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ANGELA ROMAN • SORIN GABRIEL ANTON • IRINA BILAN
(editors)
EURO AND THE EUROPEAN BANKING SYSTEM:
EVOLUTIONS AND CHALLENGES
„With the support of the LLP programme of the European Union”
„This project has been funded with support from the European Commission. This
publication reflects the views only of the author, and the Commission cannot be held
responsible for any use which may be made of the information contained therein.”
This event is an action of the project “Euro and the Banking Integration Process in an
Enlarged EU”, Reference no.2012-2911/001-001, within the Jean Monnet Life Long
Learning Programme - Key Activity 1
This volume reunites papers presented at the INTERNATIONAL CONFERENCE
“EURO AND THE EUROPEAN BANKING SYSTEM: EVOLUTIONS AND
CHALLENGES” that took place on 4-6 June 2015, at the “Alexandru Ioan Cuza”
University of Iasi, Faculty of Economics and Business Administration.
The papers published in Proceedings are exclusively engaging authors. The publisher
and editors are not responsible for their content or for language proficiency.
ISBN: 978-606-714-142-9
© Editura Universităţii „Alexandru Ioan Cuza”, 2015
700109 – Iaşi, str. Pinului, nr. 1A, tel./fax: (0232) 314947
http:// www.editura.uaic.ro
e-mail: [email protected]
ANGELA ROMAN • SORIN GABRIEL ANTON • IRINA BILAN
(editors)
EURO AND THE EUROPEAN BANKING SYSTEM:
EVOLUTIONS AND CHALLENGES
EDITURA UNIVERSITĂŢII „ALEXANDRU IOAN CUZA” IAŞI
2015
Angela Roman (n. 1968, Mureș), absolventă a Facultăţii de Ştiinţe Economice
din cadrul Universităţii „Alexandru Ioan Cuza” Iaşi, este în prezent conferenţiar
universitar doctor în cadrul Departamentului Finanţe, Monedă şi Administraţie
Publică, Facultatea de Economie şi Administrarea Afacerilor, Universitatea
„Alexandru Ioan Cuza” Iaşi.
A realizat stagii de documentare la universităţi, precum IUT Sceaux- Paris,
Franţa (1992), Universitatea Baleare, Palma de Mallorca, Spania, (1992),
Universitatea Paris-Dauphine, Franţa (2002), şi-a perfecţionat pregătirea
profesională prin participarea la Forumul – dezbatere „Academica BNR” (20122014) şi a absolvit cursurile de Formator (2012) şi Didactician (2012).
Sorin Gabriel Anton (născut la Paşcani, în 1979) este licenţiat în ştiinţe
economice la Universitatea „Alexandru Ioan Cuza” din Iași (2002) şi a obţinut
diploma de Master of Science la Universitatea Rostock, Germania (2005). În
prezent, este lector universitar în cadrul Departamentului Finanţe, Monedă şi
Administraţie Publică, Facultatea de Economie şi Administrarea Afacerilor,
Universitatea „Al. I. Cuza” Iaşi. Din anul 2009 este doctor în Finanţe în urma
susţinerii tezei cu titlul „Instrumentele pieţelor financiare derivate şi implicaţiile
lor în gestiunea riscurilor economice”.
A realizat stagii de documentare şi cercetare în domeniul financiar bancar la
universităţi prestigioase din Europa, precum Universität Bayreuth, Germania
(2008), Universite Paris-Dauphine, EURISCO LEDA, Franţa (2010) şi Tallinn
School of Economics and Business Administration, Estonia (2011). A fost
profesor invitat la Istanbul Arel University, Turcia (2013) şi Universitatea din
Huelva, Spania (2012) în cadrul programului LLP Erasmus.
Irina Bilan (născută în Iași, 1980) este absolventă a Facultății de Economie și
Administrarea Afacerilor, specializarea Finanțe și Asigurări, din cadrul
Universității „Alexandru Ioan Cuza” din Iași. În prezent este lector universitar
doctor la Departamentul de Finanțe, Monedă și Administrație Publică din cadrul
aceleiași facultăți. A urmat stagii de documentare și cercetare la Universitatea
Paris Dauphine (Franța, 2010) și Universitatea din Poitiers (Franța, 2015) și
stagii de predare la Universitat degli Studi di Perugia (Italia, 2014) în cadrul
programului LLP Erasmus. A urmat programe de formare în domeniile
„Managementul activităţilor terţiare” (2011), „SAP, ERP și Management
Școlaritate” (2011-2012) și „Didactica predării disciplinelor socio-umane”
(2012).
TABLE OF CONTENTS
SCIENTIFIC COMMITTEE ........................................................................................... 11
LIST OF REVIEWERS ................................................................................................... 12
SECTION I. BANKS, FINANCIAL MARKETS AND MONETARY POLICY
Alina Georgeta AILINCĂ, POSITIVE AND NEGATIVE ASPECTS ON
EVOLUTION OF LOANS AND DEPOSITS IN ROMANIA ....................................... 14
Andreia ANDREI, Adriana ZAIT, Elena-Mădălina VĂTĂMĂNESCU, YOUTHS'
TRUST IN BANKING. AN EXPLORATORY STUDY AMONG ROMANIAN
CONSUMERS................................................................................................................. 25
Adina APĂTĂCHIOAE, Vasile COCRIȘ, FINANCIAL INNOVATIONS, THEIR
REGULATIONS AND FINANCIAL CRISES............................................................... 35
Sabina Andreea CAZAN, Bogdan CĂPRARU, THE LENDERS OF THE REAL
ESTATE RESIDENTIAL MARKET IN EUROPE ........................................................ 44
Dorina CLICHICI, QUALITY OF BANKING SUPERVISION AND ITS
DETERMINANTS: THE CASE OF REPUBLIC OF MOLDOVA ............................... 55
Victoria COCIUG, Alesea ANDRONIC, THE EFFECTS OF A CREDIT BUREAU
IN THE ECONOMY – THE CASE OF THE REPUBLIC OF MOLDOVA .................. 65
Victoria COCIUG, Olga TIMOFEI, FACTOR ANALYSIS OF THE MECHANISM
OF MONEY CREATION IN THE BANKING SYSTEM OF THE REPUBLIC OF
MOLDOVA .................................................................................................................... 80
Vasile COCRIȘ, Ioana-Iuliana TOMULEASA, RISK MANAGEMENT AND THE
PERFORMANCE OF EUROPEAN FINANCIAL INSTITUTIONS ............................. 90
Ionuţ Marius CROITORU, MONETARY POLICY IN THE CONTEXT OF AN
ENLARGED EUROPEAN UNION ............................................................................. 116
Liliana Eva DONATH, Veronica MIHUȚESCU CERNA, Ionela OPREA, IS THE
BANKING UNION CATERING FOR SUSTAINABILITY ORIENTED BANKING
SYSTEM? ..................................................................................................................... 125
Dalina DUMITRESCU, Liliana SIMIONESCU, TOWARD INVESTIGATING THE
CORPORATE SOCIAL RESPONSIBILITY (CSR) ACTIVITIES IN THE BANKING
INDUSTRY FROM ROMANIA................................................................................... 135
Bogdan Florin FILIP, DETERMINANTS OF NON-PERFORMING LOANS IN
WESTERN EUROPEAN COUNTRIES....................................................................... 146
Bogdan FIRTESCU, INFLUENCE OF SOME INSURANCE MARKET FIGURES
ON GDP ........................................................................................................................ 156
5
Marius Dan GAVRILETEA, Corneliu BENTE, THE ROLE OF SPECIAL
CLAUSES WITHIN MOTORS’ INSURANCE CONTRACT..................................... 163
Silvia GHITA-MITRESCU, Cristina DUHNEA, SHADOW BANKING IN
ROMANIA. DOES’IT COUNT? .................................................................................. 170
Alina HAGIU, Marinela BĂRBULESCU, Roxana Mădălina POPA, THE
INFLUENCE OF THE SWISS FRANC FLUCTUATIONS ON THE ROMANIANS
AND THE ROMANIAN ECONOMY.......................................................................... 181
Simona Elena IAGĂR, REDEFINED BANKING ACTIVITY UNDER EUROPEAN
SOVEREIGN DEBT CRISIS........................................................................................ 194
Dan LUPU, MODELING INFLATION IN ROMANIA: A MARKOV SWITCHING
APPROACH.................................................................................................................. 202
Lucie MEIXNEROVÁ, DEVELOPMENT OF THE CAPITAL MARKET AFTER
THE INTRODUCTION OF MIFID IN THE CZECH REPUBLIC AND SLOVENIA 209
Larisa MISTREAN, USING CUSTOMER RELATIONSHIP MANAGEMENT TO
INCREASE CUSTOMER LOYALTY IN BANKS ..................................................... 221
Mihaela NICOLAU, THE STUDY OF THE ASSET PRICE CHANNEL IN THE
CONTEXT OF A MONETARY UNION ..................................................................... 233
Oana NIŢU, Claudiu Valentin NIŢU, Cosmin TILEAGĂ, PEOPLE`S ATTITUDES
REGARDING CONSUMPTION AND SAVINGS ...................................................... 247
Dumitru-Cristian OANEA, INTERCONNECTEDNESS OF FINANCIAL
INSTITUTIONS: A POSSIBLE CAUSE FOR SYSTEMIC RISK .............................. 256
Andreea Nicoleta POPOVICI, THE DIFFERENCE OF PRODUCTIVITY BETWEEN
SOCIETE GENERALE AND ERSTE GROUP ........................................................... 271
Mihaita-Cosmin POPOVICI, RESHAPING EUROPE`S FINANCIAL SYSTEM:
IMPLEMENTATION OF THE BANKING UNION AND FUTURE STEPS ............. 278
Victoria POSTOLACHE (DOGOTARI), THE ROLE OF FINANCIAL
INNOVATIONS IN DEVELOPMENT OF SHADOW BANKING ............................ 287
Ramona RADU, Cosmin-Octavian CEPOI, Alexandru Toma STĂNILĂ, VALUE
AT RISK BASED ON INTRA-DAY DATA FROM BUCHAREST STOCK
EXCHANGE ................................................................................................................. 297
Andrei RĂDULESCU, ROMANIA – THE WAY TOWARDS THE EURO AREA . 305
Irina SAV, THE RECENT CRISIS OF SWISS FRANC LOANS IN THE EUROPEAN
COUNTRIES ................................................................................................................ 312
Marius George TASCA, THE MAJOR RISKS IN IMPLEMENTING NEW
BANKING PRODUCTS ............................................................................................... 328
Mihaela TOFAN, PRESENT ACTIONS TO IDENTIFY THE OPTIMAL EU
BANKING REGULATION .......................................................................................... 334
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József TÓTH, THE SINGLE RESOLUTION FUND AND ITS UPLOADING ......... 341
Galina ULIAN, Lucia CASTRAVEŢ, Silvestru MAXIMILIAN, THE
DEPENDENCE OF THE EXCHANGE RATE ON THE COST OF ENERGY
RESOURCES ................................................................................................................ 349
Ion VOROVENCI, The EVOLUTION AND COLLAPSE OF THE MARMOROSCHBLANK BANK ............................................................................................................. 360
Iulian WARTER, Liviu WARTER, IMPLICATIONS OF M&AS FOR BANKING
INDUSTRY. FROM CULTURAL FIT TO CULTURAL CLASHES ......................... 367
Liviu WARTER, Iulian WARTER, CAN MERGERS AND ACQUISITIONS
IMPROVE BANKING INDUSTRY? ........................................................................... 377
SECTION II. EUROPEAN PUBLIC POLICIES FOR THE BUSINESS
ENVIRONMENT
Sorin Gabriel ANTON, Anca Elena NUCU, AN ANALYSIS OF FINANCIAL
ASSISTANCE PROVIDED BY MULTILATERAL DEVELOPMENT BANKS TO
CEE COUNTRIES ........................................................................................................ 388
Irina BILAN, Elena CIGU, LOCAL FINANCIAL AUTONOMY AND LOCAL
ECONOMIC GROWTH - AN EMPIRICAL ANALYSIS FOR ROMANIAN
COUNTIES ................................................................................................................... 396
Valeriu DORNESCU, THE ENTERING OF EURO ZONE BY ROMANIA –
CONDITIONS AND CHALLENGES FOR THE ROMANIAN ECONOMY ............. 405
Natalia BRANASCO, EVALUATION OF THE ECONOMIC EFFECTS OF
REMITTANCES: CASE STUDY REPUBLIC OF MOLDOVA ................................. 413
Mihaela CATANĂ, THE LABOUR MOBILITY – VECTOR OF DEVELOPMENT IN
EUROPE – LEGAL FRAMEWORK............................................................................ 423
Adina DORNEAN, Dumitru-Cristian OANEA, THE CAUSAL RELATIONSHIP
BETWEEN FISCAL POLICY AND ECONOMIC GROWTH: EVIDENCE FROM
EMU COUNTRIES ....................................................................................................... 430
Veronica GARBUZ, Ana-Maria BERCU, YOUTH EUROPEAN PUBLIC POLICY
ON EMPLOYMENT AND ENTREPRENEURSHIP .................................................. 441
Lucia IRINESCU, WHY DO WE NEED A COMPETITION POLICY? ................... 449
George IVĂNESCU, Florin-Alexandru MACSIM, Dumitru-Nicușor CĂRĂUȘU,
KEY PROBLEMS OF FISCAL AUTONOMY: EVIDENCE FROM ROMANIA ...... 456
Alpar LOSONC, Andrea IVANISEVIC, Mladen PERIC, IS ‘DEVELOPMENTNETWORK’ STATE POSSIBLE IN EASTERN AND CENTRAL EUROPE? .......... 465
Florin-Alexandru MACSIM, WHAT IS FISCAL INTEGRATION? A
FUNDAMENTAL APPROACH .................................................................................. 474
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Irena MUNTEANU, Dana Elena HOLBAN, ELECTRIC ENERGY MARKET IN
THE EUROPEAN UNION - CHALLANGES AND PERSPECTIVES ....................... 487
Alina NUTA, Alexandra IVAN, ANALYSIS OF THE POPULATION AGEING
IMPLICATIONS ON FISCAL POLICY IN SOME COUNTRIES OF CENTRAL AND
EASTERN EU ............................................................................................................... 498
Olimpia Elena Mihaela OANCEA, THE ROLE OF THE INTEGRATED
MARKETING COMMUNICATION MODELS IN THE CONTEXT OF ECONOMIC,
FINANCIAL AND MONETARY INTEGRATION .................................................... 504
Anca Sofia POPESCU, Felicia Elisabeta RUGEA, THE ANALYSIS AND
ASSESSMENT OF SUSTAINABLE DEVELOPMENT IN THE EUROPEAN UNION
....................................................................................................................................... 514
Valentina Diana RUSU, Mihaela Brîndușa TUDOSE, BENCHMARKS FOR THE
INTERNATIONAL COMPETITIVENESS OF ROMANIA ....................................... 526
Carmen SANDU (căs. TODERAȘCU), THE CONTEMPORARY
COMPETITIVENESS AND ITS MAIN DETERMINANTS ....................................... 537
Tudor Gherasim SMIRNA, THE EFFECTS OF NEGATIVE NOMINAL INTEREST
RATES ON ECONOMIC INTEGRATION ................................................................. 545
Brankica TODOROVIC, ECONOMIC ASPECTS OF INTEGRATION OF SERBIAN
WITH EU COUNTRIES ............................................................................................... 552
Dragos Ovidiu TOFAN, BUSSINES INTELLIGENCE TOOLS – PRACTICAL
ASPECTS ON IMPLEMENTATION IN EUROPEAN ORGANIZATIONS .............. 563
Bogdan-Gabriel ZUGRAVU, Anca-Ştefania SAVA, R&D TAX INCENTIVES
DESIGN: INTERNATIONAL PRACTICES AND LESSONS FOR ROMANIA ....... 571
SECTION III. THE IMPACT OF EUROPEAN INTEGRATION ON
CORPORATE AND ENTREPRENEURIAL FINANCE
Ciprian APOSTOL, CORPORATE SOCIAL RESPONSABILITY IN ROMANIA
BETWEEN DECLARATION AND IMPLEMENTATION......................................... 584
Marinela BĂRBULESCU, Alina HAGIU, Radu VASILICĂ, THE INSOLVENT
COMPANY: BANKRUPTCY DIFFICULTIES ........................................................... 591
Ana-Maria BERCU, PERFORMANCE AND PROMOTION OF FIRM’S
EMPLOYEES. AN EMPIRICAL RESEARCH............................................................ 602
Dumitru BUCĂTARU, INVESTMENT OPPORTUNITIES IN THE
CONTEMPORARY ROMANIAN ENVIRONMENT ................................................. 610
Brîndușa Maria BUZILӐ (MOCANU), THE IMPACTS OF FINANCIAL
LIBERALIZATION ON THE FINANCING STRUCTURE OF FIRMS..................... 618
8
Dumitru-Nicușor CĂRĂUȘU, THE LINK BETWEEN EUROPEAN INTEGRATION
AND THE CAPITAL STRUCTURE OF LARGE UNLISTED EASTERN EUROPEAN
COMPANIES ................................................................................................................ 625
Carmen - Elena COCA, Romeo BOŞNEAGU, FINANCIAL BALANCE IN
ECONOMY - ROMANIAN CONCEPT ...................................................................... 638
Mihaela DIACONU, USING OF IPRs AS MECHANISMS FOR MAINTAINING OR
INCREASING THE COMPETITIVENESS: RECENT TRENDS IN THE EU FIRMS
AND RESEARCH AGENDA ....................................................................................... 647
Lilia DUMBRAVANU, TERM FINANCING OF NATIONAL ENTERPRISES
BASED ON TECHNIQUES OF INTERNATIONAL FINANCING ........................... 659
Costel ISTRATE, EVOLUTIONS AND TRENDS IN THE REGULATION OF THE
FINANCIAL REPORTING IN EU ............................................................................... 668
Iuliia KORNIEIEVA, DIRECTIONS FOR IMPROVING THE FINANCIAL
MANAGEMENT IN STATE-OWNED CORPORATIONS IN UKRAINE ................ 682
Imen MAHJOUB, Anthony MILOUDI, EARNINGS MANAGEMENT: A REVIEW
OF LITERATURE ........................................................................................................ 691
Nicoleta MIHĂILĂ, REDUCTION OF SMEs VULNERABILITY BY ADOPTING
MEASURES IN TAXATION AREA ........................................................................... 704
Mirela-Claudia MIŢAC, DEVELOPMENTS IN ENTERPRISES’ACCESS TO
FINANCE ACROSS EURO AREA COUNTRIES AND ROMANIA ......................... 714
Mihaela ONOFREI, Florin OPREA, Sorin Gabriel ANTON, COMPARATIVE
ANALYSIS OF THE IMPLEMENTATION OF THE CORPORATE GOVERNANCE
PRINCIPLES IN THE CENTRAL AND EAST EUROPEAN COUNTRIES ............. 728
Daniela POPA, QUALITY MANAGEMENT SYSTEM ............................................ 742
Angela ROMAN, Mihaela ONOFREI, CONSTRAINTS IN BANK LENDING TO
SMEs IN THE EUROPEAN UNION AND MITIGATING MEASURES ................... 748
Inesa TOFĂNICĂ, IFRS ADOPTION IN ROMANIA AND THE IMPACT ON
REPORTED DATA ...................................................................................................... 762
Mihaela Brîndușa TUDOSE, Valentina Diana RUSU, RISK MANAGEMENT AND
THE FIRM’S VALUE .................................................................................................. 775
Georgeta VINTILĂ, Alexandra Elena NENU, COMPARATIVE APPROACHES ON
CORPORATE PERFORMANCE MEASUREMENT SYSTEMS ............................... 783
SECTION IV. THE EUROPEAN ECONOMIC LEGISLATIVE LANDSCAPE –
CHALLENGES AND PERSPECTIVES
Monica BUZEA, WAYS TO HARMONIZE THE ROMANIAN CRIMINAL LAW
WITHIN THE EUROPEAN SYSTEM ......................................................................... 797
9
Mirela Carmen DOBRILĂ, ELIMINATING DISTRUST BY MODERN
APPLICATIONS OF BONA FIDES: OFFENSES AGAINST PROPERTY BY
BREACH OF TRUST IN THE NEW ROMANIAN CRIMINAL CODE .................... 805
Ancuța Elena FRANȚ, THE ABORTION ISSUE: A MIRROR FOR THE
WEAKNESSES OF OUR SOCIAL BEHAVIOR ........................................................ 818
Sandra GRADINARU, LIABILITY OF THE PUBLIC SERVANT IN AN
EUROPEAN CONTEXT .............................................................................................. 826
Diana-Loredana HOGAS, CONSIDERATIONS ABOUT THE PECUNIARY
RIGHTS OF THE ARBITRATORS IN INTERNATIONAL ARBITRATION ........... 834
Anca Andreea MANEA, THE CONCEPT AND CHARACTERISTICS OF
UNDERGROUND ECONOMIC ACTIVITIES ........................................................... 843
Carmen-Mariana MIHALACHE, THE SOCIAL-ECONOMIC VALENCE OF CIVIL
SERVANT’S LIABILITY ............................................................................................ 849
Mihaela ONOFREI, Florin OPREA, Ioana COSTEA, ADMINISTRATIVE
REGIONALIZATION IN ROMANIA – A FUNCTIONAL PERSPECTIVE ............. 856
Rodica PANAINTE, THE NEW ROMANIAN BANKING REGULATION ON
SANCTIONING FRAUDULENT CONDUCT IN THE USE OF PAYMENT
INSTRUMENTS ........................................................................................................... 869
Ada- Iuliana POPESCU, WHISLEBLOWER PROTECTION IN A CORRUPT
PRIVATE SECTOR – A CHALLENGE ...................................................................... 877
Mihaela TOFAN, ENFORCEMENT OF TAX CLAIMS. JURISPRUDENTIAL
HIGHLIGHTS ............................................................................................................... 884
Ionuț TUDOR, STRICT LIABILITY AND INSURANCE SCHEMES OF
COMPENSATION- A STUDY IN COMPARATIVE LAW ....................................... 892
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SCIENTIFIC COMMITTEE
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Dr. Dinu AIRINEI, „Alexandru Ioan Cuza” University of Iaşi, Romania
Dr. Taoufik BOURAOUI, ESC Rennes School of Business, France
Dr. Dumitru BUCĂTARU, „Alexandru Ioan Cuza” University of Iaşi, Romania
Dr. Silviu CERNA, West University of Timișoara, Romania
Dr. Cristina CIUMAŞ, „Babes-Bolyai” University, Cluj-Napoca, Romania
Dr. Vasile COCRIŞ, „Alexandru Ioan Cuza” University of Iaşi, Romania
Dr. Luis COELHO, University of Algarve, Portugal
Dr. Liliana DONATH, West University of Timișoara, Romania
Dr. Dalina DUMITRESCU, Academy of Economic Studies, Bucharest, Romania
Dr. Vasile IŞAN, „Alexandru Ioan Cuza” University of Iaşi, Romania
Dr. Jürgen JERGER, University of Regensburg, Germany
Dr. Mihaela ONOFREI, „Alexandru Ioan Cuza” University of Iaşi, Romania
Dr. Cornel OROS, University of Poitiers, France
Dr. Gabriela PASCARIU, „Alexandru Ioan Cuza” University of Iaşi, Romania
Dr. Jenica POPESCU, University of Craiova, Romania
Dr. Adriana PRODAN, „Alexandru Ioan Cuza” University of Iaşi, Romania
Dr. Maria PRISACARIU, „Alexandru Ioan Cuza” University of Iaşi, Romania
Dr. Constantin ROŞCA, Executive Manager, Economic Sciences Faculties
Association of Romania – AFER, Romania
Dr. Elena Cerasela SPĂTARIU, Ovidius University of Constanta, Romania
Dr. Cristi SPULBĂR, University of Craiova, Romania
Dr. Ovidiu STOICA, „Alexandru Ioan Cuza” University of Iaşi, Romania
Dr. Ramona ŢIGĂNAŞU, Centre for European Studies, „Alexandru Ioan Cuza”
University of Iaşi, Romania
Dr. Diane Paula VANCEA, Ovidius University of Constanta, Romania
Dr. Georgeta VINTILĂ, Academy of Economic Studies, Bucharest, Romania
Dr. Adriana ZAIŢ, „Alexandru Ioan Cuza” University of Iaşi, Romania
Dr. Daniela ZĂPODEANU, University of Oradea, Romania
Dr. Angela ROMAN, „Alexandru Ioan Cuza” University of Iaşi, Romania
Dr. Dan CHIRLEŞAN, „Alexandru Ioan Cuza” University of Iaşi, Romania
Dr. Sorin Gabriel ANTON, „Alexandru Ioan Cuza” University of Iaşi, Romania
Dr. Irina BILAN, „Alexandru Ioan Cuza” University of Iaşi, Romania
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LIST OF REVIEWERS
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Dr. Alin Marius ANDRIEȘ, „Alexandru Ioan Cuza” University of Iași, Romania
Dr. Sorin Gabriel ANTON, „Alexandru Ioan Cuza” University of Iași, Romania
Dr. Anișoara APETRI, „Alexandru Ioan Cuza” University of Iași, Romania
Dr. Mircea ASANDULUI, „Alexandru Ioan Cuza” University of Iași, Romania
Dr. Ana-Maria BERCU, „Alexandru Ioan Cuza” University of Iași, Romania
Dr. Irina BILAN, „Alexandru Ioan Cuza” University of Iași, Romania
Dr. Taoufik BOURAOUI, ESC Rennes School of Business, France
Dr. Bogdan Sebastian CĂPRARU, „Alexandru Ioan Cuza” University of Iași,
Romania
Dr. Viorica CHIRILĂ, „Alexandru Ioan Cuza” University of Iași, Romania
Dr. Elena CIGU, „Alexandru Ioan Cuza” University of Iași, Romania
Dr. Adina DORNEAN, „Alexandru Ioan Cuza” University of Iași, Romania
Dr. Cristina DUHNEA, “Ovidius” University of Constanta, Romania
Dr. Bogdan FILIP, „Alexandru Ioan Cuza” University of Iași, Romania
Dr. Bogdan FÎRȚESCU, „Alexandru Ioan Cuza” University of Iași, Romania
Dr. Sandra GRĂDINARU, „Alexandru Ioan Cuza” University of Iași, Romania
Dr. Andreea IACOBUŢĂ, „Alexandru Ioan Cuza” University of Iași, Romania
Dr. Mihaela IFRIM, „Alexandru Ioan Cuza” University of Iași, Romania
Dr. Iulian IHNATOV, „Alexandru Ioan Cuza” University of Iași, Romania
Dr. Sebastian LAZĂR, „Alexandru Ioan Cuza” University of Iași, Romania
Dr. Dan LUPU, „Alexandru Ioan Cuza” University of Iași, Romania
Dr. Silvia GHIŢĂ-MITRESCU, “Ovidius” University of Constanta, Romania
Dr. Simona MUTU, Babes-Bolyai University of Cluj-Napoca, Romania
Dr. Florin OPREA, „Alexandru Ioan Cuza” University of Iași, Romania
Dr. Bogdan PETRIŞOR, „Alexandru Ioan Cuza” University of Iași, Romania
Dr. Ada POPESCU, „Alexandru Ioan Cuza” University of Iași, Romania
Dr. Bogdan Ioan ROBU, „Alexandru Ioan Cuza” University of Iași, Romania
Dr. Angela ROMAN, „Alexandru Ioan Cuza” University of Iași, Romania
Dr. Diana Valentina RUSU, „Alexandru Ioan Cuza” University of Iași, Romania
Dr. Anca SAVA, „Alexandru Ioan Cuza” University of Iași, Romania
Dr. Carmen TODERAȘCU, „Alexandru Ioan Cuza” University of Iași, Romania
Dr. Mihaela TOFAN, „Alexandru Ioan Cuza” University of Iași, Romania
Dr. Silviu Gabriel URSU, „Alexandru Ioan Cuza” University of Iași, Romania
Dr. Bogdan Gabriel ZUGRAVU, „Alexandru Ioan Cuza” University of Iași,
Romania
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SECTION I
BANKS, FINANCIAL MARKETS AND
MONETARY POLICY
POSITIVE AND NEGATIVE ASPECTS ON EVOLUTION
OF LOANS AND DEPOSITS IN ROMANIA
ALINA GEORGETA AILINCĂ
Centre for Financial and Monetary Research “Victor Slăvescu”, of the “Costin
C. Kiriţescu” National Institute for Economic Research, Romanian Academy
Bucharest, Romania
[email protected]
Abstract
Although it isn’t felt as a serious problem in terms of financial stability, the analysis of
the evolution of deposits and bank loans can reveal eventual tensions and
vulnerabilities of the supply and demand for loans and deposits, being, by amplification,
possible threats, on the one hand to the certain categories of customers and on the other
hand, to the macroeconomic situation of an industry, a region or even a country. A
possible consequence of poor structure of lending and deposit formation process is the
inability to resume lending to the real sector in a sustainable manner, representing an
element of inhibition regarding the normal banking operation and the economy
functioning as a whole. Lowering the cost of credit and the phenomenon of removing
from bank balance sheets the irrecoverable receivables could lead to the improvement
from structural point of view of lending; however, in order to provide a balance
banking system and economy, also the formation of deposits must support important
changes in a similar manner as the loans. For this reason1, this article aims at
analyzing in the period 2007-2014 the positive and negative aspects of the lending
process and the setting up of deposits in Romania, suggesting at the same time ways to
improve the current status.
