Supervisory cooperation and regulatory arbitrage

The dissertation explores to what extent the post-financial crisis EU resolution regime, based on equity/debt write-down and conversion powers and bail-in tools will be effective in maintaining the stability of bank groups. To arrive at its unique angle, it first asks why bank groups are considered complex, thereby explaining the reasons for their proliferation and instability, and how this may inform the view regarding a desired regulatory framework. The main observation the dissertation makes is that, notwithstanding of other factors already pointed out in the literature, bank groups adopt complex structures with multiple entities, as it allows them, inter alia, to use double-leverage financing structures and internal capital markets. Double-leverage financing structures allow bank groups to optimise the combination of their debt/equity funding from external parent entity investors with a combination of debt/equity funding downstreamed internally to subsidiaries and other entities in the bank group. An important component within this structure is also that the allocation of the bank group’s resources takes place through the internal capital market (ICM). The allocation of resources via the ICM allows bank groups to manage their liquidity constraint either to undertake activities that are more profitable, or to stabilise the financial position of the group as a whole. While both double leverage and ICMs can optimise the funding and allocation of resources of the bank group, respectively, they can also generate perils to the stability of the bank group. In particular, this is because double-leverage can result in excessive risk taking and regulatory arbitrage. Moreover, the allocation of the intra-group resources in the ICM may not maintain the financial health of all subsidiaries in the bank group, which can prove to be incompatible with the financial stability goals of the regulators in the countries where those subsidiaries conduct their business. Within this context, the dissertation argues that the current EU resolution regime does not clearly address issues of double leverage when setting out capital and other liability requirements, i.e. the ‘Total Loss Absorbing Capacity’ (TLAC) and ‘Minimum Requirement for Eligible Liabilities’ (MREL) requirements. Moreover, the dissertation emphasis that it is equally relevant to clarify the way in which the bank group resources are available ahead of, and in financial distress. It is argued that to this end, bank groups need to be allowed to make use of the ICM as it is often uncertain what may be the cause of the financial distress and how the resources of the bank group could be used to stabilise it. To this end, the dissertation highlights that there is lack of clarity in both the ex-ante provisions on intra-group support framework and in the ex-post provisions governing the allocation of any surplus TLAC/MREL resources. Besides the ‘intra-group’ issues within the bank group, the third point the dissertation makes relation to the bank group’s presence in multiple jurisdictions. This transnational element adds to the complexity of the intra-group issues resulting from sub-optimal cooperation between home and host authorities. In this regard, the dissertation underlines that the current framework could adopt a more balanced way in which the regulatory fora will take into account the interest of the authorities of all parts of the bank group.

In this paper are examined impact of share of non performing loans and cost to income ratio to banks’ profitability measured through rate of return of average assets in macedonian banking sector. For that aim, have been used date on quarter basis from 2010 until Q3 2019 which are grouped according to the size of assets of banks i.e large, medium and small. In the analysis have been used descriptive statistics and models for estimating multiple regression using the method of ordinary least squares. Results from the analysis show that share of non performing loans and cost to income ratio has significant statistical impact to rate of return on average assets. With increasing the share of non performing loans and with increasing the cost to income ratio, are decreasing the rate of return on average assets in all three groups of banks, and that is predominantly showed in group of large banks in macedonian banking sector. Thus, in traditional banking model is confirmed that the credit portfolio plays a dominant role in the operation of the banks. Loans are a major source of banks’ revenues, but at the same time they are also connected with highest risks. Problems in the credit portfolio are basic generators of problems, also in the other areas of banks’ operations and determine the profitable positions of the banks.

Branch banking network assessment using DEA: A benchmarking analysis—A note

What kinds of credit substitution, if any, occur when changes to banks’ minimum capital requirements induce them to change their willingness to supply credit? The question is of first-order importance given the emergence of ‘macro-prudential’ policy regimes in the wake of the global financial crisis, under which regulatory tools – in particular, minimum capital ratio requirements for banks – will be employed to control the supply of bank credit as part of the effort to improve the resilience of the financial system. Regulatory efforts to influence the aggregate supply of credit may be thwarted to some degree by ‘leakages’, as other credit suppliers substitute for the variation induced in the supply of credit by regulated banks. Credit substitution could occur through foreign banks operating domestic branches that are not subject to capital regulation by the domestic supervisor, or through bond and stock markets. The UK experience for the period 1998–2007 is ideally suited to address these questions, given its unique regulatory history (UK bank regulators imposed bank-specific and time-varying capital requirements on regulated banks), the substantial presence of both domestically regulated and foreign regulated banks, and the UK's deep capital markets. In this study we show that foreign-regulated branches are indeed an important source of credit substitution. Leakage by foreign regulated branches can occur either as a result of competition between branches and regulated banks that are parts of separate banking groups, or because a foreign banking group shifts loans from its UK-regulated subsidiary to its affiliated branch, which is not subject to UK capital regulation. Our results suggest the presence of both channels is important, but the responsiveness of affiliated branches is substantially stronger (roughly twice as strong). We do not find any evidence for leakages through capital markets. That result may reflect the possibility that under non-crisis conditions loan substitution through unregulated banks enjoys informational, monitoring and cost advantages over substitution via securities markets. This evidence has important policy implications: (1) because significant leakages result from interbank competition, in addition to loan transfers within affiliated entities of the same banking groups, forcing foreign banks to consolidate their operations in each country into either a foreign branch or a foreign subsidiary will not solve the leakage problem; and (2) international cooperation will be necessary to prevent regulatory arbitrage between domestically regulated banks and foreign branches. — Shekhar Aiyar, Charles W. Calomiris and Tomasz Wieladek

