Restructuring the Japanese banking system Has Japan gone far enough?

The resolution of the Japanese banking crisis has been identified as a critical factor affecting the health of the global economy. Massive restructuring must be undertaken to improve the health of Japanese financial system. We provide evidence that the Japanese banking system has begun to restructure in light of recent financial deregulation. In particular, failures, mergers and other forms of restructuring are now underway. However, Japanese banks still must overcome serious obstacles to regain their place among the world's best financial institutions.     

Have IFRS Affected Earnings Management in the European Union?

There has recently been considerable discussion of those features of IFRS that are likely to help improve financial reporting in the European Union. However, certain issues may also have a negative impact on the quality of information. This paper focuses on the effect of IFRS on earnings management. Its main purpose is to examine whether the adoption of IFRS in the European Union has increased or decreased the scope for discretionary accounting practices by comparing discretionary accruals in the periods preceding and immediately after the regulatory change. Another objective is to determine which firms' features and country factors may explain the accounting discretion observed before and after IFRS. We consider a sample of non-financial firms listed on 11 EU stock markets. The results obtained show that earnings management has intensified since the adoption of IFRS in Europe, as discretionary accruals have increased in the period following implementation. The variables explaining accounting discretion are the same before and after IFRS (business size, leverage, investor protection and legal enforcement). These results suggest that variations in earnings management might be due to some room for manipulation under international standards when compared with local standards.     

Has the CDS market influenced the borrowing cost of European countries during the sovereign crisis?

This paper assesses the potential influence of the growing CDS market on the borrowing cost of sovereign states during the European sovereign crisis. We analyze the sovereign debt market to ascertain the pattern of information transmission between the CDS and corresponding bond markets. Our methodological innovation is the use of a non-linear specification rather than the linear VECM specification customarily employed. Using a panel smooth transition model during the 2008–2010 period, we find that: 1) linearity tests clearly reject the null hypothesis of a linear transmission mechanisms between the bond and the CDS markets; 2) market distress alters the mutual influence and 3) the higher the distress the more the CDS market dominates the information transmission between CDS and bond markets.     

Back to the basics in banking? A micro-analysis of banking system stability

This paper analyzes the relationship between banks’ divergent strategies toward specialization and diversification of financial activities and their ability to withstand a banking sector crash. We first generate market-based measures of banks’ systemic risk exposures using extreme value analysis. Systemic banking risk is measured as the tail beta, which equals the probability of a sharp decline in a bank’s stock price conditional on a crash in a banking index. Subsequently, the impact of (the correlation between) interest income and the components of non-interest income on this risk measure is assessed. The heterogeneity in extreme bank risk is attributed to differences in the scope of non-traditional banking activities: non-interest generating activities increase banks’ tail beta. In addition, smaller banks and better-capitalized banks are better able to withstand extremely adverse conditions. These relationships are stronger during turbulent times compared to normal economic conditions. Overall, diversifying financial activities under one umbrella institution does not improve banking system stability, which may explain why financial conglomerates trade at a discount.     

Are cooperatives the weakest link in European banking? A non-parametric metafrontier approach

This paper investigates the productive performance of cooperative banking firms as compared to their commercial and savings counterparts, accounting for technology heterogeneity due to different ownership in European banking. Based on the metafrontier notion, we introduce a methodology which allows the identification of technology gaps among different bank types and their decomposition into input- and output-invariant components. Our findings suggest that the type-specific frontier corresponding to cooperative banking firms lies, to its largest part, away from the European metafrontier. Furthermore, within the cooperative bank type a dichotomy seems to arise. The decomposition results suggest that the cooperatives’ technology gap is attributed to output production rather than input use.     

What factors drive the adoption of digital banking? An empirical study from the perspective of Omani retail banking

This study aims to investigate the factors influencing the adoption of digital banking by retail banking customers. A theoretical model was developed based on an extended technology acceptance model to conceptualize the linkage among the factors impacting digital banking adoption. The primary data were acquired through a structured questionnaire from 200 customers. The multiple linear regression equation was used to analyse the relationship among six independent factors. The study revealed awareness, web features and perceived usefulness have significant positive influence on adoption of digital banking. The study is useful to plan and promote service model to enhance digital banking adoption.     

What do premiums paid for bank M&As reflect? The case of the European Union

We analyze the takeover premiums paid for a sample of domestic and cross-border bank takeovers in the European Union between 1997 and 2007. We find that acquiring banks value profitable, high-growth and low risk targets. We also find that the strength of bank regulation and supervision as well as deposit insurance regimes in Europe have measurable effects on takeover pricing. Stricter bank regulatory regimes and stronger deposit insurance schemes lower the takeover premiums paid by acquiring banks. This result, presumably in anticipation of higher compliance costs, is driven by domestic deals. Similar qualitative results are found for both the entire sample and the sample of publicly traded targets.     

