Competition and Financial Stability in European Cooperative Banks

Cooperative banks are a driving force for socially committed business at the local level, accounting for around one fifth of the European Union (EU) bank deposits and loans. Despite their importance, little is known about the relationship between bank stability and competition for these small credit institutions. Does competition affect the stability of cooperative banks? Does the financial stability of banks increase/decrease when competition is higher? We assess the dynamic relationship between competition and bank soundness (both in the short and long run) among European cooperative banks between 1998 and 2009. We obtain three main results. First, we provide evidence in line with the competition-stability view proposed by Boyd and De Nicolò (2005). Bank market power negatively “Granger-causes” banks’soundness, meaning that there is a positive relationship between competition and stability. Second, we find that this fundamental relationship does not change during the 2007–2009 financial crisis. Third, we show that increased homogeneity in the cooperative banking sector positively affects bank soundness. Our findings have important policy implications for designing and implementing regulations that enhance the overall stability of the financial system and in particular of the cooperative banking sector

"Whatever it takes": an empirical assessment of the value of policy actions in banking

What types of policy intervention had a greater impact during the financial crisis? By using a detailed dataset of worldwide policy, we answer this question focusing on Globally-Systemically Important banks (G-SIBs), looking both to stock returns and Credit Default Swap (CDS) spreads reactions. As robustness checks, we also analyze a control sample of 31 large Non-Financial Companies (NFCs). Overall, we show that different policy interventions from governments and central banks have produced diverse market reactions: investors generally appreciate monetary policy interventions for G-SIBs (but not for NFCs) and do not welcome bank failures and bailouts (for both G-SIBs and NCFs)

Stock market reaction to policy interventions

We analyse stock price reactions to the announcements of monetary and fiscal policy actions in 12 stock exchanges worldwide between 1 June 2007 and 30 June 2012. While past papers have analysed the effect of policy interventions focusing on monetary policy actions (e.g. Ricci 2015), our paper focuses on stock indices either capturing the whole stock market or various industries. By estimating abnormal stock reactions around the announcement date, we show that (1) stock industry indices react to policy interventions in a different manner than the broad stock index does; (2) stock returns react negatively to restriction measures for general and non-banking sector indices; and (3) stock reaction to expansionary measures was stronger at the beginning of the financial crisis

The impact of bank concentration on financial distress: them case of the European banking system

This paper examines the impact of bank concentration on bank financial distress using a balanced panel of commercial banks belonging to EU 25 over the sample period running from 2003 to 2007. Financial distress is proxied by the observations falling below a given threshold of the empirical distribution of a risk adjusted indicator of bank performance: the Shareholder Value ratio. We employ a panel probit regression estimated by GMM in order to obtain consistent and efficient estimates following the suggestion of Bertschek and Lechner (1998). Our findings suggest, after controlling for a number of enviroment variables, a positive effect of bank concentration on financial distress

Are contingent convertibles going-concern capital?

Contingent convertibles (CoCos) are intended to either convert to new equity or be written down prior to failure while a bank is a going concern. Yet, in the first actual test case, CoCos never converted before its bank failed. We develop a model that predicts that CoCos lead to less (more) extreme stock returns and have yields greater than (similar to) standard subordinated debt yields if investors do (do not) expect them to convert or be written down prior to failure. These predictions are tested using data on CoCos issued by European banks during 2011 to 2017. We find evidence that equity conversion CoCos reduce stock return variance and several other measures of downside risk, consistent with the perception that they are going-concern capital. However, we also provide event study evidence that recent regulatory actions reduced the CoCo – subordinated debt yield spread, which indicates a diminished investor belief that CoCos are going-concern capital

The unintended consequences of the launch of the single supervisory mechanism in Europe

