innovation. Our aim is twofold: (a) to explore the characteristics of equity crowdfunding campaigns launched by different European platforms and (b) to analyse the relationship between social capital created online and the number of investors sustaining the campaign. Given the web context in which it develops, the role of online social capital in the project’s success should be considered from a broad perspective that involves both the founder’s and the project’s social networks. These two levels of analysis represent different networks that mobilize different resources and frame different types of crowds.
Our results are relevant for the field of equity crowdfunding research, as they shed light on a flourishing tool for bridging the equity gap of start-ups and innovative SMEs at the same time as proposing a new perspective on the online social capital framework.
Bernardo Balboni, Elisabetta Gualandri, Ulpiana Kocollari, Alessia Pedrazzoli, Valeria Venturelli

Chapter 18. Structure and Risks of the Chinese Shadow Banking System: The Next Challenge for the Global Economy?

Abstract
Shadow banking is a very important issue in contemporary finance. It still remains the unregulated part of the financial market and may generate a major systemic risk in the future. An example of such a rapidly growing shadow banking system in the wake of the last financial crisis is that of China. It is hence necessary to attach greater importance to its development. The system differs vastly from its counterparts in Western countries. This chapter describes the structure of Chinese shadow banking and the mechanisms of its development, along with the main differences between the system in China and in Western countries. It also presents the main inherited risks present in the system and their potential impact on other sectors of the Chinese economy and financial market and hence on the global economy.
Piotr Łasak

Chapter 19. Analysis of the Main Trends in European and US Banks and Their Impact on Performance

Abstract
This chapter focuses on banks in Europe and the USA, investigating how the new trends affecting banking business affect bank profitability. In order to analyse this phenomenon, we take into consideration a particular sample composed of the banks included in two relevant indexes for the period 2006–2016. We then extract the balance sheet data on these banks from the Bloomberg database. Using cluster analysis, we identify three clusters of banking groups based on the number of employees and the number of branches. Subsequently, we analyse how the two major drivers of the evolution of bank activities, that is, technological advances (digital banking) and the need to comply with increasingly stronger prudential regulation, have changed the ways banks operate and are able to be profitable.
The main results suggest that the size of banks affects bank profitability and that investments in technology and capital requirements have different effects on profitability. These findings have strategic implications for bank managers, regulators, and supervisors due to the impact of these drivers on banking business and bank profitability, and the new challenges they entail.
Giusy Chesini, Elisa Giaretta

Backmatter

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