A New Measure for Gauging the Riskiness of European Banks’ Sovereign Bond Portfolios

For a sample of 51 European banks, during 2010-2016, we construct a novel measure (SovRisk) which captures the riskiness of sovereign bond portfolios. We demonstrate the ability of this measure to explain the phases of the European sovereign debt crisis while accounting for the substantial differences between distressed and non-distressed countries. We contend that SovRisk can be used as a complement to bank Credit Default Swap (CDS) spreads, or a substitute in the absence of traded CDS, for measuring banks’ sovereign risk

The European Bank Recovery and Resolution Directive: A market assessment

This paper provides evidence of the impact of the new European bank resolution regime on the sovereign-bank nexus. The implementation of the Bank Recovery and Resolution Directive (BRRD) is considered as an exogenous shock which provides the setting for a natural experiment. This investigation tests the financial markets’ perception of the effectiveness of the new rules in weakening the tight interconnectedness between sovereign and bank risk. A Difference-in-Differences (DiD) approach is adopted, building evidence from the Credit Default Swap (CDS) market for banks and nonfinancial corporates over the period 2011-18. The main findings do not indicate a significant weakening in the interaction between bank and sovereign CDS spreads, compared to the corresponding evidence for the non-financial corporate sector. An overall narrowing of the gap between bank and sovereign risk occurs, which initially implies a lack of credibility of the BRRD in financial markets. However, substantial cross-country variations are identified, particularly for Italy and non-euro area countries. These insights make a significant contribution to the policy debate on effective regulation of the sovereign-bank nexus, in the light of recent developments in the EU postcrisis reform agenda

Market reactions to the implementation of the Banking Union in Europe

How did announcements about the implementation of the Banking Union (BU) in Europe impact on financial markets? This paper investigates the effect of the overall bank regulatory reform, considering each associated individual announcement, on Credit Default Swaps (CDS), bank stocks and stock futures during 2012-14. Announcements related to the implementation of the supervisory mechanism, as well as those on the new resolution framework, led to a surge in bank CDS spreads, while having a detrimental effect on the wealth of banks’ shareholders. The CDS market response to sub-events associated with the ECB’s 2014 Comprehensive Assessment (CA) was positive and reflected in a decrease in bank CDS spreads. Furthermore, CDS of Global Systemically Important Banks (G-SIBs) demonstrated a significant reaction to the implementation steps in the BU. Banks’ stock prices reacted in a consistent manner with the CDS market. The stock futures market did not reveal any strong reaction to the changes in the European regulatory landscape. Cross-sectional analysis reveals that bank capitalization is positively associated with responses of G-SIBs’ CDS spreads, but is inversely related to responses of CDS spreads for other bank groups. Weak underlying credit quality is also a relevant factor in explaining abnormal increases in quoted CDS spreads. For the stock market, positive associations of the cumulative abnormal returns (CARs) with capital levels and with the business model orientation are revealed

L’evoluzione e le determinanti dei crediti deteriorati prima e durante la pandemia di Covid-19

In this paper, we analyse the evolution and exogenous determinants of Non-performing loans (NPLs) in Italy in recent years, including the current pandemic phase. The empirical analysis confirms the countercyclical nature of NPL stocks and the direct relationship between unemployment rate and volumes of impaired assets. An inverse association between public debt and NPL ratio is revealed. In addition, the newly introduced government-backed scheme (GACS) appears to be effective in facilitating the banks' disposal of NPLs. Despite recent positive developments in Italy, including the efforts to clean-up banks' balance sheets, structural changes and improved financial strategies are crucial to prevent a foreseeable reignition of the problem, especially in light of the crisis generated by the Covid-19

The evolution and determinants of the non-performing loan burden in Italian banking

We investigate the factors influencing Non-Performing Loans (NPLs) in the Italian banking sector from 2011 to 2017, a period marked by significant challenges. Using dynamic panel data methods and considering both bank-specific and macroeconomic variables, our empirical analysis reveals the complexity of NPL volumes in Italy. Our findings highlight that better capitalised banks tend to exhibit lower levels of NPLs, indicating reduced incentives for engaging in riskier practices. We document an inverse relationship between credit growth and NPLs, suggesting a potential outcome of demand-driven credit expansion. Additionally, the countercyclical nature of NPL stocks is evident, with banks' NPL volumes influenced by the economic conditions of the country

Gender Diversity in Bank Boardrooms and Green Lending : Evidence from Euro Area Credit Register Data