Keywords: Lending, deposit formation, monetary stability, monetary market
JEL Classification: E51, E65, G21
1. INTRODUCTION
Frequently discussed and analyzed by many studies and reports, the
financial stability issue has captivated media attention, politicians, analysts and
researchers. Although not seem to have a direct connection, the evolution and
the composition of loans and deposits may outline eventual threats to financial
stability by highlighting some vulnerabilities to certain key branches of the
economy, to certain categories of banking customers or even to the economy as
a whole.
Reviving lending, so vital for the functioning of the banking system is still
a crucial issue of world economies and also of our country. Understanding the
structure and evolution of loans and deposits can make manageable in a
14
BANKS, FINANCIAL MARKETS AND MONETARY POLICY
sustainable manner, the lending process, so useful for the unlocking the national
economy potential for growth.
Therefore, the article seeks to address an important topic regarding the
structure of the Romanian banking system from the perspective of deposits and
loans developments, also emphasizing the positive and negative aspects which
may raise issues in terms of financial stability.
The novelty and the importance of the paper consist in capturing, as in a
snapshot, the positive and negative conjectural aspects of the process of the
formation of deposits and lending. Although, for a particular part of academics
it may be somewhat uninteresting, for the practitioners and especially for the
monetary policy makers may be an important starting point to review their
policies or even their goals.
The paper is structured as it follows: section 2 presents a concisely
literature review on the loans and deposits subject, section 3 describes the
applied methodology, section 4 highlights the positive and negative aspects of
the loans and deposits, section 5 presents the main conclusions.
2. LITERATURE REVIEW
The literature abounds in studies regarding the situation of loans and
deposits, especially in terms of their costs or interest rates. Iuga (2011) states (in
her study on the determination of the share held by BRD - Groupe Societe
Generale in terms of the volume of attracted deposits and granted loans in the
overall Romanian banking system and the analysis of the influence of the
interest rate over the volume of deposits and loans in the Romanian banking
system) that regulation plays an important role in the establishment and
operation of the banking system. The issue was examined in studies such as
those of Merton (1977, 1978), Fries et al. (1997), Bhattacharya et al. (2002),
Lehar (2005), and Dangl and Lehar (2004), they having rather an exogenous
vision on the structure of banking deposits.
It should be noted also the latest information on the situation and the
structure of the banking system. For example, at European level, the Report
“European Banking Sector Facts & Figures 2014” states that the European
Union (especially the Euro Area) is far behind Australia, United States, Canada
and Japan regarding to the economic growth, considering the deleverage
process from the financial sector, from the public and private sectors, including
corporate sector and household. In this respect, the report notes that the
financing of the banking system relies more on deposits. Thus, “the share of
deposit liabilities over total assets has increased significantly since 2007. In
particular, an increase from 49.2% to 51.4% was observed in 2013”, trend
observed also in the case of non-bank deposits.
Noteworthy that, in Europe, bank financing is extremely heterogeneous
also due to different banking models. For example, the Scandinavian model has
used predominantly the financing through bond, hence the result was a the
modest funding through deposits of the North European banking system, while
15
EURO AND THE EUROPEAN BANKING SYSTEM: EVOLUTIONS AND CHALLENGES
Central and Eastern European countries such as Slovakia, Slovenia and the
Czech Republic, have used mainly financing based on bank deposits (more than
65%). Moreover, it is worth noting heterogeneity of the concentration of
deposits, for example according to the mentioned report in 2013 “the 76.2% of
all EU deposits are held by banks headquartered in the euro area. […] strong
growth in the stock of deposits was registered in Latvia (44.5%), Bulgaria
(8.5%) and Hungary (4.8%). In terms of the geographical share of the
outstanding deposits, Germany alone holds the 20.5% of the total.”
In terms of lending, the European banking system contributes over 80% to
the financing of the economy and SMEs are highly dependent on bank
financing. This situation is even more obvious in Romania, where access to
finance, particularly for SMEs, is made with great difficulty mainly due
guarantees, interests and fees. The situation could be improved by a relaxation
of lending standards for companies (especially SMEs) due to increasing
competition between banking and non-banking sector in Europe and in our
country.
3. METHODOLOGY
The analysis in this paper was conducted over a series of monthly data
from January 2007 to September 2014, trying to capture the period before the
triggering of the global financial and economic crisis, the climax and the return
or the tempering of world economies and also the impact of the sovereign debt
crisis (period 2010 - 2014), with short periods of relaxation, and escalation.
Data source is the statistics of National Bank of Romania.
The article aims at achieving a practical and analytical study on the most
important indicators of describing the structure and the functioning of loans and
deposits. Although the paper doesn’t use the econometric tools, however is still
able to show in a synthetic manner the pros and cons of the evolution of loans
and deposits by using statistical analysis, comparative in time, describing the
most relevant developments of the analyzed subject. Thus, the article focuses
on: the deposits structure of Romanian banking system on currencies, the loans
structure of Romanian banking system on currencies, the structure of Romanian
banking system loans according to the type of borrowers, the structure of
Romanian banking system loans granted to households depending on the loan
destination, the structure of deposits by categories of the deponents, the deposits
of households, non-financial corporations and non-monetary financial
institutions on maturity in Romania.
Based on the above mentioned indicators, pointing out the advantages but
also the areas that need to be improved, it should be easier to correct and refine
the process of the deposit formation and the process of credit granting in
Romania, thus making credit more accessible for the economy.
16
4. LOANS AND DEPOSITS DEVELOPMENTS - POSITIVE AND
NEGATIVE ASPECTS
Romanian banking system, like many European banking systems, is still
under the impact of financial deleveraging and under a blockage of the lending
process. Beyond these issues, it can be seen a strong structural gap between
assets and liabilities of the banking system, both regarding currencies and
maturities (e.g. long-term assets being supported by short-term liabilities).
Thus, when analyzing the structure of deposits by currencies in Romania
(fig. 1), it can be found that in January 2007 - September 2014, bank deposits
were formed mainly in RON (about 80%), while deposits in EUR did not
exceed 19%.
Figure 1. The structure of Romanian banking system deposits on
currencies in the period January 2007 – September 2014
100%
80%
60%
40%
20%
Ja
n-
0
Ap 7
r-0
7
Ju
l-0
O 7
ct
-0
Ja 7
n0
Ap 8
r-0
8
Ju
l-0
O 8
ct
-0
Ja 8
n0
Ap 9
r-0
9
Ju
l-0
O 9
ct
-0
Ja 9
n1
Ap 0
r-1
0
Ju
l-1
O 0
ct
-1
Ja 0
n1
Ap 1
r-1
1
Ju
l-1
O 1
ct
-1
Ja 1
n1
Ap 2
r-1
2
Ju
l-1
O 2
ct
-1
Ja 2
n1
Ap 3
r-1
3
Ju
l-1
O 3
ct
-1
Ja 3
n1
Ap 4
r-1
4
Ju
l-1
4
0%
Share of deposits in RON in the total deposits
Share of deposits in EUR in the total deposits
Share of deposits in other currencies in the total deposits
(Source: NBR data, author’s processing)
Looking in the mirror, for a good stability of the banking system also the
credit should follow the same proportions as the evolution of deposits by
currencies. However, regarding the situation in Romania, we find a clear
element of vulnerability in that the lending process takes place almost equal
both in RON and in foreign currency (see fig. 2). It should be noted that in the
analysis period (January 2007 - September 2014) the financial intermediation
process and, afterwards, the deleveraging process have acted primarily on the
segment of foreign currency lending, particularly of euro. A positive aspect is
that in recent years has increased the supply of credit in lei simultaneously with
a reduction in the stock of foreign currency loans. Note that considerable
financing through loans in foreign currency exposes borrowers to an excessive
exchange rate risk, especially since the population must take into account that
17
its revenues aren’t often denominated in foreign currency and did not cover
even the equivalent of the minimum or medium income from countries whose
currencies are used to borrow.
The same time, it should be followed the pace of lending in relation to the
growth rate of the economy or the rhythm of credit growth in relation to the
growth of monetary aggregates. A too rapid lending growth relative to
economic fundamentals should signal for macroeconomic policy managers,
especially central bankers and rulers of regulatory institutions, major slippages
from economic sustainability principles, indicating accumulation of tensions,
vulnerabilities and even risks to the financial stability.
Figure 2. The structure of Romanian banking system loans on currencies in
the period January 2007 – September 2014
100%
80%
60%
40%
20%
Ja
n-
0
Ap 7
r-0
7
Ju
l-0
O 7
ct
-0
Ja 7
n0
Ap 8
r-0
8
Ju
l-0
O 8
ct
-0
Ja 8
n0
Ap 9
r-0
9
Ju
l-0
O 9
ct
-0
Ja 9
n1
Ap 0
r-1
0
Ju
l-1
O 0
ct
-1
Ja 0
n1
Ap 1
r-1
1
Ju
l-1
O 1
ct
-1
Ja 1
n1
Ap 2
r-1
2
Ju
l-1
O 2
ct
-1
Ja 2
n1
Ap 3
r-1
3
Ju
l-1
O 3
ct
-1
Ja 3
n1
Ap 4
r-1
4
Ju
l-1
4
0%
Share of loans in RON in the total loans
Share of loans in EUR in the total loans
Share of loans in other currencies in the total loans
If we turn the attention to the correlation between loans and deposits, the
ratio of the two elements (LTD) expressed as a percentage, is still high,
although declining (since September 2012), standing at 99.65% in September
2014, according to NBR data. Currency component, as noted earlier in
analyzing loans and deposits on currencies, continued to put additional pressure
on the indicator during the analysis, although decreased in the period 20112013.
Lending to households is mainly in foreign currency (over 60%), while
deposits of households consist mainly in RON (over 60%), which describes a
net negative foreign currency position of households. The aspect is confirmed
also in the case of non-financial corporations, where the net position between
deposits and loans in foreign currency is still negative, although in recent years
the situation has improved. In order to improve the internal structure of lending
18
and saving, taking into account the foreign currency criterion, the banking
system as a whole (but especially commercial banks system) should focus his
attention on the one hand, reducing foreign currency lending or/and increase the
attractiveness of saving’s instruments in foreign currency, and on the other
hand, stimulating the use of credit in lei, especially by offering more and better
services in order to valorise more the relationship between banks and economic
agents (e.g. including tools related to payments facilitation). A major
vulnerability of the Romanian banking system (and not only) is the inability to
properly use the “deposits” tool in the sense that in banks’ balance sheet the
financing sources are mainly composed of short-term (while crediting often
means a longer maturity) and the dependence on the sources of funding
attracted from parent banks makes this negative aspect to be amplified.
Besides the constraints regarding funding sources, another negative aspect
of delaying the resumption of lending in a sustainable manner is the monetary
and financial market fragmentation in Europe, aspect noticed also in Romania.
On the other hand, lending suffered in the latter part of the period of analysis
also because of the demand-side factors such as: - the need to reduce
indebtedness (both of the population and the companies) - companies need to
adjust balance sheets - difficulties in economic recovery and sluggish
employment growth - the persistence of credit risk - daunting prospects of the
internal market - economic disparities (both vertically and horizontally between regions of the country or between branches of the national economy),
etc.
It should be noted that financial intermediation was driven both positive
and negative by the developments in lending to non-financial corporations and
households and only marginally, by the evolution of lending to non-residents.
Public administration and non-monetary financial institutions were not relevant
debtors for Romanian banking system (see fig. 3).
A gratifying aspect regarding lending to households was diversification of
loan portfolio based on the purpose of the loan. However, there may be a
reduction in time of consumption loans of households, while it can be seen a
significant increase in the share of housing loans of households in the period
January 2007 - September 2014 (fig.4). This may be an additional explanation
for the high share of foreign currency loans, given that the real estate market
mainly encourages the use of foreign currencies (mainly euros) and banking
institutions do not provide sufficient viable alternatives to boost lending in lei
for housing purchase.
Note that although the NPL in March 2014 was 22.26%, in September
2014 decreased to 15.33%, according to National Bank of Romania data. This
reduction is a good thing for the Romanian banking system, but in a European
context is still a very high value, being twice the European average for this
indicator. A contributing factor to the increase in non-performing loans is the
obvious behaviour of elusion from the macro prudential measures by an
excessive “flexibility” of the lending process (e.g. by offering promotional
19
interest rates, by a more lax assessment of the necessary guarantees, or by
artificially “adjusting” of the income of borrowers so as to comply with the
requirements imposed by the desired loan). The existence of a significant share
of low-income borrowers and hence a high degree of indebtedness or of
borrowers with income in national currency which require foreign currency
loans without the possibility of hedging currency risks are significant
vulnerabilities for the commercial banking system in Romania which can
contribute to the increase the share of non-performing loans to total loans.
Figure 3. The structure of Romanian banking system loans according to
the type of borrowers in the period January 2007 – September 2014
100%
42.19
37.82
44.15
43.29
38.76
38.96
38.26
37.84
39.61
43.31
42.5
60%
37.71
80%
A
Ja
n-
07
pr
-0
7
Ju
l-0
O 7
ct
-0
Ja 7
n0
A 8
pr
-0
8
Ju
l-0
O 8
ct
-0
Ja 8
n0
A 9
pr
-0
9
Ju
l-0
O 9
ct
-0
Ja 9
n1
A 0
pr
-1
0
Ju
l-1
O 0
ct
-1
Ja 0
n1
A 1
pr
-1
1
Ju
l-1
O 1
ct
-1
Ja 1
n1
A 2
pr
-1
2
Ju
l-1
O 2
ct
-1
Ja 2
n1
A 3
pr
-1
3
Ju
l-1
O 3
ct
-1
Ja 3
n1
A 4
pr
-1
4
Ju
l-1
4
0%
Share of loans granted to households in total loans
Share of loans granted to non-financial corporations in total loans
Share of loans granted to non-monetary financial institutions in total loans
Share of loans granted to the public administration in total loans
Share of loans granted to non-residents in total loans
20
40.59
20%
40.29
40%
10.62
42.01
8.41
8.29
41.75
49.96
8.5
39.84
40.45
51.66
51.14
8.92
9.13
37.62
38.71
53.46
52.16
9.09
8.8
36.53
54.67
8.74
35.03
35.69
56.23
55.22
8.6
8.43
32.85
34.02
58.56
57.55
8.73
8.58
30.84
31.98
60.43
59.44
8.98
29.52
8.58
28.81
62.22
61.89
8.81
62.5
8.86
27.72
28.64
63.47
8.52
3.1
25.36
26.8
71.54
80%
64.68
3.41
24.33
72.49
3.18
23.44
73.15
3.4
22.44
74.15
4.74
21.47
73.79
4.87
4.69
21.7
73.6
75.14
4.88
19.99
75.82
4.15
19.97
19.31
75.88
2.6
3.27
20.1
76.63
2.24
18.56
18.98
79.2
19.48
78.76
100%
78.41
1.76
19.64
78.64
1.72
Figure 4. The structure of Romanian banking system loans granted to
households depending on the loan destination in the period January 2007 –
September 2014
40%
20%
47.37
60%
Ja
n0
Ap 7
r-0
7
Ju
l-0
O 7
ct
-0
Ja 7
n0
Ap 8
r-0
8
Ju
l-0
O 8
ct
-0
Ja 8
n0
Ap 9
r-0
9
Ju
l-0
O 9
ct
-0
Ja 9
n1
Ap 0
r-1
0
Ju
l-1
O 0
ct
-1
Ja 0
n1
Ap 1
r-1
1
Ju
l-1
O 1
ct
-1
Ja 1
n1
Ap 2
r-1
2
Ju
l-1
O 2
ct
-1
Ja 2
n1
Ap 3
r-1
3
Ju
l-1
O 3
ct
-1
Ja 3
n1
Ap 4
r-1
4
Ju
l-1
4
0%
Share loans granted to households for other purposes in total households loans
Share of loans granted to households for housing in total households loans
Share of loans granted to households for consumption in total households loans
If we turn our attention to the situation of deposits, we find that the
structure of deposits considering the categories of depositors is relatively
satisfactory. Thus, in January 2007 - September 2014 it increased the share of
household deposits; while deposits by non-residents and non-financial
corporations declined as a share in total deposits in the same period of analysis
(see fig.5). However, it should be noted that there is a considerable gap between
the share of deposits of non-financial corporations (below 20%) and loans
granted to non-financial corporations (over 40%), a position that should be
improved in time in order to prevent the accumulation of tensions that affect the
internal balance of the Romanian banking system.
