Barbara Casu

A comparative study of efficiency in European banking

This paper investigates whether there has been an improvement in and convergence of productive efficiency across European banking markets since the creation of the Single Internal Market. Using efficiency measures derived from DEA estimation, the determinants of European bank efficiency are evaluated using the Tobit regression model approach. The established literature on modelling the determinants of bank efficiency is then extended by recognizing the problem of the inherent dependency of DEA efficiency scores when used in regression analysis. To overcome the dependency problem, a bootstrapping technique is applied. Overall, the results suggest that since the EUs Single Market Programme there has been a small improvement in bank efficiency levels, although there is little evidence to suggest that these have converged. The results also suggest that inference on the determinants of bank efficiency drawn from non-bootstrapped regression analysis may be biased and misleading.

Bank Competition, Concentration and Efficiency in the Single European Market

The deregulation of financial services in the European Union (EU), together with the establishment of the Economic and Monetary Union, aimed at the creation of a level playing-field in the provision of banking services across the EU. The plan was to remove entry barriers and to foster both competition and efficiency in national banking markets. However, one of the effects of the regulatory changes was to spur a trend towards consolidation, resulting in the recent wave of mergers and acquisitions. To investigate the impact of increased consolidation on the competitive conditions of the EU banking markets, we employ both structural (concentration ratios) and non-structural (Panzar-Rosse statistic) concentration measures. Using bank-level balance sheet data for the major EU banking markets, in a period following the introduction of the Single Banking Licence (1997-2003), this paper also investigates the factors that may influence the competitive conditions. Specifically, we control for differences in efficiency estimates, structural conditions and institutional characteristics. The results seem to suggest that the degree of concentration is not necessarily related to the degree of competition. We also find little evidence that more efficient banking systems are also more competitive. The relationship between competition and efficiency is not a straightforward one: increased competition has forced banks to become more efficient but increased efficiency does not seem to be fostering more competitive EU banking systems. Copyright Blackwell Publishing Ltd and The University of Manchester 2006.

Financial conglomeration: efficiency, productivity and strategic drive

Consolidation in the global banking industry has resulted in the emergence of financial conglomerates that conduct an extensive range of businesses with a group structure. To date, few studies have investigated the performance features of such groups. This study aims to extend the literature by evaluating the cost and profit efficiency and productivity change of Italian financial conglomerates during the 1990s using both parametric and nonparametric approaches. The impact of diversification and growth strategies on cost and profit efficiency is also investigated. The results seem to indicate that Italian banking groups have benefited from a consistent improvement in profit efficiency, while they have not experienced a clear increase in cost efficiency. Indeed, profit efficient banking groups display a high risk-high return profile.

An analysis of the relevance of off-balance sheet items in explaining productivity change in European banking

The 1990s have witnessed a significant growth in bank income generated through non-traditional activities, especially for large EU universal banking institutions. Using the non-parametric Malmquist methodology this study analyses the impact of the inclusion of off-balance sheet (OBS) business in the definition of banks’ output when estimating total factor productivity change indexes. Whereas the results reinforce the prevalent view in the recent literature, indicating that the exclusion of non-traditional activities leads to a misspecification of banks’ output, the impact of the inclusion of these activities varies. Overall, the inclusion of OBS items results in an increase in estimated productivity levels for all countries under study. However, the impact seems to be the biggest on technological change rather than efficiency change.

Regulatory Reform and Productivity Change in Indian Banking

This paper examines the impact of regulatory reform on productivity growth and its components for Indian banks from 1992 to 2009. We estimate parametric and nonparametric efficiency frontiers, followed by Divisia and Malmquist indexes of total factor productivity, respectively. To account for technology heterogeneity among ownership types, we use a metafrontier approach. Results are consistent across methodologies and show sustained productivity growth, driven mainly by technological progress. Furthermore, results indicate that different ownership types react differently to changes in the operating environment. The position of foreign banks becomes increasingly dominant, and their production technology becomes the best practice in the industry.