Do female directors on banks’ boards influence lending decisions toward less polluting firms? By using granular credit register data matched with information on firm-level greenhouse gas (GHG) emission intensities, we isolate credit supply shifts and find that banks with more gender-diverse boards provide less credit to browner companies. This evidence is robust when we differentiate among types of GHG emissions and control for endogeneity concerns. In addition, we also show that female director-specific characteristics matter for lending behavior to polluting firms as better-educated directors grant lower credit volumes to more polluting firms. Finally, we document that the “greening” effect of the female members in banks’ boardrooms is stronger in countries with more female climate-oriented politicians

Gender Diversity in Bank Boardrooms and Green Lending : Evidence from Euro Area Credit Register Data

Focus -- Since banks play a pivotal role in modern financial systems, they can help to accelerate the transition to a carbon-neutral economy if they make more sustainable lending decisions. A bank's climate strategy and related decision-making depend on the trajectory defined by the board, which in turn depends on the board's diversity. The presence of women in banks' boardrooms can add value along several dimensions, as explained by sociological and physiological theories, as well as empirical evidence. Contribution -- According to previous studies, female corporate directors and women in general are more likely to care about long-term societal issues, including climate change. However, the literature has not so far investigated the specific role played by the gender diversity of banks' boardrooms in combating climate change. In this paper, we study whether and to what extent a greater female representation in banks' boardrooms influences banks' capability in "greening" the economy via lending decisions. We do this by using granular loan-level data from the euro area credit register matched with banks' corporate governance variables and firms' greenhouse gas emission information. Given the probable effect of the Covid-19 pandemic on banks' lending patterns in 2020, we focus on the year 2019. Findings -- We find that banks with more gender-diverse boards provide more credit to greener companies. Banks with a relatively high share of female directors lend about 10% less to firms with relatively high pollution intensity (in the last quartile of the distribution), as compared with the other group of banks. This inverse relationship between banks' lending volumes and firms' pollution intensity for boards with more female directors is also confirmed when we differentiate among different types of emission (ie direct emissions caused by a firm's activities and indirect emissions arising from a firm's energy consumption versus other indirect emissions). In addition, we also find that female director-specific characteristics matter for lending behaviour to more/less polluting firms as better educated directors grant less credit to more polluting firms. Finally, we document that the "greening" effect of the female members in banks' boardrooms is stronger in countries with more climate-oriented female politicians

Gender diversity in bank boardrooms helps to combat climate change

Banks with more gender-diverse boards provide less credit to browner companies. This evidence is robust when considering different types of emissions. Better-educated female directors grant lower credit volumes to more polluting firms. The "greening" effect of a greater female representation in banks' boardrooms is stronger in countries with more female climate-oriented politicians

Interest Rate Risk and Monetary Policy Normalisation in the Euro Area

In the current low interest rate environment in the euro area there is potential for a sudden increase in interest rates and heightened interest rate risk (IRR). By using a sample of 81 euro area banks during the period 2014Q4-2018Q1 and a confidential supervisory measure of IRR, this paper identifies which bank-specific characteristics can amplify or weaken the impact of a 200 basis points positive shock in interest rates. We find that banks reliant on core deposits, that hold more floating-interest rate loans and that diversify their lending, either by sector or geography, are less exposed to a positive change in interest rates. Interestingly, we discover that banks that did not exploit the exceptional financing provided by the European Central Bank (ECB) reveal greater IRR exposure. These findings advance the debate on the impact on euro area banking of a possible return to a normalised monetary policy

Cost efficiency in the euro area banking sector and the negative interest rate environment

This brief shows that euro area banks' cost efficiency, measured by a cost efficiency score inferred from an input-output analysis alongside the ratio of operating expenses over total assets, has improved somewhat in recent years. However, the analysis also indicates that there is still ample scope to achieve further efficiency gains. Banks most affected by the negative interest rate policy (NIRP), i.e. those relying mostly on retail deposits as a source of funding, strategically reacted to the negative effects of NIRP on their net interest margins by improving their cost efficiency. In particular, high-deposit banks that were larger, less profitable, with riskier loan portfolios, weaker pre-NIRP lending growth and that operated in more competitive banking sectors enhanced their cost efficiency more strongly after NIRP than their peers. This helped them to offset the impacts of negative interest rates on their profitability and, thus, supported their solvency and extension of credit. On the other hand, low-deposit banks recorded a decline in their cost efficiency after the introduction of the NIRP. Therefore, going forward, these latter banks will need to invest more effort in improving their efficiency