Palgrave Macmillan Studies in Banking and Financial Institutions

Series Editor

Philip Molyneux Bangor University, UK Aim of the Series Th e Palgrave Macmillan Studies in Banking and Financial Institutions series is international in orientation and includes studies of banking systems in particular countries or regions as well as contemporary themes such as Islamic Banking, Financial Exclusion, Mergers and Acquisitions, Risk Management, and IT in Banking. Th e books focus on research and practice and include up to date and innovative studies that cover issues which impact banking systems globally.

More information about this series at http://www.springer.com/series/14678 Santiago Carbó Valverde • Pedro Jesús Cuadros Solas Francisco Rodríguez Fernández Editors Liquidity Risk, Effi ciency and New Bank Business Models Editors Santiago Carbó Valverde Pedro Jesús Cuadros Solas Bangor Business School University of Granada U K Spain

Francisco Rodríguez Fernández University of Granada Spain

Palgrave Macmillan Studies in Banking and Financial Institutions ISBN 978-3-319-30818-0 ISBN 978-3-319-30819-7 (eBook) DOI 10.1007/978-3-319-30819-7

Library of Congress Control Number: 2016948720

© Th e Editor(s) (if applicable) and Th e Author(s) 2016 Th is work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifi cally the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfi lms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. Th e use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specifi c statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. Th e publisher, the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, express or implied, with respect to the material contained herein or for any errors or omissions that may have been made.

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Printed on acid-free paper

Th is Palgrave Macmillan imprint is published by Springer Nature Th e registered company is Springer International Publishing AG Switzerland Acknowledgements

First and foremost we thank all our contributors, without whom this edited volume would not have been possible. We also wish to express our gratitude to all the participants in the 2015 Wolpertinger Conference, organised by the European Association of University Teachers of Banking and Finance, for their insightful com- ments on all the papers included in this volume. We are also grateful to Professor Philip Molyneux (Professor of Banking and Finance and Dean of the College of Business, Law, Education and Social Sciences of Bangor University), Editor-in-Chief of the Palgrave Macmillan Studies in Banking and Financial Institutions Series for approving our book proposal and also for his support during the process of collating the contributions to this volume. Also many thanks to the Palgrave Macmillan team, Aimee Dibbens and Alexandra Morton, for their support during the publishing process.

Contents

1 Introduction 1 Santiago Carbó-Valverde , Pedro J. Cuadros-Solas and Francisco Rodríguez-Fernández

2 A Note on Regulatory Arbitrage: Bank Risk, Capital Risk, Interest Rate Risk and ALM in European Banking 5 Magnus Willesson

3 Basel III, Liquidity Risk and Regulatory Arbitrage 35 Viktor Elliot and Ted Lindblom

4 OTC Derivatives and Counterparty Credit Risk Mitigation: Th e OIS Discounting Framework 57 Paola Leone , Massimo Proietti , Pasqualina Porretta and Gianfranco A. Vento

5 Diversifi cation and Connections in Banking: First Findings 93 Claudio Zara and Luca Cerrato

vii viii Contents

6 Banking System and Financial Exclusion: Towards a More Comprehensive Approach 127 Marta de la Cuesta González , Cristina Ruza y Paz-Curbera and Beatriz Fernández Olit

7 Small and Medium-Sized Banks in Central and Eastern European Countries 163 Katarzyna Miko ł ajczyk

8 Stock Returns and Bank Ratings in the PIIGS 205 Carlos Salvador Muñoz

9 Value Creation Drivers in European Banks: Does the Capital Structure Matter? 241 Josanco Floreani , Maurizio Polato , Andrea Paltrinieri and Flavio Pichler

10 Liquidity Mismatch, Bank Borrowing Decision and Distress: Empirical Evidence from Italian Credit Co-Operative Banks 273 Gianfranco Vento , Andrea Pezzotta and Stefano Di Colli

