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This handbook presents a timely collection of original studies on relevant themes, policies and developments in European banking. The contributors analyse how the crisis years have had a long lasting impact on the structure of European banking and explore the regulatory architecture that has started to take form in their wake. Academic experts and senior policy makers have contributed to this volume, which is organized in five main parts. The first part presents an overview of European banking through the crisis and beyond. The second part analyses performance and innovation in EU banking markets. The third part discusses the key regulatory changes aimed at fostering financial stability. Part four looks at the relevance of cross-border banking and part five presents a detailed analysis of the main EU banking markets. This is a highly informative and carefully presented handbook, which provides thought-provoking insights into the past, present and future landscapes of European banking. It will appeal to a wide readership, from scholars and students, through to researchers, practitioners and policy-makers.



European Banking: Through the Crisis and Beyond


1. European Banking: An Overview

This Handbook offers a broad overview of key issues in European banking, taking stock after the recent crises and looking forward. The European banking landscape has profoundly changed since the mid-2000s, partly driven by the regulatory response to the 2007–8 global financial crisis and subsequent sovereign debt crisis in the eurozone. The Handbook is composed of five main parts. Part I, European Banking: Through the Crisis and Beyond; Part II, Performance and Innovation in European Banking; Part III, Financial Stability and Regulation; Part IV, Cross-Border Banking; and Part V, European Banking Systems.
T. Beck, B. Casu

2. Financial Structure

The financial structure of an economy is the set of institutions that channel resources from its savers to its investors, allocate them across alternative uses, and enable investors to share risks and diversify their portfolios. These functions can be performed by capital markets or by financial intermediaries that match savers and borrowers independently of markets. In Europe, banks dominate financial intermediation, and their dominance has increased over the 1990s and early 2000s, particularly in comparison with other developed economies such as the United States and Japan. This chapter attributes Europe’s increasingly bank-based financial structure to misguided policy choices. Evidence from an emerging literature indicates that these choices have worsened Europe’s long-term economic growth prospects and rendered it more susceptible to financial crises.
Sam Langfield, Marco Pagano

3. Bank Diversification and Financial Conglomerates in Europe

The aim of this chapter is to provide an overview of the bank diversification into non-banking activities focusing on European conglomerates, while at the same time offering an update of studies on bank diversification. The financial conglomerates’ journey can be split in two periods by using the late 1990s as the cut off point. The chapter starts by discussing the corporate structure of financial conglomerates and then presenting the driving forces behind the evolution of these heterogeneous institutions. Then it moves on to review the theoretical arguments behind the creation of these universal banks and supports the discussion by presenting the empirical findings on the effects of product diversification in the banking sector. Finally, the discussion delves into the evolution of bank diversification into non-banking activities, while offering key statistics and a summary of key regulatory reforms. The chapter concludes the discussion by laying out some aspects of modern financial markets that require further thought and could ignite new research.
Panagiotis Dontis-Charitos, Sotiris Staikouras, Jonathan Williams

4. Banks’ Business Models in Europe

This chapter, which expands on Ayadi et al. (Business Models in European Banking: A pre-and post-crisis screening. Brussels: Centre for European Policy Studies (CEPS), 2011), examines the diversity of banks in Europe by identifying banks’ business models using a novel definition and methodology. Some 147 European banks are analysed, which accounts for more than 80 % of total assets during the period 2006–13. The results on the structural and financial attributes, the interaction with ownership structure, the extent of internationalization and the degree of migration are provided for each business model.
Rym Ayadi, Willem Pieter de Groen

5. Ownership in European Banking

The European banking industry comprises commercial, mutual and public banks. The categorizations refer to differences in ownership form. This chapter explores these differences and the issues in bank ownership. Section “Shareholder and Stakeholder-Oriented Financial Institutions” examines agency issues across different ownership forms. The section “Ownership Forms” provides a brief discussion of the extent and evolution of public, commercial, and mutual banks, which co-exist in various European countries. The section “Performance, Risk and Lending” provides a selective review of research which examines the importance of ownership form for the efficiency, profitability, risk and lending of financial institutions. “Concluding Comments” draws the chapter to a close.
John Goddard, Donal G. McKillop, John O. S. Wilson

