Jean Dermine

A note on banking efficiency in Portugal, New vs. Old banks

Following entry into the European Community in 1986, Portugal transformed rapidly its repressed banking system with deregulation, the opening of borders, the granting of new banking licenses, and privatization. In a more competitive banking system, one would expect a priori an increase in operational efficiency. This paper attempts to quantify the magnitude of efficiency gains over the years 1990–1995. Moreover, the paper documents the relative efficiency performance of new domestic banks. Not hampered by a legacy of inefficiency from the past, they could operate nearer the efficiency frontier. The case of Portugal provides unique information on the joint effect of deregulation and the granting of new banking licenses on the change in operational efficiency of a previously repressed banking system.

Economies of scale and scope in French mutual funds

Abstract This paper evaluates the economies of scale and scope in the French mutual funds (SICAV) industry. This segment of the financial sector offers the unique characteristic that some firms specialize, while others supply several products. The results suggest economies of scale and scope for small institutions and diseconomies for larger firms. An appropriate size for a diversified company is in the range of FF 2.9 billion.

Deposit rates, credit rates and bank capital:The Klein-Monti Model Revisited

Abstract The paper expands the Klein-Monti model with bankruptcy risk and deposit insurance. The well-known result of independence between deposit and credit rates is shown to be lost; the causal relationship becomes recursive and the direction of the recursivity depends on the existence or the absence of a deposit insurance mechanism.

Bank Mergers in Europe: The Public Policy Issues

A very large merger wave in the banking industry has taken place in Europe over the last 15 years. Public policy‐makers need to assess how bank mergers – be they domestic intra‐industry, across‐industry, or cross‐border – affect their mission of protecting investors and ensuring financial stability, an appropriate level of competition, and the competitiveness of national firms. Moreover, as the banking world is becoming increasingly international, there is a need to reassess the structure of bank regulation and supervision which has been assumed historically by each nation‐state.

Banking deregulation in Europe

Banking deregulation Ernst Baltensperger and Jean Dermine Deregulation of financial services is well under way in many European countries. This has led to fears that economies are now more vulnerable to macroeconomic shocks. The authors focus on one aspect of financial deregulation, namely liberalization of the banking system. They show that measures such as the abolition of reserve requirements increase macroeconomic variability under some circumstances but reduce it under others. No general macroeconomic case can be made for banking regulation or for its liberalization. Analysis of microeconomic issues is more fruitful. Asymmetric information and the risks of contagion in a panic can lead to runs against the banking system. To the extent that these are socially inefficient, public intervention may be justified. This presumption is stronger since the risks of bank runs have grown recently with the increased maturity mismatch – the finance of illiquid loans by liquid short-term deposits. To meet this danger, the authors recommend regulation of deposit contracts whilst preserving incentives for bank monitoring by private parties. Specifically, they propose an ex post liability of current and former depositors when banks default, thereby offsetting the incentive to withdraw funds at the onset of a crisis. Being quick off the mark would no longer be sufficient, and sophisticated depositors would press for greater disclosure and fuller monitoring of bank activities. The authors also recommend that remaining controls on deposit interest rates should be scrapped and that supervision of international banking should be cooperatively conducted by host and parent authorities.

Unexpected inflation and bank stock returns: The case of France 1977–1991 ☆

Abstract This paper evaluates the impact of unexpected inflation on the stock returns of a sample of French banks. It offers an empirical test of theories that have predicted an impact of inflation on the stock returns of banks. The paper complements a large literature that has focused exclusively on the impact of unexpected interest rates. The analysis provides empirical support to the hypothesis that, in periods of volatile inflation, there exists an inflation risk factor which is independent of the well-documented interest rate factor.

Bank Regulations after the Global Financial Crisis: Good Intentions and Unintended Evil

As a result of the global financial crisis, more stringent regulations on bank capital, liquidity and corporate structure have been passed. In this essay, we analyze the impact of these regulations and call attention to the fact that the dynamic responses by financial institutions might create unintended evil: a reduced supply of bank loans, incentives to securitize assets and move financial intermediation to shadow banking, and adverse incentives on bank risk monitoring. The conclusion is that privately-based mechanisms that put most creditors at risk - interbank lenders included - are the best way to restore the stability of financial markets.

Home Country Control and Mutual Recognition

The European Commission has worked for nearly thirty years on the integration of banking and financial markets. Freedom of establishment and entry was achieved in 1973, but further efforts to harmonize banking regulations and promote cross-border services proved to be very slow. This process led to a genial idea, incorporated in the 1985 White Paper on the Completion of the Internal Market, the opening of markets prior to harmonization. Regulation and supervision are guided by the principles of home country control and mutual recognition according to which each country will accept the regulation and supervision enforced by other countries on their domestic firms operating abroad. These principles are very broad: they apply to all products, banking and financial services included. The issue raised in this paper concerns the application of these two principles to banking services. Is there anything special in banking that would justify a different approach?

Bank Corporate Governance, Beyond the Global Banking Crisis: Bank Corporate Governance

Following up on the publication of the Walker Report (Walker, David, 2009) in the United Kingdom, international organizations such as the Basel Committee (2010), the OECD (2010), and the European Union (2010) have proposed guidelines to improve bank corporate governance and, more specifically, risk governance. These international reports vary widely on what the prime objective of bank corporate governance should be, with one group recommending a shareholder�?based approach, and the other a stakeholder�?based one. Moreover, the focus of these reports is exclusively on risk avoidance, with little guidance as to how an acceptable level of risk should be defined. Drawing on insights from economics and finance, this paper is intended to contribute to the debate on bank corporate governance. Our four main conclusions are as follows. Firstly, the debate on bank governance should concern not only the boards but also the governance of banking supervision with clearly identified accountability principles. Secondly, since biases for short�?term profit maximization are numerous in banking, boards of banks should focus on long�?term value creation. Thirdly, board members and banking supervisors should pay special attention to cognitive biases in risk identification and measurement. Fourthly, a value�?based approach to risk taking must take into account the probability of stress scenarios and the associated costs of financial distress. Mitigation of these costs should be addressed explicitly in the design of bank strategy.

Towards An Equilibrium-model of the Mutual Funds Industry

Abstract We consider an industry in which mutual funds can form portfolios at lower cost than individual investors. Investors can gather their own portfolio from primary securities and/or shares of mutual funds. In this context, we model competition between mutual funds as a non-cooperative game in which funds select their portfolios. We show that a small number of funds suffices to ensure a Pareto superior equilibrium.