The role of capital in bank failures across EU-15 countries: backward LR approach

Resolving the puzzle which financial indicators persistently indicate severe disruptions in the business of banking, is of the utmost importance for prudential authorities. Thus, the intent of this paper is to outline microeconomic determinants of bankruptcies within the banking sectors of the EU-15 countries and to clarify the role of bank capital in it. Namely, the bank capital regulation is designed as both, ex-ante (bankruptcy prevention) and ex-post (bankruptcy costs reducer) regulatory instrument. Backward stepwise logistic regression was applied on the Bankscope data sample of around 60 commercial banks in the period that preceded the global financial crisis. Estimations were obtained for the year in which a certain bank bankrupted as well as for each year over the five-year period prior to the bankruptcy. Research findings confirm that a number of financial indicators, such as asset quality and liquidity indicators could serve as early warning signals of bank failures even five years before the bankruptcy. The results for bank capital ratios were non-persistent regarding their sign and significance in the year preceding the bankruptcy and several years prior to bankruptcy. Finally, the most convincing results speak in favor of the too-big-to-fail phenomenon, as bank size explains the most of its survival odds

Croatian banks profitability under capital requirements pressure

Regulating bank behavior throughout capital requirements has been a focal point of prudential regulation since the late 1980s. However, their beneficial effect on the banking sector\u27s safety and soundness was disputed ever since their initial implementation, mainly due to an assumption that they deteriorate bank profitability and increase the odds for the enlarged risk appetites of bank managers, especially in the highly competitive financial markets. On the other hand, bank profitability is driven by many factors other than compliance with capital regulation. Concerning that, a question about the capital requirements\u27 impact on bank profitability was raised in this paper. The dynamic panel data analysis served to examine the consequences of bank capital regulation for the Croatian banking sector profitability, by taking into observation 24 commercial banks in the 2011-2016 timespan. The impact of capital regulation on the return on assets and net interest margin was positive, while for the return on equity a negative relationship was found. It was concluded that banks transfer regulatory costs on their clients, which was approximated with the net interest margin. In addition, results reveal that the overall bank profitability is achieved at the expense of bank shareholders. Thus, a more cost-efficient approach to managing a bank is suggested

Do students in Croatia care about corporate social responsibility performance of banks?

We investigate a relevance of the corporate social responsibility of banks from the students’ point of view. By doing so, we can pinpoint a compliance of the Croatian banks’ corporate social responsibility praxis with the expectations of students’ population as their current and/or future customers. Moreover, as we focus on the students of the higher years of studies at the Faculty of Economics, University of Split, who are potential employees or even future managers in the financial services industry, the results which are obtained throughout a questionnaire research might be perceived as a sort of a wider empirical verification of the stakeholder theory approach to corporate social responsibility. According to 163 responses, corporate social responsibility performance of banks in Croatia seems to be important to students, and some noticed disparities in their attitudes are discussed with regards to their socio-demographic characteristics. Nevertheless, most of students perceive an image and public reputation improvement to be the main driver of corporate social responsibility achievements in the Croatian banking sector, and thus they ask for a more responsible banking, especially from the foreign-owned banks. Apart from the identified policy recommendations in the corporate social responsibility area for the Croatian banks, students support the idea that faculties of economics should educate their students more on the ethical issues in business practices

Cyclicality of bank capital buffers in South-Eastern Europe: endogenous and exogenous aspects

The interdependence between the regulatory capital ratio and macroeconomic indicators, with reference to the phenomena cyclicality and pro-cyclicality is a widely emphasized disadvantage of the capital adequacy concept. Redesign of the aforementioned concept towards the countercyclical capital requirements is a kind of recognition of the creators of the Basel standards of the previous oversights in its development. This paper aims to explore empirically the direction, intensity and significance of endogenous and exogenous determinants of the changes in banks’ capital buffers by taking into consideration both the impact of the macroeconomic properties and the bank-specific characteristics of South-Eastern Europe. More than 80 commercial banks in the period from 2000-2010 have been encompassed by the research. Use of a dynamic panel analysis led to the conclusion that the bank capital buffers decreased during the observed period, with the exception of certain years during the economic expansion, which confirms the appropriateness of regulatory requirements considering the countercyclical capital buffers. Nevertheless, it might be that capital building and spending in the future will not follow the pattern from the last decade due to the specificities of the observed period, as well as the banking sector ownership transformations, economic and credit growth as well as asset prices growth in the post-transitional period, and finally, the real crisis which spilled over onto the financial sectors

