Rudi Vander Vennet

Cost and Profit Efficiency of Financial Conglomerates and Universal Banks in Europe

In contrast to the United States, where the banking system has historically been fragmented, the Second Banking Directive allows European banks both to form financial conglomerates and hold equity stakes in nonfinancial companies. This paper analyzes the cost and profit efficiency of European financial conglomerates and universal banks. I find that conglomerates are more revenue efficient than their specialized competitors and that the degree of both cost and profit efficiency is higher in universal banks than in nonuniversal banks. These results indicate that the current trend toward further de-specialization may lead to a more efficient banking system. An investigation of the equity betas under varying business cycle conditions supports the hypothesis of superior monitoring capabilities on the part of universal banks. Finally, profit regressions suggest that operational efficiency has become the major determinant of bank profitability and that oligopolistic rents have become less prevalent in European banking.

The effect of mergers and acquisitions on the efficiency and profitability of EC credit institutions

Abstract Based on a sample of 492 takeovers we examine the performance effects of acquisitions and mergers between EC credit institutions over the period 1988–1993. The sample is subdivided according to the degree of managerial leverage on the part of the acquirer and the degree of operational integration. The results indicate that domestic mergers among equal-sized partners significantly increase the performance of the merged banks. Improvement of cost efficiency is also found in cross-border acquisitions. On the other hand, domestic takeovers are found to be influenced predominantly by defensive and managerial motives such as size maximization.

Failure prediction in the Russian bank sector with logit and trait recognition models

The Russian banking sector experienced considerable turmoil in the late 1990s, especially around the Russian banking crisis in 1998. The question is what types of banks are vulnerable to shocks and whether or not bank-specific characteristics can be used to predict vulnerability to failures. In this study we employ a parametric logit model and a nonparametric trait recognition approach to predict failures among Russian commercial banks. We modify the trait recognition approach such that the default probabilities are calculated directly without preliminary classification of cells in the voting matrix as safe or unsafe. We test the predictive power of the models based on their prediction accuracy using holdout samples. All models performed better than the benchmark; the modified trait recognition approach outperformed logit and the traditional trait recognition approach in both the original and the holdout samples. As expected liquidity plays an important role in bank failure prediction, but also asset quality and capital adequacy turn out to be important determinants of failure.

Determinants of mutual fund underperformance: A Bayesian stochastic frontier approach

Abstract The purpose of this paper is to identify ex ante fund statistics that can be related to future performance of European equity funds. In an efficient market setting, actively managed portfolios cannot outperform a passive benchmark strategy. However, purely by chance, some funds outperform their benchmark ex post, making the identification of performance determinants a difficult task. To alleviate this problem, we decompose the return deviation from its expected return into a noise component and an efficiency term, which is 100% if the fund exhibits no underperformance. The decomposition is based on the Bayesian frontier approach. We find evidence that fund efficiency is positively related to fund size and historical performance, the latter being solely due to the poorly performing funds. We fail to find a link between fund age and performance.

Microeconomic Determinants of Acquisitions of Eastern European Banks by Western European Banks

A considerable number of Western European banks have acquired banks in Central and Eastern Europe from the mid-1990s onwards. The question is whether or not this will improve the efficiency and profitability of the Central and Eastern European banking sectors. We test the relative strength of the efficiency versus the market power hypotheses by investigating the bank-specific characteristics of the banks involved in the cross-border acquisitions. We also examine the determinants of the post-acquisition target banks’ performance. Our results indicate that large Western European banks have targeted relatively large and efficient CEEC banks with an established presence in their local retail banking markets. We find no evidence that cross-border bank acquisitions in the CEEC are driven by efficiency motivations. The evidence supports the market power hypothesis, raising concerns about the optimal balance between foreign ownership and competition.

The law of proportionate effect and OECD bank sectors

The paper investigates the growth dynamics of the bank sectors in the OECD area over the period 1985–1994 and examines whether the structural financial reforms of the late 1980s have affected their growth path. Based on a test of Gibrats law of proportionate effect, it is found that the 1985–89 period was characterized by size convergence, implying that smaller bank sectors were expanding more rapidly. However, in the 1990–1994 period the pattern reversed to proportionate growth. The analysis of the determinants of bank market growth reveals that macroeconomic growth, operational bank efficiency, credit quality, and capitalization are the main drivers of bank industry growth.

Do stock markets discipline US bank holding companies : Just monitoring, or also influencing?

This paper presents evidence that bank managers adjust key strategic variables following a risk and/or valuation signal from the stock market. Banks receive a risk signal when they exhibit substantially higher (semi-)volatility compared to the best performing bank(s) with similar characteristics, and a valuation signal when they are undervalued relative to the average bank with similar characteristics. We document, using a partial adjustment model, that bank managers adjust the long-term target value of key strategic variables and the speed of adjustment towards those targets following a risk and/or negative valuation signal. We interpret this as evidence of stock market influencing. We show that our results are unlikely to be driven by indirect influencing by regulators, subordinated debtholders, retail or wholesale depositors. Finally, we show that the likelihood that banks receive a risk and/or valuation signal increases with opaqueness, managerial discretion and specialization.

Bank Market Structure and Firm Capital Structure in Europe

We explore the impact of concentration in the banking markets on the capital structure of publicly quoted non-financial firms in the EU15 over the period 1997-2005, an era marked by intensive merger activity in the banking sector. Theory offers conflicting predictions: the market power hypothesis states that bank market concentration has a negative effect on leverage whereas the information based hypothesis shows that bank market concentration leads to higher leverage. Our main finding is a negative and significant relationship between the degree of concentration of European banking markets and the market leverage of firms, indicating the persistence of credit constraints.

European bank stress test and sovereign exposures

ABSTRACT We use an event study methodology to revisit the bank stress test conducted by the European Banking Authority in 2011. Instead of only considering the final results disclosure, we consider six key official announcements during the stress test. Our results indicate that abnormal returns reversed over the course of the stress test and that the emerging sovereign crisis contributed to the stock market perception of bank health.

Banking in the EMU: an Industrial Organization Perspective

The start of the Economic and Monetary Union (EMU) at the beginning of 1999 is generally presented as the cherry on the cake of the European financial integration process. This view sees the EMU as a catalyst towards more intense competition. The remaining price differences for the comparable financial products within the European Union would diminish or totally disappear (EC Commission (1990)). Banking in one currency would be a synonym for banking in one uniform and integrated market, without remaining barriers. Recent evidence, however, points at existing price differences across and within European countries (Economic Research Europe (ERE) report ‘Credit Institutions and Banking’). This contribution offers a review of competitive forces between financial institutions in the EMU-context. In particular, we analyse how the EMU affects market imperfections and other forces of change in the financial sector. We investigate whether the above reasoning of financial integration applies, or whether certain market imperfections are persistently determining banking competition.