Digital Transformation – Why Do Some Significant Banks Fall Behind

This paper shows that larger banks and better capitalised banks invest more in computer software. These findings could reflect that larger banks can attain greater benefits from computer software and that better capitalised banks have more resources to make larger software investments. All the same, smaller and less capitalised banks will also have to make substantial software investments to maintain sustainable businesses, something that supervisors will need to point that out to these banks

Non-performing Loans – New Risks and

This paper reviews the main differences between the prospects for NPL build-up and resolution between the current pandemic and the financial crisis of 2008-2009. To facilitate NPL reduction following the pandemic, the ECB should actively counter the revealed tendency of banks with low profitability to implementrelatively low loan loss provisions

Why Do Some Significant Banks Fall Behind?

This paper shows that larger banks and better capitalised banks invest more in computer software. These findings could reflect that larger banks can attain greater benefits from computer software and that better capitalised banks have more resources to make larger software investments. All the same, smaller and less capitalised banks will also have to make substantial software investments to maintain sustainable businesses, something that supervisors will need to point that out to these banks

Do “White Knights” Make Excessive Profits in Bank Resolution?

This paper finds that accounting gains to acquirers in bank resolutions in the EU are comparable to those in recent transactions in other major banking markets. Accounting gains for acquirers are shown to be lower in transactions involving relatively bigger acquirers. This suggests that resolution authorities should aim to tie distressed banks to relatively larger acquirers to reduce resolutions costs. This document was provided/prepared by the Economic Governance and EMU Scrutiny Unit at the request of the ECON Committee

Is the financial safety net a barrier to cross-border banking ?

A bank's interest expenses rise with its degree of internationalization, measured by its share of foreign liabilities in total liabilities or a Herfindahl index of international liability concentration, especially if the bank is performing badly. The results in this paper suggest that an international bank's cost of funds raised through a foreign subsidiary is 1.5-2.4 percent higher than the cost of funds for a purely domestic bank. That is a sizeable difference, given that the overall mean cost of funds is 3.3 percent. These results can be explained by limited incentives for national authorities to bail out an international bank, as well as an inefficient recovery and resolution process for international banks. In any event, a less reliable financial safety net appears to be a barrier to cross-border banking.Banks&Banking Reform,Debt Markets,Access to Finance,Emerging Markets,Economic Theory&Research

Has the Application of the “Fit and Proper” Regime Improved Governance Structures in the Banking Union?

This paper examines trends in the size and composition of the boards of significant institutions during the 2011-2018 period, comprising several years before and after the ECB started conducting fit and proper assessments in 2014. Throughout this period, there have been trends towards directors who are more qualified, hold fewer other board positions, and are more likely to be female and a foreign national. Unlike in the pre-SSM period, however, more recently the average age of directors has increased, bank boards have become larger, and the share of independent directors has risen. The appointment of additional independent directors in recent years is potentially harmful to financial stability, as especially independent directors could favour riskier bank strategies with a view to increasing shareholder value

What are the Main Factors for the Subdued Profitability of Significant Banks in the Banking Union, and is the ECB’s Supervisory Response Conclusive and Exhaustive?

This paper examines how the ECB should respond to the currently low profitability of significant banks in the Banking Union. The subdued profitability appears to be a structural problem caused by overbanking, with too many bank assets chasing too few profitable banking sector opportunities. To address the root problem of overbanking, the ECB should use its existing supervisory powers to require significant banks with unsustainably low profitability to restructure reducing their overall size. This document was provided by the Economic Governance Support Unit at the request of the ECON Committee

Leverage, Bank Employee Compensation and Institutions

This paper investigates the empirical relationship between financial structure and employee compensation in the banking industry. Using an international panel of banks, we show that well-capitalized banks pay higher wages to their employees. Our results are robust to changes in measurement, model specification and estimation methods. In order to account for the positive association between bank capital and employee compensation, we illustrate a stylized 3-period model and show that well-capitalized banks have incentives to pay higher wages to induce monitoring. Such monitoring rents of employees at capitalized banks are expected to be higher in societies with weak institutions. Further empirical analysis shows that the weaker is institutional quality of a country the stronger is the positive relationship between bank capital and wages - supporting our theoretical conjectures. High compensations in the financial industry received increasing criticism over the course of years following the great recession, whereas capitalization of banks has been encouraged. Our paper is the first to highlight that there is an empirically visible trade-off between the two and that institutions strongly interact with this relationship

Have European Banks Actually Changed Since the Crisis? An Undated Assessment of Their Main Structural Characteristics

This paper documents trends in key bank variables over the 2003-2016 period for the set of banks that the ECB directly supervises as of January 1, 2017. A range of variables is considered that together indicate to what extent banks have been moving in the direction of better performance and greater stability. We examine variables related to bank profitability, activity mix, size, balance sheet composition, and loan impairment. The identified trends provide a mixed picture of whether banks have been moving in the right direction since the start of the crisis