PalgraveMacmillanStudiesinBankingandFinancialInstitutions SeriesEditor:ProfessorPhilipMolyneux ThePalgraveMacmillanStudiesinBankingandFinancialInstitutionsareinternationalin orientationandincludestudiesofbankingwithinparticularcountriesorregions,andstudies ofparticularthemessuchasCorporateBanking,RiskManagement,MergersandAcquisitions, etc.Thebooks’focusisonresearchandpractice,andtheyincludeup-to-dateandinnovative studiesoncontemporarytopicsinbankingthatwillhaveglobalimpactandinfluence. Titlesinclude SteffenE.Andersen THEEVOLUTIONOFNORDICFINANCE SethApati THENIGERIANBANKINGSECTORREFORMS PowerandPolitics RobertoBottiglia,ElisabettaGualandriandGianNereoMazzocco(editors) CONSOLIDATIONINTHEEUROPEANFINANCIALINDUSTRY DimitrisN.Chorafas BASELIII,THEDEVILANDGLOBALBANKING DimitrisN.Chorafas CAPITALISMWITHOUTCAPITAL DimitrisN.Chorafas SOVEREIGNDEBTCRISIS TheNewNormalandtheNewlyPoor StefanoCosmaandElisabettaGualandri(editors) THEITALIANBANKINGSYSTEM ImpactoftheCrisisandFuturePerspectives ViolaineCousin BANKINGINCHINA VincenzoD’ApiceandGiovanniFerri FINANCIALINSTABILITY ToolkitforInterpretingBoomandBustCycles PeterFalushandRobertL.CarterOBE THEBRITISHINSURANCEINDUSTRYSINCE1900 TheEraofTransformation JoséManuelPastorMonsálvezandJuanFernándezdeGuevaraRadoselovics(editors) MODERNBANKBEHAVIOUR JuanFernándezdeGuevaraRadoselovicsandJoséManuelPastorMonsálvez(editors) CRISIS,RISKANDSTABILITYINFINANCIALMARKETS FrancoFiordelisiandOrnellaRicci(editors) BANCASSURANCEINEUROPE Past,PresentandFuture FrancoFiordelisi,PhilipMolyneuxandDanielePreviati(editors) NEWISSUESINFINANCIALANDCREDITMARKETS FrancoFiordelisi,PhilipMolyneuxandDanielePreviati(editors) NEWISSUESINFINANCIALINSTITUTIONSMANAGEMENT KimHawtrey AFFORDABLEHOUSINGFINANCE JillM.Hendrickson REGULATIONANDINSTABILITYINU.S.COMMERCIALBANKING AHistoryofCrises Alexandros-AndreasKyrtsis(editor) FINANCIALMARKETSANDORGANIZATIONALTECHNOLOGIES SystemArchitectures,PracticesandRisksintheEraofDeregulation PaolaLeoneandGianfrancoA.Vento(editors) CREDITGUARANTEEINSTITUTIONSANDSMEFINANCE CaterinaLucarelliandGianniBrighetti(editors) RISKTOLERANCEINFINANCIALDECISIONMAKING RomanMatousek(editor) MONEY,BANKINGANDFINANCIALMARKETSINCENTRALANDEASTERNEUROPE 20YearsofTransition PhilipMolyneux(editor) BANKPERFORMANCE,RISKANDFIRMFINANCING PhilipMolyneux(editor) BANKSTRATEGY,GOVERNANCEANDRATINGS ImadA.Moosa THEMYTHOFTOOBIGTOFAIL SimonMouattandCarlAdams(editors) CORPORATEANDSOCIALTRANSFORMATIONOFMONEYANDBANKING BreakingtheSerfdom VictorMurinde(editor) BANKREGULATORYREFORMSINAFRICA AndersÖgren(editor) THESWEDISHFINANCIALREVOLUTION ÖzlemOlgu EUROPEANBANKING Enlargement,StructuralChangesandRecentDevelopments FotiosPasiouras GREEKBANKING FromthePre-EuroReformstotheFinancialCrisisandBeyond DanielaPîrvu CORPORATEINCOMETAXHARMONIZATIONINTHEEUROPEANUNION RamkishenS.Rajan EMERGINGASIA EssaysonCrises,CapitalFlows,FDIandExchangeRate AllesandroRoselli FINANCIALSTRUCTURESANDREGULATION:ACOMPARISONOFCRISESINTHEUK,USA ANDITALY YasushiSuzuki JAPAN’SFINANCIALSLUMP CollapseoftheMonitoringSystemunderInstitutionalandTransitionFailures RuthWandhöfer EUPAYMENTSINTEGRATION TheTaleofSEPA,PSDandOtherMilestonesAlongtheRoad Thefulllistoftitlesavailableisonthewebsite: www.palgrave.com/finance/sbfi.asp PalgraveMacmillanStudiesinBankingandFinancialInstitutions SeriesStandingOrderISBN978–1–4039–4872–4 Youcanreceivefuturetitlesinthisseriesastheyarepublishedbyplacingastandingorder. 