21
Figure 5. Structure of deposits by categories of the deponents in the period
January 2007 – September 2014
24.88
24.01
26.45
28.52
30.59
33.46
35.06
36.07
39.91
39.87
40.39
41.96
41.13
41.96
41.52
41.59
42.93
41.77
39.22
39.45
40.87
38.89
39.76
38.78
39.56
33.81
35.46
34.09
29.1
32.34
32.15
80%
32.55
100%
17.08
16.04
16.14
16.26
16.27
17.09
16.85
17.85
18.68
18.84
19.1
19.5
31.88
32.64
32.94
33.55
34.88
34.82
34.73
35.72
35.76
37.09
36.77
17.39
31.84
31.21
16.8
16.77
31.08
17.03
30.14
31.13
16.95
17.23
16.88
30.88
30.94
17.62
31.34
30.36
17.75
30.57
18.81
32.17
17.46
20.1
30.36
21.13
22.65
32.05
31.02
23.45
31.54
30.28
23.83
30.97
22.81
29.36
23.78
23.52
30.98
24.88
20%
29.16
40%
27.76
60%
Ja
n-
0
Ap 7
r-0
7
Ju
l-0
O 7
ct
-0
Ja 7
n0
Ap 8
r-0
8
Ju
l-0
O 8
ct
-0
Ja 8
n0
Ap 9
r-0
9
Ju
l-0
O 9
ct
-0
Ja 9
n1
Ap 0
r-1
0
Ju
l-1
O 0
ct
-1
Ja 0
n1
Ap 1
r-1
1
Ju
l-1
O 1
ct
-1
Ja 1
n1
Ap 2
r-1
2
Ju
l-1
2
O
ct
-1
Ja 2
n1
Ap 3
r-1
3
Ju
l-1
O 3
ct
-1
Ja 3
n1
Ap 4
r-1
4
Ju
l-1
4
0%
Share household deposits in total deposits
Share of non-financial corporations deposits in total deposits
Share of non-monetary financial institutions deposits in total deposits
Share of the public administration deposits in total deposits
Share of non-resident deposits in total deposits
Another positive aspect regarding deposits may be found when we analyse
the situations on maturities. Thus, we can say that a significant share of
deposits, if we refer to an analysis by category of depositors, are built on longterm (more than 70%, even 80%), especially for households and non-monetary
financial institutions (see fig. 6). Non-financial companies are however in
distinct situation, maybe because of considerable need for liquidity and having a
low profitability, holding a large extent of their deposits (by over 50%) in
overnight deposits. However, this aspect should be improved, banking system
requiring finding some solutions to attract non-financial corporations in order to
form deposits with a longer maturity which to accommodate with the need for a
medium or even long term lending so needed for companies’ investment
process.
22
Figure 6. Deposits of households, non-financial corporations and nonmonetary financial institutions on maturity in Romania in the period
January 2007 – September 2014
%
14.72
16.63
29.22
21.13
30
21.84
29.98
50
47.22
48
60
51.99
52.67
52.78
47.15
70
40
82.68
69.13
70
80
78.87
78.14
90
83.57
100
20
10
0
Share of overnight
Share of term
Share of overnight
Share of term nonShare of overnight
Share of term nonhouseholds deposits household deposits in
non-financial
financial corporations non-monetary financial
monetary financial
in total households
total households
corporations deposits deposits in total non- institutions deposits in institutions deposits in
deposits
deposits
in total non-financial financial corporations non-monetary financial non-monetary financial
corporations deposits
deposits
institutions deposits
institutions deposits
Jan-07
Oct-07
Jan-08
Oct-08
Jan-09
Oct-09
Jan-10
Oct-10
Jan-11
Oct-11
Jan-12
Oct-12
Jan-13
Oct-13
Jan-14
Sep-14
5. CONCLUSIONS
Looking at the structure of deposits by currency in Romania, we find that
in January 2007 - September 2014, bank deposits were considered mainly in
RON, while deposits in EUR did not exceed 19%. To confer resilience to
banking system also the lending process should meet the same proportions as
the evolution of deposits on currencies, but lending process takes place almost
equal in both RON and in foreign currency.
It should be noted that during the analysis, the financial intermediation
process and afterwards the financial deleveraging, acted primarily on foreign
currency lending segment, particularly in the euro. A positive aspect of this
view is that in recent years has increased the supply of credit in lei
simultaneously with a reduction in the stock of foreign currency loans.
It may be noted, however, that the structure of deposits considering the
category of depositors is relatively satisfactory, the share of household deposits
in January 2007 - September 2014 increasing, while deposits formed by nonresidents and non-financial corporations as a share of total deposits declined in
the same period analysis. Note that there is a considerable gap between the
share of deposits of non-financial corporations (below 20%) and loans to nonfinancial corporations (over 40%), fact which will be enhanced in order to
prevent the build-up of tensions which might affect the internal balance of the
Romanian banking system.
Another positive aspect of the deposits may be found on maturity, a
significant share of deposits being formed on long-term (over 70%, even 80%),
23
situation remarked especially in the case of households and non-monetary
financial institutions.
If we will turn the attention to the correlation between loans and deposits,
the LTD ratio is still high, standing at 99.65% in September 2014.
A negative factor regarding the functioning of the Romanian banking
system is the inability to properly use funds through “deposits” instrument
because in the bank balance sheets sources of funding are mainly composed on
short-term and there is still a significant dependence of funding sources
attracted from parent banks which amplifies this negative aspect, considering
also the slow process of strengthening domestic savings.
In order to improve the internal structure of lending and saving, taking into
account currency criterion, the banking system as a whole, but especially
commercial banks should focus their attention on the one hand, on the reduction
of foreign currency lending or/and the increase of the attractiveness of foreign
currency savings instruments and on the other hand, on the stimulation of the
use of credit in lei, especially by diversifying the portfolio of services focused
towards customer needs.
References
[1] Bhattacharya S., Plank M., Strobl G., Zechner J. (2002). Bank capital regulation
with random audits. Journal of Economic Dynamics and Control, vol. 26, 1301–
1321.
[2] Dangl T., Lehar A. (2004). Value-at-risk vs. building block regulation in banking.
Journal of Financial Intermediation, vol. 13, 96–131.
[3] Fries, S., Mella-Barral P., Perraudin, W. (1997). Optimal bank reorganization and
the fair pricing of deposit guarantees. Journal of Banking and Finance, vol. 21,
441–468.
[4] Iuga, I. (2011). Comparative study on the evolution of loans and deposits between
the Romanian Bank for Development (BRD) – Groupe Societe Generale and the
Romanian banking system. Annales Universitatis Apulensis Series Oeconomica,
vol. 13, issue 2, 451-460.
[5] Lehar, A. (2005). Measuring systemic risk: A risk management approach. Journal
of Banking and Finance, vol. 29, 2577–2603.
[6] Merton, R.C. (1977). An analytic derivation of the cost of deposit insurance and
loan guarantees: An application of modern option pricing theory. Journal of
Banking and Finance, vol. 1, 3–11.
[7] Merton, R.C. (1978). On the cost of deposit insurance when there are surveillance
costs. Journal of Business, vol. 51, 439–452.
Notes
1. The paper is a partial valorization of the project „Tensions of the monetary market in
Romania” (coord. Alina Georgeta Ailincă) conducted in 2014 at the Centre for
Financial and Monetary Research „Victor Slăvescu”.
24
YOUTHS' TRUST IN BANKING. AN EXPLORATORY
STUDY AMONG ROMANIAN CONSUMERS
ANDREIA ANDREI
Alexandru Ioan Cuza University of Iasi
Iasi, Romania
[email protected]
ADRIANA ZAIT
Iasi, Romania
[email protected]
ELENA-MADALINA VĂTĂMĂNESCU
National University of Political Studies and Public Administration
Bucharest, Romania
[email protected]
Abstract
The current research uses an exploratory analysis based on 34 in-depth interviews
conducted with Romanian graduate students to investigate consumer trust in banking
and banks. Results indicate that a low level of trust emerged mostly from consumer
doubt regarding banks' intentions to develop win-win relationships with their clients.
The paper highlights consumers negative feelings and trust erosion, suggesting
potential directions of improvement, based on the two-fold nature of trust and the
connections between trust and economic growth.
Keywords: Romania, consumer trust, bank reputation
JEL Classification: M31, G21
1. INTRODUCTION
Recognized in the last years for both advertisements effectiveness (eg.
Effie awards and nominees, 2014) and the large marcomm budgets spent,
banking and insurance services ranked in 2014 as one of the top 10 media
buyers in Romania (Initiative: Media Fact Book, 2014).
Still, despite of the high advertisement quality, media coverage and budget
spending, banking sector was found to suffer from a profound lack of
consumers trust in Romania, according with Järvinen's (2014) results generated
from a 41,308 participants survey conducted according European Commission
25
directions in 29 European countries: Norway, Iceland and EU members Austria,
Belgium, Bulgaria, Cyprus, Czech Republic, Denmark, Estonia, Finland,
France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania,
Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia,
Slovenia, Spain, Sweden, United Kingdom.
In Järvinen's (2014) study Romania was found to belong to the low trust
cluster of European countries, alongside three other Eastern EU states (Bulgaria,
Hungary, Poland) and those struggling with indebtedness such as Greece, Italy,
Portugal, Spain, Iceland and Ireland.
While most of Eastern EU countries are placed in either high trust cluster
(Estonia and Latvia) or medium trust cluster (Czech Republic. Lithuania,
Slovenia and Slovakia), Romania belongs to the group of lowest level of trust,
signaling the potential presence of some additional factors (such as distrust
readiness or consumer disappointment) that probably amplified the negative
effects of the economic crisis. As results revealed, Romanians distrust towards
banks and banking services signals consumer disappointment to a greater extent
than a potentially generalized less trusting predisposition induced by the postcommunist condition of the Romanian society (post-communists were labeled
(Bjornskov, 2006) as less trusting than other societies).
Without neglecting the contribution of the global financial crisis that
diminished people's welfare and trust (Shim et al., 2013), or the impact of the
recent turbulent events from European region (e.g. Greece or Ukraine), we
assumed that deeper reasons of the trust loosing and incidents that have fueled
Romanians disappointment might result from an in-depth investigation of
consumers perceptions, feelings and attitudes towards banks and financial
services.
Therefore, beyond macro-events and numbers, the current research pursued
an in-depth investigation of the consumer mind, in the attempt to provide
additional insights that might be helpful in the process of Romanians trust
recovery in banks and banking. In this regard, the first part of the paper revise
the literature to highlight the importance of rebuilding the trust in banking,
given the impact of trust on the general wellbeing and the linkage between trust,
the financial system stability and the economic growth. The second part of the
paper explains the two-fold nature of trust and the importance of knowing what
type of trust is more affected. The third part of the paper reports results from our
exploratory study of consumer perceptions, in the attempt to find out which type
of consumer distrust is more characteristic for banks and banking services in
Romania. Finally, the fourth part discuss results and presents conclusions.
The importance of trust between transactional parties is unquestionable,
being recognized in the literature as a key element of successful business
relationships (Arrow, 1972; 1974, Morgan and Hunt, 1994), being of first
importance especially in the services area (Palmatier et al., 2006).
26
The concept of trust has raised lots of research and debates because it is a
complex phenomenon with multiple meanings and a profound future orientation
(Williamson, 1993) that involves the fact that people will find out only in the
future whether the events they are trusting in will occur as they anticipated, or
as they had hoped to happen.
2.1 The importance of rebuilding the trust in banking
Previous research have shown that people decide to trust when they
voluntarily accept to risk and to make themselves vulnerable (Hardin, 2006)
offering trust to a partner that might act opportunistically (Williamson, 1993).
From a customer perspective, banking relationships entail that the client
accepts the risk to trust the bank (and implicitly the financial sistem) because he
expects that he can rely on bank's promise, although bank might prove to act
opportunistically, deceiving his expectations and trust.
Analising trust versus oportunism in the relationships between banks and
their clients, Dahlstrom et al. (2014, p. 271) have shown that opportunistic
intentions might exist and they are usually manifested by “the incomplete or
distorted disclosure of information meant to mislead or confuse the trading
partner”. Authors pointed out that banks have to be committed to build trust and
long term relationships in order to be able to resist the temptation of making
abuse of their position to obtain higher levels of immediate profits resulting
from the opportunities generated by the lack of transparency and the “inevitable
asymmetry in customer's ability to understand financial information”. For
rejecting the temptation of behaving opportunistic to gain immediate profits,
banks should be aware that opportunism and trust are mutually exclusive and
the building of trust represents a priority for service sector in general, but for
financial industry in particular. The top importance of trust building for the case
of banking industry is grounded on the high level of perceived risk involved by
the financial transactions, requiring trust between trading partners for reducing
the perceived risk to a level that enables the transaction occurrence (Dahlstrom
et al., 2014).
As researchers have shown, banks oportunistic behaviors have shattered
customer trust and institutional reputation, eroding banking sector stability.
Further, an extended instability was triggered in 2008 by the fall of trust in the
financial system and bank institutions, damaging investments and economic
growth (Dia, 2011 and Armstrong, 2012 cited in Dahlstrom et al., 2014).
Highlighting the linkage between trust, the financial system stability and the
economic viability, researchers pointed out that trust recovery in the banking
sector is vital, “since financial markets hinge on trust” Stiglitz (2008, p. 30).
2.2 The two-fold nature of trust
Despite of the fact that trust represents a central topic in the scholar
literature for more than 150 years, since Mill (1848) wrote about the beneficial
impact of trust on every aspect of life, the measurement of the trust concept is
27
still debated in social sciences, while interdisciplinary efforts were called to find
a more complete approach that would integrate results from economics,
sociology, psychology and so on.
While economic related works have discussed trust versus opportunism
(Williamson, 1993; Hardin, 2006), and some of these used utility maximization
theory to explain trust behavior (Coleman, 1990), some other lines of research
analyzed the interplay of rational expectations and emotions to explain trust
decisions (Berg et al., 1995; McAllister, 1995; Dunning, 2012). In this vein,
trust behavior was found to have a two-fold nature (McAllister, 1995):
emotional (affect based trust, or perceived intentions related), and rational
(perceived competence or abilities related).
Although the emotional and rational dimensions of trust were named
differently by various researchers - e.g. “integrity” and “reliability” to denote
the confidence that the partner is honest and credible (Morgan and Hunt, 1994);
a belief in the “benevolent intentions” and “credibility” of the partner (Doney
and Cannon,1997); faith in partner’s openness and truthfulness (Kumra and
Mittal, 2004); –, or some other studies considered three or more components of
trust, it seems that most of the scholars have investigated trust as an expectation
of partner's good intentions, cooperation and honesty on one hand, and the faith
in partner's future performance at the promised level.
Thus, we adopted the aforementioned two-fold approach of trust
(emotional and rational) in our consumer investigation, considering emotional
trust as the decision to trust based on the perceived intentions, and the rational
trust as the decision to trust based on the perceived ability.
Our research sought to find out which type of consumer trust (intentions
related or competence related) was affected to a greater extent in consumer –
bank relationship in Romania. In this regard we remind that banking was found
to suffer from the lack of consumer trust to a greater extent in Romania than in
most of the other Eastern EU countries (Järvinen, 2014).
Since emotional trust was found to influence people's decisions to a greater
extent than rational expectations (Dunning, 2012), people being more prone to
trust on those seeming to care about common welfare (Hurley, 2012), our
pursuit represents an attempt of providing additional inputs that might direct
banks' efforts of spreading away consumers suspicions and rebuilding
Romanians trust in banking industry.
3. EXPLORATORY STUDY OF CONSUMERS TRUST IN BANKING
Our exploratory study regarding Romanian consumers trust in banking was
conducted in the fall of 2014. The study comprised a qualitative research based
on in-depth interviews conducted with Romanian graduate students (N=34
participants, 23-33 years old).
28
3.1 Procedure
The qualitative research procedure was based on ZMET semi-structured
interviews centered on the visual images that have been selected as most
relevant for the discussions topic, and brought to the interview by each
participant. The in-depth interviews were conducted according with literature
indications for the patented method of triggering information from customers
known as ZMET - Zaltman Metaphor Elicitation Technique (Zaltman, 1995).
Since the metaphor (the representation of one thing in form of an other) was
found to be central to human thought (Lakoff & Johnson, 1980), we have
chosen ZMET to reveal the unconscious reasons of the deep grounded thoughts
about banking that might be embedded in the images that each participant has
collected.
The number of interviewees in our study (34 participants) was significantly
higher than the number of participants usually required in ZMET investigations
(12 interviewees), although ZMET interviews are known to provide from 4 to 5
participants 90% of the data extracted from large set of interviews (Coulter &
Zaltman, 1995).
Both sample size and participants profile (graduate students, 23-33 years
old, Romanian nationality) were meant to depict the common shared patterns
from individual perceptions of highly educated young adults from Romania, the
representants of a population segment that we consider to be of first importance
for banks if they consider the long-term process of trust building.
Thus, 34 Romanian graduate students (23-33 years old) participated in our
qualitative research based on ZMET in-depth interviews regarding banks and
banking services.
In the first step participants received the task to collect withing one week a
set of 6 - 12 images they consider to best describe their feelings, sensations,
impressions and thoughts towards banks and banking services. After one week
each participant brought his own collection of images, and they were invited to
a face-to-face discussion regarding the deep thoughts and motives that have
prompted them to select each image from the chosen set.
The image collection was used to surface participant's thoughts during a 2
hours, one-to-one semi-structured interview.
In the beginning of the interview participants were invited to tell the story
of each collected image and how it relates with his thoughts and feelings about
banks and different banking services.
The storytelling for each image was followed by the usual ZMET steps:
investigation the meaningful grouping of the collected images; the identification
of sensory metaphors for the color, sound, smell, taste and touch associated with
participant's feelings and thoughts towards banks and banking; the indication of
the most representative image, the description of those relevant thoughts or
feelings for which the participant couldn't find a representative image (so called
missing images); the expansion of the frame to reinforce participant's ideas; the
29
unveiling of the metaphor and participant's overall thinking about banks and
banking services.
In the end of the 2 hours interview, each participant was invited to use his
imagination to create a very short story-like vignette, expressive for his
thoughts on the topic, and to pick and organize his collection of images into a
digital canvas that would summarize his thoughts and feelings towards banks
and banking services.
Computer assistance was used during the interviews to store, display,
group, select, organize images, and respectively to create the digital canvas.
For data analysis purposes, all interviews were voice recorded with
participants consent.
3.2 Results
The analysis of the data resulted from the in-depth interviews revealed that
the overall feelings towards banks and banking services were mainly negative,
such as: distrust, suspicion, worry, fear, frustration, anxiety, disappointment,
customer's hopelessness and the feeling of being manipulated.
While 16 participants (47% of the total sample) reported exclusively
negative thoughts and feelings and 9 participants proved to mix negative with
positive thoughts towards specific banking services and banks, only 9 from 34
participants (26% of the total sample) reported mainly positive feelings, such as
trust, fairness, respect, satisfaction, safety and fulfillment regarding their bank
and banking services.
The major part of the negative thoughts expressed in participants'
storytelling were related to the disappointment regarding the terms and
conditions for credits and savings. “Unfair”, “insincere”, “insidious” and
“deceptive” were the words frequently used to describe banking in conjunction
with credits or saving plans, no matter if participants recalled their own
frustrating experiences or the experience of a family member or an
unsatisfactory attempt of a close connection.
The main explanation for reported disappointments have made reference to
the many downsides and disadvantages hidden under the banking services that
are being presented exclusively in the light of consumer benefits instead of
being honestly shown, with all details and explanations.
The interviews have revealed that participants perceive banking services as
being full of traps, especially in the case of credits. Participants ilustrated their
suspicions regarding banks and banking using eloquent images (see fig.1) such
as: a mask of virtue on a faceless darkness; a two-faced man, or a liar.
The negative thoughts are related mainly with credits. Frustration appeared
as a consequence of the bureaucracy and the lack of transparency in the
communication between bank and clients.
The mix of negative with positive thoughts was expressed regarding a
special line of credits granted to young people for buying their first home.
30
Although participants were unwilling to take such a credit, they admitted that
they would consider it as an option in the absence of any other possibility.
Most of the positive feelings and favourable opinions reported by
interviewees were associated with e-banking. In this regard, they talked about
satisfaction and fulfillment to express their thoughts regarding the comfort and
promptness of online payments, and the safety of using their bank facilities for
on-line transactions and money transfer.
Figure 1. Image metaphors: banks and banking services
The sensory metaphors emphasized the predominance of the negative
connotations. Thus, the higher number of entries for the associated colour were
found for red (11 participants) and gray (6 participants), suggesting customer's
anger and hopelessness, disappointment and distrust. Excepting 9 participants
that mentioned optimistic colours (orange, yellow, pink, blue, green), all the rest
provided bad connotation alternatives (black, brown, violet). Most mentions for
taste were bitter (10 participants), followed by bittersweet (5 participants) and
piquant (5 participants). Pungent smell (14 participants), unpleasant tactile
sensations such as sharp and harsh (10 participants), cold and slippery (8
participants), and disturbing sounds (26 participants) such as klaxon, horn, bell
ringing, alarm, alarm-clock, tick tock clock, whistle or woodpecker noise, all
indicated negative associations and feelings.
31
Not surprisingly, the interviewee statements and exemplifications indicated
that almost all participants that reported positive thoughts, feelings or sensory
metaphors, had reffered specific banking services and also certain bank names.
With no intention to debate on how different banks seems to be positioned
on the mental map of our youth participants, we have to notice the significant
differences resulted between trust towards different brands. While some banks
are seen as deceptive, crafty and greedy, very few other banks are considered
reliable, respectful, cordially and opened.
4. CONCLUSIONS
Results suggest that the most positive feelings of the participants towards
banks are related with e-banking. They experience satisfaction and fulfillment
to enjoy the comfort of online payments. They feel safety and reward to use
time-saving and secure facilities of their banks for on-line transactions and
money transfer.
The credits granted to young people for buying first home are also
appreciated, although positive feelings are mixed with negative thoughts, most
participants rejecting the idea of taking such a credit unless they have no other
choice. They are afraid of becoming indebted on a higher level than they
expected.
Consumer disappointment regarding the terms and conditions for credits
and savings, frustrating experiences generated by hidden costs, bureaucracy and
the lack of transparency leads lots of negative perceptions towards banking.
In this regard, 47% of the participants reported exclusively negative thoughts
and feelings, perceiving banks as being unfair, insincere, insidious and
deceptive.
Only 9 participants (26% of the total sample) reported mainly positive
feelings towards their bank, such as trust, fairness, respect, satisfaction, safety
and fulfillment, while 9 participants reported a mix of negative feelings with
positive thoughts towards specific services or institutions.
As our in-depth investigation revealed, emotional trust erosion represents
the main problem of banking sector in Romania. Consumers have no doubts
regarding banks expertise, knowledge or efficiency, but most of them are
skeptical regarding banks intentions of developing win-win relationships with
their clients. Banks in general are seen as being interested exclusively of their
profits, disregarding customers. Some banks in particular are seen as especially
false, wily and rapacious, while very few other banks are considered fair,
reliable, behaving respectful, friendly and opened to client.
On one hand, the high level of suspicious feelings regarding banks'
intentions explains why Romania was found to suffer from the lack of consumer
trust to a greater extent than most of the other Eastern EU countries in Järvinen
(2014) study. On the other hand, the presence of better perceptions towards
some of the banking services and banks offer some hope for the trust recovery
on Romanian market.
32
From a managerial perspective, findings about the main type of consumer
mistrust are valuable information for banks in their reputation nurturing efforts,
since suspicions regarding company’s intentions were found to be more
damaging and harder to dispel than suspicions regarding competence faults
(Kervin et al., 2014), needing a long-term comprehensive strategy of trust
restoring at both organizational level and industry level. Knowing that behavior
proofs associated with positive competence were found to be more effective in
restoring a reputation affected by suspicions regarding intentions (Kervin et al.,
2014), each bank would be able to adjust its reputation management based on
the presented results.
Revealing the way of thinking of a population category that represents the
main decider of tomorrow (highly educated educated, 23-33 years old), our
study has shed a light on the type of consumer distrust that threatens to detract
banking (or at least the operations of most banks that operates today on the
Romanian market), making a first step to understand bank's weaknesses and to
indicate an important direction for the efforts that should be made for taking
care of the most valuable capital of financial markets: consumer trust.
ACKNOWLEDGEMENT
This work was partly supported by the strategic grant
POSDRU/159/1.5/S/133652, co-financed by the European Social Fund within
the Sectoral Operational Program Human Resources Development 2007- 2013.
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34
FINANCIAL INNOVATIONS, THEIR REGULATIONS
AND FINANCIAL CRISES
ADINA APĂTĂCHIOAE
University of Alexandru Ioan Cuza
Iasi, Romania
[email protected]
VASILE COCRIȘ
University of Alexandru Ioan Cuza
Iasi, Romania
[email protected]
Abstract
The modern financial system is characterized by a permanent innovation that is
manifested in all its components: markets, institutions, instruments and regulations.
