Financial Crisis, Bank Behaviour and Credit Crunch

This chapter considers the 2008 international financial crisis, the Eurozone and economic growth in a long term perspective. This systemic crisis has been the most severe among the recurring crises that have marked the “age of global finance” which had begun with the destruction of Bretton Woods. The current crisis led to a world-wide, near-meltdown of the financial and banking system, to the debt crisis and the Eurozone crisis. Contrary to the 1930s the worst has been avoided thanks to bold innovation and the successful cooperation among central banks, national governments and international organizations, and due to the break with policy orthodoxy. Yet, many of the excesses of globalization and of global finance still have to be corrected. Today, the world has to face the tasks of ending the artificially low (and even negative) interest rates and returning to a more market-conform interest rate structure without new financial turbulences as well as of overcoming the vicious circle of excessive debt and stagnation or slow growth. Both Europe and the world would be much worse off without the Euro. Strengthening the Eurozone requires cooperation, discipline and solidarity, not the creation of a European “super state”. In the long term, in order to restore sustained growth, social progress and economic and monetary stability, we also need a new rule-based global international monetary order. It is the responsibility of the main pillars of the liberal and democratic world economic order, Europe, the United States and Japan, to take the initiative and lead it to success.

Europe currently faces a severe economic and financial Great Crisis. It is often described as a sovereign debt crisis, but in fact, it is really a sequence of interactions between sovereign problems and banking problems that caused a severe economic slowdown. It also caused a fragmentation of euro-area financial markets. The genesis of the crisis focuses on the imbalances in European Monetary Union (EMU) countries balance-of-payments, where the TARGET2 payment system became crucial, reflecting stress in the funding of banking systems in crisis-hit countries. The decisions by European leaders to set up a banking union and the announcement, as well as adoption, of non-standard measures by the European Central Bank (ECB) greatly contributed to restoring confidence in the euro-area financial markets, improving market sentiment and reversing the earlier trend towards market fragmentation. Ultimately, an expansion of the European aggregate demand is necessary to promote growth, and to this aim, the role of Germany is crucial.

The banking literature has extensively examined risk shifting, especially in theoretical terms and in relation to the safety net and regulation. To set a framework of analysis for this moral hazard problem, we provide a brief synthesis of the incentive scheme underlying risk shifting. Then, we propose an empirical method to determine whether banks engage in risk shifting. This method also allows us, first, to classify risk shifting practices depending on the group of creditors to which shareholders transfer risk (that is, our method implies a taxonomy of risk shifting), and second, to identify positive and negative incentives for risk shifting. We apply our method to the banking systems of the United States and the European Union and discuss the resulting findings.

Since the global banking crisis in 2007 and 2008 and the more recent euro sovereign debt crisis there have been growing calls to rethink the way banks are monitored and governed. Banks have been forced to take on more capital and liquidity, remove riskier types of activity and also shrink their balance sheets. Numerous new rules have been put in place to constrain their risk-taking business including moves to remove executive excesses by curtailing their remuneration packages. All these new rules place a straightjacket around banker’s activities and as a consequence inhibit their freedom and this new environment has led various commentators to talk about banks being no more private free-wheeling profit-maximising firms, but more like public utilities that provide a service to society that should be regulated more heavily, namely limiting prices and profits. These arguments stem from the similarity that banks have with public utilities and the problems associated with current banking size and structures. This chapter outlines various features of European banking along with a brief analysis of proposed structural regulatory reforms aimed at reducing the likelihood of systemic bank failure, too-big-to-fail guarantees and other forms of taxpayer support for troubled banking systems. We finish off by looking at why banks are maybe turning into public utilities.

The introduction of the risk-sensitive capital Accord, commonly known as Basel II, raised concerns among practitioners about possible increases in the procyclicality of capital charges during downturns. Based on a sample consisting of yearly observations for the period 2007–2012 and related to 76 countries, we test whether—throughout this period of financial distress—banks implementing Basel II reduce corporate lending growth more than banks adopting the first of the Basel Accords. Furthermore, we also test whether Basel II differently affects the growth of corporate loans according to bank size. Our analysis shows that banks, in general, that have complied with Basel II have not apparently reduced the growth of corporate loans. Interestingly, however, we find that the very largest banks decreased corporate lending growth by more than 3 % during the observed period, thus providing evidence of the above mentioned procyclicality issue affecting larger banks.

