Banking Internationalisation and the Expansion Strategies of European Banks to Brazil during the 1990s

This paper aims at analysing the determinants of the recent wave of European banks to Brazil in the context of the recent phase of banking internationalisation. The first part analyses the process of banking internationalisation from both an analytical and an historical approach. Focusing on the determinants of the banking internationalisation process, the paper shows that (i) the recent wave of banking internationalisation is characterised not only for financial institutions pursuing their existing relationships, but also and increasingly by a greater integration into the local market; (ii) banks operating in countries where the banking sector is larger and more profitable should be able to export a superior skill and are more likely to expand their activities abroad. The second part of the paper examines the determinants of the expansion of European banks in Brazil, as well as the expansion strategy of the four major European banks in Latin America – BSCH, BBVA, HSBC and ABN-Amro. In this regard, it shows that the recent wave of European banks entering Latin America and Brazil is determined by several factors, that include the process of restructuring the banking sector under the EMU; the dynamics of the internationalisation of the Spanish banks, since they have been the main players in the recent influx of foreign banks into Latin America; the process of market deregulation in the region since the early 1990s, in the broader context of economic and political reforms; the better prospects of the region for increasing returns to financial institutions compared to developed countries, as well as the potential gains in efficiency. Besides, it also shows that one of the common features of the four major European banks in Latin America – BSCH, BBVA, HSBC and ABNAmro – is that all the top four are big universal banks that choose to expand abroad as a strategy to expand their activities. More precisely, expanding abroad is not only a source of diversification of earnings, but also a way to strengthen their position in the European banking market under the pressure of economic and monetary union.

Financial Stability in European Banking: The Role of Common Factors

In this paper, I investigate the development and determinants of CDS spreads for 18 major European banks between December 2001 and January 2004 using daily data. I demonstrate that two nonstationary common factors can be extracted from the data that together explain most CDS spread variation across time and across banks. The group of German banks plus a few Southern-European banks appear to systematically have high CDS spreads and to be relatively sensitive to changes in the underlying factors. The dominating first common factor impacts on all banks in a similar direction, suggesting strong market integration. However, the quantitatively less important second factor has opposite effects on credit spreads of Southern European versus Northern European banks, suggesting some remaining country-specific or region-specific credit risk. Finally, I show that the first common factor may indeed be interpreted as a measure of market conditions as it is cointegrated with the European P/E ratio and the 2-year nominal interest ratecredit default swap spreads, contagion, cointegration, factor analysis

The threat of systemic risk in banking: evidence for Europe

This paper attempts to answer the question whether the threat of systemic risk in banking exists only on a national or on a European level. Following De Nicolo and Kwast (2001), mean rolling-window correlations between bank stock returns are used as a measure for interdependencies among European banks, and hence for the systemic risk potential in Europe. National influences on stock returns are eliminated by estimating a return generating model. There is some evidence that interdependencies among European banks have increased over the past 15 years and that the potential of systemic risk has shifted from a national level to a European level. --systemic risk,banking,contagion,Europe

The threat of systemic risk in banking: Evidence for Europe

This paper attempts to answer the question whether the threat of systemic risk in banking exists only on a national or on a European level. Following De Nicolo and Kwast (2001), mean rolling-window correlations between bank stock returns are used as a measure for interdependencies among European banks, and hence for the systemic risk potential in Europe. National influences on stock returns are eliminated by estimating a return-generating model. There is some evidence that interdependencies among European banks have increased over the past 15 years and that the potential of systemic risk has shifted from a national level to a European level. --systemic risk,banking,contagion,Europe

Payment scale economies, competition, and pricing

Payment scale economies affect banking costs, competition in payment services, and pricing. Our scale measure relates operating cost to physical measures of European banking "output", finding large economies. This differs from relating total cost to the value of balance sheet assets (the conventional approach). Interest expenses are excluded since differences here are primarily due to mix, not scale. Also, since standard indicators of competition can give inconsistent results, a revenue-based frontier measure is developed and applied to European banks, with little difference evident across countries. Existing differences in bank prices (EC report) are associated with small differences in competition. JEL Classification: E41, C53Bank competition, European banks, frontier analysis, Payment scale economies

