Liquidity Risk, Efficiency and New Bank Business Models (eBook)

Santiago Carbó-Valverde is Professor of Economics and Finance at Bangor University, UK. He was previously a Professor of Economics at the University of Granada, Spain. He currently serves as Director of the Financial Services Studies of Spanish Savings Banks Association (FUNCAS) and as President of the Rating Committee of Axexor. He has been advisor to the European Central Bank, the Federal Reserve Bank of Chicago, financial institutions, such as BMN, and has spoken at the G-20 forum. Pedro Jesús Cuadros-Solas is a Lecturer in Economics and a Researcher in Banking and Finance at the University of Granada, Spain. He holds a Bsc in Business Management and Law from the University of Jaén, Spain, and a Msc in Economics from the University of Granada. He is also a member of the Department of Economic Theory and History at the University of Granada. He has been a visiting scholar at the Bangor Business School (UK) and also at the University of St. Andrews, UK. Francisco Rodríguez-Fernández is Professor of Economics at the University of Granada, Spain. He is also a Senior Economist at the Spanish Savings Banks Foundation (FUNCAS). He has spent time as a visiting scholar at the University of Modena (Italy), Bangor Business School (UK) and the Federal Reserve Bank of Chicago (USA). He has served as a consultant to the European Commission, the European Research Framework Programme, the Spanish Ministry of Labour, KPMG and Euro 6000. 

Acknowledgements 6
Contents 8
List of Figures 10
List of Tables 12
Notes on Contributors 16
1: Introduction 23
References 26
2: A Note on Regulatory Arbitrage: Bank Risk, Capital Risk, Interest Rate Risk and ALM in European Banking 27
1 Introduction 27
2 ALM and Interest Rate Risk in Banking 30
3 Study Set-up and Hypothesis Development 32
3.1 Capital Regulation, Bank Risk and Regulatory Arbitrage 33
3.1.1 Motivations for the Use of Regulatory Arbitrage in Less Capitalised Banks 35
3.1.2 Motivations for the Use of Regulatory Arbitrage in Heavily Capitalised Banks 37
3.2 Interest Rates, ALM and Regulatory Arbitrage 38
4 Variables and Data 40
5 Results 46
5.1 H1: Changes in Capital Risk Determines Changes in Bank Risk 46
5.2 H2: Changes in Capital Risk Determines Changes in ALM Risk 47
5.3 H3: Interest Rate Environments Determine Changes in ALM Strategies 49
5.4 H4: Interest Rate Environments and Capital Requirements Determine Bank Risk Levels via Bank ALM Strategies 50
6 Conclusions 51
References 53
3: Basel III, Liquidity Risk and Regulatory Arbitrage 56
1 Introduction 56
2 Regulatory Definitions of Liquidity Risk 59
3 Review of the Literature 62
4 The Effects of the Liquidity Regulations on and off the Balance Sheets of Banks 66
5 Concluding Remarks 73
References 74
Liquidity Regulation 76
4: OTC Derivatives and Counterparty Credit Risk Mitigation: The OIS Discounting Framework 77
1 Counterparty Credit Risk Reforms in Context 77
1.1 The EMIR Regulation 78
1.2 Bilateral Collateralisation 80
2 Counterparty Risk in the Capital Regulatory Framework (Basel II and III) and in the International Accounting Standard 82
3 OIS Discounting: Theoretical and Operational Implications 88
3.1 Aspects of Valuation in the Presence of Collateralisation Agreements 92
3.2 The Multi-curves Valuation Framework Based on Eonia Discounting: A Case Study 96
4 Determination of Capital Requirement when Credit Risk Mitigation Techniques are Adopted: Case Study 102
5 Some Conclusions 109
References 111
5: Diversification and Connections in Banking: First Findings 112
1 Introduction 112
2 Literature Review 113
3 Data Analysis and Methodology 117
4 Results 132
5 Conclusion and Further Research Goals 134
Appendix 136
References 142
6: Banking System and Financial Exclusion: Towards a More Comprehensive Approach 145
1 Introduction 145
2 Literature Review and Hypotheses 148
2.1 Financial Exclusion from the Perspective of Difficulties of Use 148
2.2 Recent Shocks or Exogenous Drivers of Financial Exclusion 154
2.2.1 The Restructuring of the Banking System in Spain and the Deterioration of the Entity’s Social Dimension 154
2.2.2 Rise in Social Inequality in Urban Areas 155
3 Analysis of Madrid Metropolitan Area 157
3.1 Sample and Variable Selection 157
3.2 Methodology 162
3.3 Empirical Results 164
4 Conclusions and Discussion 171
Appendix 175
References 175
7: Small and Medium-Sized Banks in Central and Eastern European Countries 180
1 Introduction 180
2 The Impact of Bank Size on Its Strategy: A Brief Literature Review 183
3 Data Description and Classification Strategy 185
4 Ratio Analysis of CEE Banks 191
4.1 Ratio Analysis of CEE Banks: Investment Strategy 191
4.2 Ratio Analysis of CEE Banks: Safety 197
4.3 Ratio Analysis of CEE Banks: Performance 202
5 Efficiency of CEE Banks in DEA Models 205
6 Conclusions 210
Appendix 211
References 219
8: Stock Returns and Bank Ratings in the PIIGS 221
1 Introduction 221
2 Review of the Literature 224
2.1 Expected Impact of Rating Signals on Share Returns 224
2.2 Effect of Rating Signals on the Financial Markets 225
3 Data and Sample 227
4 Methodology 232
5 Empirical Results 237
5.1 Causality 244
6 Conclusions 250
7 Appendix 252
References 252
9: Value Creation Drivers in European Banks: Does the Capital Structure Matter? 256
1 Introduction 256
2 Theory 257
3 The Model 263
4 Sample and Methodology 267
5 Results 271
6 Discussion 281
7 Conclusions 283
References 284
10: Liquidity Mismatch, Bank Borrowing Decision and Distress: Empirical Evidence from Italian Credit Co-Operative Banks 288
1 Introduction 288
2 Literature Review 291
3 Liquidity Mismatch Index 294
3.1 Theoretical Framework 294
3.2 Data Source and Empirical Design 296
4 Macro-Prudential Perspective of the LMI 300
4.1 LMI as a Macro-Prudential Instrument 300
4.2 LMI Breakdown: Asset and Liability 301
4.3 Liquidity Stress Test and Liquidity Risk 302
5 The LMI and Cross-Section analysis 303
5.1 Cross-Sectional LMI 303
5.2 Bank Participation in the ECB’s LTRO and the LMI 306
5.3 DGS Interventions in Bank Crises and the LMI 307
6 Conclusions 309
Appendix 310
References 311
Index 315