Has the euro affected the choice of invoicing currency?

We present a new approach to study empirically the effect of the introduction of the euro on the pattern of currency invoicing. Our approach uses a compositional multinomial logit model, in which currency choice is explained by both currency-specific and country-specific determinants. We use unique quarterly panel data on the invoicing of Norwegian imports from OECD countries for the 1996–2006 period. We find that eurozone countries have substantially increased their share of home currency invoicing after the introduction of the euro, whereas the home currency share of non-eurozone countries fell slightly. In addition, the euro as a vehicle currency has overtaken the role of the US dollar in Norwegian imports. The substantial rise in producer currency invoicing by eurozone countries is primarily caused by a drop in inflation volatility and can only to a small extent be explained by an unobserved euro effect.     

The measurement of harmonization in the form and content of the auditor’s report in the European Union

This study attempts to determine the degree of harmonization in the form and content of the auditor’s report in the European Union. To accomplish this goal, audit reports from 1995 annual reports of the largest industrial companies in Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Italy, Netherlands, Portugal, Spain, Sweden and the United Kingdom are analyzed. The analysis uses the basic elements of the auditor’s report listed in the International Standard on Auditing, “The Auditor’s Report on Financial Statements” as the control. Comparability is tested using the chi-square statistic which tests for equality of the proportions of the various elements in the auditor’s report across the Member States. The results reveal that harmonization exists in three of the five elements in the auditor report relating to form (appropriate title, the dating of the report and the listing of the location of the auditor’s office). Harmonization does not exist for the remaining two elements related to form, nor does it exist for any of elements related to content.     

How do bank competition,regulation, and institutions shape the real effect of banking crises? International evidence

This paper studies the influence of bank competition on the real effect of 36 systemic banking crises in 30 countries over the 1980–2000 period and how this influence varies across countries depending on bank regulation and institutions. We find that bank market power is not on average useful for mitigating the negative real effect of a systemic banking crisis. Market power promotes higher growth during normal times in industries that are more dependent on external finance but induces a bigger reduction in growth during systemic banking crises. We also find a country-specific effect depending on bank regulation and institutions. Stringent capital requirements and poor protection of creditor rights increase the benefits of bank market power for mitigating the negative real effect of a systemic banking crisis because bank market power has a positive effect on economic growth during both crisis and non-crisis periods in these environments.     

Do Islamic stock indices perform better than conventional counterparts? An empirical investigation of sectoral efficiency

Literature is rife with studies on efficiency of stock markets and financial performance aspects. One such aspect is the measurement of sectoral efficiency amongst stock markets. While there are several studies analysing sectorial efficiency, there is no study on the efficiency of Islamic sector indexes. The rise of Islamic indices has raised the question and multiple studies have been undertaken in exploring and validating the better performance from a risk return framework for the Islamic indices. This study attempts to pioneer in this niche area by conducting a comparative analysis of 10 sectoral global indices for both conventional and Islamic counterpart spanning over 18 years. The sample time period runs from 1 January 1996 until 31 December 2014. To further validate our study, we have divided our data into four major time periods, to factor in different phases the world markets have gone through in the sample period, i.e. 1996–2000; 2001–2002; 2003–2006 and 2006 to 2014. The methodology selected in understanding the efficiency of these sectoral stock indices is the multifractal de-trended fluctuation analysis (MFDFA). Our analysis reveals that in the shorter horizon, efficiency tends to follow a similar pattern amongst the conventional and Islamic counterpart. Furthermore, Islamic sectoral indices generally tend to exhibit a higher efficiency regime across the last decade. Overall, Islamic index seems to have stayed attractive and resilient, allowing conformity with the weak form efficient market hypothesis.     

Is cloud computing the digital solution to the future of banking?

This study investigates the impact of banks’ strategic move to cloud computing on bank performance and risk-taking. Based on a novel index of banks’ exposure to cloud computing, we find that banks’ adoption of cloud computing is associated with lower cost efficiency, higher profit efficiency, and greater operational risk using data on Chinese banks over the period 2008–2019. We also find that cloud computing interacts with other newly emerging technologies, leading to synergy gains in cost efficiency and operational risk control but with a substitutive effect on profit efficiency from blockchain. The findings are of timely policy importance and practical relevance for regulators, policy-makers, and bank managers.     

Do environmental variables affect the performance and technical efficiency of the European banking systems? A parametric analysis using the stochastic frontier approach

The paper compares the efficiency of the European banking systems in view of the constitution of the European Monetary Union. Since competition among banks will increase, it is important to identify the most efficient banking system able to play a role in that market. A parametric approach is adopted, based on the estimation of a stochastic cost frontier. This methodology enables one to measure X-inefficiency and to model it as a function of environmental variables which may influence firms' efficiency. By means of this analysis it is possible to identify the most efficient banking systems and to focus on the determinants of deviations from cost minimizing. The analysis highlights significant efficiency gaps among the performances of banks in different countries and of different institutional types. In particular, it is found that the Mittel-European model is the one that operates closest to the efficient frontier. This may indicate that, compared with separated banks, the universal banking system allows for production plans which come closer to the optimal frontier. The analysis suggests that, at the beginning of European Monetary Union, national barriers and regulatory frameworks are still responsible for deviation from the efficient frontiers.     