6. Pay Structures in European Banks

The aim of this chapter is to provide an understanding of trends in executive compensation and establish a connection between ongoing policy reforms and executive pay structures in European banks. The section “Theoretical Background” discusses the theoretical background behind executive compensation and its implication for the banking industry. The next section, “The Structure of Managerial Compensation”, discusses the various components of executive compensation. Following on, “Impact of European Policy Developments on Pay Characteristics” assesses the link between recent policy developments and academic research, and the section “Contrasting Compensation Reforms in the US to the European Approach” contrasts the regulatory approach followed in the US to that in Europe. “Are there costs Associated with Regulating Executive Pay?” highlights some of the unintended consequences of cross-country differences in pay rules. The “Conclusion” draws the chapter to a close.
Jens Hagendorff, Abhishek Srivastav

Performance and Innovation in European Banking


7. European Retail Payments Systems: Cost, Pricing, Innovation and Regulation

In this chapter, the authors examine the structure of European payment markets in terms of payment composition, behaviour and cost. Next, the operation of a typical payment network is described, which illustrates the so-called two-sidedness of payment markets. This specific network structure underlies many aspects of the economics of payments. Payment pricing, incentives, competition and cooperation are analysed within this two-sided markets framework. A discussion of payment innovations, the growing importance of “non-banks” in all segments of the payment chain and the European regulatory framework affecting the future of retail payments complete this overview.
Wilko Bolt, Nicole Jonker, Mirjam Plooij

8. Competition in EU Banking

This chapter discusses recent EU-wide movements in bank competition and concentration. We start with a concise overview of the most frequently used competition and concentration measures. Given that different measures may capture different aspects of bank competition, we focus on the differences and similarities between concentration and competition measures for a broad sample of EU banks. We show that a high level of bank concentration does not necessarily imply a low level of competition and that competition measures such as the Boone indicator (Boone, The Economic Journal, 118(531), 1245–1261, 2008) and the H-statistic (Panzar and Rosse, The Journal of Industrial Economics, 35(4), 443–456, 1987) might capture different aspects of bank competition. Next, we discuss the evolution of bank competition in the EU over time. We end with an overview of recent findings on three important issues concerning bank competition: the impact of bank competition on bank risk-taking, the relationship between bank competition and systemic risk and the relationship between bank competition and switching costs for bank customers.
Olivier De Jonghe, Maaike Diepstraten, Glenn Schepens

9. The Internet, Crowdfunding and the Banking Industry

This chapter discusses some issues at the crossroads between the Internet and banking. It focuses on the impact of the Internet on the banking industry. As the topic is still very broad and the available space limited, only a selected number of more specific themes are covered. The section “The Internet, Network Effects and the Horizontalization of Organizations” discusses network effects and the horizontalization of established organizations and communications that arise from the Internet and social media, and how such horizontalization may ultimately affect market structure. The section “Loan‐Based Crowdfunding, Peer‐to‐Peer Lending and the Banking Industry” covers the main theme of the chapter, namely loan-based crowdfunding and peer-to-peer lending. This new form of corporate finance for smaller businesses is likely to affect banks’ core activities in several ways, some of which have already been studied in recent years. The section “Further Issues” discusses a few other topics related to the Internet and the banking industry that have attracted attention among researchers and for which data have become available. “Concluding Remarks” draws the chapter to a close.
Armin Schwienbacher

10. Small Business Lending

In this chapter the authors analyse small business lending in Europe from both the theoretical and empirical perspectives. They generally refer to small and medium enterprise (SME) lending, as most of the literature specifically looks not only to small but also to medium-sized firms as particularly vulnerable in terms of access to external finance. The chapter comprises three sections following the introduction. The section “A Growing Academic Interest” explains the growing academic interest in SME funding. The section “Recent Evolution of SME Finance in Europe” shows the main descriptive figures for Europe making use of the Survey of Access to Finance of Enterprises (SAFE) jointly provided by the European Commission and the European Central Bank. The section “Small Business Lending Technologies in Europe: A Diagnosis” surveys the role of technology in SME lending and how the taxonomy of funding alternatives for SMEs has been changing over time. It also revises some of the most recent contributions on SME lending in Europe. “Conclusions” draws the chapter to a close.
Santiago Carbo-Valverde, Francisco Rodríguez-Fernández

11. European Bank Efficiency and Performance: The Effects of Supranational Versus National Bank Supervision

This chapter explores European bank efficiency and performance. First, the authors provide an overview of the key estimation methods for efficiency and discuss selected applications to the European banking sector. Second, they apply stochastic frontier analysis to investigate the extent to which the reallocation of supervisory powers is associated with efficiency differences between European banks. In doing so, the discussion focuses particularly on whether direct supervision by the Single Supervisory Mechanism (SSM) as opposed to national competent authority (NCA) is related to cost and profit efficiency.
Rients Galema, Michael Koetter