The launch of the Single Supervisory Mechanism (SSM) was an historic event. Beginning in Nov. 2014, the most significant banks came under the direct supervision of the European Central Bank, while national supervisory authorities maintained direct supervision of the remaining banks. Thus, supervision is conducted on two levels, which could cause inconsistency problems. Did the behavior of the significant banks differ from that of the less significant banks during the SSM launch? We find that the significant banks reduced their lending activity more than the less significant banks did in order to shrink their balance sheets and increase their capitalization

Competition and regulation in the banking and quasi-banking industries: evidence from Italy

Over the past three decades, new types of credit institution have been developed and new forms of intermediation have succeeded in establishing themselves as important competitors in the credit market. The literature on regulation has never paid much attention to the behaviour of quasi-banking institutions, from the point of view of their distinctive characteristics and management peculiarities This paper investigates the relationship between regulation and competition among non banking credit intermediaries and banks. This study assess the importance of the management characteristics and profiles of quasi-banking institutions, for regulatory purposes, and to examine the relationship between the regulatory process and differing business behaviours. This study deals with a specific aspect of the regulation of financial systems. In any case, in the wide-ranging and animated discussions on regulation, recently there seems to be a growing interest in this specific issue, in respect of both the tendency towards the harmonization of regulations and of the extension of forms of control to sectors and/or activities which had previously been excluded. The paper also discusses the ideal design for an empirical investigation to analyse: 1) the management and organization structures of quasi-banks and their differing characteristics and behaviours, in respect of the regulatory process; 2) if the recent development of controls ensure competitive equality among the financial institutions. The empirical investigation has focused on factoring institutions and identified some behavioural differences which are relevant for the supervisory authorities

Competition and stability in the credit industry: banking vs. factoring industries

Over the last decade, most credit-industries registered a decline in lending volumes, while factoring industries instead registered a substantial growth in terms of turnover. Surprisingly, only a handful of papers so far investigate factoring companies. Do factoring firms display the same stability levels of banks? Is the competition similar in factoring and banking industries? Is the relationship between competition and stability the same in these industries? Focusing on Italy (one of the largest factoring and banking markets in Europe) and using a unique dataset, we show three main results: factoring companies are (on average) more stable than banks; 2) the stability of factoring companies increase when competition declines (competition-fragility view); 3) the competition-fragility view is weaker in the factoring industry than in the banking industry. Our findings indicate that competition in the Italian credit industry was greater in factoring than in banking

Competition and regulation in the banking and quasi-banking industries: evidence from Italy

Over the past three decades, new types of credit institution have been developed and new forms of intermediation have succeeded in establishing themselves as important competitors in the credit market. The literature on regulation has never paid much attention to the behaviour of quasi-banking institutions, from the point of view of their distinctive characteristics and management peculiarities This paper investigates the relationship between regulation and competition among non banking credit intermediaries and banks. This study assess the importance of the management characteristics and profiles of quasi-banking institutions, for regulatory purposes, and to examine the relationship between the regulatory process and differing business behaviours. This study deals with a specific aspect of the regulation of financial systems. In any case, in the wide-ranging and animated discussions on regulation, recently there seems to be a growing interest in this specific issue, in respect of both the tendency towards the harmonization of regulations and of the extension of forms of control to sectors and/or activities which had previously been excluded. The paper also discusses the ideal design for an empirical investigation to analyse: 1) the management and organization structures of quasi-banks and their differing characteristics and behaviours, in respect of the regulatory process; 2) if the recent development of controls ensure competitive equality among the financial institutions. The empirical investigation has focused on factoring institutions and identified some behavioural differences which are relevant for the supervisory authorities

Competition and risk-taking in investment banking

How does competition affect the investment banking business and the risks individual institutions are exposed to? Using a large sample of investment banks operating in seven developed economies over 1997-2014, we apply a panel VAR model to examine the relationships between competition and risk without assuming any a priori restrictions. Our main finding is that investment banks’ higher risk exposure, measured as a long-term capital-at-risk and return volatility, was facilitated by greater competitive pressures for both boutique investment banks and full service investment banks. Overall, we find some evidence that more competition leads to more fragility before and during the recent financial crisis