Valeria Stefanelli

Relationship lending, default rate and loan portfolio quality

This article empirically verifies the existence of a connection between the relationship-oriented model and the quality of the loan portfolio, by using alternative risk measures to previous studies. Consistently with earlier literature, bank size, distance and intensity of labour are used as proxies for the relationship lending model. The main results demonstrate that the relationship lending variables are all significant contributory factors to the loan portfolio quality. Robustness tests, conducted using intermediate risk measures (Doubtful Loan Rate (DLR), Past Due Loan Rate (PDLR)), confirm the results. Our findings are consistent with the relationship lending literature, but we extend to Default Rate (DR) measurement, a new role in terms of a banking model to create loans and manage credit risk. Finally, banking literature can take advantage of the DR indicator as a proxy for the quality of loan portfolio, and we consider its strong relationship to the intermediation model chosen.

Bank Intermediation Models and Portfolio Default Rates: What’s the Relation?

Literature on the banking intermediation model (relationship vs. transactional) is largely focused on the bank-firm relationship aspect, highlighting the advantages and disadvantages both for the bank and the borrower. However, previous studies analyzing the implications of the quality of the loan portfolio resulting from the adoption of a particular model are very few (McNulty et al., 2007; Berger et al., 2010). Our analysis empirically verifies the existence of a relationship between the relationship-oriented model and the quality of the loan portfolio by using alternative measures to those used in existing literature to assess credit quality (Acharya, Hasan and Sauders, 2002; Cornet et. al., 2009). Bank size, functional distance and the intensity of the labour factor are used as proxies of the intermediation model, consistent with previous literature (Nakamura, 1993 and 1994; Udell, 2002; De Young et al., 2004; Berger et al., 2005; Berger and; Alessandrini et al., 2009). The analysis was conducted on a sample of 1,927 Italian banks over the 2006-2008 period and demonstrates the existence of a positive relationship between bank size, functional distance and the default rate, while confirming that bank profitability (ROA) negatively affects the default rate. The robustness test, implemented with the use of intermediate risk rating (doubtful loans rate, past due loans rate), confirms the results. On the base of these findings, some managerial implications are proposed.

The Peculiarity of the UK Case: Mutual Building Societies

In regards to European cooperative credit, the English situation is the most diverse when considering the prevailing cooperative model that is on the market and the resulting competitive solutions it has implemented. The cooperative sector in the UK is that of mutual building societies, a particular category of reciprocal financial enterprises specialized in lending mortgages and subject to the “one man — one vote” principle. These building societies are governed by a special single text, even if they have substantially the same functions as banks. In recent years, the greater competitiveness of the financial markets and the changes in the regulatory framework have led to the demutualization of the majority of the mutual building societies, which resulted in a change in their structure.

Are There Differences in Boards of Directors Between Banks and Non-financial Firms? Some Evidence from EU Listed Companies

This study compares the board features of major listed bank and non-financial firms in Europe. We find that at the industry-specific level the structure of bank board’s is similar to that of non-financial firms, although banks tend to have more meetings and committees. Second, when we consider country-specific board diversity, bank boards are similar across countries apart from in Spain where the bank boards have a higher presence of older directors, a lower number of independents and foreigners, and more meetings. Finally, when we look at domestic-specific board diversity differences we find no statistically significant differences. All in all there is not much difference between bank and non-financial boards.

Bulgarian Cooperative Banking

The chapter describes the peculiar characteristics of the Bulgarian economic system, with reference to the trend of the major macroeconomic variables. In this context, the analysis point out the features of the Bulgarian cooperative credit system, determining its profile based on the type of network taken into consideration and the two different entities: the Central Cooperative Bank Plc (CCB) and the Agriculture Credit Cooperatives (ACCs). The study highlights a substantial fragility of the Bulgarian cooperative system and outlines the hope of a better regulation to support it in the recent contest of EU Cooperative regulation changes.