Index 301 List of Figures

Fig. 2.1 Th e relationships between capital risk, interest rate environments, ALM and bank risk considered in the hypotheses 11 Fig. 2.2 Risk and capital level outcomes when regulatory arbitrage is considered by a less capitalised bank 14 Fig. 2.3 Risk and capital level outcomes when regulatory arbitrage is considered in a heavily capitalised bank 16 Fig. 3.1 Th e liquidity coverage ratio 40 Fig. 3.2 Th e net stable funding ratio 40 Fig. 3.3 Monthly bank lending at diff erent maturities to the corporate sector (excluding fi nancial fi rms) between 2007 and 2015 48 Fig. 3.4 Contractual relationships in the VRDB market 50 Fig. 3.5 Transaction fl ow chart for VRDBs designed to avoid the LCR 50 Fig. 4.1 Collateral agreement at time t : Bank X post collateral 73 Fig. 6.1 Research hypothesis 136 Fig. 6.2 Assessment model 137 Fig. 6.3 Histogram of Branch Reduction 146 Fig. 6.4 Histogram of Inhabitants per Branch 146 Fig. 7.1 Average value of bank total assets for diff erent classifi cation criteria 172

ix x List of Figures

Fig. 7.2 Rate of loan growth, by bank absolute size (left-hand side) and market share (bottom chart), % 175 Fig. 7.3 Loans-to-total-assets ratio, by bank absolute size (left-hand side) and market share (bottom chart), % 175 Fig. 7.4 Non-interest income-to-total-income ratio, by bank absolute size (left-hand side) and market share (bottom chart), % 177 Fig. 7.5 Deposits-to-total-assets ratio, by bank absolute size (left-hand side) and market share (bottom chart), % 177 Fig. 7.6 Loans-to-deposits ratio, by bank absolute size (top chart) and market share (bottom chart) 178 Fig. 7.7 Leverage ratio, by bank absolute size (top chart) and market share (bottom chart), % 180 Fig. 7.8 Liquidity, by bank absolute size (top chart) and market share (bottom chart), % 181 Fig. 7.9 Non-performing loans ratio, by bank absolute size (top chart) and national banking assets distribution (bottom chart), % 182 Fig. 7.10 Provisioning coverage ratio, by bank absolute size (top) and market share (bottom), % 183 Fig. 7.11 Net interest margin, by bank absolute size (top) and market share (bottom), % 184 Fig. 7.12 Cost-to-income ratio, by bank absolute size (top) and market share (bottom), % 185 Fig. 7.13 Return on assets, by bank absolute size (top) and market share (bottom), % 185 Fig. 7.14 Return on equity, by bank absolute size (top) and market share (bottom), % 186 Fig. 9.1 Estimates for the volatility of asset returns derived from the Ronn and Verma model 257 Fig. 10.1 Liquidity premium proxies from OIS rates 281 Fig. 10.2 Liquidity premium proxy 282 Fig. 10.3 Aggregate LMI 284 Fig. 10.4 Asset-side and liability-side LMI 285 Fig. 10.5 LMI and LMI under stress scenario 286 List of Tables

Table 2.1 Presentation of data, defi nition of variables and interpretation of variables 20 Table 2.2 Summary statistics on bank, ALM and interest rate risk variables 23 Table 2.3 Random eff ect regressions on capital risk and bank risk 25 Table 2.4 Random eff ect regressions on the association between changes in ETA and ALM risk 26 Table 2.5 Random eff ect regressions on ALM risk and interest rate environments 27 Table 3.1 Nordea’s net balance stable funding from 2007 to 2014 47 Table 4.1 Th e CVA in CRD IV 62 Table 4.2 Other legal sources of counterparty risk 63 Table 4.3 OIS vs Eonia curve 75 Table 4.4 Zero-coupon rate 77 Table 4.5 Swap curve vs Euribor 6 m 78 Table 4.6 Forward rate curve 79 Table 4.7 Fixed cash-fl ow interest 81 Table 4.8 Floating cash-fl ow interest 82 Table 4.9 Hypothetical portfolio derivatives and foreign exchange contracts 83 Table 4.10 MtM of the portfolio 84 Table 4.11 Simulation of capital requirement 85 Table 4.12 Synthesis of new fi nancial characteristics of the portfolio 86

