Financial reforms and technical efficiency in Indian commercial banking: A generalized stochastic frontier analysis

In this study we estimate technical efficiency of Indian commercial banks from 1989 to 2009, using a multiple-output generalized stochastic production frontier and analyze the effects of financial reforms on estimated efficiency. The generalized method estimates technical efficiency in the presence of multiple outputs, filling a gap in the existing literature. Our results show that Indian commercial banks were operating with 64% efficiency on average during the sample period. The initial phase of reform had a positive impact on while the later phase adversely affected technical efficiency of banks. Public sector banks show higher efficiency levels compared to private and foreign banks.     

Determinants of risk in the banking sector during the European Financial Crisis

Risk assessment in the banking sector has been a prominent topic in the banking literature and has gained attention especially since the recent financial crises. In particular, the European crisis, which was the first since the formation of the Eurozone, underlined a number of significant problems and increased concerns on the tail or crash risk of banks. In the present study, we seek to examine whether information asymmetry, the importance of banks in the financial system and systemic risk play significant roles in the evolution of stock crashes in the banking sector. Information asymmetry is proxied by opacity, the importance of a bank in a financial network is proxied by network centrality, and systemic risk is proxied by clustering. The research framework considers a number of regulatory, reporting and financial market factors that have also been determined to relate to stock crashes and shows that all of the above factors are related to (idiosyncratic) stock crash risk under specific conditions.     

The global financial crisis and integration in European retail banking

The aim of this paper is twofold. Firstly, to investigate the integration process within the European Union retail banking sector by analysing deposit and lending rates to the household sector during the period 2003–2011. Secondly, to assess the impact of the 2008 global financial crisis on the banking integration process, an area that is yet unexplored. An important contribution of the paper is the application of the recently developed Phillips and Sul (2007a) panel convergence methodology which has not hitherto been employed in this area. This method analyses the degree as well as the speed of convergence, identifies the presence of club formation, and measures the behaviour of each country’s transition path relative to the panel average. The empirical results point to the presence of convergence in all deposit and lending rates to the household sector up to 2007. In sharp contrast, the null of convergence is rejected in all deposit and credit markets after the onset of the 2008 financial crisis. These results show that the global crisis has had a detrimental effect on the banking integration process. We find some convergence in a few sub-clusters of countries but the rate of convergence is typically slow and several countries are identified as diverging altogether. In addition, we find that the credit market, in general, is far more heterogeneous than the savings market.     

Risk and efficiency in the Central and Eastern European banking industry under quantile analysis

This paper estimates cost efficiency in the banking industry of 11 Central and Eastern European (CEE) countries over the period 1998–2005 using a quantile regression analysis. Our purpose is to investigate for the first time whether cost efficiency in CEE banks differs across quantiles of the conditional distribution. We employ stochastic frontier analysis across quantiles using the Distribution-Free Approach. The reported evidence demonstrates lower efficiency scores for higher conditional distributions. The paper goes further into a second-stage analysis to investigate how risk, measured by non-performing loans and loans loss provisions, affects bank efficiency across quantiles. This second-stage analysis finds that risk asserts a negative impact on cost efficiency, especially in high-order quantiles. Finally, the paper investigates the relationship between bank-specific ‘z’ variables, such as structural reforms, bank concentration and profitability, and cost efficiency across quantiles.     

The impacts of risk-taking behaviour and competition on technical efficiency: Evidence from the Chinese banking industry

This paper tests the impact of risk and competition on efficiency in the Chinese banking industry over the period 2003–2013. Comprehensive types of risk-taking behaviour are considered including credit risk, liquidity risk, capital risk, and insolvency risk. Competition is measured by the Lerner index. The results are cross-checked using an alternative econometric technique as well as an alternative competition indicator. The findings show that the technical and pure technical efficiencies of Chinese commercial banks are significantly and negatively affected by liquidity risk. They further show that greater competition precedes declines in technical and pure technical efficiencies of Chinese commercial banks. The results suggest that Chinese bank efficiency is significantly affected by bank diversification, banking sector development, stock market development, inflation and GDP growth rate. The findings also indicate that, compared to state-owned commercial banks, joint-stock commercial banks and city commercial banks have lower technical and pure technical efficiencies.     

Competition,efficiency and soundness in European life insurance markets

This paper provides cross-country evidence on the association between soundness and competition in the life insurance industry, where competition is measured by the Boone indicator. We analyse 10 European Union (EU) life insurance markets over the post-deregulation period 1999–2011. The results indicate that competition increases the soundness of the EU life insurance markets. Since the Boone indicator measures competition based on the reallocation of profits from inefficient insurers to efficient ones, our results suggest that efficiency is the mechanism through which competition contributes to insurer solvency. The soundness-enhancing effect of competition is greater for weak insurers than for healthy ones.     