Financial innovations are made in order to obtain benefits such as lowering costs,
improving the efficiency of the financial system, economic growth and achieving social
welfare. However, some financial innovations have been proven over time to be
inefficient and have adversely affected the financial system and the entire economy by
contributing to the manifestation of the crisis events. The aim of this article is to present
the position that it occupies innovations in the financial system, the barriers faced by
the financial regulations in front of these new elements and how they contributed to the
appearance and development of financial crisis. The mutations of financial economy
have posed new challenges in terms of financial regulation and supervision, and their
adjustment to the current circumstances is intended to ensure the financial stability of at
national and international level.
Keywords: financial innovations, regulatory, financial crisis
JEL Classification: G00, G01, G010, G20
1. INTRODUCTION
The entire financial world can be seen as an innovation obtained over time.
Financial innovation is different from that undertaken in other industries, but its
main feature is that a new financial element is the starting point for another,
thus forming a spiral innovative performed at the financial sector level. The
purposes for which the financial innovations are made are different, but it is the
responsibility of regulatory authority to ensure the responsible transfer thereof
to the customers and their proper utilization in order to improve their current
situation and to ensure financial stability and efficiency.
35
2. PLACING INNOVATION IN THE FINANCIAL WORLD
Financial innovation can be defined as the act of creating and disseminate
new financial instruments as well as new technologies, institutions and financial
markets. Financial innovation refers to the institutional component but also to
the innovative products and processes. Institutional innovations may affect the
financial system whereas involves creating new types of financial firms, such as
specialized credit cards, brokerage firms, internet banks, etc., but also some
changes in the legal and supervisory framework. Financial innovations at the
product level involving the creation of new products such as derivatives,
securitized assets, foreign currency mortgages, etc. The introduction of
innovative products is intended to respond appropriately and in a more efficient
manner to market demand. Innovative processes relates to new ways of
achieving the financial business, such as internet banking, phone banking; in
order to increase efficiency or market expansion.
Financial innovation has been defined as a process of creation
(development) of new financial products; in a broader sense, are embedded new
ways to mobilize funds or to place money, or the development and evolution of
new financial institutions. Consequently, financial innovation is manifested not
only in the context of capital market, but also at the level of the entire financial
market: NOW accounts or credit derivatives, together with the financing of
some acquisitions (like leverage, buy-out), electronic funds transfer and credit
cards, securities; are all the result of financial innovation.
William Silber (1983) considers that financial innovation can occur in
three different forms: 1) the emergence of new financial instruments (product
innovations) - most often they are not completely new, but are the result of
changes performed in certain characteristics of financial products, or the
combination of existing features in a new way; 2) the emergence of new
financial institutions (institutional innovations); 3) the emergence of new
financial markets.
In the specialized literature we find the statement that, at the level of
financial services, the innovations are rather rare and the innovations appear as
update of the old version (Tufano & Schneider, 2008). Moreover, we found the
concept of spiral innovation according to which the existing financial
innovations allows the creation of other innovations (Merton, 1992).
Financial innovation refers to any novelty element at the level of financial
system which contribute to enhancing the efficiency of the financial
intermediation and to improve operational efficiency of the financial system by
reducing costs and /or of trading risks of financial instruments.
The main features of financial innovations are: they can be entirely new
solutions or just traditional instruments in which they were introduced new
elements and which becomes better suited to the specific circumstances of the
moment; they may substitute the traditional financial instruments but improves
the financial situation of the entities that use them; they can be used to hedge
against the intensive volatility of the market parameters; they cannot be easily
36
attributed to a single segment of the financial market; can be used in a form of
complex instruments which include both simple financial instruments, as well
as traditional instruments; they can be used as processes, techniques or new
financial strategy that contain new financial products (Ionescu, 2012).
Financial innovations can be classified into three categories according to
the functions for which they were created, as follows: broadening marketinstruments (which can cope the market changes or expansion); specific risk
management tools (allowing a reallocation of risks to those market participants
with a lower aversion to risk or are better prepared to cope with risks) or
arbitrage instruments (allow obtaining gains from cost differentials between
markets). According to the functions they perform, financial innovations are
classified into five categories: price-risk transferring, transferring credit-risk,
liquidity-generating, credit-generating, equity-generating instruments.
In analyzing the impact that financial innovation manifests on the financial
system, should be considered two factors: the potential changes that these
innovations can manifest on the efficiency and stability of the financial system.
The sustainable financial innovations it should be beneficial in reducing the
negative elements that propagate on the financial system by reducing the level
of risk, eliminating information asymmetries, reducing transaction costs and
minimize tax payment system. In addition, they should contribute to the
stability of the financial system and increase its effectiveness (Ionescu, 2012).
Financial innovations differ substantially from those performed in other
industries, this in term of at least three elements. First, the institution that
achieves financial innovations cannot keep the added value for her private use.
The benefits of this added value depend on the decisions of the firm, the market
structure in which it operates and of the sources of the idea which have led to
the innovative results. The financial services industry it was distinguished to
other industries and through the capacity of its innovators to appropriate their
own discoveries. Until recently, financial institutions have been limited in their
ability to protect new ideas through patents.
Many innovative products from the financial sector have been examined in
detail by public regulatory agencies, and this fact is almost unknown at the level
of manufacturing industry. Another element that differentiates financial
innovations by the innovations from other industries relates to the collaboration
from the innovative process. In many segments of the financial services
industry, the companies often is committed in collaborative activities for
development of new products, services or financial institutions (Lerner, 2006).
The last few years have been marked by an acceleration of the process of
financial innovation and the causes of this phenomenon can be considered the
increased volatility of exchange rates, of the interest rates, of the commodity
prices and the changes at the level of the regulatory framework (Laurent, 2001).
The most important developments can be observed in the increase of the risk
transfer instruments and of the risk management, the increasing role acquired by
the non-banks institutions at the level of capital markets throughout the world
37
and the increasing integration of national financial systems. Nonetheless, most
financial innovations are achieved at the level of derivative markets (Anton,
2007).
3. UNCERTAINTIES REGARDING FINANCIAL INNOVATIONS
Although it is considered that helps to increase the risk, financial
innovation materialized in various types of derivative products and financial
engineering technology generally provides low cost and are extremely
effectively in mitigating the risks (Laurent, 2001). The main benefits of
financial innovations from the derivative instruments level can be found in the
fact that financial institutions have a greater ability to measure and to achieve a
more efficient management of risks (Anton, 2007). The empirical evidences
shows that the less profitable financial institutions invest more in innovations
and in the subsequent years of their introduction can be observed a significant
increase of their profitability (Lerner, 2006).
Financial innovations, in besides the advantages that it presents were
always criticized that cause the increase of the systemic risk. Innovations in
financial products have given rise to new challenges for market participants, but
also to the supervisors from the areas of systemic risk. An important
characteristic of the periods of financial innovation is that the rapid rhythm of
the emergence of new products and the changes in the structure of the markets
associated with these products may exceed the capacity of achieving the risk
management and of the processing and settlement infrastructure. Since the
financial innovations are achieved, generally, in favorable economic and
financial conditions are unknown the reactions of markets where these
innovations are performed under stress conditions (Anton, 2007).
The theory of innovative industry dynamics is based on two assumptions
about financial innovations: 1) financial innovations are unknown, and their
learning will focus on the benefits that they can generate; 2) in these industries
is difficult for outsiders to understand and monitor the actions of the users of
financial innovations, which may generate moral hazard and crisis. The value of
financial innovations is uncertain and its putting into service allows the
progressive discovery of their effects.
Beyond the theoretical structures, what really interested is that in recent
years the range of the securities available in the financial market has greatly
increased, and their complexity impeding, at a given time, the market authorities
to realize a proper surveillance of the market and making it more difficult their
integration into the products of the money market or the capital market. From
the investor’s point of view, the capital market has become more attractive
because has increased the number of available instruments for investment or
those suitable to use in portfolio management or for covering (transfer) the risk.
The high level of substitution of some stock products with others, result of the
financial innovation, the rapid growth in the volume of operations performed,
38
have determined, in time, the reduction of the costs of stock transactions
(Stoica, 2006).
In order to maximize its profits and to respond properly to the customers’
needs the bank develop new products; in other words, innovation, which is
extremely beneficial to the economy, is generated by the desire to receive
earnings.
The information technologies which are in a continuous advance, modifies
the conditions of the offer. The financial firms ascertain that many of their old
activities are no longer profitable, the products, banking and financial services
that they offer to customers are no longer sold, thus that many financial
intermediaries utilizes financial innovations or other modalities to avoid being
eliminated from the market. To survive in the new economic environment the
banking institutions should seek and produce new products and services, which
should be appropriate to consumer needs and demonstrate that there are
profitable; a process that involves the development of financial engineering
operations, promoting financial innovation. Among the causes of innovation we
can mention: responses to the changes generated by the demand, answers
generated by the offer, the avoidance of financial regulations.
Financial innovations have emerged as a consequence of the development
and diversification of the financial markets, of its actors, of the products and
services which are offered in the financial sector. Because the markets are in a
permanent change, financial institutions must restructure itself in order to
respond properly to market demand and to remain competitive (Căpraru &
Stoica, 2008; Litan, 2010). Financial innovations are considered to be a natural
element of the competitive system, through which is searching for new ways to
increase profits and to ensure risk management (Lumpkin, 2009).
4. THE REGULATION OF FINANCIAL INNOVATIONS AND
FINANCIAL CRISES
Even though the recourse is had to financial innovations in order to
improve the current situation, sometimes has been shown that, those may have
negative effects on the economy. The negative effects can occur because these
financial innovations encourage intermediaries to abandon their traditional
modalities of action in order to improve their level of solvency, but without
changing other elements. Other negative elements that may result from the
development of financial innovations are that through the complexes innovative
financial instruments is attempting to financing very complex activities by
transferring the risk to other market participants.
These takes the form of derivatives, which, although initially have been
designed to protect against market risk, these have become to be more and more
frequently used by financial intermediaries for speculation and to the
manipulation of the volatility of other market parameters. The development of
the derivatives market and its characteristic uncertainty determined the
emergence of new risks and their extension to the whole system.
39
Financial innovations allow to financial intermediaries to differentiate
towards other market participants, representing solutions that help them in
meeting customer requirements. At the same time, innovations created can
generate negative effects on social welfare because they can trigger
informational asymmetry.
If until the triggering of the recent financial and economic crisis, to the
financial innovations were associated only beneficial elements, after the trigger
moment in 2008 many have become skeptical about the positive effects of
financial innovations, prevailing pessimism regarding them. Financial
innovations have positive elements, but with time it has been demonstrated that
they have generated negative effects on the financial system. They have allowed
financial intermediaries to change the level of the risk associated with their
activities and their level of solvency, but without changing the external
structure. Banks have become an access to capital markets and they have
transferred their assets outside, to other specialized operators who in turn issue
liabilities that are purchased by institutional investors who then transform and
sell them to the final buyers.
The transfer of the risks to other agents causes that banks decline their
level of stringency with which they select and monitor their customers.
Financial innovations and the expansion of those are considered causes of the
recent financial crisis (Gai et al., 2008). In order to avoid or limit these
phenomena it is necessary to monitor and regulate the derivatives markets
(Palmerio, 2009) and of all financial innovations.
If usually, the financial sector is subjected to a detailed control and
regulation, the financial innovations, clearly accentuates the need for such
activities. A first step in this direction would be that the financial institutions
shall disclose all off-balance sheet activities. This would show the true risk
exposure of banks and the adaptation of the capital requirements, of the
liquidity, of the solvency, etc. to such risks; it would eliminate some of the
causes of financial crises.
Innovations may increase the sources of financing the public debt, the level
of monetary aggregates, which increases vulnerability to shocks. In literature we
find that asset prices are changing rapidly and in a short time, can change their
equilibrium value. If the new financial instruments are created based on the
behavior of the asset prices is developing another risk that manifest negative
effects on the entire economy.
Financial innovations decreased the level of the transaction costs,
increased the number of the available assets and increased the diversification of
the substitutes at the asset level. This fact determined the reduction of the
capacity of the regulatory authorities to measure and controls the money supply.
Together with the development of financial innovations, there were some
limitations at the level of financial regulations, but the measures taken regarding
to prudential supervision and other financial policies show the effort made by
the regulatory authorities to remedy this situation.
40
Overall, the entire economy it benefits from financial innovations, but this
cannot be achieved without the appearance of new risks and without resorting to
the coordination of regulatory policies (Levich et al., 1988; Calomiris, 2009).
Financial innovations can be used for various purposes, so it is very
important that the regulatory authorities ensure that the financial products are in
an appropriate manner provided to consumers and assume responsibilities that
the new discoveries that are made at the financial sector ensure the
improvement of financial intermediation and of the social welfare (World
Economic Forum Report, 2012).
The mutations from the financial economy have posed new challenges in
terms of financial regulation and supervision, and their adaptation to the current
circumstances attempts to ensure the financial stability at national and
international level.
5. CONCLUSIONS
Financial innovations have always characterized the financial system. The
recourse to the financial innovations is to obtain certain benefits, but the time
and the amendment of macroeconomic circumstances have demonstrated that
new financial instruments can manifest negative effects on the economic and
financial sector. The most financial innovations can be found at the level of
derivative financial instruments and are characterized by a greater complexity
and the primary purpose of those is risk coverage. The deviation from the main
purpose for which they were created and the prevalent usage of financial
innovations in order to produce speculative transactions and arbitrage, caused a
negative reaction of these at the level of financial sector, increasing their
contribution in the propagation of crisis and a sense of pessimism before the
development of financial innovations.
Thus, the main conclusion is to highlight the fact that the financial
innovations are characterized principally by benefits, but the development of
complex derivative financial instruments has proved to manifest negative
effects on the entire economy. These developments bring challenges for the
regulatory framework which must respond with appropriate measures in order
to ensure the stability and the efficiency of the financial system.
ACKNOWLEDGEMENT
This work was supported by the European Social Fund through Sectorial
Operational Programme Human Resources Development 2007 – 2013, project
number POSDRU/159/1.5/S/134197, project title “Performance and Excellence
in Doctoral and Postdoctoral Research in Economic Sciences Domain in
Romania”.
41
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2012.pdf
43
THE LENDERS OF THE REAL ESTATE RESIDENTIAL
MARKET IN EUROPE
SABINA ANDREEA CAZAN
Doctoral School of Economics and Business Administration
“Alexandru Ioan Cuza” University of Iasi, Romania
[email protected]
BOGDAN CĂPRARU
Faculty of Economics and Business Administration
“Alexandru Ioan Cuza” University of Iasi, Romania
[email protected]
Abstract
The real estate market is considered an economic force. The level and the volume of the
transactions and also the contribution to the gross domestic product have determined
the national authorities to acknowledge its importance. This article analyses the activity
of the financial institutions specialised in funding the real estate residential sector.
Taking into consideration the impact of the economic crisis and also the significant
level of fragmentation in the European Union countries, the national authorities are
trying to implement the needed measurement in order to actuate the residential
segment. The main goal was to determine the impact of the residential segment on the
real estate market and national economy, the price housing trends, the structure of the
mortgage products and their evolution over the last years. The countries involved in this
quantitative analysis were Romania, Spain, Poland, Germany, United Kingdom and
Denmark. The last year was considered a difficult one from many points of view but
overall, the progress has been noted in the majority of the states. The residential real
estate sector has been more stable, the prices and the transactions level grew
significantly due to the decrease of the interest rates. The European authorities are
optimistic, forecasting that in the next three years the mortgage system will increase its
stability, transparency and productivity.
Keywords: housing market, financial institutions, housing price, mortgage system
JEL Classification: G01, G15, G21, R30
1. INTRODUCTION
The real estate assets have a significant percentage in each individual
patrimony. For the majority of people, buying a house it’s the most expensive
and significant transaction they will ever do. Therefore, in many cases the
necessary funds are obtained by contracting a mortgage. In the last years, the
44
real estate market has experienced an important development, both nationally
and worldwide. Even if the European integration level of the real estate markets
is reduced, the national authorities have made real progresses in respect of the
legislation and regulations.
This study will show the latest trends in respect of the housing prices, the
value of the loans and the structure of the mortgage products. Furthermore, we
will analyse the main lenders in each state and establish the differences and the
resemblances between the mortgage systems. The results will contribute to the
economic analysis of the residential real estate sector. In the same time, the
study will demonstrate the importance of the economic and savings banks
through the financiers of the housing market.
The countries have been chosen taking into consideration economic,
political and social factors like the level of development, the productivity and
the stability of the economy, geographical position, the political system and the
interdependence between them. The statistical data were collected from the
regulatory national and European authority’s reports. The most important
organization is The European Mortgage Federation (www.hypo.org) which
regulates and supervises the real estate markets from Europe. Beside this, the
European Union portal and the World Bank website have been used in the
analytical process.
The real estate markets subject has been approached by many studies and
authors. In this respect, Jose Luis Suarez and Amparo Vassalo (2004) identified
three key points: the market functionality, the refinancing ways of the financial
institutions and the interdependences between European real estate market and
national economy. The authors made a correlation between the progress and the
changes of the housing market and the outstanding loans, concluding that
countries like Greece, Portugal, Ireland or Spain had contracted huge loans in
order to finance the real estate sector. These countries have felt the most the
pressure of the financial crisis from 2007, the economic environment been
really affected. After seven years, we can say that the real estate market
conditions are starting to improve, the housing markets have grown and the
outstanding loans percent is becoming smaller and smaller.
Regarding the European integration issue, studies have shown that there
still are political and economic barriers to overcome (Costa & Hardt, 2003). The
main objectives of the European authorities should be strengthening the
competition and the stabilisation of the interest rates. In respect to the
harmonizing process of the real estate markets, there are some key factors we
need to consider (Dubel & Rothemund, 2011). The legal framework of the
contracts information access should be improved, the annual interest rate (APR)
should be calculated using the same method in every country, the risk of
offering financial inappropriate advices should be mitigated by separating the
brokering services, the accessibility assessments and the stress tests should be
45
made on a monthly or quarterly basis and last but not least, the consumer
protection measures should be reviewed. According to Zehnder, the most
difficult stage from the economic point of view has been passed. The period
between 2007 and 2011 has been very challenging, the national authorities
being forced to implement certain monetary and fiscal policy measures which
raised complaints among individuals. Given the fact that the financial crisis has
been triggered by the subprime loans from US, the whole real estate sector has
been very affected. Lately there has been noted a stabilization of the mortgage
market, due to the global economic progress. The house prices began to rise and
the real estate assets regained their value.
3. EUROPEAN RESIDENTIAL REAL ESTATE LENDERS. A
COMPARATIVE ANALYSE
Overall, the real estate market activity has increased in the first quarter of
2015. Some countries such as Belgium or Denmark, have obtained
performances worthy of consideration. The gross value of mortgage loans has
been increased by 123% in Denmark and 90% in Belgium compared to the
same period of 2014. This increase is attributed to the gradual dissolution of the
tax advantages offered as the bonus for home (woonbonus) by the Flemish
government. Furthermore, thanks to the low interest rate, more and more
consumers have opted for a refinancing, 5% of all loans being represented by
these applications. At the same time, the decrease of the interest rate has had a
positive impact over the outstanding loans as well. Lending terms have
improved and the labour market has stabilized, consumers regaining confidence
in the banking sector. Positive changes in the real estate market in Hungary
were made based on GDP growth of 3.5%, as well as government support. This
offered the possibility of clearing and conversion of foreign currency loans,
lenders expecting compensation that can reach 15% - 20% of the original value
of the loan. In Ireland real estate loan growth was significantly reduced by over
46%. In Italy, the main factors that contributed to the intensification of the
housing market were represented by the increase of the domestic demand, the
improvement of the credit conditions, the positive dynamics of housing sales
and the government initiatives (Memorandum of Understanding who is
governing the access to the Solidarity Fund warranted by state). As for
Romania, it can be seen an intensification of the demand for loans by
approximately 25%, mainly due to First House Program. In the category of
countries that did not had the same productivity on the real estate plan, falls
Poland which recorded the lowest value since 2005. Although the interest rate
was relatively low and housing prices stable enough, real estate activity was
very weak. In Portugal the situation has been similar, the level of loans granted
diminishing considerably.
As it can be seen, the last quarter of 2014 showed a significant
improvement in the general conditions of the real estate markets in the
European Union. Although the level of homogeneity is still low, forecasts for
46
the following years are optimistic. Compared to the previous years, the gross
amount of loans increased by 8.5%, with the assumption that it will reach 220
billion euro in 2015. We must take into consideration the fact that overall
economic situation has improved, GDP growth was positive in most states.
Taking into consideration the analysed states, the activity of financial
institutions specialized in financing the residential real estate segment has
been intensified and the volume of granted loans increased significantly. The
economic progresses highlighted in the global economic developments have had
a positive impact on the housing market. We can assert the fact that in the last
year the share of outstanding loans has become smaller and smaller. By
analysing the similarities and differences between residential real estate markets
from Spain, Germany, United Kingdom, Denmark, Romania and Poland, there
were identified certain interdependencies.
Table 1. The main financiers of the residential real estate market
Spain
Germany
United Kingdom
Denmark
Romania
Poland
- Commercial Banks
- Savings Banks
- Credit Unions
- Specialized credit institutions
- Commercial Banks
- Savings Banks
- Land Banks
- Credit Unions
- Regional cooperative credit institutions
- Mortgage Banks
- Savings and loan institutions specialized in the field of housing
- Instituții financiar bancare
- Mortgage Banks
- Non-financial institutions
- Real estate development
- Building societies
- Systemic Banks
- Non-systemic banks
-Specialized credit institutions (BRFkredit, LR Realkredit,
Nordea Credit,Nykredit Realkredit, Realkredit Danmark,
Totalkredit)
- Commercial Banks
- Savings and loan institutions specialized in the field of housing
- Credit Cooperative Organization (CREDITCOOP)
- Non- banking financial institution
- Commercial Banks
- Mortgage Banks
From the banking systems point of view, it can be noted that all the state
are organized according to the principle of universality, with a high level of
47
competition. The first five major banks hold a share of more than 40% from the
total assets, only Germany registered a lower coefficient of approximately 20%.
Nevertheless, the German banking system is highly competitive, with a
remarkable dynamic. In the United Kingdom the banking system is specialized,
with a reduced number of banks and financial institutions. However the UK real
estate market is considered the biggest market from Europe. From table 1 we
noted that commercial and savings banks are present amongst all real estate
markets.
For the most countries commercial and savings banks have the largest
share in terms of volume of mortgage loans granted. In the case of Spain and
Romania, these are responsible for over 80% of all mortgage loans contracted
within a year. On the other hand, the specialised credit institutions or the
mortgage banks do not have a very intense activity, less the 10% of the
residential real estate market funding being granted by them. In Spain, their
activity has decreased by approximately 5% compared to previous year. In
Romania, institutions of this kind such as Raiffeisen Housing Bank or BCR
Housing Bank have limited their activity, whilst the volume of loans recorded
an upward trend. Through their intermediary, customers can save a certain
period of time, after which they may opt for a mortgage loan released under
more advantageous condition compared to those of the market. This is also the
main reason why their activity has intensified lately. Raiffeisen Housing Bank,
the first institution of its kind in Romania increased by over 10% in terms of
deposits contracted. The state grants a premium for the savings of a maximum
of 25% of their value. In 2013 this amounted to 156 million lei, compared to
133 million lei in 2012. Also, in the contracted loans terms we can observe an
improvement: their volume increased by over 30 million lei.