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Customer Services Department, Macmillan Distribution Ltd, Houndmills, Basingstoke, HampshireRG216XS,England Crisis, Risk and Stability in Financial Markets Editedby Juan Fernández de Guevara Radoselovics and José Manuel Pastor Monsálvez UniversityofValencia,Spain Introduction,selectionandeditorialmatter©JuanFernándezdeGuevara RadoselovicsandJoséManuelPastorMonsálvez2013 Individualchapters©contributors2013 Softcover reprint of the hardcover 1st edition 2013 978-1-137-00182-5 Allrightsreserved.Noreproduction,copyortransmissionofthispublication maybemadewithoutwrittenpermission.Noportionofthispublication maybereproduced,copiedortransmittedsavewithwrittenpermission orinaccordancewiththeprovisionsoftheCopyright,Designsand PatentsAct1988,orunderthetermsofanylicencepermitting limitedcopyingissuedbytheCopyrightLicensingAgency,SaffronHouse, 6–10KirbyStreet,LondonEC1N8TS. Anypersonwhodoesanyunauthorizedactinrelationtothispublication maybeliabletocriminalprosecutionandcivilclaimsfordamages. Theauthorshaveassertedtheirrightstobeidentifiedastheauthorsofthiswork inaccordancewiththeCopyright,DesignsandPatentsAct1988. Firstpublished2013by PALGRAVEMACMILLAN PalgraveMacmillanintheUKisanimprintofMacmillanPublishersLimited, registeredinEngland,companynumber785998,ofHoundmills,Basingstoke, HampshireRG216XS. PalgraveMacmillanintheUSisadivisionofStMartin’sPressLLC, 175FifthAvenue,NewYork,NY10010. PalgraveMacmillanistheglobalacademicimprintoftheabovecompanies andhascompaniesandrepresentativesthroughouttheworld. Palgrave®andMacmillan®areregisteredtrademarksintheUnitedStates, theUnitedKingdom,Europeandothercountries ISBN 978-1-349-43367-4 ISBN 978-1-137-00183-2 (eBook) DOI 10.1057/9781137001832 Thisbookisprintedonpapersuitableforrecyclingandmadefromfully managedandsustainedforestsources.Logging,pulpingandmanufacturing processesareexpectedtoconformtotheenvironmentalregulationsofthe countryoforigin. AcataloguerecordforthisbookisavailablefromtheBritishLibrary. AcatalogrecordforthisbookisavailablefromtheLibraryofCongress. 10 9 8 7 6 5 4 3 2 1 22 21 20 19 18 17 16 15 14 13 Contents ListofIllustrations vi NotesonContributors ix Introduction 1 JuanFernándezdeGuevaraRadoselovics andJoséManuelPastorMonsálvez 1 FinancialStabilityandEconomicGrowth 8 SantiagoCarbó-ValverdeandLuisPedaugaSánchez 2 FinancialCrisisandEUBanks’Performance 24 TedLindblomandMagnusWillesson 3 Diversification,DiversityandSystemicRiskin EuropeanBanking 49 PierluigiMorelli,GiovanniB.PittalugaandElenaSeghezza 4 BaselIII,Pillar2:TheRoleofBanks’InternalControl Systems 71 ElisabettaGualandri 5 ShadowBankingandSystemicRisk:InSearchof RegulatorySolutions 96 GianfrancoA.VentoandPasqualeLaGanga 6 SocialLendinginEurope:Structures,Regulationand PricingModels 116 