xi xii List of Tables

Table 4.13 Simulation of the capital requirements based on the new evidence contained in Table 4.11 86 Table 5.1 Literature review by research fi eld 93 Table 5.2 Final sample banks by country and continent 97 Table 5.3 Business segments and their aggregations 98 Table 5.4 Base variables 100 Table 5.5 Ratios 100 Table 5.6 Variables employed in cost of equity capital computation 101 Table 5.7 Geographic diversifi cation variables 101 Table 5.8 Dummy variables 102 Table 5.9 Cross-sectional regression (OLS): estimate of divisional equity (equity/total Assets) missing data. Divisions: retail, private and corporate 105 Table 5.10 Cross-sectional regression (OLS): estimate of divisional total assets (total assets/total revenues) missing data. Divisions: retail, private and corporate 106 Table 5.11 Cross-sectional regression (OLS): estimate of divisional credits (credits/total assets) missing data. Divisions: retail, private and investment 107 Table 5.12 Cross-sectional regression (OLS): estimate of divisional deposits (deposits/total assets) missing data. Divisions: retail and private 108 Table 5.13 Linear correlation analysis: retail vs. corporate and retail vs. DBC 109 Table 5.14 Summary statistics: base variables at business segment level 115 Table 5.15 Summary statistics: ratios at business segment levela 117 Table 5.16 Summary statistics: variables representing performance and effi ciency at business level, revenue mix, size and performance at equity level 119 Table 5.17 Summary statistics: geographic diversifi cation variables 120 Table 5.18 Summary statistics: dummy and control variables 121 Table 6.1 Relevant socio-economic determinants 132 Table 6.2 Variables and information sources included in the analysis 140 Table 6.3 Expected sign of covariates based on previous literature 141 Table 6.4 Determinants of branch reduction using OLS and QR in the city of Madrid (information at LAU level 2) 145 Table 6.5 Determinants of branch reduction using OLS and QR in the Madrid Metropolitan Area (information at LAU level 2) 148 List of Tables xiii

Table 6.6 Determinants of inhabitants per branch using OLS and QR in the city of Madrid (information at LAU level 2) 149 Table 6.7 Determinants of inhabitants per branch using OLS and QR in the Madrid Metropolitan Area (information at LAU level 2) 151 Table 6.8 Population of Madrid city and its Metropolitan Area 155 Table 7.1 Th e dataset: geographic distribution 167 Table 7.2 Classifi cation criteria 169 Table 7.3 Banks’ allocation to size classes (number of banks), using diff erent classifi cation criteria, 2013 170 Table 7.4 Dataset by size class 171 Table 7.5 Technical and scale effi ciency scores 189 Table 7.6 Absolute size of banks in diff erent size classes: total assets (EUR bn) 193 Table 7.7 Dataset: breakdown by country and size class 195 Table 7.8 Description of fi nancial ratios 197 Table 7.9 Investment strategy of CEE banks, breakdown by size group 198 Table 7.10 Safety of CEE banks, breakdown by size group 199 Table 7.11 Performance of CEE banks, breakdown by size group 200 Table 8.1 Distribution of banks’ rating signals in the sample by country 210 Table 8.2 Descriptive statistics of bank issuer ratings 213 Table 8.3 Eff ect of rating signals issued by Standard and Poor’s on cumulative abnormal returns 220 Table 8.4 Eff ect of rating signals issued by Fitch on cumulative abnormal returns 222 Table 8.5 Eff ect of rating signals issued by Moody’s on cumulative abnormal returns 224 Table 8.6 Granger causality test, before the crisis 227 Table 8.7 Granger causality test, fi nancial crisis 229 Table 8.8 Ratings scale of the rating agencies and the numerical scale defi ned 234 Table 9.1 Sample banks by assets and market capitalisation 251 Table 9.2 Variables employed in the study 253 Table 9.3 Equity beta, betaGO, betaAIP: descriptive statistics 255 Table 9.4 Beta, analysis of variance 256 Table 9.5 Volatility of asset returns, ANOVA 257 Table 9.6 Volatility of asset returns, regression results 258 xiv List of Tables

