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An Analysis of Financial Crisis Consequences and The UNIVERSITY OF LJUBLJANA FACULTY OF ECONOMICS MASTER’S THESIS AN ANALYSIS OF FINANCIAL CRISIS CONSEQUENCES AND THE IMPACT OF SUBSEQUENT REGULATORY REFORMS ON THE SYSTEMICALLY IMPORTANT FINANCIAL INSTITUTIONS IN THE EU FROM 2007 TO 2015 Ljubljana, March 2018 KRISTIAN JEREBIČ AUTHORSHIP STATEMENT The undersigned Kristian Jerebič, a student at the University of Ljubljana, Faculty of Economics, (hereafter: FELU), author of this written final work of studies with the title An analysis of financial crisis consequences and the impact of subsequent regulatory reforms on the systemically important financial institutions in the EU from 2007 to 2015, prepared under supervision of Marko Košak, PhD. DECLARE 1. this written final work of studies to be based on the results of my own research; 2. the printed form of this written final work of studies to be identical to its electronic form; 3. the text of this written final work of studies to be language-edited and technically in adherence with the FELU’s Technical Guidelines for Written Works, which means that I cited and / or quoted works and opinions of other authors in this written final work of studies in accordance with the FELU’s Technical Guidelines for Written Works; 4. to be aware of the fact that plagiarism (in written or graphical form) is a criminal offence and can be prosecuted in accordance with the Criminal Code of the Republic of Slovenia; 5. to be aware of the consequences a proven plagiarism charge based on the this written final work could have for my status at the FELU in accordance with the relevant FELU Rules; 6. to have obtained all the necessary permits to use the data and works of other authors which are (in written or graphical form) referred to in this written final work of studies and to have clearly marked them; 7. to have acted in accordance with ethical principles during the preparation of this written final work of studies and to have, where necessary, obtained permission of the Ethics Committee; 8. my consent to use the electronic form of this written final work of studies for the detection of content similarity with other written works, using similarity detection software that is connected with the FELU Study Information System; 9. to transfer to the University of Ljubljana free of charge, non-exclusively, geographically and time-wise unlimited the right of saving this written final work of studies in the electronic form, the right of its reproduction, as well as the right of making this written final work of studies available to the public on the World Wide Web via the Repository of the University of Ljubljana; 10. my consent to publication of my personal data that are included in this written final work of studies and in this declaration when this written final work of studies is published. Ljubljana, ________________________ Author’s signature: _________________________ TABLE OF CONTENTS INTRODUCTION ............................................................................................................... 1 1 EXCURSION INTO THE FINANCIAL CRISIS OF 2007/08................................. 4 1.1 Banking basics ........................................................................................................ 4 1.1.1 The purpose of FIs ........................................................................................... 4 1.1.2 Types of banks ................................................................................................. 5 1.2 Conflicts of interest in banking ............................................................................... 6 1.3 Securities trading .................................................................................................... 6 1.4 Off-balance sheet activities ..................................................................................... 7 1.5 The originate to distribute model ............................................................................ 8 1.5.1 The pre-crisis real estate market in the USA ................................................... 8 1.5.2 Securitization ................................................................................................. 10 1.6 Capital adequacy regulation .................................................................................. 13 1.6.1 Basel .............................................................................................................. 13 1.6.1.1 Basel I ..................................................................................................... 13 1.6.1.2 Basel II ................................................................................................... 14 1.6.2 Supervision .................................................................................................... 16 1.7 The great recession in a nutshell ........................................................................... 16 2 REFORMS OF THE FINANCIAL SYSTEM TO ENSURE BETTER BANKS’ SOLVENCY ................................................................................................................ 17 2.1 Basel III ................................................................................................................. 17 2.1.1 The European Union ...................................................................................... 19 2.1.1.1 Capital requirement directive ................................................................. 19 2.1.1.2 Supervision, Resolution, Insurance: Pillars of the European banking union ................................................................................................................ 21 2.2 SIFIs: Criteria and special regulation ................................................................... 23 2.3 Criticism of Basel III with the emphasis on the SIFIs .......................................... 28 3 INTRODUCTION TO STUDIES CONDUCTED ON THE SIFIS SUBJECT MATTER .................................................................................................................... 29 3.1.1 Past studies .................................................................................................... 31 3.1.2 The current studies......................................................................................... 32 i 3.1.3 Highlights ...................................................................................................... 35 4 EMPIRICAL ANALYSIS ......................................................................................... 36 4.1 Variables tested: Hypotheses and the descriptive statistics ............................ 37 4.1.1 Introduction ................................................................................................... 37 4.1.2 Hypotheses .................................................................................................... 40 4.1.3 Descriptive statistics ...................................................................................... 41 4.1.3.1 Total regulatory capital – Capital ratio ................................................... 41 4.1.3.2 Asset-based variables .............................................................................. 43 4.1.3.3 Income-based variables ........................................................................... 48 4.1.3.4 Equity-based variables ............................................................................ 51 4.1.3.5 Macroeconomic conditions: Real per capita GDP growth ..................... 53 4.1.3.6 Results of Europe wide stress test in 2014 .............................................. 55 4.2 Methodology and the Empirical model ............................................................ 55 4.3 The hypotheses’ testing ...................................................................................... 58 4.3.1 Multivariate analysis of variance (MANOVA) ............................................. 58 4.3.2 The results ..................................................................................................... 59 4.3.3 Interpretation of the results with possible implications ................................ 61 4.3.4 Shortcomings of the model ........................................................................... 63 CONCLUSION .................................................................................................................. 65 REFERENCE LIST .......................................................................................................... 67 APPENDIXES ii LIST OF FIGURES Figure 1. An Asset-backed security (simplified) ................................................................. 11 Figure 2. Incremental implementation of the minimum capital requirements (CRD IV) ... 21 LIST OF TABLES Table 1. List of variables tested in this paper ...................................................................... 40 Table 2. Average capital ratio (%), 2007-2015 ................................................................... 43 Table 3. The average total assets for the observed samples, 2007-2015 ............................. 44 Table 4. Average RWA/Total assets for the observed samples, 2007-2015 ....................... 45 Table 5. Average Gross Loans (€mil) for the observed samples, 2007-2015 ..................... 46 Table 6. Average Government securities for the observed samples, 2007-2015 ................ 47 Table 7. Average Net interest margin for each sample, 2007-2015 .................................... 49 Table 8. Average Net fees & Commissions/Average earning assets for each sample, 2007- 2015
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