MarioLaTorreandFabiomassimoMango 7 Banks’Ratings,theFinancialCrisisandSizeofEntities 156 CarlosSalvadorMuñoz,JoséManuelPastorMonsálvezand JuanFernándezdeGuevaraRadoselovics 8 StockExchangeMergersintheAftermathoftheCrisis: NewInsights 183 MaurizioPolatoandJosancoFloreani 9 SustainabilityandFinancialInclusioninMicroinsurance 203 MartadelaCuestaGonzález,CristinaRuzayPaz-Curbera andFranciscoJavierGarayoaArruti Index 231 v Illustrations Figures 1.1 Selectedtransitionvariablesplottedagainsttime 19 1.2 Effectofpositivefinancialdevelopmentshocksbyinitial stateofeconomy 19 2.1 Thedevelopmentofshort-termmarketrates(3months) inthefiveregions 41 3.1 Returndistributionatthesystemlevel 58 3.2 Correlationsbetweenbanks’stockprices 63 3.3 Correlationsbetweenstockpricesofbankswithassets d exceeding 300billion 63 3.4 Cross-sectionvariabilityoftheROEforlargeEuropean banks 64 3.5 Cross-sectionvariabilityoftheROEforlarge internationalbanks 65 5.1 Shadowbankliabilitiesversustraditionalbankliabilities 97 5.2 Prudentialstandardsandsupervisoryoversight:degree ofapplication 98 5.3 Theshadowcreditintermediationprocess 102 5.4 Thetwoliquidityspirals:lossspiralandmarginspiral 103 5.5 Phase-intimeline:graph 107 5.6 Phase-intimeline:table 108 6.1 DistributionofSLplatformsactiveintheUE 119 6.2 StronglyPureSL(directmodel) 124 6.3 PureorPass-ThroughSL(directmodel) 124 6.4 HybridSL(brokeredmodel) 125 6.5 DistributionofpureplatforminEU 132 6.6 Distributionofprofit-basedplatformsinEU 132 6.7 DistributionofbrokeredplatformsinEU 133 6.8 Anoperationalmodelforsociallending 142 7.1 Distributionofratingsbysize:beforeversusafterthe outbreakoffinancialcrisis 165 7.2 Changeintheratingestimatedbeforeversusafter financialcrisis 175 9.1 Themicroinsurancemarket 210 9.2 Theinclusivefinancialproductscircle 211 9.3 Microinsuranceperformancebalance 214 vi ListofIllustrations vii 9.4 Microinsurancedeliverychannels 218 9.5 Netincomeratio 224 9.6 Incurredexpenseratio 225 9.7 Incurredclaimsratio 226 Tables 1.1 Selectedstudiesonthegrowthresponsivenessfinance hypothesis 12 1.2 Lagrangemultipliertestforlinearity 17 2.1 Numberofbanks(N),totalassets(TA)andmeantotal assets(MillionEUR)byyearandbyassociationform 30 2.2 Numberofbanksandcountriesincludedinthesample byregion 31 2.3 TheoverallprofitabilityofEUbanksindifferentregions 33 2.4 TheaverageprofitabilityofEUbanksintermsofROIF andROFL 36 2.5 Leveragespreadbefore(LS )andafter(LS )loanloss bLL aLL provisions 38 2.6 Interestmargins(IM)andaverageinterestexpenses(k ) D oftheaverageEUbank 40 2.7 Capitalriskexposure(D/E)forbanksingeneral, commercialbanks(CB)andsavingsbanks(SB) 44 3.1 Numberofcreditinstitutions 52 3.2 ConcentrationmeasuresofEuropeanbanking 52 3.3 Thebiggest15banksintheworld 53 3.4 Non-interestincomeshare 54 3.5 Twobankingsystems 57 3.6 Risk–returnatthesystemlevel 59 3.7 Thebanksample 62 4.1 Coreprinciplesforeffectivebankingsupervision 86 4.2 TheEuropeanSupervisoryAuthorities(ESA) 88 5.1 Thesteps,entitiesandfundingtechniquesinvolvedin shadowcreditintermediation 101 6.1 Ataxonomyofsociallendingplatforms 123 6.2 SociallendingplatformsinEurope 130 6.3 