Financial Stability and Regulation


12. Regulatory Reforms in the European Banking Sector

This chapter discusses the main regulatory reforms impacting European banks, like capital and liquidity regulation, activies restrictions, as well as the changes associated with the establishment of the Banking Union (i.e., the Single Superviosty Mechanism and the Single Resolution Mechanism). For each new regulatory tool, the chapter highlights the market failure that the reform is meant to address and identifies challenges and open issues related to its design and implementation.
Elena Carletti, Agnese Leonello

13. Complexity in Regulation

This chapter explores how banking regulation has become ever more complex, evolving from a number of simple metrics into one highly complex ratio defined by the Basel Committee on Banking Supervision. It specifically discusses each of the fault lines discovered in the Basel accord during the Financial Crisis in turn. The discussion looks at the aftermath of the crisis and posits what might be done in the future to avoid systemic crises.
Andrew Haldane, Tobias Neumann

14. State Aid and Guarantees in Europe

During the recent financial crisis, governments massively intervened in the banking sector by providing liquidity assistance and capital support to banks in distress. This helped stabilize the financial system in the short run. However, public bailouts also bear the risk of longer-term distortions, for example, by affecting bailout expectations of banks. In this chapter, the authors first provide an overview of state aid interventions during the recent crisis episode. The third section then analyzes the effects of state aid on financial stability from a theoretical view. This is followed by the description of results obtained from empirical studies. The link between the provision of state aid and politics is discussed in the section “Institutional Design and Policy Implications”. Finally, in the section “The European Banking Union” the authors describe the elements of the European Banking Union meant to resolve and restructure banks in distress and to lower the need for public intervention. Based on the preceding analysis, conclusions are drawn regarding the new design.
Reint Gropp, Lena Tonzer

15. The Bank Lending Channel of Monetary Policy: A Review of the Literature and an Agenda for Future Research

As members of the European Monetary Union are characterized by the same monetary policy but yet different institutional settings, this chapter will analyse the different institutional factors among member states of the European Union (EU), and will try to explain how these factors can determine how large the pass-through of monetary policy via the bank lending channel is by reviewing the existing work on this topic. The chapter begins by outlining the concepts of the bank lending channel. The authors relate these concepts to the existing empirical literature and to the institutional differences among EU member states. In the section “International Bank Lending Channels”, they define the notion of an international bank lending channel of monetary policy more formally and summarize the recent empirical literature on this topic. The section “Decomposition of Credit: The Bank Risk Taking Channel” outlines research and findings on the bank risk-taking channel of monetary policy. The section “Conclusion and Future Research” concludes and provides some suggestions for future research.
Mintra Dwarkasing, Narly Dwarkasing, Steven Ongena

16. The Interplay Between Banks and Markets: Supervisory Stress Test Results and Investor Reactions

This chapter provides an overview of European bank stress tests, one of the supervisory tools used to provide investors with in-depth information on the risks and profit drivers of big lenders. The authors review previous evidence on stress test exercises run by the Federal Reserve and by European supervisors (including the European Banking Authority and the European Central Bank), discussing the key differences in stress test programmes across the two areas in terms of institutional designs, scenario assumptions and disclosure procedures. The interplay between banks and markets is analysed by looking at investor reactions upon the announcement of stress test results. The chapter also includes some brief concluding remarks on the functions of the stress tests.
Giovanni Petrella, Andrea Resti

Cross-Border Banking


17. The Banking Union: An Overview and Open Issues

This chapter documents cross-border banking trends in the European Union (EU). Importantly, it finds that cross-border banking is not only pervasive in the Eurozone, but also in the non-Eurozone member states of the EU. The latter may wish to join the Banking Union at a later stage. The section “The Rationale for Banking Union” is followed by “Cross-border Banking”. The next section, “An Integrated Framework”, analyses what the new governance framework of the Banking Union is about. We stress that the Banking Union should be seen as an integrated framework. The section “How Does the Banking Union Work?” explains the completed building blocks of Banking Union, in particular single supervision and single resolution. Next, “Completing the Banking Union” discusses which building blocks are not yet completed, notably European Deposit Insurance. The final section concludes.
Dirk Schoenmaker

18. Recent Trends in Cross-Border Banking

This chapter identifies a number of recent trends in European cross-border banking. The authors first distinguish between two main modes of international banking: cross-border versus multinational banking. Cross-border banking occurs when a bank in country A lends directly to a borrower in country B. Multinational banking, on the other hand, takes place when a bank in country A lends to a borrower in country B via a local bank affiliate (a branch or a subsidiary) in country B. The chapter describes which countries rely more on cross-border banking and which ones on multinational banking and assess how both forms of banking integration fared during the recent crises. The remainder of the chapter then focuses on trends in European banks’ funding structures, the source countries of cross-border and multinational banking, and the recent growth of corporate bond markets in Europe as an alternative to bank credit.
Ralph De Haas, Neeltje van Horen