In Poland the situation is similar, the main lenders being represented by
commercial and savings banks as well as those specialized in mortgage lending.
It must be noted that the mortgage banks have only 3% of the market share,
their applicability being limited. Mortgage banks have the right to issue the
mortgage bonds as debt securities or even providing secured loans. Foreign
investors have played a very important role, reaching to control over 39
commercial banks and most branches. The Italian investors have dominated the
market, owning 12.4% of the banking sector assets, followed by Germans with
10.4% and Dutch with 8.6%.
While in Romania, Spain and Poland the residential real estate market
players are approximately the same, in Germany the situation is different. In
addition to the common financial institutions such as commercial and savings
banks or credit unions, in Germany are present the land banks and the mortgage
ones. These are public local banks responsible for banking operations in a
particular area. In 2013, they granted mortgages of more than 45,000 million
euro, currently holding a market share of almost 4%. Those over 400 banks and
financial institutions offer simple savings - crediting products, being governed
by the national bank. Another feature of the German real estate market is
48
represented by the importance of the credit unions. They are considered
mutualistic credit institution which mobilizes financial resources attracted from
cooperative members that can be represented by individuals, SMEs, family
associations, etc. in order to provide loans. Of the five markets analysed, their
activity is best represented in Germany. They hold over 20% market shares,
being responsible for more than 240.00 million credits annually. Another
distinctive characteristic is the presence of the “Group of Four Large Banks". It
consists of Dresdner-Bank, Commerz-Bank, Bayerische Hypo-Bank and
Deutscher. Even though their activity is more investment banking activities
oriented, the financing of companies and foreign trade in 2013 have granted
over 10% of total residential mortgage loans.
The British real estate market is the largest European market, with a
significant volume of residential mortgage loans, accounting over 1.2 trillion
pounds. Even if the banking system is a specialised one, the housing market has
been dominated by the commercial and savings banks, with a 70% share.
Noteworthy is the involvement of the real estate developers which offers the
possibility to purchase a house in fixed or variable rates for an average period of
time (5-10 years). Another characteristic element is the presence of the Building
Societies. They started as mutual societies; the only distinguished being the
organisational form. From this point of view there are companies without
foreign shareholders, which offer loans at lower interest cost. However, there is
a limitation in terms of the shared and attracted fund; the average ought to be
around 30%. As a result of the regulatory processes, the institutions have been
forced to merge with banks and other financial organisation. However, in 2013
there were 46 Building Societies of which 26 showed an increase in profits. The
value of the deposits grew from 218 million GBP to 221 million GBP in 2013.
When it comes to loans, the trend is ascending, from 240 million GBP to 256
million GBP. In 2013 more than 25% of the total loans were contracted through
a Building Society.
In Denmark, the residential real estate market players are organized in a
different way, the majority of the loans being contracted through the specialised
credit institution. The Danish mortgage model is considered one of the best one
in the world, due to its transparency, competitiveness and stability. It was built
according to the Match Funding Principle that establishes a direct connection
between the mortgage loan and the bonds issued in this matter. By applying this
principle, is ensure the financial stability and the minimizing of the risks. In the
same time, the clients receive a very good payment system, transparent and
flexible. In 2013, the total value of the mortgage loans amounted to 520.3
billion DKK, the major contribution being made by the specialised institutions.
In figure 1 was highlighted the share of each type of the financial
institutions responsible for residential mortgage loans. In most countries has
been noted the significant contribution of the commercial and savings banks. To
a much better understanding of the residential real estate sector, an analyse of
the house prices and the volume of the loans has been made.
49
Figure 1. The share of financial institutions responsible for financing the
housing market
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Mortgage banks
The big four banks
Specialized credit
institutions
Credit unions
Commercial and savings
banks
(Source: Own elaboration based on European Mortgage Federation, 2007 and 2012)
Given that in 2013 has been a slight increase of the prices, in 2014 the
trend remained constant. Although in Poland the price index contracted by more
than 1,5% per quarter, the home prices remained stable. In the UK, the upward
trend of prices from the last few years has stopped mainly due to the policy
measures implemented by the British government. Another notable change was
in Spain where for the first time since the financial crisis the prices have slightly
grown. The same thing has happened in Romania, where the analysts expect an
increase of the housing prices in 2015 by 5%. Due to the high significant level
of European real estate market fragmentation, Germany and Denmark have
experienced a decrease of the prices by 0,5% in the last quarter of 2014.
(European Mortgage Federation, 2015) Taking into consideration the decline of
the property prices, the demand has increased significantly, the gross value of
the contracted loans multiply by 7% over the previous year, reaching 49,2% of
the average hold peak year, 2007.
If we will analyse the real estate market from the value of the mortgage
loans point of view, we will see that most of the loans have been contracted in
Germany and United Kingdom, gathering in the fourth quarter of 2014, over
100 million euro. In the last part of the year, the interest rates have decreased
mainly because of the intense economic activity and the negative value of the
inflation. Therefore, the Central Banks were forced to reduce the interest rate
even more, offsetting additional measures to stimulate the economy and the
inflation. Even if, overall, the analysed countries have increased the number of
the granted loans, note that there are some differences when it comes to the
interest rate at the new mortgage loans. In Germany and United Kingdom, the
50
consumer preferences have switched to the fixed rates loans, contracted for a
shorter period of time, while in other countries the clients prefer variable
interest rates and longer periods of time (see table 2.).
Figure 2. Price index of the housing
(Source: European Mortgage Federation, 2015, p. 8)
Figure 3. The value of the mortgage loans contracted in 2013-2014
(Source: European Mortgage Federation, 2015, p. 6)
In all the selected states, the financial institutions give the possibility to opt
for loans in euro or another currency, with fixed, variable or combined rates.
Specific to the Danish housing market is the existence of the Arms or
Adjustable Rate Mortgages. The main advantage is represented by the fact that
the value of the interest rates is smaller than the fixed ones. The interest rate is
being calculated at a frequency of 1, 3, or 10 years. In Germany the level of the
advanced repayment loans is quite high compared to other states like Romania,
Poland or Italy. This is mainly because of the stability of the economy and the
51
high standard of living. In Poland, the majority contracts loans with variable
interest rates, therefore there are only three institutions responsible for the
mortgage loans in fixed rates terms.
Table 2. The preferences of the consumers in mortgage products
The best-selling loan product
Spain
The most frequently purchased
property type
3-4 rooms houses
Floating rates loans (10-15
years)
Germany
Fixed rates loans (10-15 years)
2-3 rooms houses
UK
Fixed rates loans (10-15 years)
2-3 rooms condos
Denmark
Floating rates loans – ARMs
3-4 rooms houses and condos
(20-30 years)
Romania
1-2 rooms condos
years)
Poland
1-2 rooms houses and condos
years)
(Source: Own elaboration based on European Mortgage Federation, 2007 and 2012)
In terms of the most commonly purchased property, it can be noticed that
the consumer preferred houses with an average area and 2 or 3 rooms. The
analyst’s expectations are that in the coming years the clients will acquire
buildings with larger areas thanks to the improvement of the national and
international economy and living standards.
The main framework for social housing comes from the national
governments and local authorities. Overall, the main objectives of the programs
are to prevent the social exclusion of buying a house, define and improve the
legal and financial principles and stabilize the demand and supply in the
property market. Nevertheless, each country has some specific characteristics,
depending on the economic environment and life standards. The Spanish
government created The National Housing Program who aims to monitor and
facilitate the houses purchases. An equivalent of this would be the First House
program in Romania or Right to Buy Scheme in United Kingdom. Last year, 9
out of 10 houses have been bought through the First House program.
On the other hand, in Germany and Great Britain local authorities have
been given greater autonomy and influence in terms of social housing allocation
and funds management. In Denmark was created the National Building Fund
through which the citizens may receive grants to finance a percentage of the
purchase price. In this category we can also integrate the National Strategy for
Social Policy from Poland. The main goal is to increase the number of the
housing purchased, helping the youth and actuate the real estate market. In order
for the real estate market to become more efficient, all the governments are
offering tax benefits, grants or deduction.
52
Table 3. Government social housing policy
Spain
-National Housing Plan (Plan Estadal de Vivienda y
Rehabilitacion)
Germany
UK
Denmark
Romania
Poland
-The involvement of the local authorities
-Deduction and grants to the householders and renters
-Increase the power of the local authorities
-Right to buy scheme
-National Building Fund
-Lease premiums
-First Home programme
-The National Housing Agencies (NHA)
-The national development plan (National Strategy for Social
Policy)
-National Housing Fund
-Social Building Associations (TBS)
4. CONCLUSIONS
This paper has provided an analytical analysis on the residential real estate
market from Europe. The main objective was to create an overview over the
lenders of the housing sector in Spain, Romania, Poland, Germany, United
Kingdom and Denmark. This has been achieved by demonstrating the
importance of each financial institution of every state. From this perspective we
can state that the majority of lenders are represented by the commercial and
saving banks, followed by specialised institution. In general, the mortgage
system is interconnected with the policy environment, the economic condition
and the life standards. In the last years has been noted an increase of the
economic profitability and stability. The countries are starting to overcome the
negative effects of the financial crisis. The limitation of the study can be
considered future research directions. In this respect, we can mention that
overall, the used data are from 2013/2014. Also, there are no figures ascertain
the loans volume for Germany in 2014. This statistical lack did not make the
study less comprehensive.
The European Union has encouraged the market dynamics by
implementing the Directive on energy performance of buildings in 2010, the
creation of the Regional Housing Fund (ERDF) which has more a social
meaning, being responsible for the construction and rehabilitation of housing
for low-income households, but also the implementation of certain social and
financial programs through the European Investment Bank (EIB). In this way,
the housing market has been stimulate, the level of the investments, stability
and profitability being increased.
Over the last year, the mortgage applications have increased with
approximately 55%. The intense activity from 2014 continued in the first
quarter of 2015. The stability of the interest rate had a positive impact over the
loans volume and housing price. However, the situation is not similar to the
53
period before 2007, the fragmentation level of the market is still high and the
activity of housing market is low enough. Overall, investments increased by
123%, UK owning an overwhelming percentage of 45%, followed by the rest of
Western Europe with 41%. Southern European countries such as Spain, Italy
and Greece have registered a significant increase in loans granted by over 80%.
Apparently, from more than 186 lending institutions, over 47% were
represented by the non-banking ones, followed by commercial banks and
savings. As can be seen, the housing market had a significant activity, stately in
Europe in terms of number and volume of transactions made. With increased
economic stability and domestic demand, namely the strengthening of external
price pressures have been diminished, house purchase is to be stimulated.
References
[1] Amparo, V., Suarez, J.L. (2004). European Mortgage Market: an overview 19922003. Working paper.
[2] Costa, C., Hardt, J. (2003). The Challenges of Developing Housing in Europe. The
World Bank.
[3] Dubel, H.J., Rothemund, M. (2011). A new Mortgage Credit Regime for Europe.
CEPS Special Report.
[4] European Mortgage Federation (2012). Factsheet– Denmark, Germany, UK, Spain.
[5] European Mortgage Federation (2008). Factsheet – Poland.
[6] European Mortgage Federation (2015). Quaterly review of European Mortgage
Markets.
[7] Zehnder, A. (2012). The future of Specialized Housing Finance in Europe.
European Federation of Building Societies.
54
QUALITY OF BANKING SUPERVISION AND ITS
DETERMINANTS: THE CASE OF REPUBLIC OF
MOLDOVA
DORINA CLICHICI
National Institute for Economic Research
Chisinau, Republic of Moldova
[email protected]
Abstract
Recent events which have taken place within the Moldovan banking system have
highlighted significant weaknesses regarding banking supervision. As a consequence
the financial integrity and stability of the Moldovan banking system has been shaken
and the confidence in it has been seriously affected. These deficiencies have induced the
necessity of revising the central bank’s role in regulating the Moldovan banking system
and increasing the quality of banking supervision. This is the main argument for
addressing the determinants of bank supervision quality and finding solutions for
enhancing it.
The quality of banking supervision depends on several factors and preconditions which
are addressed in this article. There has been highlighted the need for a greater focus to
be put on independence, accountability and transparency of the supervisor for
increasing the effectiveness of banking supervision. There are identified banking
supervision’s deficiencies and their determinants in the Republic of Moldova and made
an analysis of country’s compliance with the Basel Committee’s Core Principles. The
evaluation of the quality of banking supervision in the Republic of Moldova includes
statistical analysis of data related to the banking system, review of IMF assessments, as
well as observations and qualitative judgments. This paper presents the policy
recommendations in institution building for stronger banking system in the Republic of
Moldova.
Keywords: banking supervision, central bank, financial stability
JEL Classification: G21, G28
1. INTRODUCTION
The recent global financial crisis has highlighted significant weaknesses
regarding risk management and banking supervision. Regulation and
supervision of financial markets arises as a primary issue due to the importance
of timely regulation and supervision to fix the deficiencies in the financial
markets. In the light of developments that emerged during the last few years of
55
market turmoil Basel Committee on Banking Supervision (BCBS) has
emphasized:
• the need for greater supervisory intensity to deal with systemically
important banks;
• the importance of applying a macro perspective to the microprudential
supervision of banks;
• an increasing focus on effective crisis management, recovery and
resolution measures in reducing both the probability and impact of a bank
failure.
The concern for the health of the global banking and financial markets has
produced a growing consensus that the development and compliance with
standards and codes of best practice can improve financial system integrity and
stability (Demirguc-Kunt et al., 2006; Aysan, Huseyin, 2006; Arnone et al., 2007).
The first initiative in this sense was set up in 1997 by the BCBS, issuing the
Core Principles for Effective Bank Supervision (Core Principles), with the last
revised version in 2012. The basic principles are the de facto standard minimum
for a strong prudential regulation and supervision of banks and banking
systems. The principles are used by the IMF and the World Bank in conducting
Financial Sector Assessment Program, through joint evaluations of member
countries’ compliance with these standards. It is a unique source of information
about the quality of supervision and regulation around the world. The primary
objective for banking supervision set by the Core Principles is the promotion of
safety and soundness of banks and the banking system. Core Principles address
supervisory powers, responsibilities and functions, and cover supervisory
expectations of banks, emphasizing the importance of good corporate
governance and risk management, as well as compliance with supervisory
standards (BCBS, 2012, p. 2).
As a response to the lessons learnt in the financial crisis a wave of studies
have been developed in addressing the enhancement of quality of banking
supervision (Ojo, 2010, Randle, 2009, BCBS, 2012, European Central Bank,
2014, PwC’s Central Bank Forum, 2014). There is a common opinion on the
interdependence and the complementary nature of the macroprudential and
microprudential elements of effective supervision. In their application of a riskbased supervisory approach, supervisors and other authorities need to assess
risk in a broader context than that of the balance sheet of individual banks
(compliance supervision).
The central objective of regulatory activity and bank supervision is to
achieve a sound and viable banking system by establishing rules, following
strict adherence to them, and ensuring the elimination of unviable banks. Recent
events which have taken place within the Moldovan banking system have
highlighted significant deficiencies regarding observance of rules by distinct
banks and weaknesses of bank supervision. As a consequence the financial
integrity and stability of the Moldovan banking system has been shaken and the
confidence in it has been seriously affected. This is the main argument for
56
addressing the determinants of bank supervision quality and finding solutions
for enhancing it. The quality of bank supervision activity depends on several
factors and preconditions which are addressed in the section 2. Section 3
identifies banking supervision’s deficiencies and their determinants in the
Republic of Moldova. Section 4 details the main conclusions and policy
recommendations.
2. DETERMINANTS OF BANKING SUPERVISION QUALITY
The quality of banking supervision determines the integrity and stability of
the banking system. Good regulatory governance in the financial and banking
sector has received considerable attention in the recent past (Lybek, 1998, De
Haan et al., 1999, Quintyn and Taylor, 2002, Das and Quintyn, 2002,
Demirguc-Kunt et al., 2006, Arnone et al., 2007 ).
Demirguc-Kunt et al. examined the banking systems within 39 countries in
the context of compliance with the basic principles of the Basel Committee and
have found that banks that largely correspond to those principles are stable
banks. The authors found a significant and positive relationship between bank
soundness (measured with Moody's financial strength ratings) and compliance
with principles related to information provision. Countries that require banks to
report regularly and accurately their financial data to regulators and market
participants have sounder banks.
Arnone et al. have investigated the relationship between the components of
regulatory governance and the quality of banking supervision. They have found
a positive correlation between the transparency of the supervisor and the
effectiveness of banking supervision. Moreover, better accountability and
integrity practices of the banking supervisors are associated with higher
independence, which in turn is associated with better compliance with the Basel
Core Principles. They have identified three main components of good regulatory
governance in the financial sector considered as prerequisites to regulatory and
supervisory agencies’ successful supervision of financial institutions or
activities: independence, accountability and transparency. These components
constitute key elements in achieving and maintaining the objective of financial
sector stability.
Independence address to the degree to which the regulatory/supervisory
agencies (RSA) are separated from inappropriate interference both from the
political sphere and from the supervised entities in order to take decisions
belonging to their sphere of competence without undue outside interference.
Accountability is the degree to which RSA are responsible for their own
actions, decisions and performances and are required to explain and justify them
to market participants and to the institutions that delegated authority to them.
Transparency of the RSA is a measure of the degree to which the
information about its official activities (objectives, legal, institutional and
economic framework, decisions, actions, practices, data and information over
the regulatory and supervisory policies and the accountability of the senior
57
executives) is constantly verifiable and communicated to the interested parties
on a timely basis (Arnone et al., 2007, p. 6).
An effective system of banking supervision needs to be able to effectively
develop, implement, monitor and enforce supervisory policies under normal and
stressed economic and financial conditions. There are a number of
preconditions highlighted by Basel Committee (BCBS, 2012, p. 14) that have a
direct impact on the effectiveness of banking supervision in practice, which are
mostly outside the direct or sole jurisdiction of banking supervisors: sound and
sustainable macroeconomic policies; a well established framework for financial
stability policy formulation; a well developed public infrastructure; a clear
framework for crisis management, recovery and resolution; an appropriate level
of systemic protection (or public safety net); and effective market discipline.
Supervisors should work with the government and relevant authorities to
address concerns regarding the impact of these preconditions on the efficiency
or effectiveness of regulation and supervision of banks.
Upgrading bank regulation and supervision, in the context of assuring the
integrity and stability of banking system, is a complex and difficult process,
especially for developing countries, where the required expertise is scarce, the
legal environment weak, and governance problems could generate regulatory
capture.
3. DEFICIENCIES OF BANKING SUPERVISION IN THE REPUBLIC
OF MOLDOVA
The Republic of Moldova is a small country with a financial sector
dominated by the banking system: it accounted for 93% of total financial assets
and 96% of total loans provided by the financial sector at the end of 2014.
National Bank of Moldova (NBM) is the central bank of the Republic of
Moldova and has the primary responsibility for bank supervision. The major
concern that affects the integrity and the stability of the banking system in the
Republic of Moldova remains the corporate governance within banks and
significant deficiencies in the legal and regulatory framework. Risks regarding
financial stability are significant due to limited capacity of authorities to act.
Ultimate beneficial ownership of several large banks has been actively
concealed, which has disguised credit to related parties and large exposures.
The latter already exceed regulatory norms by a wide margin in some banks.
The liquidity position of some banks may also be worse than reported since
some assets may be encumbered through undisclosed side agreements. In
general, governance structures and internal oversight processes are not well
developed, blurring the roles and responsibilities of owners and managers, and
so put at risk safe banking operations.
The preconditions with the main negative impact on the quality of banking
supervision which contribute to the weakening of banking supervision, and
frustrate its improvement in Moldova are:
58
- the lack of a clear framework for macroprudential surveillance and
financial stability policy formulation,
- the lack of an efficient and independent judiciary,
- the lack of a clear institutional framework for crisis management and
resolution, an appropriate level of systemic protection,
- the lack of an effective market discipline with the corporate governance
issue to be addressed.
As the main prerequisites to regulatory and supervisory agencies’
successful supervision of financial institutions are: independence, accountability
and transparency, it is imperative to address them in the context of Moldovan
banking supervision.
According to Basel Core Principles the primary objective of banking
supervision is to promote the safety and soundness of banks and the banking
system. If the banking supervisor is assigned broader responsibilities, these are
subordinate to the primary objective and do not conflict with it (BCBS, 2012, p.
21).
Recent developments that took place at Banca de Economii S.A. (BEM), a
state owned bank with an important role in the banking sector, with the largest
branch network, affected seriously the safety and soundness of the Moldovan
banking system. These events put under doubt the capacity of NBM in achieving
the primary objective of banking supervision, acting effectively and in due time.
In August 2013 a dilution of the government’s share following its
recapitalization took place at BEM. Through an additional issue of shares of
80,2 mln. lei, private shareholders have doubled their share in the bank’s
capital, and the state share has been diminished to 33%. Until this event the
share of the state in this bank was 56,13%. During the next year several
developments have disrupted financial condition of the bank and the situation
deteriorated till the possibility to withdraw the license. A possible BEM
bankruptcy could have generated rough adverse effects on financial stability and
could have irretrievably hit the economic security of the state. However, the
most influencing factor regarding the deteriorated situation belongs to defective
lending, contrary to any principle of prudence and an efficient management. In
November of 2014 BEM has been returned to the state (following the decision
of the Supreme Court on the quashing the decision of General Meeting of
Shareholders on the additional share issuance). The condition of BEM, a
systemically-important bank that has large public sector deposits, still remains
fragile.
In the case of BEM’s supervision were ignored the following Basel Core
Principle for Effective Banking Supervision:
- The first Principle (Responsibilities, objectives and powers): the NBM
has not undertaken timely corrective actions to address compliance with laws
and to address safety and soundness concerns.
- Principle 2 (Independence, accountability, resourcing and legal
protection for supervisors). One of the essential criteria indicates that the
59
supervisor publishes its objectives and is accountable through a transparent
framework for the discharge of its duties in relation to those objectives. The
accountability determinant towards the NBM tasks’ discharge was ignored.
- Principle 6 (Transfer of significant ownership). Until now the NBM has
not obtained the identities of all beneficial owners of shares being held by
nominees, custodians and other vehicles that might be used to disguise
ownership.
- Principle 8 (Supervisory approach). NBM has not developed until now
a forward-looking assessment of the risk profile of individual banks,
proportionate to their systemic importance. It has not identified, assessed and
addressed risks emanating from the BEM and from the system as a whole. The
authority does not have a framework in place for early intervention; and does
not have plans in place, in partnership with other relevant authorities, to take
action to resolve banks in an orderly manner if they become non-viable. In 2010
was established the National Committee for Financial Stability (NCFS) in order
to ensure an adequate coordination among the public authorities for taking
prompt actions in case of extraordinary financial shocks. Unfortunately, this
Committee has only a formal function, and has not taken action in case of the
situation with BEM.
- Principle 9 (Supervisory techniques and tools) and Principle 11
(Corrective and sanctioning powers of supervisors). According to these
principles the supervisor should use a variety of tools to regularly review and
assess the safety and soundness of banks and the banking system. The NBM
should have required BEM to take action to mitigate any particular vulnerability
that could have the potential to affect its safety and soundness, which has not
happened.
The political decision to take over a failing bank in full crisis, corporate
raids, delayed and contradictory actions of public institutions and dilution of
shareholder all are events that reveal a low quality of banking supervision.