DistributionofpricingformulasadoptedbySLplatform inEurope 147 6.4 Averageinterestrateappliedbytheplatformsofthesample 148 6.5 AverageinterestratesandusuriousratesinItaly 150 7.1 Descriptivestatisticsofratingsandthemarketshareof CRAs 163 viii ListofIllustrations 7.2 DescriptivestatisticsofratingsissuedbyFitchdepending ofthesizeofbanks 164 7.3 Descriptivestatisticsofthedeterminantsofthebanks evaluatedbyFitch 170 7.4 Eqn(1)–(2):orderedprobitmodelwithrandomeffects 172 7.5 CRIanditscomponents 177 8.1 EV/EBITDAmultipleinmajorexchanges 190 8.2 Theeconomicsofmergeragreements 192 8.3 Estimatedlossesinvaluefor5percentdecreasein revenuesCAGRor5percentincreaseincostCAGR 197 Boxes 4.1 Internalgovernanceinbanking 76 4.2 Internalcontrolreview(Pillar2) 78 Annex 9.1 Formaloperatorsandinstitutionsvisited 229 9.2 ResearchprogrammesinColombia,PeruandBrazil 229 Contributors Santiago Carbó-Valverde is Director of Financial Studies and Analysis atBancoMareNostrumandFullProfessorofEconomicsattheUniver- sityofGranada,andDirectorofFinancialStudiesattheSpanishSavings BanksFoundation(FUNCAS).HeisalsoaresearchprofessorattheInsti- tutoValencianodeInvestigacionesEconomicas(IVIE).Hehasalsobeen aresearcherandconsultantattheFederalReserveBankofChicagosince 2008. He has been a consultant for both public and private financial institutions. HeobtainedhisPhDinEconomicsfromtheUniversityof Wales, Bangor, UK. He has published more than 200 papers on finan- cial systems in European Economic Review, Review of Finance, Journal of Money,CreditandBanking,JournalofInternationalMoneyandFinanceand Journal of Banking and Finance. He has participated in conferences and internationalforums,includingtheG-20. Marta de la Cuesta González is a senior lecturer at the Department of Applied Economics, Universidad Nacional de Educación a Distancia (UNED), Spain. She was Vice-chancellor of Economic Affairs at UNED between2005and2009.ShehasheldtheTelefónicaChairinCorporate ResponsibilityandSustainability,isamemberoftheSpanishCorporate SocialResponsibilityBoard(MinisteriodeTrabajo),andhasbeenaninde- pendentmemberoftheBancaCívicaBoardsinceJune2011. Shehasa PhD in Economics and Business Management. A teacher at undergrad- uate and postgraduate levels, she is responsible for delivering modules in the areas of banking, financial systems and sustainable finance. She isafoundingmemberoftheEconomicswithoutFrontiersNGOandhas promotedthefoundationoftheSpanishCSRWatch.Hermainresearch interestsincludebankingandfinance,corporatesocialresponsibilityand socially responsible investing. Her work has been published in books, conference proceedings and academic journals such as Journal of Busi- nessEthics,BusinessEthics:AEuropeanReview,TheServiceIndustryJournal, CorporateSocialResponsibilityandEnvironmentalManagement. Juan Fernández de Guevara RadoselovicsisAssistantProfessoratthe University of Valencia and Associate Researcher at the Instituto Valen- cianodeInvestigacionesEconómicas(IVIE).Between1997and2008he was a member of the technical staff at IVIE. He has also been a asso- ciateresearcherofseveralprojectsoftheSpanishNationalR+D+IPlan. ix