Safety-net benefits conferred on difficult-to-fail-and-unwind banks in the US and EU before and during the great recession

ABSTRACT: This paper analyzes how French cooperative banking groups adapted their organization, status and model to develop and grow, until the current financial crisis. It explores how they benefitted from evolutions in cooperative law that lowered financing constraints and increased the scope of their activities, becoming large banking groups, and identifies how these groups tried to develop a model of governance, characterized by internal control, which was partly dedicated to the members, but biased more and more towards the top of the organizational pyramid and to stockholders (the new stakeholders coming from the existence of listed vehicles). While the developing business model for cooperative banks appeared to confer a comparative advantage and was synonymous with efficiency before the financial crisis, it seems that the hybridization of the cooperative model has also been a source of conflict of interest, weakness in strategy and an incentive to increase risk. The third part of the article examines how French cooperative banking groups have been hurt by the recent crisis and whether different organizational and strategic features or choices may explain different levels of resilience to financial turmoil.

Multinational Banks and the Global Financial Crisis: Weathering the Perfect Storm?

Did the EBA Capital Exercise Cause a Credit Crunch in the Euro Area?

Current banking regulation does not fully support the crucial role of cross-border banks in financial market integration, particularly with respect to retail banking, which is considered the less integrated financial sector. Cross-border banks contribute to the integration of this market segment by extending their services beyond national boundaries through branches and/or subsidiaries. Supervision, however, is fragmented at national level and regulation imposes additional regulatory costs on subsidiary structures, hindering the most efficient allocation of resources through the internal capital market of the banking group.The current regulatory framework is based on cooperation and information exchange between national supervisors. Memoranda of Understanding and colleges, however, have proved insufficient, especially in the case of crisis management of cross-border institutions. Obstacles to asset transferability between group entities do not allow for fully consolidated supervision, centralized compliance and risk management of cross-border banking groups.The de Larosie`re Report and the Turner Review partially address such problems, suggesting a reform of the current European supervisory architecture. Both proposals assign macro-prudential supervision and supervisory standard setting to newly established European Authorities, while micro-prudential supervision would remain with national authorities and colleges of supervisors. The de Larosiere Report also proposes the coordination of colleges by a European Authority responsible for micro-prudential supervision, which would enact binding mediation and, eventually, overruling.The new supervisory architecture would benefit from a more harmonized European regulatory framework for cross-border banks, which would ease the coordination activities of supervisory colleges and the setting of common standards by the European Authority. An EC regulation on banking groups would set conditions for the recognition of the parent company’s management powers over the whole group, including asset transferability. As a result, branch and subsidiary structures would converge and become relatively fungible. Such regulation would also define ex ante rules on deposit insurance and lender of last resort, providing for a clear allocation of responsibilities, thus avoiding regulatory arbitrage and reducing systemic risk.

Efficiency of the Czech Banking Sector Employing the DEA Window Analysis Approach

Cross-Border Bank Lending, Risk Aversion and the Financial Crisis

Os fatores determinantes da geração de resultados e da estrutura de capital nas Instituições Financeiras têm sido temas amplamente discutidos nas Finanças Corporativas. O objetivo desta pesquisa é identificar o impacto da estrutura de capital na agregação de riqueza aos supridores de capital, considerando-se dois grupos de bancos com ações negociadas na BM&FBOVESPA: (i) grande porte e (ii) médio porte. Com base em uma amostra de nove bancos, sendo três de grande porte e seis de médio porte, e considerando os dados semestrais obtidos nas Demonstrações Financeiras entre 2009 a 2014, período após a crise bancária de 2008, são testadas três hipóteses com a utilização de técnicas estatísticas de regressão linear e quadrática, correlação de Pearson e valor-p. A pesquisa caracteriza-se como descritiva e com metodologia empírico-analítica, utilizando-se das medidas de Índice de Alavancagem (IA) e Economic Value Added (EVA®). Os resultados indicam para características próprias nos grupos estudados. O grupo de bancos de grande porte apresentou alta explicação da geração de EVA® a partir de sua estrutura de capital. Em contrapartida, no grupo de bancos de médio porte a estrutura de capital não apresentou capacidade de explicação para a geração de EVA®, contudo, a pesquisa identificou outros dois fatores com capacidade de explicação neste grupo: (i) as despesas de Provisão para Créditos em Liquidação Duvidosa (PCLD) e (ii) o indicador de eficiência operacional. A justificativa deste trabalho baseia-se na relevância e atualidade do tema para a comunidade acadêmica e pela representatividade da atividade bancária no desenvolvimento econômico do país.

Do depositors care about enforcement actions?

Czech Commercial Banks: Are they Liquid Enough to Finance Loan Commitments?

The present study attempts to analyse the cost analysis of the banking industry with special focus on optimum size of a bank. It studies the cost structure, economies/diseconomies as well as the optimum size of public sector banks for the period 1991–1992 to 2013–2014. Economies of scale relating to 26 public sector banks are worked out for selected years. The large banks operated at a scale, reaping economies in all the years, the exception being the year 2004–2005 achieving position of the minimum AC—. For the small banks, there are economies of scale in all the selected years. Both the banks groups did not show diseconomies with respect to total cost, even though there were diseconomies associated with other individual cost items. The minimum efficient size (MES) was attained by all the public sector banks in each of the years selected. JEL codes: D24, D210, D220, D240, D240, D250