As a consequence, the 2014 year has ended with a very unstable financial
situation of the banking system, especially because of the situation within three
commercial banks. These three banks, BEM, B.C. ”BANCA SOCIALĂ” S.A.
and B.C. ”UNIBANK” S.A., considered to be affiliated, which combined
comprise 28 percent of banking system assets, equivalent to about 20 percent of
GDP, have large interbank exposures among themselves and also large
exposures to several Russian banks. The level of capitalization and liquidity of
these banks declined drastically under the minimum required level (≥ 20%) at
the end of 2014. The level of capitalization collapsed at BEM to 3.2% and BC
„BANCA SOCIALĂ” S.A. to 2.5%. The current liquidity indicator has
decreased at all three banks: at BEM it has decreased to the level of -1,71%, at
B.C. ”BANCA SOCIALĂ” S.A. to 5,85% and at B.C. ”UNIBANK” S.A. to
11,54%.
A high rate of non-performing loans has been recorded. The worst situation
was recorded at BEM where this indicator has reached 72%. Also the
60
profitability indicators have dropped. This situation has been the consequence
of serious deficiencies existing in corporate governance within these banks and
the incapacity of the National Bank of Moldova to prevent and eliminate them.
According to data provided by NBM, BEM’s exposure to affiliated persons has
exceeded the required limits (according to the NBM regulation total bank
exposure to any affiliated person shall not exceed 10% of the bank's Total
Regulatory Capital and the aggregate amount of bank’s total exposure shall not
exceed 20%). In accordance with its quarterly reports, BEM exceeded these
limits since the second quarter of the year 2014, reaching at the end of June a
significant share of aggregate exposure to affiliates of 34.93%. During the next
three months, this value was almost doubled, reaching the amount of 66.22% by
the end of the third quarter of 2014. It is evident that NBM has failed in
preventing capital from falling below the minimum levels and in requiring
remedial actions in these cases. Moreover, being aware regarding the situation
of the exposure to affiliates, the supervisor has not imposed any remedial action
or sanctions. Only in November 2014, after detecting extremely large
transactions between those three banks, NBM has established the special
administration regime within these banks for a period of 9 months.
All these events have affected the level of capitalization and liquidity
indicators of the banking system at the aggregate level. On 31.12.2014 the
aggregate level of capitalization has fallen under the minimum required level,
reaching 13.21% and the liquidity has fallen with 12,6 p.p. (fig. 1).
Figure 1. The main financial soundness indicators of the Moldovan
banking system, for the years 2006-2014
45.00
40.00
35.00
30.00
25.00
20.00
15.00
10.00
5.00
0.00
35.0
30.0
38.27
33.53
34.18 33.17 32.90 33.76
28.98 30.67
25.0
20.0
21.615.0
10.0
5.0
0.0
-5.0
2006 2007 2008 2009 2010 2011 2012 2013 2014
Liquid assets ratio (≥ 20), %
Capital adequacy ratio (≥ 16), %
ROA, %
ROE, %
Nonperforming loans ratio, %
(Source: elaborated by the author based on NBM data base)
61
In line with the last Financial Sector Assessment Program (FSAP) carried
out in 2014 in Republic of Moldova, significant weaknesses in the legal and
regulatory frameworks must be urgently addressed to ensure stability and
soundness of the Moldovan financial sector (IMF, 2014). Financial stability has
been preserved, although the condition of BEM continued to deteriorate and
subsequent steps to stabilize its financial situation were not in line with IMF’s
advice. Although amendments to the Law on Financial Institutions were passed
in line with Fund program understandings, their implementation has been slow,
in part because of legal challenges. The regulatory framework for banks still has
a number of shortcomings:
- The ability of the NBM to enforce regulations has been seriously
hampered by a series of court challenges. A Constitutional Court (CC) ruling
issued in 2013 substantially reduced the powers of the NBM by authorizing any
court to suspend decisions of the NBM (except the ones on liquidation of banks
and cancelation of licenses) until the end of the court process. In December
2013, Parliament approved legislation that addressed the implications of the CC
ruling on NBM decisions with a more specific focus on those related to
monetary and exchange rate policies. A separate CC ruling limits the
independence and effective operation of the National Commission for Financial
Markets (supervisor of nonbank financial institutions) (IMF, 2014).
- There is inadequate legal protection for supervisory staff. Even
allowing for the legal constraints, the NBM has on some occasions failed to
take corrective actions when faced with serious or persistent infringements by
the banks.
- The crisis management framework is weak. The National Commission
for Financial Stability lacks focus and is not forward looking. There is little
evidence of contingency planning and testing of processes and powers.
Coordination between the member agencies is limited. There are also significant
gaps and deficiencies in the statutory powers required for cost-effective bank
crisis resolution.
- A key element of the framework for systemic protection – the Deposit
Guarantee Fund (DGF) - which could contribute to public confidence in the
system and thus limit contagion from banks in distress is weak.
4. CONCLUSIONS
Despite some progress in addressing the recommendations of the previous
FSAP update from 2008, there are serious governance problems in several
banks, including the largest ones, the ability of the regulators to take action is
constrained, and the crisis management framework is weak. In order to enhance
the quality of banking governance in the Republic of Moldova the following
policy recommendations should be implemented:
1. Undertaking by NBM the task of safeguarding financial stability of the
sector which it oversees. It is necessary to make relevant amendments to the
Law on NBM (Art. 5), by stipulating that the licensing, supervision and
62
regulation of financial institutions are provided for promoting the safety and
soundness of banks and the banking system. This amendment will increase the
accountability of NBM towards this objective.
2. Restoring the independence of NBM in carrying out its functions.
Although it is stipulated in the Law on NBM (Art. 6) that the National Bank
shall be independent in exercising its tasks conferred upon it by the present law,
and shall neither seek nor take instructions from public authorities or from any
other authority, it has became a product of the socio-political system. Legal
protection of board members and employees of NBM in case of lawsuits for
action in good faith should also be strengthened. Amend the Law on NBM, and
other legislation as required, to provide NBM with the ability to enforce
supervisory and regulatory actions in a timely manner (addressing, for instance,
problems ensuing from the Constitutional Court rulings of October 2013).
3. Conducting monthly analyzes of the banking system stability based on a
set of financial and prudential indicators, quarterly assessment of system
vulnerabilities to potential credit risk, currency and interest risk, based on a
simulation model response to extreme conditions (stress test). Drafting
Financial Stability Reports (taking into consideration the experience of the EU’s
member countries) on an annual basis, by highlighting the developments of the
financial system and its related risks, risks related to domestic economic and
financial developments, risks generated by non-financial corporations and
households, addressing the stability of payment system.
4. Enforcing resolutely the regulatory requirements by NBM and reevaluating banks’ shareholders to ensure disclosure of ultimate beneficial
owners and controllers. Anti-Money Laundering and Combating the Financing
of Terrorism framework needs to be strengthened.
5. Maintaining by NBM a high level of scrutiny of BEM’s operations, and
monitor developments in liquidity indicators in the affiliated banks on a daily
basis, including interbank exposures. NBM should carry out an assessment of
the financial situation in all other banks. Any bank found in breach of regulatory
requirements based on these studies should expeditiously submit time-bound
plans to address any shortcomings.
6. Developing a comprehensive financial crisis resolution contingency
plan, and identify necessary amendments to the legislation, by making from the
National Commission for Financial Stability a functional body.
7. Enhancing funding of the DGF by developing a target fund
methodology; amending legislation to provide a line-of-credit to the DGF from
the Ministry of Finance; and amending the Law on DGF Law and the Law on
NBM to include the NBM as an additional source of back-up funding for the
DGF. Several aspects of the deposit insurance scheme require strengthening, for
example, a back-up funding facility for the Deposit Guarantee Fund should be
put in place.
63
References
[1] Aysan, A.F., Huseyin, Al. (2006). Assessing the Preconditions in Establishing an
Independent Regulatory and Supervisory Agency in Globalized Financial Markets:
The Case of Turkey. Journal of Applied Business and Economic Research, vol. 4,
no. 2, 125-146.
[2] Arnone, M., Darbar, S., Gambini, A. (2007). Banking Supervision: Quality and
Governance. IMF Working Paper, WP/07/82.
[3] Basel Committee on Banking Supervision (BCBS) (2012). Core Principles for
Effective Banking Supervision. Bank for International Settlements.
[4] Das, U.S., Quintyn, M.G. (2002). Crisis Prevention and Crisis Management: The
Role of Regulatory Governance. IMF Working Paper 02/163.
[5] Demirguc-Kunt, A., Detragiache E., Tressel T. (2006). Banking on the Principles:
Compliance with Basel Core Principles and Bank Soundness. IMF Working Paper,
WP/06/242.
[6] De Haan, J., Amtenbrink F., Eijffinger S. (1999). Accountability of Central Banks:
Aspects and Quantification. Banca Nazionale del Lavoro Quarterly Review, No.
209, 169-193.
[7] European Central Bank (2014). Guide to banking supervision.
[8] IMF (2014). Country Report No. 14/190, Republic of Moldova.
[9] Lybek, T. (1998). Elements of Central Bank Autonomy and Accountability.
MAE/IMF Operational Paper, 98/1.
[10] Ojo, M. (2010). Redefining a role for central banks: The increased importance of
central banks’ roles in the management of liquidity risks and macro prudential
supervision in the aftermath of the Financial Crisis. MPRA Paper, No. 25884.
[11] PwC’s Central Bank Forum (2014) At a crossroads: The future of central banking.
Retrieved from http://www.pwc.com
[12] Quintyn, M., Taylor M. (2002). Regulatory and Supervisory Independence and
Financial Stability. IMF Working Paper 02/46.
[13] Randle, T. (2009). Risk Based Supervision. Primer series on insurance, issue 14.
The International Bank for Reconstruction and Development/The World Bank.
64
THE EFFECTS OF A CREDIT BUREAU IN THE
ECONOMY – THE CASE OF THE REPUBLIC OF
MOLDOVA
VICTORIA COCIUG
Academy of Economic Studies
Chișinău, Republic of Moldova
[email protected]
ALESEA ANDRONIC
Chişinău, Republic of Moldova
[email protected]
Abstract
A financial infrastructure in its broad definition comprises the underlying foundation of
a country’s financial system. It includes all institutions, information, technologies, rules
and standards that enable the financial intermediation. The poor financial
infrastructure in the Republic of Moldova represents a considerable constraint for
financial institutions to expand their offer of financial services to underserved segments
of the population and the economy. It also creates risks which can threaten the stability
of the financial system as a whole. This article brings into debate the question of the
efficiency of the first credit bureau in Moldova. It is a challenge to find the solutions to
animate the credit bureaus and financial market as a whole.
Keywords: commercial banks, credit bureaus, banking stability, credit market,
financial market, credit risk
1.
INTRODUCTION
One of the main tasks of any economy is to promote the economic growth
and job creation, based on the robust private sector’s activity and the increase of
investments. In this regard, the improvement of the business environment is an
essential premise to stimulate the sustainable development of the private sector,
this purpose can be only achieved by increasing the access to funds of the
private sector and removing the artificial barriers from the process of obtaining
credits.
Limited access to funds, especially to the investment financing, is one of
the main constraints of the sustainable development of competitive exports in
the Republic of Moldova. Although the fierce competition among the
65
commercial banks stimulates the commercial lending, medium and long term
lending is still underdeveloped. The long-term lending is extremely expensive
for the companies from the Republic of Moldova, that’s why almost all loans
exceeding the maturity of one year are granted from the foreign financial
resources.
Most market studies conducted by local and foreign experts invoke reasons
of lack of infrastructure of the credit market, elements of which could facilitate
the access to funds for the entrepreneurs of small and medium business. Thus,
appeared the credit guarantee fund, the Organization for development of the
small and medium enterprise sector, and finally the Credit Bureau, all of them
offering services aimed at reducing the cost of credit risk management and of
the credit itself for the private sector. But the rate of loans in the economy
increased insignificantly and the efficiency of these agencies is doubtful. So, the
purpose of this study is to identify the problems concerning the lack of
involvement of the credit bureau of the Republic of Moldova in the financing of
the economic growth.
2. OVERVIEW OF THE CREDIT MARKET IN THE REPUBLIC OF
MOLDOVA
The Moldovan financial system is largely dominated by the banking sector.
The banking sector, at its turn, proved to be sufficiently stable and relatively
resistant to losses during the global financial crisis of 2008-2009. The economic
recession has affected the credibility of economic agents, causing the
deterioration of the banks’ loan portfolio. However, these effects were shortterm, the situation returning to a normal one along with the economic recovery.
Despite of the stability of banking sector, the economic agents announce the
limited access to funds and financial intermediation level is among the lowest in
the region. So, the average share of the banks’ loans in GDP in the period of
2005-2013 was 32.5%, with a maximum of 44.01% in 2013. The Republic of
Moldova in this field is surpassed by most countries from Central and Eastern
Europe, except only Albania and Georgia. Leaders from the region - Serbia,
Slovenia and Latvia - provide loans which average share of GDP ranges
between 80% and 82.78% (fig. 1).
66
Figure 1. Domestic credit provided by the financial sector (% of GDP)
(Source: http://data.worldbank.org/indicator/FS.AST.DOMS.GD.ZS/countries/MD)
Although the situation is slightly better relating to the share of the banks’
deposits in the GDP - the main source of lending, in this field the Republic of
Moldova, characterized by an average share of the banks’ deposits in the GDP
of 32.9%, is ranked lower than such countries as Lithuania, Serbia, Romania,
Belarus and Georgia, remaining positioned below the regional average. The
distrust in banks of the population and companies is the main obstacle which
causes a relatively low share of deposits in the GDP.
So, the main function of the banking system, namely the concentration of
citizens' savings and their targeting towards those who need additional
liquidities is exercised inefficiently. A reserve of increasing the lending level in
the real sector of economy, along with the increase of the savings rate,
represents the income of Moldovans’ who are working abroad. The empirical
studies show that about a half of the earnings made abroad are transferred in the
Republic of Moldova as remittances. The preference to place savings in foreign
banks, conditioned by the fact that the amount of guaranteed deposits in EU
countries is considerably higher, does not allow full capitalization of this
potential.
However, the value of bank intermediation, which may be reflected by
bank’s relatively small margin of 5.30% in 2014, in comparison to Serbia,
which registered 8.0% (fig. 2).
67
Figure 2. The cost of intermediation, banking margin
13,12
14,00
12,00
11,5
10,00
9,15
8,81
8,00
7,05
8,69
6,72
7,41
8
7,63
5,97
6,00
6,05
6,87
6,25
5,79
5,60
4,00
5,07
5,30
2013
2014
3,82
3,13
2,00
0,00
2005
2006
2007
2008
2009
2010
Moldova
2011
2012
Serbia
(Source:
http://data.worldbank.org/indicator/IC.CRD.PRVT.ZS/countries/MD?display=graph)
The low level of the intermediation margin highlights the situation when
banks cannot afford to grant risky loans because the difference between the paid
interest and the interest received is relatively small to finance the credit risk.
Another relevant aspect for the analysis of the situation of the financial and
banking sector is related to the efficient usage of the available resources and the
effectiveness of the risk management. On one hand, the liquidities of the banks
in the Republic of Moldova exceed the prudential norms prescribed by the best
international practices. Thus, the average share of liquid reserves in the bank
assets in the period 2005-2014 amounted to 27.3%. In the case of an efficient
intermediation the surplus of liquidity would determine the banks to increase
the lending efforts, which would mean reducing the risk premium. In reality, the
legal entities from the Republic of Moldova pretend to have limited access to
financing, noting the high interest rate as one of the major problems faced by
the economic activity - 17.2% of respondents to the questionnaire which was
the basis of the Global Report on Competitiveness in 2010-2011 indicated the
access to financing as the biggest barrier of doing business (Credit Reporting
Knowledge Guide). The same is confirmed by the fact that the risk premiums
(expressed as the difference (in percentage points) between the interest rate for
the loans granted by banks and the interest rate for the bonds) applied in the
Republic of Moldova are the highest in the region (fig. 3).
68
Figure 3. The risk premiums
20,00
15,00
10,00
17,54
15,51
13,69
5,00
10,69
9,15
7,85
8,65
0,00
1996
1997
1998
1999
8,73
2000
2001
2002
2003
9,23
7,16
5,30
3,52
3,26
2004
2005
2006
2007
2008
6,73
4,27
2,73
2,17
2009
2010
2011
2012
2013
2014
-3,37
-5,00
-8,01
-10,00
(Source: http://data.worldbank.org/indicator/FR.INR.RISK)
The fact that in the Republic of Moldova in the period 2004-2010 the risk
premiums amounted to 8.6% shows the lack of confidence of commercial banks
in potential debtors and determines their preference for liquid assets. The
decrease of the risk premiums in the period 2012-2014 from 7.16% to 4.27%
indicates the incapacity of banks to finance the credit risk in periods of increase
of the non-performing loans. However, in Moldova the basic problem of the
banking system is the credit risk. Thus, the share of non-performing loans in
total loans is increasing and amounted to 11.94% at the end of 2014 (fig. 4).
Although this value is lower than it was during the crisis in period of 20082009, on the background of an economic growth this figure is a very high one.
There are some unresolved issues related to the exercise of the pledge rights in
the case when the borrowers become insolvent. The inefficient use of resources
and inadequate risk management are caused by the lack of real competition in
the banking sector of the financial market, as well as by the lack of viable
alternatives for financing through the nonbanking financial sector.
69
Figure 4. The share of the non-performing loans in total loans
18,00
16,00
14,00
12,00
10,00
16,38
8,00
14,50
13,33
6,00
10,66
11,58
11,94
2013
2014
4,00
2,00
0,00
2006
5,20
4,40
3,70
2007
2008
2009
2010
2011
2012
(Source:
http://data.worldbank.org/indicator/FB.AST.NPER.ZS/countries/MD?display=graph)
This situation leads to the conclusion that the increase of the
nonperforming loans is as well the result of inefficient credit risk management
models, one of them being the lack of or limited access to the information about
the financial situation of debtors, the problem of information asymmetry in the
banking market/sector of the Republic of Moldova, being characterized by its
specific feature - a relatively small and closed market. Partially, the confidence
crisis could be overcome by improving the information on debtors’ credibility.
A recent reform in this area concerns the creation in the Republic of Moldova of
credit history bureaus, which collect the information on the honor on time of the
lending obligations by the debtors, allowing commercial banks to adjust the
interest rates based on the debtor's credibility. As a result of implementation of
this reform, the Republic of Moldova has considerably improved its position in
the ranking of the World Bank - Doing Business 2012, rising from the place 96th
to 40th.
3. THE USEFULNESS OF A CREDIT BUREAU FOR THE BANKING
MARKET
A lot of theoretical and empirical studies on the role of credit bureaus show
that through the dissemination to a credit bureau of information on debtors,
banks contribute to the reduction of the effects of adverse selection and moral
hazard, help to a better assessment of credit risk, improve the access of credit
applicants to banks’ resources and support the financial stability of the banking
system. However, the credit reporting systems, which are at the basis of a credit
bureau’s activity, are a critical element of the financial infrastructure of a
country, and are essential to facilitate the access to financial services. They
should effectively support the equitable appearance and expansion of the credit
70
in an economy as the basis for competitive credit markets. For this purpose, the
systems of credit reporting should be safe and effective, to fully support the
rights of subjects of credit history and consumers.
Credit reporting systems contribute to financial stability by enabling access
to financing and can also play a key role in expanding access to loans and other
financial services (Martinez Peria and Singh, 2014). They facilitate lending
processes by providing the creditors with an objective information to enable
them to reduce the portfolio risk, the transaction costs, and expand their lending
portfolios. So, the credit reporting systems allow lenders to expand the access to
loans for creditworthy borrowers, including people with little credit history,
micro entrepreneurs and SMEs.
Another problem that can be solved by the introduction of credit reporting
systems is effective management of asymmetric information, which according
to Stiglitz and Weiss (1981) Credit Rationing in Markets with Imperfect
Information) leads to higher interest rates on loans. Thus, a firm seeking to
borrow from a lender knows better its financial situation and the ability to repay
the loan than the lender, thus willing to pay a lower price for the borrowed
resources than the lender requires, not knowing this information. The problem
of identifying the debtor's solvency creates additional costs, leading to the
increase of the interest rates on loans. These rates can be accepted only by less
serious borrowers; this will further increase the creditor’s costs by creating
needs of managing the credit risk and the problematic loan portfolio. So, is
created a vicious circle in which the equilibrium interest rate is so high that it
exceeds the capacity of debtors that are willing to pay it, the debtors being
unable to get a loan at a reasonable price. Credit reporting systems are
mechanisms that can help lenders and borrowers to overcome the problems
concerning the information asymmetry, because they allow creditors to share
with other creditors the information about their customers whether through a
private credit bureau or a credit registry publicly regulated. Such credit
information systems disseminate information concerning the payment histories,
total debts’ and overall solvency of borrowers, thus balancing the gap of
information between the lenders and the borrowers.
The theoretical literature shows that the credit information exchange can
increase the financing of the entrepreneurs, reducing the smaller financial
constraints. In particular, there are four different mechanisms by which the
information exchange can have a potentially positive impact upon the
company's financial position (Pagano and Jappelli, 1993; Padilla and Pagano,
1997):
(i) facilitation of the adverse selection;
(ii) reduction of the costs of collecting and storing information;
(iii) discipline the borrowers by reducing the moral hazard;
(iv) reduction of the over-indebtedness of borrowers.
71
In such a way, the importance of the activity of the credit history reporting
systems is perceived by all the economies, both developed and emerging, as it
was demonstrated by the worldwide evolution of the credit bureaus (fig. 5).
Figure 5. The worldwide evolution of the credit bureaus
(Source:
http://siteresources.worldbank.org/FINANCIALSECTOR/Resources/Credit_Reportin
g_text.pdf)
Although the first office was opened in the early 1800s in London, since
1950s the modern providers of similar services have rapidly developed, fueled
by improvements in technology and the expansion of credit. This revolution has
made the access to loans almost in all developed markets, allowing banks to
shift from the subjective traditional approach to more automated crediting
processes assisted by quantitative models. As a result, lenders are able to
provide financial services to significantly lower costs and extend loans to large
segments of the economy, thus further developing the credit services. In
particular, the introduction of credit scoring in the 1950s in the United States,
along with the automation of the lending workflow played a key role in the
rapid expansion of the consumer loans.
Between 1990 and 2011, the number of credit bureaus in the world, almost
tripled. In Asia, many markets returned to private credit reporting system after
the financial crisis of the end of 1990. New developments in credit reporting are
ongoing in Central Asia, especially in Azerbaijan, Kyrgyzstan, Tajikistan,
Uzbekistan, Nepal, and Mongolia. From the beginning of the 1990s till the end
of 2000s, a significant number of credit bureaus appeared in the Eastern Europe.
During the last years, the Middle East and the North Africa registered an
increase in credit reporting being open credit bureaus in Morocco and Egypt,
72
along with new developments that took place in other North African countries.
There are also a lot of new developments in the under-Saharan Africa, with the
launch of credit bureaus in Ghana, Uganda, Kenya, Rwanda, Botswana and
other countries (fig. 6).
Figure 6. The share of loans granted with the use of credit information
bureau
(Source:
http://siteresources.worldbank.org/FINANCIALSECTOR/Resources/Credit_Reportin
g_text.pdf)
Thus, in Figure 6 it can be observed that with the development of the credit
market and a positive development of the economy, the need to purchase the
credit history services increases. OECD countries are the first in this field, the
credit reporting system covering about 63.9% of registered credit transactions,
while in Central Europe this figure is only 29.4%. This is due to little
experience in the formation and systematization of credit information and
customer refusal from purchasing such services.
