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. Cover image © Michelle Chaplow / Alamy Stock Photo 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. v 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.