Table 9.7 Th e drivers of beta 259 Table 9.8 Th e drivers of beta (time dummies) 261 Table 9.9 Relations between equity betas and growth opportunities 262 Table 9.10 Th e drivers of βGO 262 Table 9.11 Th e drivers of βGO (time dummies) 263 Table 10.1 Key statistics of the sample of BCCs 280 Table 10.2 Th e relationship of LMI with key bank characteristics 288 Table 10.3 Th e relationship of LRI with key bank characteristics 289 Table 10.4 Th e relationship of LMI/LRI and bank’s borrowing decision 290 Table 10.5 LMI/LRI and DGS intervention probability 291 Table 10.6 Assets liquidity weights _t,a k t,k ( = 1- m ) 293 Table 10.7 Liability liquidity weights _ t l …T k e t k , ( = - ¢ ) 294 Notes on Contributors

Editors

Santiago Carbó-Valverde is Professor of Economics and Finance at Bangor University (UK). He holds a BSc in Economics from the University of Valencia, and a PhD in Economics and an MSc in Banking and Finance from the University of Wales, Bangor. He was formerly Professor of Economics at the University of Granada (Spain). He is Director of Financial Services Studies for the Spanish Savings Banks Association (FUNCAS). He is researcher at the Institute of Economics Research of Valencia (Ivie). He is President of the Rating Committee of Axexor, an independent adviser to Cecabank and President of Game Stores Iberia. He has been an adviser to the European Central Bank, the Federal Reserve Bank of Chicago, fi nancial institutions such as BMN and to prestigious international fi rms. He has published in economics and fi nance journals such as the European Economic Review , Review of Finance, Journal of Money, Credit and Banking,Review of Eco- nomics and Statistics, Journal of International Money and Finance , and Journal of Banking and Finance . He has been a speaker at international conferences and seminars including the G-20 forum and several central banks conferences. Pedro Jesús Cuadros-Solas is lecturer in Economics and researcher in Banking and Finance at the University of Granada (Spain). He holds a BSc in Business

xv xvi Notes on Contributors

Management and Law from the University of Jaén (Spain) as well as an MSc in Economics from the University of Granada. He is a member of the Department of Economic Th eory and History at the University of Granada. He has been visiting scholar at the Bangor Business School (UK) and at the University of St Andrews (UK). His main research interests lie in the areas of banking and fi nance, especially in corporate fi nance, securitization, underwriting and the role of reputation for banks and non-fi nancial fi rms in the capital markets. Francisco Rodríguez-Fernández is Professor of Economics at the University of Granada (Spain). He holds a BSc in Business and Economics and a PhD in Economics from the University of Granada. He is Senior Economist at the Spanish Savings Banks Foundation (FUNCAS). He has spent time as a visiting scholar at the University of Modena, the Bangor Business School and the Federal Reserve Bank of Chicago. He is a consultant for several prestigious institutions including the European Commission, the European Research Framework Programme, the Spanish Ministry of Labour, KPMG and Euro 6000. His research work has been published in international economics and fi nance journals such as the European Economic Review, Review of Finance, Journal of Money, Credit and Banking, Review of Eco- nomics and Statistics, Journal of International Money and Finance and Jour- nal of Banking and Finance . His main research interests are the economics of banking, banking regulation, fi nance and economic growth, industrial organization and payment instruments.