CONTROVERSIES OF BANK CAPITAL REQUIREMENTS REGULATION

Standardi adekvatnosti kapitala nastali su i opstaju u vjeri da njihova primjena ima blagotvorne učinke za stabilnost bankarskog sustava. S druge strane, prošla i tekuća kretanja svjedoče o njihovoj nedovoljnoj funkcionalnosti u sprječavanju nestabilnosti ovog sektora. Kako bilo, nadnacionalni i nacionalni regulatorni autoriteti ne posustaju u modificiranju kapitalnih zahtjeva te obvezivanju banaka na njihovom udovoljavanju. Ovaj rad ima za cilj analizirati i sistematizirati slabosti promatrane regulatorne mjere, identificirane u teorijskim i empirijskim istraživanjima o predmetnoj problematici te tako poslužiti kao uporište za buduću diskusiju i potencijalnu empirijsku kvantifikaciju učinaka od primjene kapitalnih zahtjeva.The capital adequacy accords were created and have survived in a belief that their implementation has beneficial effects on the banking system stability. On the other hand, the past and the current trends testify their insufficient functionality in preventing instability of the sector. Nevertheless, the national and the supranational prudential authorities do not give up the capital requirements modification and obliging banks to comply with it. This paper aims to analyze and systematize the weaknesses of the aforementioned regulatory measure, which were identified in theoretical and empirical researches in the field, and thus, serve as a stronghold for a future discussion and a potential empirical quantification of the capital requirements effects

SOLVENCY AND LIQUIDITY LEVEL TRADE-OFF: DOES IT EXIST IN CROATIAN BANKING SECTOR?

Abstract We focus on 32 Croatian banks in the period 2002-2010 in order to investigate the solvency-liquidity nexus. Dynamic panel data analysis is applied on two basic models in which current liquidity ratio and equity to assets ratio are set as dependent variables, interchangeably, and other explanatory variables employed to capture the effect of bank size, profitability and asset quality as well as macroeconomic environment. We found two-way positive relationship between bank solvency and liquidity. However, bank size plays an important role in the capital and liquidity management, and trade-off between the solvency and liquidity level is found for the larger banks. Therefore, policymakers should take into consideration capital and liquidity interdependence, as well as the bank size effect when designing capital and liquidity requirements in order to downsize the regulatory burden for smaller banks, and increase them for larger banks. Namely, larger banks tend to minimize regulatory costs by avoiding simultaneous increase of liquidity and solvency. Small banks do exactly the opposite and stock both, capital and liquidity, what potentially makes their funds allocation sub-optimal, from their own as well as social point of view. Altogether, the paper contributes to scarce empirical evidence regarding bank solvency and liquidity interdependence, particularly when the post-transitional banking sectors are taken into consideration. It adds to knowledge on bank financial management in praxis, and bank managers and prudential authorities might find it relevant for their policies design and implementation

Društvena odgovornost banaka u vrijeme financijske krize: ususret direktivi Europske unije o nefinancijskom izvještavanju

Aktualna financijska kriza reafirmirala je značaj društvene odgovornosti i etike u financijskim proizvodima. Prijevare, skandali, kolektivne tužbe udruga za zaštitu potrošača, negativna reputacija i rastući antikorporativni aktivizam nisu zaobišli ni bankovnu industriju. U okolnostima učestalog isticanja društvenih troškova i šteta prouzrokovanih njihovim djelovanjem, od banaka se očekuje značajnije preuzimanje društvene odgovornosti i u velikoj mjeri podnošenje tereta gospodarske krize. U skladu s teorijom legitimnosti, dobrovoljno integriranje koncepta korporativne društvene odgovornosti u bankovno poslovanje može poslužiti kao sredstvo izgradnje reputacijskoga kapitala banaka i vraćanja povjerenja društva u bankovne proizvode, pri čemu je važno da društveno odgovorno djelovanje prati i adekvatno izvještavanje o društvenoj odgovornosti. Zahvaljujući direktivi Europske unije 2014/95/EU o nefinancijskom izvještavanju velikih i kotirajućih kompanija te subjekata od javnog značaja, izvještavanje o društvenoj odgovornosti uskoro će postati obvezno za bankovni sektor. Uvidom u opseg izvještavanja o društvenoj odgovornosti izabranih banaka u Hrvatskoj ovaj rad odgovara na pitanje je li se, u skladu s teorijom legitimnosti, u financijskoj krizi povećalo bankovno izvještavanje o društvenoj odgovornosti, a samim time i kolika je pripremljenost banaka za nove regulatorne zahtjeve što se tiče nefinancijskog izvještavanj