Integration of European bond markets

I investigate the time variation in the integration of EU government bond markets. The integration is measured by the explanatory power of European factor portfolios for the individual bond markets for each year. The integration of the government bond markets is stronger for EMU than non-EMU members and stronger for old than new EU members. For EMU countries, the integration is weaker the lower the credit rating is. During the recent crisis periods, the integration is weaker, particularly for EMU countries.     

Cost efficiency of the banking industry in the South Eastern European region

This paper analyses cost efficiency in the banking sector of six South Eastern European countries over the period 1998–2003. A stochastic frontier approach, incorporating firm-specific and country-related variables, indicates a generally low level of cost efficiency, with significant inefficiency differences among countries. Foreign banks and banks with higher foreign bank ownership involvement are associated with lower inefficiency. Furthermore, we observe a negative correlation of cost inefficiency with bank capitalization and firm market share, and a positive one with the fraction of loans in the asset portfolio.     

Introduction to recent research topics in banking and finance

This note introduces a set of papers that have been presented to the third International Symposium on Computational Economics and Finance (ISCEF), organized in Paris on April 10–12, 2014, focusing on topics in banking and financial markets. This selection of papers emphasizes the role of the development of research in quantitative finance that benefited from the progress in econometric modeling and the availability of high frequency data. These studies carried in the context of the global financial crisis provide different interesting findings enabling to better understand financial market dynamics and banking sectors. We briefly analyze in this note their methodologies and discuss their empirical findings.     

Determinants of loan securitization in European banking

Analyzing 75 securitizing and non-securitizing stock-listed banks in the EU-13 plus Switzerland over the period from 1997 to 2010, this paper provides empirical evidence that loan securitization in Europe is a composite decision based on bank-specific as well as market- and country-specific determinants. In addition, we find that these determinants remarkably change when separately investigating securitization transactions during the pre-crisis and crisis period. Moreover, results from several subsample regressions reveal that determinants of loan securitizations in Europe depend on the transaction type, the underlying asset portfolio and the regulatory and institutional environment under which banks operate.     

Overview on the recent developments of banking and risk management

This note aims at focusing at the recent developments in banking and risk management with a particular focus on empirical analyses about banks’ regulation and financial risk. It notably describes a financial atmosphere whereby, in response to the US subprime mortgage crisis and the continuing stress in financial markets, policymakers developed alternative monetary policies and regulators pursued different reforms and new regulations to overcome the effects of this crisis. To better understand these different changes and reforms, this note presents the 9 best articles selected from the second International Workshop on Market Microstructure and Nonlinear Dynamics (Paris, June 4–5, 2015, www.fmnd.fr) that focused on these topics. Interestingly, through these different contributions, this special issue has developed new insights about methodologies and quantitative risk management techniques that assess the effects of the financial crisis, explain its different challenges, and suggest some solutions.     

Crisis-related shifts in the market valuation of banking activities

We examine changes in banks’ market-to-book ratios over the last decade, focusing on the dramatic and persistent declines witnessed during the financial crisis. The extent of the decline and its persistence cannot be explained by the delayed recognition of losses on existing financial instruments. Rather, it is declines in the values of intangibles – including customer relationships and other intangibles related to business opportunities – along with unrecognized contingent obligations that account for most of the persistent decline in market-to-book ratios. These shifts reflect a combination of changed economic circumstances (e.g., low interest rates reduce the value of core deposits; meager growth opportunities reduce the value of customer relationships) and changed regulatory policies. Together, these changes in the business environment since the financial crisis have led investors to associate little value with intangibles. For example, changing market perceptions of the consequences of leverage have affected the way investors value banks; prior to the crisis, higher leverage, ceteris paribus, was associated with greater value (reflecting the high relative cost of equity finance), but during and after the crisis, as default risk and regulatory concerns came to the fore, lower leverage was associated with greater value. Reflecting the rising importance of regulatory risks (e.g., the uncertain consequences of the Volcker Rule), after controlling for other influences, dividend payments (a signal of management and regulatory perceptions of the persistence of financial strength) matter for market prices much more after the crisis, while increases in recurring fee income matter less.     

Insurance and economic policy uncertainty

Just as the world has witnessed the increased importance of the insurance sector over the past few decades, it has also witnessed a sharp rise in risks and uncertainties. Surprisingly, studies analyzing the relationship between economic policy uncertainty and the insurance sector are almost non-existent. Another major limitation of insurance literature is the choice of methodology. Most studies on the insurance sector do not take into consideration issues of heterogeneity and cross-sectional dependence, and are therefore subject to errors. To address the identified gaps, this research investigates the impact of economic policy uncertainty on insurance premiums in a panel of 15 countries over the period 1998–2016 by employing heterogeneous panel estimation techniques with cross-sectional dependence. The Durbin-Hausman cointegration tests of Westerlund (2008) confirm that a long-run relationship exists between the variables. Findings from the error correction based panel estimations show that the insurance sector is not immune to the effects of economic policy uncertainty. Economic policy uncertainty raises insurance premiums both in the short and long run, although the long-run impact is greater than the short-run impact. In addition, economic policy uncertainty exerts a bigger influence on non-life insurance premium than on life insurance premium, indicating that the economic risks covered by non-life insurance are more sensitive to uncertainty than the mortality and longevity risks covered by life insurance. Our findings further show that national income, education, population, financial development and institutional quality all raise insurance premiums, while inflation lowers insurance premiums.     