A comparative study of the cost efficiency of Italian bank conglomerates

Outlines previous research on the efficiency of the Italian banking system, describes the structure of Italian banking groups and uses parametric (stochastic cost frontier) and non‐parametric (data envelopment analysis) approaches to assess the efficiency of Italian bank conglomerates in 1995 compared with the parent companies and subsidiearies. Explains the methodology and presents the results, which suggest that parent companies and subsidiaries are more efficient than groups and that efficiency is not related to size. Analyses efficiencies of scale and scope to show that bank groups gain more economies of scope than parents or subsidiaries; but finds mixed results for economies of scale.

Emerging Themes in Banking: Recent Literature and Directions for Future Research

This paper presents a review of the recent banking literature centred on the core themes of performance, risk and governance of financial institutions. We write this review against the backdrop of the recent financial crisis and the major changes it caused to banking sectors in many countries. Several themes emerge, but the overarching issue relates to the need to better understand bank risk-taking incentives and the implications for systemic stability. Specifically, there is a need for more work on: the role of safety net subsidies and how these relate to systemic risk; financial innovation and the adoption of new products and processes; and how innovative behaviour links to risk-taking, market returns and contagion. Future research could also be directed to provide a better understanding of the inter-connections between competition, capital, profitability, liquidity and risk.

The determinants of bank CDS spreads: evidence from the financial crisis

Based on a sample of mid-tier and top-tier internationally active banks with 5-year senior CDS, this paper investigates the determinants of credit default swaps (CDS) spreads and whether CDS spreads can be considered a good proxy of bank performance. The analysis encompasses three time periods: a pre-crisis period (1 January 2005–30 June 2007), a crisis period (1 July 2007–31 March 2009) and a post-crisis period (1 April 2009–30 June 2011) and focuses exclusively on bank-specific balance sheet ratios. The results of the empirical analysis indicate that bank CDS spreads, both in the pre-crisis period, but especially in the crisis period, reflect the risk captured by bank balance sheet ratios. We find that the determinants of bank CDS spreads vary strongly across time, as economic and financial conditions vary. TIER 1 ratio and leverage appear insignificant in all of the three periods considered, while liquidity indicators become significant only during the crisis and post crisis period.

Does Securitization Reduce Credit Risk Taking? Empirical Evidence from US Bank Holding Companies

This study investigates the impact of securitization on the credit risk-taking behavior of banks. Using US Bank Holding Company data from 2001 to 2007, we find that banks with a greater balance of outstanding securitized assets choose asset portfolios of lower credit risks. Examining securitizations by the type of underlying assets, we find that the negative relationship between outstanding securitization and risk taking is primarily driven by securitizations of mortgages, home equity lines of credit, and other consumer loans. Securitizations of all other types of assets, on the other hand, seem to have no significant impact on bank credit risk-taking behavior. We attribute these results to the recourse commonly provided in securitization transactions, as it might alter the risk-taking appetite of the issuing banks across asset classes. Therefore, we conclude that the net impact of securitization on the risk-taking behavior of issuing banks, and consequently on the soundness of the banking system, is ambiguous and will depend on the transactions structure. In particular, it will depend on the relative magnitude of credit support provided by banks. This leads us to suggest that banks have typically viewed securitization as a financing rather than a risk management mechanism.

Competition issues in European banking

Purpose - The purpose of this paper is to assess the outcome of European Union (EU) deregulation and competition policies on the competitive conditions of the main EU banking markets. Design/methodology/approach - After a review of deregulation and competitition policies in the EU banking industry, the degree of competition in the largest five EU banking markets using is tessted both structural (concentration ratios and Herfindahl-Hirshman indices) and non-structural ( Findings - Results indicate that EU banking markets are becoming progressively more concentrated and that there is no evidence of an increase in competitive pressure. Country differences are also apparent thereby indicating that despite the sustained regulatory interventions, significant barriers to the integration of EU retail banking markets remain. In line with recent literature, the analysis also seems to provide further evidence that concentration is not necessarily a good proxy for competition. Originality/value - Increased market concentration and its effects on competition are of relevance in a period of renewed EU regulatory efforts to remove the remaining barriers to the integration of financial markets. The evaluation of competitive conditions and market power in EU banking are therefore of interest to policy-makers and regulators.