Contributors

Luca Cerrato holds a Master’s in Accounting and Finance from Bocconi University. Luca is a teaching assistant in Bocconi University’s Department of Finance and an analyst at Boston Consulting Group’s Milan offi ce. Marta de la Cuesta González , PhD holds a PhD in Economics and Business Management. She is a senior Lecturer in the Applied Economics Department at the National University of Distance Education (UNED), Spain. She is Director of the Master’s programme in Sustainability and Corporate Social Responsibility and a former Vice-Chancellor of Economic Aff airs at UNED. She is a member of the Spanish Ministry of Employment’s Corporate Social Responsibility Board, Chair of Corporate Responsibility and Sustainability for Telefónica and Notes on Contributors xvii an independent member of the board of Banca Cívica. Her main research interest lines are in the areas of banking and fi nance, corporate social responsibility, socially responsible investment and microfi nance. She teaches Banking, Corporate Social Responsibility and Sustainable Finance at undergraduate and postgraduate levels. Stefano Di Colli (PhD in Money and Finance and MSc in Econometrics at University of Rome Tor Vergata) is Senior Economist at Federcasse, lecturer in Economics and Finance at the University of Teramo and lecturer in Financial Econometrics at SNA (Italian National School of Public Administration). He has also been at the University of Cambridge (2013), Cass Business School (2012 and 2013), Queen Mary College (2011) and the University of Copenhagen (2005), and was a visiting fellow at the ICMA Centre, University of Reading (2006–2007). His fi elds of interest include monetary economics, applied economics and banking. He is the author of several papers and books. Viktor Elliot is Assistant Professor of Banking, Finance and Accounting at the School of Business, Economics and Law, University of Gothenburg. His interests include performance management, risk and regulatory implications in banking, funds transfer pricing and savings banks. His current research is conducted within the areas of fi nancial exclusion, supply chain fi nance and regulatory implications in banking. Beatriz Fernández Olit is PhDstudent in Economics in the Applied Economics Department, National University of Distance Education (UNED), she has a degree in Business Economics from the University of Alcalá (Madrid), with advanced studies in International Business at the University of Erlangen- Nurenberg. She is Coordinator of the Corporate Social Responsibility (CSR) and Ethical Investments Department of Economistas sin Fronteras Foundation, and Vice-president of the CSR Spanish Observatory. She is also a former Vice- president of the Spanish Social Investment Forum (SPAINsif). Her main research interests are CSR, socially responsible investments, ethical banking and fi nancial inclusion. She teaches on several Master’s programmes (UNED, University of Alcalá, University of Cantabria and Polytechnic University of Madrid). Josanco Floreani is Associate Professor of Banking and Finance. His research fi elds mainly relate to the securities and exchange industry. He is co-author of various publications which address issues related to the industry structure, measurement of performance and value for securities exchanges, and regulation. xviii Notes on Contributors

Paola Leone is Professor of Banking and Finance at Sapienza University of Rome, Italy. She is a member of the academic board for the PhD in Management, Banking and Commodity Science, Chairperson of the Business Science gradu- ate degree and Director of the Master’s programme in Banking and Finance of Management at Sapienza. Professor Leone is the author of several books and has published articles on banking and fi nance in prestigious journals. Her main research interests are banking, capital markets, risk management, mutual guarantee institutions and credit risk mitigation. She acts as a consultant and trainer for various fi nancial intermediaries, public and private entities and consulting fi rms. Ted Lindblom is a Professor and member of the Business Administration PhD Research Committee and the Academic Appointments Committee at the School of Business, Economics and Law at the University of Gothenburg. His current research mainly concerns corporate fi nance and banking. For almost thirty years he has been studying regulation, risk management, market structural changes and the pricing of payment services, princi- pally in retail banking. He has authored and co-authored several articles and books on these subjects. Katarzyna Mikołajczyk is Assistant Professor of Finance and Banking at Cracow University of Economics. Her main research interests relate to transi- tion economies and include the outcomes of privatization programmes, bank mergers and acquisitions, multinational banking groups operating in Central and Eastern European countries and the impact of structural changes in the banking industry on effi ciency and stability. Andrea Paltrinieri is a research scholar in Financial Markets and Instruments at the University of Verona. Research topics include the evolution of fi nancial systems, stock exchange mergers in the emerging markets, asset management and institutional investors, with a particular focus on sovereign wealth funds. Andrea Pezzotta is a Senior Adviser in the Governance and Risk Management Department at the Italian Federation of Co-operative Banks (Federcasse), where he is in charge of prudential and accounting regulation, represents Federcasse in several national and international fora and coordinates internal working groups on these issues. He is currently Chairman of the Accounting and Statutory Audit Working Group of the European Association of Co-operative Banks (EACB). He has published articles in the fi eld of accounting and prudential regulation. Notes on Contributors xix