Determinants of European banks' engagement in loan securitization

We analyze collateralized loan obligation (CLO) transactions by European banks (1997 - 2004), trying to identify firm-specific and macroeconomic factors influencing an institution's securitization decision. CLO issuance seems to be an appropriate funding tool for large banks with high risk and low liquidity. However, risk transfer turns out to be limited in the extremes. Controlling for fixed effects, we find that fixed costs of securitization are surmountable also for smaller institutions. Interestingly, commercial banks seem to use loan securitization to access capital-market based businesses and the associated fee income. Regulatory capital arbitrage does not appear to have driven the market. -- Trotz des rasanten Wachstums des Marktes für Kreditrisikotransfer sind die Motive der Banken für die Verbriefung von Kreditportfolios noch nicht vollständig geklärt. Kreditverbriefungen führen zwar zu höherer Liquidität, einer Reduktion von Kredit- und Zinsrisiken, einer Steigerung von Provisionseinkommen, möglicherweise auch einer Verbesserung der Kapitalstruktur, jedoch entscheiden sich einige Banken trotzdem gegen eine Strukturierung und Weiterreichung ihrer Kreditportfolios. Unter den Nachteilen der Verbriefung werden unter anderem die relativ hohen fixen Kosten der erstmaligen Errichtung einer Verbriefungsstruktur sowie eventuelle Steuernachteile von nicht auf der Bilanz gehaltenen Krediten genannt. Weiterhin ermöglicht das neue Basel-II Regelwerk keine ?Arbitrage regulatorischen Eigenkapitals? via Kreditverbriefung mehr, anders als die weniger risikosensitive Eigenkapitalunterlegung unter den alten Basel-Richtlinien. Unsere Studie analysiert ?Collateralized Loan Obligation? (CLO) Transaktionen von Europäischen Banken in den Jahren 1997-2004. Ziel ist es, Faktoren zu isolieren, die die Entscheidung einer Bank, Kredite zu verbriefen, beeinflusst haben. Während wir einen Einfluss regulatorischer Arbitrage nicht vollkommen ausschließen können, zeigt unsere Studie, dass die wesentlichen Bestimmungsfaktoren vielmehr individuelle Faktoren der Banken sind. So ist die Wahrscheinlichkeit, dass eine Bank Kredite verbrieft, umso höher, je größer die Bank, je geringer ihre Liquidität und je höher ihr erwartetes Kreditrisiko ist. Kreditverbriefungen werden offensichtlich als Möglichkeit des Kreditrisikotransfers genutzt. Allerdings zeigt sich, dass Banken mit dem höchsten Kreditrisiko ihre Verbriefungsaktivitäten mit zunehmendem Risiko einstellen, so dass die Risikotransferfunktion nur begrenzt zu nutzen zu sein scheint. Für am Aktienmarkt notierte Banken treffen obige Aussagen noch stärker zu. Interessanterweise zeigt sich hier sogar ein ?negativer? regulatorischer Arbitrageeffekt : Banken mit niedrigem regulatorischem Eigenkapital verbriefen weniger Kredite als Banken mit höherem Eigenkapital. Die neuen Eigenkapitalrichtlinien nach Basel II sollten daher das zukünftige Wachstum des Kreditrisikotransfermarktes nicht beeinträchtigen. Bemerkenswerterweise scheint auch die Bankengröße eine weniger wichtige Rolle zu spielen als zunächst gedacht. Auch kleinere Banken sind somit in der Lage, die mit einer Kreditverbriefung verbundenen Fixkosten zu tragen. Es ist zu vermuten, dass gerade traditionelle Kreditbanken die Verbriefung von Kreditportfolios unter anderem auch nutzen, um indirekt dem ?investment-banking? verwandte Geschäftsbereiche und die entsprechenden Provisionseinkommen zu erschließen.Securitization,credit risk transfer,collateralized loan obligations

Technical and Allocative Efficiency in European Banking

This paper specifies an empirical framework for estimating both technical and allocative efficiency, which is applied to a large panel of European banks over the years 1996 to 2003. Our methodology allows for self-consistent measurement of technical and allocative inefficiency, in an effort to address the issue known in the literature as the Greene problem. The results suggest that, on average, European banks exhibit constant returns to scale, that technical and allocative efficiency are close to 80% and 75% respectively, and that overall economic efficiency shows a clearly improving trend. We also show through the comparison of various estimators that models incorporating only technical efficiency tend to overestimate it.Technical and allocative efficiency; Translog cost function; Maximum likelihood; European banking

Revisiting the Merger and Acquisition Performance of European Banks

The study examines the value creation of Merger and Acquisition (M&A) deals in European Banking from 1990-2004. This is performed, first, by examining the stock price reaction of banks to the announcement of M&A deals and, second, by analysing the determinants of this reaction. The findings provide evidence of value creation in European banks as the shareholders of the targets have benefited from positive and (statistically) significant abnormal returns while those of the acquirers earn small negative but non-significant abnormal returns. In the case of the shareholders of the acquirers, domestic M&As and especially those between banks with shares listed on the stock market, seem to be more beneficial compared to cross-border ones or those when the target is unlisted. Shareholders of the targets earn in all cases positive abnormal returns. Finally, although the link between abnormal returns and fundamental characteristics of the banks is rather weak, it appears that the acquisition of smaller, less efficient banks generating more diversified income are more value creating, while acquisition of less efficient, liquid and characterised by higher credit risk banks is not a value creating option.Bank mergers; mergers and acquisitions; abnormal returns

Bank Efficiency: Evidence from a Panel of European Banks

The goal of this paper is to investigate the efficiency of the banking systems in eight European countries over the period 1994 to 2008 by using the production frontier methodology. The paper shows that risk factors along with a size variable should be taken into account, otherwise inefficiency tends to be overstated.Bank efficiency, Stochastic frontier, European banks

MANAGEMENT OF BANKING RISKS: ROMANIAN BANKS VERSUS EUROPEAN BANKS

The role of the banking system as essential link the savinginvestment process makes of its stability a priority on the agenda of the public authorities. One of the major objectives of a central bank is to prevent the risk by promoting an efficient bank monitoring, which should contribute to the achievement of the stability and viability of the entire financial system. Thus, the central banks developed methods and processes for the continual supervising and evaluation of the banks – premises of the prevention of the apparition of a great variety of bank crisis or other unpleasant surprises regarding the entities of the banking system.model, banking risk, trend analysis, rating system