Explaining M&A Success in European Banks

We study 98 large M&As of European bidding banks from 1985 to 2000 in order to investigate drivers of excess returns to the shareholders of the targets, the bidders, and to the combined entity of the bidder and the target. Our findings show that many of 13 drivers identified mostly from prior, US‐focused research have significant explanatory power, indicating that the stock market reaction to M&A announcements of European bidding banks can be at least partly forecast. Our results are largely consistent with the US‐experience and confirm the preference of stock markets for focused transactions and against diversification. Moreover, we find that less active bidders create more value than more active/experienced bidders. This stands in contrast to some US research and may indicate that managers of frequent European bidding banks may be motivated by other objectives than creating shareholder value.     

欧洲主权债务危机的发展与应对之策

受近期希腊债务违约风险上升、欧债危机向核心国蔓延、欧洲银行业融资缺口扩大等负面因素冲击,欧洲金融市场遭遇大幅动荡。文章指出,在短期内,防止希腊债务违约是遏制欧债危机进一步蔓延、防范债务危机与银行危机并发的关键;长期而言,欧元及欧盟运作机制的改革将不可避免,完善退出机制将是欧元区长期稳定运作的基石。     

欧洲主权债务危机的根源与出路

欧洲主权债务危机是主权问题与银行问题相互作用的结果,其根源在于欧洲银行体系和政治结构的特殊性。要化解主权债务危机需要实现财政政策的一体化和银行监管的一体化,同时进一步推动欧盟和欧元区改革。     

Dynamic Efficiency in the East European Emerging Markets

The paper re-investigates the efficiency of the East European emerging markets of the Czech Republic, Hungary, Poland and Russia analyzed by Rockinger and Urga (2000, 2001) based on the data from September, 1995 through December, 2004. We propose a first-order autoregressive (AR (1)) type time varying parameter model with a non-stochastic linear time trend including the random walk (RW) type model as a special case. The observed data rejects the RW type model for the AR (1) type one. The markets exhibit dynamic efficiency for all the four countries in the sense that the linear time trend approaches to zero over time. The empirical result for the Russian markets differs from that of Rockinger and Urga (2000). JEL Classifications: G14, G15     

Examining the Relationships between Capital,Risk and Efficiency in European Banking

This paper analyses the relationship between capital, risk and efficiency for a large sample of European banks between 1992 and 2000. In contrast to the established US evidence we do not find a positive relationship between inefficiency and bank risk‐taking. Inefficient European banks appear to hold more capital and take on less risk. Empirical evidence is found showing the positive relationship between risk on the level of capital (and liquidity), possibly indicating regulators' preference for capital as a mean of restricting risk‐taking activities. We also find evidence that the financial strength of the corporate sector has a positive influence in reducing bank risk‐taking and capital levels. There are no major differences in the relationships between capital, risk and efficiency for commercial and savings banks although there are for co‐operative banks. In the case of co‐operative banks we do find that capital levels are inversely related to risks and we find that inefficient banks hold lower levels of capital. Some of these relationships also vary depending on whether banks are among the most or least efficient operators.     

Social networks in the global banking sector

We show that banks with shared social connections partner more often in the global syndicated loan market and that central banks in the network play dominant roles in various interbank transactions, indicating that social connections facilitate business connections. However, more centralized banks in the network also contribute significantly to the global systemic risk. Moreover, we find the soft information generated by social networks is particularly valuable when potential partners operate under different accounting and regulatory standards. Finally, we show that the recent banking crisis significantly limited the positive soft information effects of social networks in the global banking system.     

Capital and liquidity ratios and financial distress. Evidence from the European banking industry

Using a large bank-level dataset, we test the relevance of both structural liquidity and capital ratios, as defined in Basel III, on banks' probability of failure. To include all relevant episodes of bank failure and distress (F&D) occurring in the EU-28 member states over the past decade, we develop a broad indicator that includes information not only on bankruptcies, liquidations, under receivership and dissolved banks, but also accounts for state interventions, mergers in distress and EBA stress test results. Estimates from several versions of the logistic probability model indicate that the likelihood of failure and distress decreases with increased liquidity holdings, while capital ratios are significant only for large banks. Our results provide support for Basel III's initiatives on structural liquidity and for the increased regulatory focus on large and systemically important banks.