4. THE PROBLEM OF CREDIT BUREAU’S EFFICIENCY IN THE
REPUBLIC OF MOLDOVA
The first stage of introduction of the credit reporting system in our country
was in the period 2010-2011, when it was developed and implemented the set of
legislation acts of informing and reporting of the credit history as well as the
establishment of the Credit Bureau. Currently, started the work on the second
stage, in which will be developed the regulatory framework of secondary
legislation in this area. The market of the Republic of Moldova is in the
ascending phase of development and the activity of a credit bureau is a
fundamental pillar for banking and non-banking financial institutions, but also
for the country’s economy. But the element that would ensure the success of
this entity is transparent and effective cooperation between all the involved
components. The problem of the credit bureau activity in the Republic of
73
Moldova is a complex and its efficiency is rather low. And this is because of the
fact that its potential is not fully valued, so as to reduce the costs of financial
intermediation. Some problems will be listed below:
1) The need for developing the infrastructure of nonbanking
financial market’s industry by creating the information structures such as
Credit Bureau on nonbanking financial market is much higher than on bank
credit market. Access to the loans of non-banking companies’ usually have
small companies from rural areas and individuals who borrow relatively small
amounts and credit management cost is rather high. By connecting the nonbanking companies to the credit bureau services will lead directly to a decrease
in the interest rates on loans.
Although, from the experience of Ukraine, where the Credit History
Bureau has been operating beginning with 2006, it did not lead to the decrease
of the interest rates, but only to a significant reduction of time for analysis and
granting of loans, and this can lead to the access to funding of small businesses
in useful time. Experts from the Russian Federation also believe that the
introduction of this element of infrastructure is not likely to significantly
decrease the interest rate, arguing that it mainly depends on the competitiveness
of the industry.
According to an analysis conducted by American Chamber of Commerce
of Moldova on reporting systems of credit history in the Southeastern Europe
and the CIS countries, in Croatia, Macedonia, Slovakia, countries with a
relatively short history of non-banking financial/leasing industry, there does not
exist a legal framework that would regulate the relationship between nonbanking financial/leasing companies on the one hand and the credit bureaus on
the other hand.
Table 1. Hypothetical tariff matrix recommended by the IFC
Inquiry Volume
Price per inquiry
<25000
25 001 – 50 000
50 001 – 100 000
100 001 – 250 000
250001 – 500 000
> 500 000
1.00
0.95
0.85
0.80
0.70
(Source: International Finance Corporation, 2006)
2) Excessive and unreasonable prices. According to a study conducted
by the EBRD for the countries of Central and Eastern Europe, the costs of
obtaining of a credit report are reduced in all the studied countries. In most
countries, the Credit History Bureau members/customers can get a report for
less than € 15. According to the informative Guide on Credit History Bureaus
developed by the International Finance Corporation (IFC), it provides a
74
hypothetical tariff matrix representing the recommended price of a report based
on the number of units sold in one year (table 1).
Thus, it can be concluded that the price recommended by the IFC should be
around 1 USD per report. According to the analysis of the American Chamber
credit
reporting
systems
(http://www.amcham.md/userfiles/file/2014/
PPAmCham-BIC (final), the strategy of the tariff matrix is widely used in a
number of countries like: Ukraine, Russia, Kyrgyz Republic, Republic of
Kazakhstan, Romania. According to the same analysis on the price of a credit
report in the countries of the region, we can easily see that the price of issuing a
report in the Republic of Moldova is at the highest level compared to the prices
in the analyzed countries (fig. 7). In this context, we would like to mention that
in a number of countries, the credit bureaus do not charge fees for issuing empty
reports (Ukraine), or charge a substantially reduced fee (Serbia, Kazakhstan).
We believe that using this practice allows the development of the reporting
system of credit histories and the attraction of new players in the system.
Figure 7. The price of a credit report in the Republic of Moldova compared
with the prices in other countries in the region
(Source: International Finance Corporation, 2006)
As an alternative to the above mentioned strategies, a number of bureaus
allow unlimited access to the database of reports, for a monthly/annual fixed
fee. In this context, it can be mentioned the example of Ukraine, Russia,
Romania, Macedonia.
It should be mentioned that most of the nonbanking financial sector
companies are specialized in consumer lending. In such circumstances, it is
unfair to charge a fee of 54 MDL (incl. VAT), which significantly increases
both the cost of credit and makes difficult its granting.
3) The regulatory framework. The ,,Credit Bureau” Ltd., being the only
credit bureau in the Republic of Moldova, is a fundamental element for the
75
infrastructure of the lending market. Therefore, its activity must be carefully
supervised by the public authorities with regard to safety standards,
transparency of decisions and the price policy.
Since the only credit history bureau is a private one, the subjects of this
property being mainly the commercial banks, there exists the risk of
monopolization, creation of the dominant position on the market and the
application of unfair practices to different categories of customers (commercial
banks, microfinance organizations, leasing companies, etc.).
In this context, we recommend the analysis of the bill in terms of
legislation on competition protection (art. 10-12, Law no. 183 of 11.07.2012).
For example, in Russia, the State Duma has not approved the establishment of a
Credit Bureau, claiming that it will be done only when the segment will be a
competitive one, where will operate at least two companies that offer the same
services.
4) Order other businesses to provide information to the credit bureau, in
the situation when it is the only bureau of credit history in Moldova, the
information about debtors contradicts the provisions of the paragraph (1) art. 8
of the Law on entrepreneurship and enterprises which states that: ,,The State
creates for all the enterprises equal legal and economic conditions of managing,
guarantees the observance of their rights and legitimate interests, contributes to
the development of free competition among them, ensuring equal opportunities
to the use of technical-material, natural, labor, financial and informative
resources, not allowing the monopolization of markets of these resources, and
regulating the business activity under the legislation in force".
The encouragement of the market players should not be done through the
amendments to legislation, but by improving the services provided, including
the decrease of the fees charged by the ,,Credit Bureau” LTD. The effort of
improving the infrastructure of the local crediting reporting system should focus
on the development of the benefits that would provide competitive advantages
as a result of voluntary collaboration with the credit bureau and not by the legal
constraints.
The credit bureaus from Europe have advanced tools such as scoring report
of borrowers, through which a creditor can view the credit history of the
borrower in the financial system. As well, it can be calculated the total risk of
the loan portfolio, and the probability of default the some loans. More than that
there can be calculated the aggregate credit risk - the so-called stress tests of
consumers, allowing banks to determine any problem loan with 6-12 months
before it becomes non-performing. Meanwhile, the banking and non-banking
regulators are able to identify the banks that are the most exposed to such kind
of risks. This is due to the fact that the credit bureaus generate regulatory
institutions reports concerning the situation in the entire system.
76
5. CONCLUSIONS
The lending institutions are interested in obtaining true and complete
information about the potential borrowers. Here intervenes the regulator’s role
of promoting the benefits of providing information to the credit bureau.
But, the regulation of the credit history reporting system has not welldefined standards and the Republic of Moldova has to put into practice those
mechanisms from which would benefit all the system’s participants. As a
summary of the above mentioned issues, we wish to propose recommendations
on improvement of the credit bureau’s activity.
1. So, the credit bureau should collaborate not only with banks, but also
with other financial institutions, which offer loans, and the cost of these services
should be a reasonable one depending on the size of the requesting company
(fig. 8).
2. The credit bureau should collaborate with supervisory authorities for
storing and transmitting the information that can be used for a better supervision
of the credit risk. The existence of a system of credit reporting, additional to the
regular reports submitted by the banks, is justified by the fact that credit risk is
the most important risk and is often the main cause of the banking crises.
This instrument offers the supervisory authority valuable information both
at the banking system level as well as at the level of each credit institution: the
evolution in dynamic of the loans and of their quality, sector and maturity
distribution of loans. Also, the banks which report such data benefit at their turn
from the information that enables them to identify borrowers with debts at other
banks and their performance in loans repayment.
Supervisory authorities use the information collected through the credit
registers both for the on-site and off-site supervision. Among the most common
functions of the public credit registries is the determination of aggregate
exposure of every borrower towards the banking system, assessing the risk
profile of the credit institutions, monitoring the loan provisioning activity and
analysis of systemic evolutions trends in lending activity. Many public credit
registries were created in response to the occurrence of banking crises caused by
the insolvency of the major debtors. The monitoring of the loans’ concentration
and informing the banks about these risks is therefore a key objective for most
credit registers.
An important function of the off-site operations is the determination of risk
profile of credit institutions. The purpose of this objective is to select the
aggregate credit institutions for the monetary policy operations.
The public credit registries contribute to the assessment of how the banks
are provisioning the granted loans. In this sense, there can be identified those
credit institutions which conduct an inadequate provisioning policy by
monitoring the systematic differences of classifying the loans granted to the
same borrower.
In the process of the systemic risk monitoring, the analysis of trends in the
crediting activity allows the identification of factors that may impede the
77
financial stability and even the quantification of systemic effects using the
stress-testing models.
Figure 8. The collaboration chart of the Credit History Bureau
Creditors
Financial sector
Banks
Microfinancing
institutions
Non-financial sector
Other creditors
Clients
Entrepreneurs
Individuals
Public companies
Concerning the Credit Bureau, it aims at supporting banks in the decision of
granting or refusing loans to their customers. Generally, it includes all loans,
regardless their size, and in some countries the reporters and beneficiaries of
information are not only the banks, but also the leasing companies and other
providers of financial services.
The Credit Bureaus are particularly useful to the banks in relation to the
retail customers, because their relatively small size of loans escapes from
reporting to the credit systems operated by the supervisory authority. The Credit
Bureaus contribute through the information provided to the achievement of a
high quality of the loan portfolio of banks since the phase of decision to grant
the loan.
78
References
[1] International Finance Corporation (2006). Credit Bureau Knowledge Guide.
Retrieved
from
http://www.ifc.org/wps/wcm/connect/industry_ext_content/ifc_external_corporate_
site/industries/financial+markets/financial+infrastructure/credit+reporting/credit+b
ureau+knowledge+guide
[2] Jappellia, T., Pagano, M. (2002). Information sharing, lending and defaults: Crosscountry evidence. Journal of Banking & Finance, vol. 26, issue 10.
[3] Martinez Peria, M.S., Singh, S. (2014). The Impact of Credit Information Sharing
Reforms on Firm Financing. Policy Research Working Paper 7013.
[4] Pagano, M., Jappelli, T. (1993). Information Sharing in Credit Markets. The
Journal of Finance, vol. 48, issue 5, 1693–1718.
[5] Stiglitz J.E., Weiss, A. (1981). Credit Rationing in Markets with Imperfect
Retrieved
from
Information.
http://socsci2.ucsd.edu/~aronatas/project/academic/Stiglitz%20credit.pdf
[6] World Bank (2011). General Principles for Credit Reporting. Retrieved from
http://siteresources.worldbank.org/FINANCIALSECTOR/Resources/Credit_Report
ing_text.pdf
[7] http://www.amcham.md/userfiles/file/2014/PPAmChamBIC%28final%2930,09.pdf
[8] http://data.worldbank.org/indicator
[9] ***Law on Protection of Competition in the Republic of Moldova, nr 183 of
11.07.2012
[10] ***Law on entrepreneurship and enterprises in the Republic of Moldova, Nr.845XII of 03.01.92.
79
FACTOR ANALYSIS OF THE MECHANISM OF MONEY
CREATION IN THE BANKING SYSTEM OF THE
REPUBLIC OF MOLDOVA
VICTORIA COCIUG
[email protected]
OLGA TIMOFEI
[email protected]
Abstract
Money creation is one of the essential functions performed by commercial banks in the
economy. The knowledge of the influencing factors can offer major opportunities for
effectively linking of the central bank's monetary policy and its response from the real
sector. It is certain that monetary policy signals are often distorted by commercial
banks, which should further promote them in the economy, which means that the ability
of commercial banks to create money is not influenced only by the central bank, but
also by other non-monetary factors. The central purpose of this article is the
determination of these factors and the correlation between them and the amount of
money.
Key-words: Money creation, monetary policy, the ability of banks to make money,
money supply
1. INTRODUCTION
The ability of creation money by commercial banks is influenced by a
number of monetary policy factors which differ from country to country and can
present contrary incidents according to the analyzed periods.
The efficiency of monetary policy, which consists of a number of methods
and measures through which monetary authorities try to influence the
macroeconomic conditions by changing the money supply in economy, is
determined by the way of compensating this offer by the demand for money
coming from real economy in order to maintain an optimum balance for the
foreseen inflation. In this respect, monetary authorities have three essential
80
ways of influencing the market: to increase the money supply for printing
banknotes used only in emergency situations; to control directly the amount of
money from the monetary sector and open-market transactions. The second
option in solving this problem aims at the capacity of subordinate banks to the
central bank, to issue currency through specific methods of financial mediation.
Commercial banks, due to their ability to create money, have an
indispensable role in the modern economy sustainable growth by supplying it
with necessary financial resources. In fact, these are the only institutions which
establish the interconnection between monetary authorities and the real
economy through monetary policy impulses transmission, interconnection
which dependents on banks' ability to respond to the demand for money
received from the real sector and stimulating influences or restrictive monetary
authorities. Thus, when the monetary policy pursued by the monetary
authorities does not lead to expected effects, the failures can be sought not only
in the provisions of the policy itself, but also in the rate of correlation of the
banking and monetary policy.
So far, the mechanisms of optimizing the relationship between monetary
and prudential policy promoted by the authorities and banks' ability to create
money have not been identified. The knowledge of the factors that have the
greatest impact on activity of the banking creation leading to destabilization of
the monetary system, banking system's ability to return to a steady state after
any external influence, to preserve the characteristics of the issuer of the
currency account in current circumstances is very important and vital to the
economy. A viable banking system and responsive to the needs of the real
economy, contributes greatly to the maintaining of an effective monetary
system by reducing management costs of financial stability.
2. THE SITUATION IN THE REPUBLIC OF MOLDOVA
In order to make a factor analysis of the incidence of micro and
macroeconomic factors on the ability of money creation by commercial banks
we should observe the influence of monetary policy instruments that have been
made in recent years.
The increase of the money supply in the Republic of Moldova (fig. 1) was
influenced by monetary policy instruments, which in fact had one goal - to keep
inflation within a target area from 3.5 to 6.5%. The promotion of this objective
has led to the implementation of some monetary policy instruments that have
not had the expected response on the money supply, and this because in the
banks' ability to create currency factors are identified and non-monetary policy
factors which are based on banks' desire to get a certain rate of return on money
created.
81
Figure 1. The evolution of monetary aggregates in the Republic of
Moldova, mil. MDL
(Source: National Bank of Moldova, 2015)
Although the money rate is growing, and this is due in large part to its
accumulated deposits from remittances, the growth rate of new loans is
decreasing (fig. 2), leading to lower profitability and banking.
Figure 2. The evolution of profitability of bank assets and average annual
interest rates on loans and deposits in the Republic of Moldova
(Source: National Bank of Moldova, 2015)
The relationship between the interests of commercial bank in getting profit
and the interest of the central bank in creating money supply comes out in a
certain contradiction. Namely, on the one hand there is a sufficient supply of
cheap money, and on the other, the demand for loans is limited due to the
inability of the real economy to ensure the solvency required to obtain these
82
loans by the potential debtors of these banks. Thus, the risk premium built into
interest that is quite high - equivalent to the capacity of banks to finance credit
risk makes the interest rate to be unattractive.
All this brings us to the idea of compiling two types of factors:
macroeconomic (monetary policy) and meso-economic factors (stakeholders
banking system) in a separate analysis of the evolution of the money supply in
Moldova.
3. THE FACTORIAL ANALYSIS OF MONETARY CREATION IN
THE REPUBLIC OF MOLDOVA
3.1 Literature review and method
The most cases in the literature that studies the modeling of monetary
expansion is analyzed the correlation between the volume of monetary and
macroeconomic indicators, being analyzed the effect of money supply – the
economic growth. In order to identify the transmission mechanism of monetary
policy on the real economy is used the descriptive approach and the vector
autoregression method (VAR) proposed by the scientist Sims in 1980, which
identifies exogenous central bank actions that can not be associated with
monetary policy objectives (Sims, 1980).
In general, using descriptive method for identifying the transmission
mechanisms of monetary policy can be seen as a way of preliminary analysis of
the data used in the construction of econometric models. This method is less
objective than vector autoregression and panel data analysis can have only an
illustrative character.
One of the main features of the VAR method is that it captures the dynamic
structure of several variables simultaneously, and impulse-response functions
capture the propagation of a shock to the system dependent variables (Greene,
2003). In order to achieve the purpose of this paper, we propose to use this type
of analysis for determining the impact of response elements of the real economy
on money supply, since this issue is less studied but has quantitative and
qualitative effects on the economic growth.
This method is used to simulate different situations with the advantage of
not requiring forecasts of variables outside the system, being also useful to
analyze the impact of some random disturbances (shocks) on the variables of
the system. Each variable is expressed depending on how is has manifested in
the previous period. The general form of a VAR process of order p is given by
the following vector equation (Helmult, 2005; I Gusti, 2009; Brooks, 2014):
Yt = C + A1Yt −1 + A2Yt − 2 + ... + ApYt − p + ut
in which: Yt is the vector of dependent variables; t = 1, ..., T is the length
of time series; n - the number of endogenous variables; C = (c1, c2, ..., cn) - a
vector of constants; A1, A2, ..., Ap - the matrix of coefficient lag and the size
83
(nxn); ut is the size (nX1) and is a vector of uncorrelated errors with mean zero
(white noise).
In order to estimate the coefficient is used the method of least squares for
each equation in part, without loss of efficiency (Maddala,1992; Dimitrios &
Aristeidis, 2007).
For econometric analysis of monetary incidence in Moldova were selected
the following factors, being considered responsible for monetary policy
developments:
• Money in local currency (M2) - variable incidence;
• Interest rate on deposits done in MDL (RDDN)
• Unemployment rate (rs);
• Inflation rate (RI);
• Financial result of activity of commercial banks (z-score);
• Non-performing loans in the banking system (CN);
• Total bank assets (TA).
In order to do this research were used statistical information of the National
Bank of Moldova and the National Bureau of Statistics, beginning with the first
quarter of 2003 and ending up with the fourth quarter of 2014, a total of 48
quarters.
For a more realistic illustration of macro and meso incidence of economic
factors on money supply was used the pair correlation coefficient because the
statistical method of covariance does not automatically assume that the variable
is determined or caused by the other one.
It was necessary to transform mobile series into stationary series in order to
identify correlations pairs of variables, since the first case showed a strong
linear relationship, which showed that the classical correlation analysis results
were false (Granger & Newbold,1974).
We obtained some logical results explained in economic theory after
transforming the data into stationary series (table 1).
Table 1. Correlation coefficients matrix pairs (stationary series)
Covariance Analysis: Ordinary
Balanced sample (list wise missing value deletion)
DZ_SCORE
DCN
Correlation
DM2
DRDDN
DRS
DRI
DZ_SCORE
DTA
DM2 DRDDN
1.000000
-0.039247 1.000000
-0.266840 0.187906
0.271290 -0.009433
0.059642 0.213325
0.317974 0.228442
DRS
DRI
DTA
1.000000
0.307709
0.232626
-0.072051
1.000000
-0.041231
0.330617
1.000000
0.092935 1.000000
DCN
-0.030466 -0.260345
-0.169891
1.00
-0.377035 -0.162639 -0.147678 0000
(Source: performed by the author with Eviews 7.0)
84
3.2 Interpretation of results
The next step of the typical VAR modeling application is the analysis of
causality between variables. To identify causal relationships from the selected
factors was used Granger test and the following variable correlations were
identified as valid for the Republic of Moldova:
- The interest rate on new attracted deposits influences the money supply in
the short term; it is explained by the reaction of short-term interest rate increase
on the desire of people to deposit money in banks. Finally, in the Republic of
Moldova the depositor's decision to keep money in the bank is not determined
by the profitability of deposits but by the lack of other investment instruments
available to the public. This is the main reason of the growth during the whole
period of analysis of the volume of deposits, their rate being in decrease.
- Changes in the volume of money supply have a large impact on interest
rates on deposits, because with the increase of the money supply on the market
at a rigid demand, the price of deposits will decrease and vice versa.
- The unemployment rate turned out to have little and undetermined impact
on money supply. A reaction response to changes in the money supply of the
population occupation level appears late 3 consecutive quarters, and only for a
short period of time. Normally the impact of unemployment on the money
supply would have been much more pronounced and longer duration in time,
because changing the degree of occupation of the population leads to change in
the amount of their revenue and respectively in the volume of savings, which
influences broad money. The lack of logical relations between them in the
Republic of Moldova proves hidden unemployment rate in the country that can
not be taken into account in the analysis of its impact on economic variables. In
the circumstances when the unemployment rate increases and the money supply
remains indifferent to these changes, it appears that household income and their
propensity to savings remain unchanged, demonstrating the existence of other
forms of income besides their salaries. Given the weak investment activities
characteristic to the Republic of Moldova, other forms of income remain
remittances, the existence of which diminishes the impact of unemployment on
money supply.
- The relationship between inflation and money supply was found to be
unidirectional. For a long time period there was not recorded an impact of rate
changes on monetary inflation, which shows the character of inflationary
monetary changes in RM. But the changes in the money supply turned out to
have a direct, immediate and long-term (9 consecutive quarters) impact on
inflation, which also shows the existence of massive injections of liquidity into
the economy of the country, not based on the needs of the real sector
development.
- The interdependence between Z-score indicator (the financial result of
activity of commercial banks) and money is also unidirectional. Financial
modification changes obtained by Moldavian banks have no impact on
monetary dynamics, which also actually contradicts theoretical arguments of the
85
banking activity, according to which only when there are clear benefits, banks
are interested in participating in the issue of money, otherwise they remain
neutral. The lack of impact of z-score indicator on monetary amount,
demonstrates the weak interdependence between financial-banking sector
activity and the real sector needs, thus the low level of bank intermediation.
Even in terms of obtaining higher incomes, banks are not interested in boosting
economic growth by providing financing to the real rector.
- But the changes in the volume of money supply in circulation have a
direct, immediate and long-term impact on the financial results of the banking
system. This also shows that the more money the banks have, the more
profitable is their work and vice versa.
- The correlation between bank assets and money is very faint and
indefinite. Instead the correlation between money and non-performing loans as
part of bank assets influence each other immediately on a short term (two
quarters). Thus, any increase in NPL leads to short-term increase in money
supply. This is explained by the need to maintain an adequate level of money
supply in the economy, which decreases with the emergence of a significant
amount of non-performing loans in the banking system, as these are actually
certain assets of bank liquidity. These non-performing loans, which turn at a
time into bank assets, dehydrate economy, which also requires the central bank
to inject additional money into the economy in order to cover the monetary gap
created, which also eventually increases the money supply for a long term, after
a response period, after which commercial banks assimilate this new amount of
money supply this interdependence disappears.
- The increase of money supply in circulation influences dramatically the
non-performing loans, it appears immediately in the short term (2 quarters) and
then a delayed response reaction in the interval between the 6th and 8th
quarters. The increase of the amount of money supply makes commercial banks
to ease lending conditions to some extent, which also leads eventually to
increased non-performing loans.
- The interest rate on new deposits and inflation rate. These two variables
showed a mutual interdependence, the response of interest rates to changes in
inflation is immediate and lasts for six consecutive quarters, but inflation and
interest rate changes reaction occur with a delay of half a year and lasts for
seven quarters.
- Financial result of commercial banks and the interest rate on new
attracted deposits have unilateral correlation, with interest rate as exogenous
and financial result - endogenous factor. It is a logical correlation,
demonstrating the influence of interest rates on the result of banking activity. At
the same time the financial results of banks also have a strong impact in the
short term (1 year) on unemployment rate.