Flavio Pichler is Associate Professor in Banking and Finance at the University of Verona. Research topics include the theory, regulation and supervision of fi nancial systems, the economics of insurance, banking and risk management. Maurizio Polato is Professor of Banking and Finance at Udine University. His research fi elds mainly relate to the securities and exchange industry, and bank performance. He is author of various publications on the topic which address issues related to the industry structure, measurement of performance and value for securities exchanges, and regulation. Pasqualina Porretta is Associate Professor in Banking and Finance at Sapienza University of Rome, Italy, where she teaches Risk Management in Banking and Insurance, and Derivatives. She is a member of the academic board for the PhD in Management, Banking and Commodity Science at Sapienza. Her main research interests are risk measurement and management (credit risk, market risk, liquidity risk, counterparty risk), capital regulatory frameworks, fi nancial derivatives, credit guarantee institutions and microcredit. Professor Porretta is the author of books and papers on banking and fi nancial topics. She acts as consultant and trainer for various fi nancial intermediaries, microfi nance institutions, public bodies and consulting fi rms. Massimo Proietti is currently Head of the Financial Solutions Unit at Iccrea Banca. He teaches Financial Markets and Derivatives Pricing on the Master’s programme in Banking and Finance in the Management Department, Faculty of Economics, at Sapienza University of Rome, Italy. He is the author of two books dedicated to fi nancial engineering and of papers in the fi eld of risk measurement and management (markets, credit, liquidity, counterparty) and capital requirements. Cristina Ruza y Paz-Curbera holds a PhD in Economics from the National University of Distance Education (UNED), a degree in Economics from Alcalá de Henares University (Madrid), a Master’s degree in Public Finance and Taxation from the Offi cial College of Economists (Madrid) and a Master’s degree with distinction in Banking and Finance from the University of Wales (Bangor). Currently she is lecturer in Banking and Financial Systems in the Applied Economics Department at UNED. She has published several articles in national and international journals related to savings behaviour, risk analysis in fi nancial institutions, household indebtedness and microfi nance, among others. She has been Director of the Centre for Guidance, Information and Employment at UNED. xx Notes on Contributors

Carlos Salvador holds a PhD in Banking and Quantitative Finance (with spe- cial honours) and a degree in Economics from the University of Valencia. He is currently Assistant Professor of Economics at CUNEF University and a researcher at FUNCAS. He was a researcher in the Department of Eco- nomic Analysis at the University of Valencia and a visiting researcher at the College of Business at Bangor University (UK) in 2012. His fi elds of specialization are the fi nancial economy and macroeconomics. His most outstanding research works have been published in national and international scientifi c journals (Journal of Financial Stability, , Th e European Financial Review , Regional and Sectoral Economic Studies , BBVA Foun- dation , Papeles de economía)and books published by Palgrave Macmillan studies. Gianfranco A. Vento , (MSc, PhD) is Professor of Banking and Finance at Regent’s University in London, where he leads the Centre for Banking and Finance, and at Guglielmo Marconi University in Rome. He is the author of four books and many articles on fi nancial topics and a member of the editorial advisory boards of several international academic journals. He has been a consultant to central banks, governments, banks and microfi nance institutions on risk management, fi nancial regulation and other fi nancial topics. Before beginning his academic career, he worked for fi ve years in the Banking Supervision Department at the Bank of Italy. Magnus Willesson is Senior Lecturer at Linnæus University, Växjö (Sweden) and a risk and fi nancial operations consultant. He obtained his PhD from the University of Gothenburg. His current teaching includes banking, fi nancial institutions and markets, strategic risk management and corporate fi nance. His research is focused on how risk, effi ciency and the governance of actors in the fi nancial sector are aff ected by changing environments (such as tech- nology, market changes, regulation and management requirements). His research has resulted in several internationally published journal articles and book chapters covering subjects such as risk taking and risk management in banks, banking effi ciency, operational risk in banks and banks’ adoption of the Basel II and Basel III accords, and the cost effi ciency and pricing of payments. Claudio Zara is Professor of Banking and Finance in the Department of Finance at Bocconi University, Milan and in the Financial Institutions Notes on Contributors xxi

Department at SDA Bocconi School of Management. Claudio has a degree in Business Administration from Bocconi University. He was a visiting fellow at the Warwick Business School, University of Warwick and in the Depart- ment of Accounting and Finance at the National University of Singa- pore. His research interests are corporate banking and corporate fi nance, venture capital and private equity, fi nancial analysis and management of fi nancial institutions. Claudio is also an independent director at Credem Private Equity, the equity investment arm of Credito Emiliano Group.