Is M&A different during a crisis? Evidence from the European banking sector

The financial crisis has affected the landscape of the banking sector around the world. We use a sample of transactions carried out by European acquirers in 2007–2010 to study the acquirer’s stock price market reaction to both announcements and completions of acquisitions. At the aggregate level, we find that there are no significant abnormal returns around the announcement of an acquisition while there are positive abnormal returns at completions. We study the cross-sectional determinants of abnormal returns and find that announcement returns are mainly explained by the acquirer bank characteristics, while completion returns mainly depend on opacity of the target and on the drop in idiosyncratic volatility associated with a reduction of uncertainty.     

Has the value of cash increased over time?

We document a dramatic increase in the market valuation of cash holdings of US firms from 1988 to 2013. The value of one dollar of cash has increased by $0.019 per year during the period, indicating that shareholders place more value on cash in recent years. We also find that the increasing trend in cash value is driven mainly by increases in institutional shareholdings and accounting conservatism. We further decompose cash change into cash flows from operation (CFO) and cash flows from investing and financing activities, and find that CFO is a significant driver of the increasing trend in cash value.     

Bank efficiency in the new European Union member states: Is there convergence?

We employ the stochastic frontier approach and estimate a common frontier in order to examine cost and profit efficiency in the banking systems of the ten new European Union member states over the period 1998-2003. The results indicate a generally low level of cost and an even lower level of profit efficiency, whilst we do not observe marked differences of inefficiency scores across countries. Foreign banks outperform both state-owned and domestic private-owned banks in terms of profit efficiency, though results are less clear in the case of cost efficiency. In addition, β- and σ-convergence criteria indicate some convergence in cost efficiency across the new member states, yet no convergence appears to have been achieved in terms of profit efficiency.     

Has the CDS market lowered the cost of corporate debt?

Many have claimed that credit default swaps (CDSs) have lowered the cost of debt financing to firms by creating new hedging opportunities and information for investors. This paper evaluates the impact that the onset of CDS trading has on the spreads that underlying firms pay to raise funding in the corporate bond and syndicated loan markets. Employing a range of methodologies, we fail to find evidence that the onset of CDS trading lowers the cost of debt financing for the average borrower. Further, we uncover economically significant adverse effects on risky and informationally opaque firms.     

New development: The future of public service regulation—the professional's perspective

Regulatory failures have shifted the debate from the burden of regulation to its effectiveness. In response, regulators will be more sceptical of self-assessments, more responsive to consumers, provide better information, investigate inputs as well as outcomes and work more collaboratively.     

Interpreting the European Union’s IFRS Endorsement Criteria: The Case of IFRS 9

EU Regulation requires that any international accounting standards (International Financial Reporting Standards, IFRS) and interpretations (IFRIC) pronounced by the International Accounting Standards Board (IASB) meet three sets of criteria before they become binding for EU-based companies: a ‘true and fair view’ criterion, a list of qualitative criteria, and a ‘European public good’ criterion. During the endorsement process, EU institutions evaluate each standard or interpretation’s compliance with these three criteria. Nevertheless, despite plenty of past endorsement decisions, there is still disagreement about a unanimous interpretation of the criteria in the literature. In this study, we interpret all three criteria against the background of European accounting law and academic accounting research. Then, the paper illustrates for the case of the new IFRS 9 standard on accounting for financial instruments how these criteria can be applied in the endorsement practice. We conclude that the standard cannot reasonably be rejected on grounds of the IAS Regulation. We also explain that the vagueness of the endorsement criteria and the inherent discretion in the eventual endorsement decision help maintain the EU’s political influence on the IASB’s standard-setting ex ante.     

Corporation taxes in the European Union: Slowly moving toward comprehensive business income taxation?

This paper surveys and evaluates the corporation tax systems of the Member States of the European Union on the basis of a comprehensive taxonomy of actual and potential regimes, which have as their base either profits; profits, interest and royalties; or economic rents. The current regimes give rise to various instate and interstate spillovers, which violate the basic tenets—neutrality and subsidiarity—of the single market. The trade-offs between the implications of these tenets—harmonization and diversity, respectively—can be reconciled by a bottom-up strategy of strengthening source-based taxation and narrowing differences in tax rates. The strategy starts with dual income taxation, proceeds with final source withholding taxes and rate coordination, and is made complete by comprehensive business income taxation. Common base and cash flow taxation are not favored.