'When a Scoffer is Punished, the Simple Becomes Wise' -- The Influence of Enforcement Actions on Bank Risk-Taking

Enforcement actions (or sanctions) pursue two complementary goals, namely to penalize guilty companies and to provide an example to other companies that bad behaviour will be penalized. Although the recent financial crisis showed that this topic is critical in banking, only a few papers (e.g. Delis, Staikouras and Tsoumas, 2015) have analyzed the consequence of sanctions, and no papers have investigated the cross-effects on non-sanctioned banks. Focusing on the Italian banking industry (i.e. as an ideal case study), we assume that non-sanctioned banks care about the enforcement actions taken against other similar banks. By adopting a two-step model based on a propensity score matching technique to calculate the probability of a bank to be subject to sanctions, we show that the stability of non-sanctioned banks increases as the probability of being sanctioned increases (and also as the Mahalanobis distance from the group of sanctioned bank is reduced).

Bank Stability and Enforcement Actions in Banking

This paper analyzes the causes and consequences of the enforcement actions (sanctions) imposed by supervisory authorities for banks. Focusing on a sample of Italian banks between 2005 and 2012, we found 302 sanctions regarding 3,588 persons (i.e. Board of directors, Top Managers, and Chief Executive Officers) were sanctioned in banks. We have three main results. First, enforcement actions are given to banks having high credit risk and poor Return on Assets (both one and two years in before the sanction). Second, sanctioned banks are unable to change their conduct in the first year following the enforcement sanction and the stability levels do not improve. Rather, it takes at least two years after an enforcement action so that banks are able to improve their stability. We also provide evidence that socio-eco-demographic differences in Italy have a substantial impact on the banks reaction after enforcement actions.

Enhancing Board Effectiveness: What About Induction and Training Programs for Directors?

The paper discusses the idea that an institutionalized and effective board induction and training process could maximize the director’s contribution and thus improve board effectiveness in banks, especially if training and induction are done in a board that respects good practices with regards to board independence, board diversity, presence of board committees, degree of directors’ turnover, recommended by regulators and institutions. In the wake of the recent financial crisis, in fact, a growing “professionalisation” of directors may be considered as a tool to improve the board effectiveness in banks. Contrary to the relevance of the topic, the available literature is very poor. Using the qualitative research methods, the paper shows, first of all, the state of the art on board induction and training programs for directors in the 25 largest European banks and, then, the results of a survey about the opinions of an Italian panel on the topic. Findings confirm that induction and training programs for directors are a fundamental tool to improve the effectiveness of corporate governance. However there is a substantially limited dissemination of these practices in banks and, in those cases where these practices are used more extensively, it is possible to spot some areas of improvement compared to best practices. Overall, the most disappointing results, in terms of the dissemination of induction and training programs for directors, emerge from the interviews carried out on the Italian panel. Based on the results, some motivation and managerial implications are proposed.

Boards at work: why and how induction and training could enhance directors' effectiveness in the boardroom

In the wake of the recent economic and financial crisis, board induction and training process has become highly important. This article discusses that an institutionalized and effective board induction and training process could maximize the directors contribution thus improving board effectiveness in banks. Firstly, by using qualitative research methods, the study shows the state of the art measures on board induction and training programs for directors in European banks. And then, it also depicts the results of a survey about the opinions of an Italian panel on the topic. Findings confirm that directors are aware of the importance of induction and training programs as a tool to enhance the effectiveness of corporate governance. However, there is substantially limited dissemination of these practices in banks and, in those cases where these practices are used more extensively, it is possible to spot some areas of improvement compared to best practices. Our results may be justified by: a delay of regulation on governance; a possible disappointment of company executives and a consideration of these practices in terms of mere business “costs” rather than as “opportunities” to improve the bank board effectiveness. On the basis of our knowledge, there is no empirical analysis designed to describe the dissemination and the organizational characteristics of the initiatives of training and updating of directors in banks, so this article will improve the existing literature on bank governance and European boards.

Institutional Models, Role of Shareholders (Member and Customers), Governance

In industrialized countries (OECD, 2004), financial globalization and stronger market competitiveness, as well as the large number of corporate malpractice cases which have occurred internationally (such as Enron and Worldcom in the USA, Ahold in the Netherlands, and Parmalat in Italy), have made the enforcement of corporate governance (CG)1 control mechanisms a priority.