Christos Staikouras

Competition and Concentration in the New European Banking Landscape

This paper measures the degree of concentration and competition in the enlarged European Union (EU) banking environment over the period 1998–2002. In the empirical part we opt for a methodology as proposed by Panzar and Rosse based on a non-structural estimation of market competition. Our results suggest that European banks were operating under conditions of monopolistic competition and that bank interest revenues in the 10 new EU member states was earned under conditions of higher competition than those that existed in the old EU banking countries. The opposite result was observed for total operating revenues. Smaller banks earn interest income in a less competitive environment than larger banks, while the opposite is observed for total revenues.

Non-Interest Income and Total Income Stability

Banks can differ markedly in their sources of income. Some focus on business lending, some on household lending, and some on fee-earning activities. Increasingly, however, most banks are diversifying into fee-earning activities. Such diversification is either justified (by the bank) or welcomed (by commentators), or both, as reducing the banks exposure to risk. Diversification across various sources of earnings is welcomed for, it is claimed, diversification reduces risk. Whether it does of course depends on how independent of each other the various earnings sources are. Traditionally fee income has been very stable; but, also traditionally, it has been a small part of the earnings stream of most banks. Has non-interest income remained stable, or at least uncorrelated with interest income, as banks have increased its importance in their earnings? This paper examines the variability of interest and non-interest income, and their correlation, for the banking systems of EU countries for the years 1994-98. It is found that the increased importance of non-interest income did, for most but not all categories of bank, stabilise profits in the European banking industry in those years. It is not, however, invariably more stable than interest income.

Evaluating cost and profit efficiency: a comparison of parametric and nonparametric methodologies

The objective of this article is 2-fold. First, it provides an empirical assessment of the cost and profit stochastic frontiers based on a panel dataset of Greek commercial banks over the period 1993 to 2005. Second, on the basis of the same sample, it also compares the most widely used parametric and nonparametric techniques to cost efficiency measurement, namely, the Stochastic Frontier Approach and Data Envelopment Analysis. The results suggest greater similarities between the predictions of cost and profit efficiency methods than between parametric and nonparametric techniques. Such evidence is new in the literature and calls for a more technically level playing field for estimating bank efficiency.

Fuzzy Cognitive Maps in Banking Business Process Performance Measurement

This paper addresses the problem of designing an “intelligent” decision support methodology tool to act as a back end to financial planning. The methodology tool proposes a novel approach to supplementing typical financial strategy formulation projects by utilizing the fuzzy causal characteristics of Fuzzy Cognitive Maps (FCMs) to generate a hierarchical and dynamic network of interconnected profit and loss (P&L) concepts. By using FCMs, the mechanism simulates the efficiency of complex hierarchical financial models with imprecise relationships and external stimuli while quantifying the impact of strategic changes to the overall P&L status. Generic maps that supplement the decision making process demonstrate a roadmap for integrating hierarchical FCMs into the P&L model of typical financial sector enterprises. Preliminary experiments indicate that ex ante reasoning of the impact of strategic changes (actual or hypothetical) to the status of financial performance can be effective and realistic, without employing detailed P&L numerical calculations.

Competition and Banking Stability in the Euro Area: The Cases for Greece and Spain

Banking markets across the world are evolving rapidly, under the impact of financial innovation, globalization, and information technology. Within Europe these changes are especially fast and far-reaching, accelerated by both the completion of the single market in financial services and the introduction of the Euro. The Euro and the associated deregulation of banking markets are affecting the revenues of the European banking system as a whole, and are changing the allocation of revenue between banks, with implications for financial stability and prudential regulation. Essential to the continuing stability of a banking system is that it be profitable. This paper describes the current situation of the banking industry in two countries, Greece and Spain. It provides a comparative analysis of the structure and sources of profitability for the Greek and Spanish national banking systems. Profitability has been higher and less variable in Spain compared with Greece. This comparison enables us to offer some suggestions as to the impact of deregulation and inflation on banking sector stability. A full liberalization of interest rates setting and removal of most institutional barriers restricting competition between different banking markets had an impact on both banking sectors. Higher and more variable rates of inflation in Greece can give an explanation of higher variability in bank profits compared with Spain. The paper demonstrates that there remains substantial differences, and thus responsibility for national financial systems should rest, at least for the time being, with national central banks rather than be centralized with the ECB.

A micro-econometric model of the UK property-liability insurance industry

The aim of this study is to assess the effect of claims and expenses on premiums for the UK property-liability insurance industry. A cointegration approach of a multivariate system of equations is applied to disentangle the causal relationships between premiums, claims and expenses. The findings reveal that, in the long run, claims and expenses cause premiums, supporting the ‘rational expectations’ and the ‘institutional rigidities’ hypotheses. A dynamic analysis, using the impulse response functions, confirm the positive impact of claims on premiums, whilst premiums also positively affect claims, underlying that the former are price sensitive.

Does R&D, human capital and FDI matter for TFP in OECD countries?

ABSTRACT This study investigates the interplay between research and development (R&D), human capital (HC), foreign direct investment (FDI) and total factor productivity (TFP) in OECD countries. We divide the sample into two sub-groups; the European and the non-European states so as to account for underlying country heterogeneity. The analysis follows a panel data approach over the period 1995–2015, taking into account the modelling on non-stationarity, long-run relationships and short-run dynamics with a panel VAR. Both R&D and HC have a positive effect on TFP, whilst FDI has a positive and significant effect only in the case of non-European countries. Moreover, the contribution of R&D is higher than that of HC and FDI in all cases. Thus, based on these findings, policymakers should design and implement policies to increase resources invested in R&D, with a consistent ongoing spending review, to attract foreign direct investment, especially for the majority of the European and some of the non-European countries and to improve education system on a more productive innovation and research base.

Multiobjective portfolio optimization: bridging mathematical theory with asset management practice

We attempt to establish an integrated portfolio optimization business framework, in order to bridge the underlying gap between the complex mathematical theory of multiobjective mathematical programming and asset management practice. Our aim is to assist practitioners and portfolio managers in formulating successful investment strategies, by providing them with an effective decision support tool. In particular, we propose a multiobjective portfolio model, able to support the simultaneous optimization of multiple investment objectives. We also manage to integrate a set of sophisticated real-world non-convex investment policy limitations, such as the cardinality constraints, the buy-in thresholds, the transaction costs, along with particular normative rules. The underlying investment management rationale of the proposed managerial protocol is displayed through an illustrative business flowchart, while we also provide an analytical step-by-step portfolio management business routine. The validity of the model is verified through an extended empirical testing application on the Eurostoxx 50. According to the results, a sufficient number of efficient or Pareto optimal portfolios produced by the model, appear to possess superior out-of-sample returns with respect to the underlying benchmark.

A use of Black-Scholes model in market risk

The aim of this paper is to use the Black-Scholes model for market risk by using the estimated drift and volatility of a stock-return for a relatively small time-horizon, in case where the historical returns are better-fitted to a normal distribution. In this case, we may use the infinitesimal operator of the complete market formulated by the stock and the numeraire by taking the interest rate also constant and equal to the mean reference rate for the turning of theoretical and historical VaR to an economic capital functional.

RAROC in portfolio optimization

In this paper, we provide the implications of using the performance ratio being defined by the expected shortfall-well known as RAROC-in static portfolio optimization, by giving the proof of the relevant results. We also use RAROC as a primary function in the AUGMECON algorithm, providing the main scheme of such an application on data from Athens Stock Exchange. The use of RAROC in AUGMECON as a primary function is also faced as an optimization problem under a general nonconvex optimization framework.