The Business of Banking (eBook)

Giusy Chesini is Associate Professor in Banking and Finance at the University of Verona, Italy. She holds a PhD in financial markets and intermediaries from the University of Bergamo, Italy. Giusy is also the author of several papers and books related to the evolution of financial intermediation. Her research topics include financial markets, stock exchanges, banking and corporate finance.Elisa Giaretta is a Research Fellow at the University of Verona, Italy, where she received a PhD in Business Administration and Management. She works in the ‘Polo Scientifico e Didattico di Studi sull’Impresa’, an academic centre focused on the analysis of Italian enterprises. Her research topics include private equity, companies’ networks and bank risks.Andrea Paltrinieri is Assistant Professor in Banking and Finance at the University of Udine, Italy. He holds a PhD in Business Administration from the University of Verona, Italy. Research topics include asset management and institutional investors, with a particular focus on sovereign wealth funds, Islamic finance and the relative financial instruments such as sukuk, commodity markets and exchange traded products.

Acknowledgements 6
Contents 8
Notes on Contributors 10
List of Figures 16
List of Tables 18
1 Introduction 20
2 Interest Rates and Net Interest Margins: The Impact of Monetary Policy 24
2.1 Introduction 24
2.2 Theoretical Framework and Testable Hypothesis 28
2.2.1 Theoretical Framework 28
2.2.2 Testable Hypothesis 30
2.3 Data, Definition of Variables and Methodology 30
2.3.1 Data 30
Variables 31
Level of Interest Rates 31
Market Power 32
Bank Size 33
Risk Aversion 34
Credit Risk 34
Interest Rate Risk 34
Interaction Between Credit Risk and Market Risk (Risk Covariance) 35
Average Cost of Transactions (Average Cost) 35
Liquid Reserves (Reserves) 35
Implicit Interest Payments 35
Efficiency 36
GDP Growth 36
Net Interest Margin 36
2.3.2 Methodology 41
2.4 Results 41
2.4.1 Base Scenario 41
Robustness of the Results 43
2.5 Economic Impact of the Determinants of Net Interest Margin 45
2.6 Conclusions 48
Acknowledgments 50
References 50
3 The Swedish Mortgage Market: Bank Funding, Margins, and Risk Shifting 53
3.1 Introduction 53
3.2 Covered Bonds—Essential Features 55
3.2.1 The Swedish Market for CBs 57
3.3 Sources of Data and Selection of Banks 60
3.4 Mortgage Rates of Swedish Banks 62
3.4.1 Residential Mortgage Rates and Bank Margins 63
3.4.2 Risk Shifting and CB Funding on the Swedish Mortgage Market 68
3.5 Concluding Remarks 68
References 70
4 Incapability or Bad Luck? Testing the “Bad Management” Hypothesis in the Italian Banking System 72
4.1 Introduction 72
4.2 Determinants of NPLs: Main Strands of Literature 74
4.2.1 Macroeconomic Factors 74
4.2.2 Bank-Specific Factors 76
4.2.3 Micro and Macro Approach 79
4.3 Data Description and Variables 80
4.4 Model and Variables 84
4.5 Results 89
4.6 Conclusion 92
References 94
5 Why Do US Banks React Differently to Short Selling Bans? 96
5.1 Introduction and Motivations of the Study 96
5.2 Literature Review 98
5.3 Data and Methodology 102
5.4 Empirical Results 110
5.4.1 Banks’ Fundamental Analysis 110
5.4.2 Stock Price Reaction 113
5.4.3 Risk Analysis: Total and Systematic Risk 116
5.5 Discussion and Limitations of the Study 120
References 123
6 Reputational Risk in Banking: Important to Whom? 126
6.1 Introduction 126
6.2 Reputational Risk from a Regulatory Perspective 128
6.3 Reputational Risk as Internal and External Factor 130
6.4 Reputational Risk in Global Surveys 133
6.5 Problems with Measurement of the Reputational Risk 136
6.6 Empirical Analysis of the Reputational Risk in the CEE Banking 138
6.7 Conclusion 143
References 144
7 The Business Model of Banks: A Review of the Theoretical and Empirical Literature 147
7.1 Introduction 147
7.2 The Definition of Business Model 149
7.2.1 ICT and e-Business Stream 150
7.2.2 Organisational Theories and Resource-Based View 151
7.2.3 Strategy Stream 152
7.2.4 Strategic Groups 154
7.3 The BBM Literature 155
7.4 The Literature on Bank Diversification: The Nexus with BBM Analysis 163
7.5 Banks’ Key Vulnerabilities in the Supervisory Assessment Scheme 168
7.6 Conclusions 173
References 178
8 On European Deposit Protection Scheme(s) 184
8.1 Introduction 184
8.2 The Legal Framework 187
8.3 The EU Status Quo 196
8.4 Conclusive Remarks 213
References 215
9 A Technical Approach to Deposit Guarantee Schemes 218
9.1 Introduction 218
9.2 Deposit Guarantee Schemes in Italy 221
9.3 The FITD’s Monitoring System of Bank Riskiness 222
9.3.1 Balance Sheet Indicators 222
9.3.2 Thresholds, Classes and Coefficients 225
9.3.3 Contribution Quotas 228
9.3.4 The Weighted Average Aggregate Indicator and the Sample Banks 229
9.4 The EBA’s Monitoring System of Bank Riskiness 231
9.4.1 Risk Indicators 231
9.4.2 Individual Risk Score 236
9.4.3 Bucket Method 236
9.4.4 Aggregate Risk Score 238
9.5 Comparison Between FITD and EBA Monitoring System of Bank Riskiness 241
9.6 Conclusion 244
Appendix 246
References 247
Index 249