Bank capital adequacy is the key driver of a resilient banking system that is capable of absorbing shocks. Consequently, Basel III regulation raised the quality and quantity of the regulatory capital base. But are better capitalized banks perceived as less risky by the market? In other words, how do banks’ capital bases impact the riskiness of their equity? Does the market also consider leverage, asset quality and profitability? In our work, we aim to address these issues, analysing a sample of large European listed banks (those under ECB supervision) for the 2007–2013 period. We expect to find that bank equity return riskiness is influenced by capital adequacy and, in turn, by how higher capital ratios have been achieved: through profitability, retained earnings, new share issues or deleveraging (i.e., lower total assets and/or risk weighted assets).

Based on a broad body of literature that investigates the determinants of gender discrimination in the credit market, we provide some descriptive evidence on women’s access to credit by employing a set of financial viability and socio-economic data for a sample of 11 European countries after the global financial crisis (2009–2013). From our preliminary analysis it emerges that, on the demand side, female firms apply for bank loans less than male firms, and one of the relevant determinants for their decision not to apply is the fear of rejection. On the supply side, when applying, female firms face a higher rate of rejection or receive less bank financing than male firms. No general patterns seem to emerge when crossing micro and macro data, even though at the country level, we detect some correspondence between banking system characteristics, socio-institutional indicators and gender differences in access to formal credit.

This chapter seeks to understand how the characteristics of executive directors affect the market performance of US banks. To explore the expected performance effects linked to executive characteristics, we measure changes in the market valuation of banks linked to announcements of executive appointments. We show that age, education and the prior work experience of executives create shareholder wealth while gender is not linked to measureable value effects. Our results are robust to the treatment of selection bias. By illustrating the wealth effects linked to executive appointments, our study contributes to the current debate on whether and how individual executives matter for firm performance and behaviour. The findings also shed light on the value of human capital in the banking industry. This chapter offers important insights to policymakers charged with ensuring the competency of executives in banking. Our findings advocate policies that mandate banks to appoint highly qualified executives with relevant banking experience.

Analyses of the financial structure of Italian firms agree on the evidence that compared with other European countries, companies are characterised by a peculiar fragility because of their lower capitalisation and higher leverage. These effects, in terms of the current and potential financial vulnerability, are well known. During crises, the problems related to internal financing capacity and bank debt funding intensify. What are the best solutions to rebalance the financial structure of Italian firms? How should banks refinance firms to provide them with the necessary period to settle finances? This paper provides the reader with some answers to both questions. With regards to the capitalisation processes, we recommend setting up new highly capitalised intermediaries. In particular, they should be created with capital that comes from selling those bank buildings that are no longer useful, given the increasing importance of online services. Later, we analyse the opportunity for and, thus, the effects of banks to securitise their loans. For both alternatives, we obtain relevant findings that can represent suitable solutions for firms and intermediaries to overcome the credit crunch issue.

This paper examines the effects of changes in civil and fiscal law that were made to facilitate direct access to the debt capital market by unlisted companies in Italy to allow them (particularly SMEs) to cope with the persisting credit crunch. This study is based on an empirical investigation of data regarding issues listed in the ExtraMOT Pro market (MTF) of the Italian Stock Exchange from March 2013 to June 2014.

Our results demonstrate that few issues were listed in this period and that approximately one-half of the total outstanding issues were absorbed by issues of the top three companies. This is because companies of medium to large size were also among the first movers; afterwards, issues were primarily launched in smaller amounts. The most frequent sectors are services (Information and Communication Technology, engineering, gaming) and building/real estate sectors.

Despite the slow start, corporate finance regulations have created “work in progress” so that a greater use of direct financing through bonds, in addition to bank credit, is almost at hand.