Troubles with the Chf Loans in Croatia: The Story of a Case Still Waiting to Be Closed

In numerous Central and Eastern European (CEE) countries, the global financial crisis as well as the unpegging of the foreign exchange rate of the Swiss franc (CHF) against the euro amplified the repayment troubles of households with the outstanding CHF-linked debt. In Croatia, the CHF loans were approved mainly as mortgages to unprotected and subprime household borrowers without sufficient credit capacity for long-term euro-linked loans, which also contained a possibility of an incremental interest rate change, i.e., the so-called administrative interest rate. This article aims to disclose the reasons behind the credit boom of these loans, the unsustainable CHF debt hardship that the household sector consequently faced, and how it was/could have been resolved, with the Croatian banking sector at the center of the research. Although the CHF case of Croatia has some specificities concerning the prudential regulation and government-sponsored loan conversion, the findings about the supply and demand determinants of the CHF credit boom, as well as a critical assessment of the Croatian government and central bank interventions, might be useful for timely noticing universal threats from the exotic currency-linked loans for the systemic risk and financial stability, and for minimizing the negative externalities from probable debt relief measures. Based on the descriptive and univariate statistics conducted on Bloomberg and the Croatian National Bank (CNB) data, it was found that interest rate differentials and carry trading behavior were the main reasons for the rapid CHF credit growth in Croatia. Nevertheless, according to the financial experts’ opinions obtained via a questionnaire survey, and the court verdicts reached since, the financial consumer protection when contracting these loans was severely violated, which implies that the central bank must enhance its consumer protection role. By adopting a single-country and holistic approach, this is the first paper that deals with the socioeconomic dynamic of the CHF credit default issues in Croatia, which might be interesting as a case study or for making comparison with other CEE countries that have been coping with negative consequences of Swiss francization

Bank sustainability reporting within GRI-G4 Framework

Sustainability accounting, with its final output – sustainability reporting, is a new field of accounting focused on evaluating and following up activities regarding a firm’s governance, environmental issues and social inclusion and interaction. Among several standardized frameworks, companies worldwide often choose the Global Reporting Initiative (GRI) Sustainability Reporting Guidelines. Since the year 2000, GRI Guidelines have evolved and currently the fourth generation is in use. The aim of this study is to assess the latest form of sustainability reporting within an integrated report in the banking industry using the UniCredit Group, which operates in 15 countries, as an example. Sustainability reporting will soon become mandatory in the European Union (EU) for large companies, listed companies and publicinterest entities (e.g. banks) with an average of at least 500 employees, starting from the year 2018 (for activities in 2017). This paper is focused on a content analysis of the recent bank sustainability reporting with a critical review on this matter

Do students in Croatia care about corporate social responsibility performance of banks?

We investigate a relevance of the corporate social responsibility of banks from the students’ point of view. By doing so, we can pinpoint a compliance of the Croatian banks’ corporate social responsibility praxis with the expectations of students’ population as their current and/or future customers. Moreover, as we focus on the students of the higher years of studies at the Faculty of Economics, University of Split, who are potential employees or even future managers in the financial services industry, the results which are obtained throughout a questionnaire research might be perceived as a sort of a wider empirical verification of the stakeholder theory approach to corporate social responsibility. According to 163 responses, corporate social responsibility performance of banks in Croatia seems to be important to students, and some noticed disparities in their attitudes are discussed with regards to their socio-demographic characteristics. Nevertheless, most of students perceive an image and public reputation improvement to be the main driver of corporate social responsibility achievements in the Croatian banking sector, and thus they ask for a more responsible banking, especially from the foreign-owned banks. Apart from the identified policy recommendations in the corporate social responsibility area for the Croatian banks, students support the idea that faculties of economics should educate their students more on the ethical issues in business practices