European Banking Systems


19. Banking in the UK

This chapter outlines recent features of UK banking including an evaluation of the regulatory reforms outlined in the Independent Commission on Banking (known as the Vickers Commission), of September 2011 and incorporated into the UK Financial Services (Banking Reform) Act of 2013. Other regulatory issues, such as the bank levy (a tax on bank debts introduced in 2011) and the surcharge on bank profits (introduced in the summer budget of 2015) are also covered. We then briefly compare these changes with EU and US legislation and consider UK views on the European Banking Union. We then analyse the changing industry structure, performance and the role of the new challenger banks. We then conclude.
Philip Molyneux

20. Banking in Italy

This chapter begins with a brief historical perspective on the evolution of the Italian banking sector and then considers the most recent developments in the structure and performance features of the industry. It also covers key issues and concerns that have intensified in Italy particularly in the aftermath of the global financial crisis of 2007-08, including the deterioration in credit quality and the debated reforms affecting cooperative banks.
Elena Beccalli, Claudia Girardone

21. The German Banking System

This chapter provides a comprehensive overview of the German banking system. In the sections “Structural Features of the German Banking System” and “The Structure of the German Banking System”, we will give a detailed description of the current structure of the German banking system and its recent developments. The consequences of the financial crisis of 2007–8 for the German banking system and other challenges facing German banks are discussed in the section “Challenges Facing German Banks”. In the section “German Banking in an International Comparison”, we provide a brief comparison of the German banking system with other European banking systems to point out the uniqueness of the German banking system. The strong role and involvement of the government in German banking is subject to ongoing debate. We elaborate more on this and discuss the findings of recent empirical research on the German banking system in the section “Results of Recent Research on the German Banking System”. Finally, “Concluding Remarks” draws the chapter to a close and offers an outlook for the future.
Patrick Behr, Reinhard H. Schmidt

22. Banking in Spain

This chapter aims to explore recent developments in the Spanish banking industry and the measures adopted in recent years to correct the imbalances that built up during the expansion, in order to give an up-to-date picture of the sector in the international context. To this end, the chapter is divided into four sections. The section following the Introduction examines the importance of the banking sector in the Spanish economy using various indicators of banking penetration. The next section, “Characteristics of the Spanish Banking Sector: Recent Trends”, looks at key features of the banking sector and its evolution in terms of a range of measures, including margins, profitability, efficiency, solvency, specialization and market concentration. The section “Crisis and Restructuring: From the 2012 Bailout to Passing the Stress Tests in 2014” describes the imbalances that built up during the expansion, which lasted until 2008, and which provided the rationale for the subsequent restructuring, analysing the main measures taken and the restructuring’s outcome. Finally, to conclude, the section “Lessons of the Banking Crisis and Future Challenges” sets out the lessons of the banking crisis and the challenges the Spanish banking sector faces going forward.
Joaquin Maudos, Xavier Vives

23. Banking in France

The French banking system has experienced major changes since the mid-1980s, with the deregulation process triggered by the Banking Act of 1984 and the broader reform of capital markets in 1985. The aim of these actions was to improve the performance and the efficiency of the entire banking industry and enhance competition between financial institutions and markets by allowing various types of agents, and specifically non-financial firms, to directly borrow from the market by issuing short-term debt. This chapter offers a comprehensive discussion of the French banking system, its architecture, regulatory system and current issues facing the industry.
Laetitia Lepetit, Céline Meslier, Amine Tarazi

24. Credit Institutions, Ownership and Bank Lending in Transition Economies

This chapter provides a brief survey of banking in the transition economics. The discussion focuses on the 1990s, when commercial banks emerged, and the 2000s, the era of foreign bank ownership. The emphasis is on the structure of banking—the emergence of foreign banking—and the role of institutions. It is difficult to distinguish the influence of good institutions from the influence of foreign bank ownership because they emerged at the same time and clearly influenced each other. However, the crisis provides a quasi-experimental context for evaluating the role of ownership and institutions. The authors present some suggestive econometric results that test whether foreign ownership and good institutions enable banking systems to withstand a crisis shock. Specifically, the chapter shows that a well-functioning credit information system can help dampen the impact of financial crisis on the financial sector.
Rainer Haselmann, Paul Wachtel, Jonas Sobott


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