- The relationship between the financial results of banks and inflation rate
is mutual and more evident. The increase of financial bank results encourages
immediately the growth of a higher inflation rate in the short term (2
86
consecutive quarters). However, under the influence of inflationary increases,
the financial results of banks in the Republic of Moldova change with a delay of
one quarter and last up to 12 consecutive quarters.
- The correlation between total bank assets and the interest rate turned out
to be one-sided, where only the total banking assets have an impact on the
interest rate but not the opposite. The lack of an impact of interest rates on bank
assets shows that the banks from the Republic of Moldova do not increase their
assets on account of the increase of more attractive deposits but from the lack of
other opportunities of investing money in economy. Thus, regardless of the rate
proposed by the banks, people will deposit their money in these banks in the
absence of other methods of recovery and deposition of money.
- Non-performing loans and the interest rate on deposits showed a mutual
correlation with a different response time. The increase in non-profit loans has
an immediate impact and for a period of one year on the cost of new attracted
deposits. When the bank records losses, the only possibility to improve the
situation is to attract more financial resources by increasing the attractiveness of
its deposits and cash compensation fixed in non-performing loans. The reverse
correlation, the increase of the rate of loans leads to the appearance of nonperforming loans in the 7th quarter during a long period. This result is a logical
one, because the increase of the attractiveness of deposits increases the growth
of available bank resources for propulsion of them in the economy, the increase
the amount of loans involves additional risks and can lead to the appearance of
non-performing loans.
- The inflation and unemployment rate affect each other. The increase in
inflation causes almost immediately changes in the unemployment rate over a
period of four consecutive quarters. The impact of unemployment rate on
inflation occurs with a delay of two quarters and takes a longer period of time
(10 consecutive quarters).
- The relationship between total bank assets and the unemployment rate is
less evident. A weak and short-term effect only with changes in bank assets on
the unemployment rate, the existence of a reverse interdependence was not
proved.
- Non-performing loans and unemployment - completely missing
dependencies.
- Changes in bank assets generate a significant influence on inflation with a
lead time of 2 years. And the impact of inflation on bank assets is less
significant, appears with a delay of 2 quarters and lasts two consecutive
quarters.
- No mutual interdependence between inflation rate and non-performing
loans has been recorded.
- The total assets of banks and their financial results have outlined a
unilateral interdependence. The change of bank assets having an immediate
impact on a period of 5 quarters on the financial results, but the financial results
do not influence banks' total assets. This proves once more that banks in the
87
Republic of Moldova increase the volume of their assets not from the results of
their work but from other resources.
- A mutual correlation between non-performing loans and financial result
of the banking activity was observed only for a short period of time. They
influence each other immediately and for a period of two quarters.
- Non-performing loans and bank assets show a mutual interdependence,
but in different time periods. The influence of non-performing loans on bank
assets is strong but a short-term one and is manifested in the 2nd, the 5th-6th
and the 12th-16th quarters. The change of bank assets has an immediate impact
on non-performing loans, but a short period, felt again after a delay of a year
and a half.
4. CONCLUSIONS
Thus, the factor analysis performed shows the peculiarities of the
Moldovan economy. Repealing some postulates of interdependence of
macroeconomic variables and their impact on inflation and monetary default.
The weak correlation between unemployment and inflation rate, the
undetermined incident of unemployment on other indicators of monetary
procreation (Philips curve) is explained by the financing of monetary growth
from remittances (about 30% to GDP). In addition to monetary policy decisions,
the Central Bank should take into consideration the interests of the banks from
the commercial segment and the results of their activities, which usually settles
as non-performing loans. The creation of a delayed money supply is conditioned
by the lowering rates on deposits, although the amount of these deposits (which
finances the total banking assets) has no effect on the money supply. A brief but
fast response on the ability of banks to create money in the Republic of
Moldova have: the increase of the interest rate on new attracted deposits ( for a
short period), the amount of non-performing loans ( for a short period) and the
inflation rate, which is understandable because the inflation rate makes the
implementation of monetary policies which have a direct impact on money
supply.
However monetary shocks, affect practically all the indicators used in
addition to bank assets, namely:
- The interest rate on new attracted deposits (medium, with a delay of 2
quarters);
- Unemployment rate (short-term);
- Inflation rate (long-term);
- The financial results of banking activity (long term);
- Non-performing loans (short and medium term)
The feebleness of Moldovan banking system, the low ability to create
money and assign it to the real sector of economy is determined by the weak
and uncertain development of Moldovan economy. A close relationship
between the financial results of banks and non-performing loans and a lack of
correlation between the volume of money and the same financial results
88
demonstrate the fear of the banks to push money into the economy in order not
have bad final results because of these loans. In such circumstances the issue of
currency by the Cenral Bank of the country has no effect, banks are rather
willing to keep its money into their accounts than to credit economy, thus
compromised their money creation function. This situation will improve only if
the direction of development of the Moldovan economy becomes a certain one,
giving confidence to the banking system. Any other actions of monetary policy
to stimulate the economy, which are now accepted in Europe and the USA, will
only lead in our country to the growth of inflation, the real sector being
deprived of the access to this money. Thus, the role of commercial banks in
money creation is not just a major one, but it is indispensable from the
economic growth.
References
[1] Brooks, C. (2014). Introductory Econometrics for Finance. Cambridge: University
Printing House, Cambridge CB2 8BS.
[2] Dimitrios, A. & Aristeidis S. (2007). Applied Econometrics: A Modern Approach
with Eviews and Microfit. Stephen G. Hall.
[3] Granger, N. (1974). Spurious regressions in econometrics. Journal of
Econometrics, vol. 2, 111-120.
[4] Greene, W. H. (2003). Econometric Analysis, 5th edition. New Jersey: Prentice Hall
[5] Gusti Ngurah Agung, I. (2009). Time Series Data Analysis Using Eviews.
Singapore: John Wiley & Sons (Asia) Pte Ltd, 2 Clementi Loop.
[6] Helmut, L. (2005). New introduction to multiple time series analysis
(Econometrics). Springer-Verlag Berlin Heidelberg.
[7] Maddala, G. S. (1992). Introduction to econometrics, 2nd edn. New York:
Macmillan.
[8] National Bank of Moldova. Retrieved from www.bnm.md
[9] Sims, C.A. (1980). Macroeconomics and reality. Econometrica, vol. 48, 1-48.
89
RISK MANAGEMENT AND THE PERFORMANCE OF
EUROPEAN FINANCIAL INSTITUTIONS
VASILE COCRIȘ
Iasi, Romania
[email protected]
IOANA-IULIANA TOMULEASA
Alexandru Ioan Cuza University of Iasi; University of Auvergne
Iasi, Romania; Clermont-Ferrand, France
[email protected]
Abstract
The European financial system is currently dominated by uncertainty because of the
weaknesses of the national economies, the contagion effect and moral hazard issues,
thus the European financial stability is characterized by a high sensitivity to the
pressures observed in the regional and also international level. Within this context, the
purpose of this paper is to empirically assess the impact of risks, size and other
macroeconomic factors on the performance of 240 financial institutions from the EU
non-euro and EU candidate countries. By using unbalanced panel data, and employing
static and dynamic statistical techniques, the results provide substantial evidence that
risks play a significant role in the evolution of financial institution’s profitability.
Moreover, the results outline that the main vulnerability of the analysed European
financial institutions was and still remains credit risk. Overall, better risk management,
an optimal size and an efficient regulatory framework are associated with higher levels
of performance. Evidence outlines also that the European financial systems are
currently under the sign of profound changes, determined, in a significant extent, by the
mutations in financial markets, the regulatory and institutional changes, illustrating
their powerful impact on the participants of the financial system.
Keywords: European Union, risks, profitability, GLS, MLE
JEL Classification: G21, G28, C33
1. INTRODUCTION
The European financial system plays a vital role in the regional economic
environment, so during the recent distressing events, a high significance was
given to the stability and performance of this specific sector. In general, the
financial institutions’ performance was a theme intensely addressed in the
literature, mainly because of the belief that the profitability of the financial
90
intermediation activity considerably influences the development of the
economic sector. Though, there are other opinions according to which the
financial institutions’ activity can also have harmful consequences for the
overall economic system. In this respect, financial or banking failures can
merge towards systemic crises, with devastating consequences for the entire
economy. If in general, the financial sphere is volatile because of a high range
of subjective and objective factors, in particular, during the recent period of
economic instability, the volatility has substantially amplified, and it was
created the perfect financial environment for risk manifestation. In this context,
the European financial institutions faced even more risks in their activity, thus
their performance was intensely affected. Under these circumstances, it is
obvious that the subject of financial system’s performance is of high interest for
various participants in the financial markets, such as governmental and
monetary authorities, board of directors and supervisors, investors, and also the
general public.
Consequently, we have selected this topic with the main purpose of
identifying the dynamics between financial risks, dimension, macroeconomic
factors, and the performance of 240 European financial institutions which are
operating in EU non-euro and EU candidate countries. The period studied is
2000-2012, and is covering the subprime crisis, but also the sovereign debt
crisis.
In our paper, we consider “performance” as the “action or operation in
terms of how successfully it is performed” (Oxford Dictionary), and we related
this notion to the concepts of “profitability” and also “efficiency”. In most of
the papers identified in the academic literature, performance was expressed by
three main indicators, namely: return on assets, return on equity, and net interest
margin. Moreover, several research papers have used at least one of the
mentioned ratios, among which we can note: Bourke (1989), Corbett and
Mitchell (2000), Staikouras and Wood (2004), Park and Weber (2006),
Pasiouras and Kosmidou (2007), Athanasoglou et al. (2008), Albertazzi and
Gambacorta (2009), Dietrich and Wanzenried (2011), and Kanas et al. (2012).
Although, it’s necessary to mention that there are studies were performance was
evaluated in a different manner. For example, Molyneux and Thornton (1992)
have included as profitability indicator the net profit after tax with staff
expenses and provisions for loan losses. Furthermore, Lee et al. (2014a) used
the ratio of net non-interest income to net operating income as a non-interest
income measure.
In terms of risks, we consider that a risk can be seen as an event, more or
less predictable, which generates several losses for an individual or an economic
agent. Generally, risks can influence any organization, but in the recessionary
environment, a stronger impact was felt by financial institutions. Therefore, for
a financial institution, risks can manifest by means of direct losses, or by
indirect implications, such as economically discouraged clients or business
partners. Though, in this environment dominated by uncertainty, financial
91
institutions have adopted a more cautious behaviour, thus a high importance
was given to risk management. In the literature, a particular attention was
granted to credit risk; thus a significant strand of researchers state that a high
level of credit risk, measured by means of the non-performing loans ratio, imply
a deterioration of loan portfolio, which has a negative impact on the financial
institution’s profitability (see Kosmidou, 2008; Athanasoglou et al., 2008;
Demirguç-Kunt and Huizinga, 1999; Pervan and Guadagnino, 2010; Curak et
al., 2012, among others). Moreover, a common belief can be extracted, which
implies a strong connection between bank profitability and asset quality,
suggesting that an increase in doubtful assets imposes to the financial
institutions a higher allocation of resources for provisioning in order to cover
for imminent losses (see Angbazo, 1997; DeYoung and Rice, 2004; Hernando
and Nieto, 2007; Athanasoglou et al., 2008; Chiorazzo et al., 2008).
Another risk discussed in the literature is the liquidity risk, which is
considered as the probability that a financial institution cannot meet its financial
obligations, which may, thereafter conduce to failure. Without any doubt, liquid
assets have often reduced financial institution’s returns. Thus, a lower level of
the loan to deposit ratio, respectively a higher liquidity ratio will indicate an
inferior profitability level. In other words, since the ratio loan to deposit is an
inverse proxy for liquidity, the greater the ratio the higher will be the
profitability (Kosmidou, 2008). Among the papers that confirm a strong
relationship between liquidity and bank performance are the following:
McKenzie and Thomas (1983), Angbazo (1997), Barros et al. (2007), Chiorazzo
et al. (2008), DeYoung and Rice (2004), Goddard et al. (2004b), Iannotta et al.
(2007), Molyneux and Thornton (1992), Pasiouras and Kosmidou (2007), and
Wagner (2007).
Furthermore, the literature has drawn the attention also towards solvency
and its relation with a financial institutions’ performance. In most of the papers,
solvency risk is seen as an important contributing factor of bank performance
(i.e. Kim and Santomero, 1988; Peura and Keppo, 2006; Drumond, 2008; Chen,
2011). It was stated that an adequate level of capitalization will allow a financial
institution to absorb any losses or shocks in the economic system. Furthermore,
a high value of capitalization, which acts as a safety buffer, involves less risk of
insolvency, and according to the risk-return hypothesis, is can be expected a
lower value of profitability, thus suggesting an inverse relationship between
these factors. Among the most common indicators used to evaluate solvency
risk is Z score, which estimates the default probability of a financial institution.
Among the papers that used this index, it can be observed the following: Laeven
and Levine, 2009; Chortareas et al., 2012; Sufian and Habibullah, 2012; Bertray
et al., 2013; Bourkhis and Sami Nabi, 2013; Elliot et al., 2013; Pasiouras and
Gaganis, 2013; Tabak et al., 2013; Anolli et al., 2014; Lee et al., 2014b etc.
During the recent financial recession a great importance was given to the
dimension of the financial institutions. Normally, the relationship between size
and the performance of a financial institution is positive, which means that a
92
larger size will induce a higher level of profitability (i.e. Iannotta et al., 2007;
Mercieca et al., 2007). Furthermore, a high dimension of a financial institution
could indicate economies of scope, as a result of mutual regulations and related
financial services. Although Elsas et al. (2010) strengthens this idea, Barros et
al. (2007) indicates that, in the big and diversified financial institutions it is
more likely to be registered lower performances, suggesting that small and
specialized financial institutions can diminish the difficulties associated to
informational asymmetry in the lending activity.
In addition to the mentioned factors, we consider that a high importance
has to be granted to the macroeconomic risks. According to Bernanke and
Gertler’s vision, during the recession, the quality of loans is lessened, and the
companies are getting financed at higher margins, thus suggesting an inverse
and strong relationship between economic growth and bank performance
(1989). Likewise, Claeys and Vander Vennet (2008) support the mentioned
vision, and state that the conditions prevailing in the economic cycle influences
noticeably the net interest margins. Other studies have outlined that the
relationship between bank profitability and the economic sphere is a cyclical
one (Demirguç-Kunt and Huizinga, 1999; Garcia Herrerro et al., 2009; Naceur
and Kandil, 2009; Dietrich and Wanzenried, 2011 among others).
The literature related to the performance of the financial institutions and its
determining factors is highly developed. Therefore, there are various studies
that approached this subject. Though, our paper is different from the literature in
several ways. First, our study is focused on the European Union non-euro and
European Union candidate countries, and we outline the differences between the
financial institutions operating in the mentioned countries. Second, we extent
the period studied, and focus on an unbalanced panel, in order to capture the
implication of both the subprime and sovereign debt crisis. Third, compared to
previous papers we have developed four main models, and compared the results
obtained in these cases. We have employed the classical OLS and GLS models,
but we have discussed also the ML model. Fourth, we have discussed in the
same context several financial risks, the risk related to the dimension of a
financial institution, and also some risks connected to the macroeconomic
environment. Additionally, we have applied several differentiation criteria, as
tests of robustness of our analysis.
The rest of the paper is structured as follows: Section 2 delineates the
methodological design employed in this paper, Section 3 discusses the empirical
results, and Section 4 concludes and presents future areas of research.
2. METHODOLOGICAL APPROACH
In this section there are going to be discussed the database used in the
analysis, and also the methodological design employed.
93
2.1 Data
The database used in our research is formed from individual information
collected for 240 financial institutions, which are operating in six EU non-euro
countries (Bulgaria, Croatia, Czech Republic, Hungary, Poland and Romania)
and six EU candidate countries (Albania, FYROM, Iceland, Montenegro, Serbia
and Turkey). The main reason for selecting these countries refers to the
similarities between the economic systems, the instability of the justice system,
and underdevelopment of fiscal policies. Furthermore, the banking sector plays
a vital role in the evolution of the financial system because it holds the largest
share in all the financial systems analysed.
The main source of the data is Bankscope, but there were also used in
several case the data published by the financial institutions in their annual
financial reports. Furthermore, in the case of the macroeconomic variables it
was used the publicly available database provided by the World Bank. The
period studied is 2000-2012, covering 13 years, while the frequency of the data
is annual.
The variables used in this analysis are divided in four groups. The first
group comprises the dependant variables which are measuring the performance
of the financial institutions analysed. There were used three main variables to
count for performance, namely: return on average assets (ROAA), return on
average equity (ROAE), and net interest margin (NIM) (see Table 1).
The following three groups refer to the independent variables. The second
group is covering three variables proxy for financial risks. First, it was used
credit risk (NPL), which is seen as the risk that a client does not fulfil its debt
obligation in the contractual terms established. In our study credit risk is
measured by means of the ratio of non-performing loans. A higher value of this
ratio will oblige the financial institutions to deviate a part of their revenues to
the creation of provisions, with the main purpose of covering the potential
losses assimilated to the non-performing loans. This aspect will negatively
influence the financial institutions’ performance. Second, we have included
liquidity risk (LIQ) which implies that an asset cannot be traded quickly enough
to prevent a loss for a financial institution. In our case we have used the ratio of
loans to total assets to count for this risk. The expected impact of this variable is
a mixed one; thus on the one side it can have a negative impact on the
profitability of the financial institution, but on the other side it can imply higher
profitability for the financial institutions because of the amplified volume of
loans. Third, we have included solvency risk (Zalt) which refers to the
incapacity of a financial institution to remain solvent. In our paper we have used
Z score as a proxy for solvency, this indicator being initially developed by Boyd
and Runkle (1993). Compared to previous papers, we decided to apply a distinct
version of this ratio, which was developed in the paper of Yeyati and Micco
(2007). This new version of the index solves the endogeneity issue determined
by the different distributions from which were extracted the return on assets and
the volatility of return on assets. The third group refers to the dimension of
94
financial institutions (Size). The relationship between a financial institutions’
size and its performance is considered, at least theoretically, to be positive,
outlining the idea that a higher dimension should allow the financial institution
to register higher profits. The fourth group of variables are covering the
macroeconomic risks that a financial institution has to face. In this respect we
have chosen two main indicators, namely the growth rate of GDP (RGDP) and
inflation rate (INF). In most of the papers, the most commonly used indicator
that studies the relationship between the financial sector and the business cycle
is the gross domestic product. Theoretically, during recessions, the quality of
the loans granted should be diminished, which amplifies the potential losses that
a financial institutions has to face, and thus the level of provisions has to grow,
which will negatively impact profitability.
Financial risks
Variables
Financial
Return on
performance
average assets
(ROAA)
Return on
average equity
(ROAE)
Net interest
margin
(NIM)
Credit risk
Ratio of nonperforming loans
(NPL)
Definition
Liquidity risk
Liquidity ratio
(LIQ)
Loans / total assets
Solvency risk
Alternative Z
score
(Zalt)
Dimension of a
financial
institution
(SIZE)
GDP growth rate
(RGDP)
Dimension risk
External risks
Independent variables
Dependant variables
Table 1. Description of the variables
Macroeconomic
risks
Inflation rate
(INF)
Source
Bankscope
Annual
reports
Net income /average total equity
Bankscope
Annual
reports anuale
(Interest received - interest paid) / Bankscope
average invested assets
Annual
reports
Loans that are in default more Bankscope
than 90 days / total gross loans
Annual
reports
Net income / average total assets
Bankscope
Annual
reports
(Average of return on assets + Author’s
capital adequacy ratio) / volatility calculation
of return on assets
Natural logarithm of total assets
Author’s
calculation
Natural logarithm of (GDP at time Author’s
t / GDP at time t-1)
calculation
The annual percentage change in World Bank
the cost to the average consumer
of acquiring a basket of goods and
services
From another perspective, inflation rate is also of great importance,
because it may capture the effect of seignorage collection on interest margins.
Furthermore, an amplified inflation rate may increase also the uncertainty in the
95
financial markets and will implicitly diminish the credit volume, which will
affect in a negative manner the financial institution’s performance.
2.2 Empirical method
In our analysis we have selected initially the classical panel regression
method, employing the OLS and GLS techniques. Furthermore, after the initial
results, we have decided to employ also the ML regression technique in order to
obtain more robust results. Our paper was similar to previous ones in terms of
the methods, such as: for the OLS (Glick and Rose, 2002; Morgan et al., 2004;
Staikouras and Wood, 2004; Dermiguç-Kunt et al., 2006; Degryse and Nguyen,
2007; Uchida et al., 2008; Lin and Zhang, 2009; Boerner and Volckart, 2011;
Moshrian and Wu, 2012; Lee and Chih, 2013; Rughoo and Sarantis, 2014); for
the GLS (Boubankri et al., 2005; Bourkhis and Nabi, 2013) and for the ML
(Altunbas et al., 2000; Cipollini and Firodelisi, 2012; Assaf et al., 2013).
Though, neither of the mentioned studies has compared the results for all three
techniques. Therefore, we have used also the ML model in order to avoid a
misspecification of the model.
The general equation of the model is the following:
𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑖𝑖𝑖𝑖,𝑡𝑡 = ∝𝑖𝑖 + 𝛽𝛽1 𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝑖𝑖𝑖𝑖,𝑡𝑡 + 𝛽𝛽2 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑖𝑖,𝑘𝑘,𝑡𝑡 + 𝛽𝛽3 𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑖𝑖,𝑡𝑡 + 𝜀𝜀𝑖𝑖𝑖𝑖 ,
(1)
Where 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑖𝑖𝑖𝑖 ,𝑡𝑡 stands for the performance of a financial institution “k” in
country “i” for the period “t”; 𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝑖𝑖𝑖𝑖,𝑡𝑡 stands for the financial risks taken
into our analysis for a financial institution “k” in country “i” for the period “t”;
𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑖𝑖𝑖𝑖 ,𝑡𝑡 stands for the size for a financial institution “k” in country “i” for the
period “t”; 𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑖𝑖,𝑡𝑡 stands for the macroeconomic risks taken into our
analysis for a specific country “i” in the period “t”; and 𝜀𝜀𝑖𝑖𝑖𝑖 stands for the error
term for a specific country “i” in the period “t”.
3. RESULTS
In this section there are going to be discussed some general information
regarding the variables used in the analysis, and the results obtained for the
overall sample and after applying some differentiation criteria.
3.1 Descriptive statistics
The analysis began with the statistical description of the variables, so in
Table 2 there are exposed some key information regarding the dataset used, for
the period 2000-2012.
Currently, we are witnessing a change of the financial paradigm regarding
risk management, financial institutions’ minimum solvency and the debtor’s
behaviour in crisis situations. The new pressures from the international, but also
regional financial sphere, have determined an increase in the level of financial
instability, thus it was facilitated the diversification of risks present in this
sector. If we study the overall period analysed, we can easily observe that, on
96
average, the profitability of the financial institutions from the countries studied
is characterized by positive returns, although a higher level was registered in the
EU non-euro countries. Despite that on average the profitability indicators had
positive results, we have observed that in some cases the profitability entered
into a negative territory during the crisis period, and this was determined by the
increasing level of minimum provisions, the stricter monetary authority’s
requirements, higher standards of asset quality etc.
Table 2. Descriptive statistics
Variables
ROAE
ROAA
NIM
NPL
LIQ
Zalt
SIZE
RGDP
INF
N
Obs.
EU non-euro
EU candidate
1,58
(1,82)
0,91
(2,04)
5,35
(3,74)
8,12
(8,80)
56,46
(18,81)
27,49
(35,14)
13,66
(2,45)
2,93
(3,64)
5,08
(5,41)
128
1258
1,35
(2,70)
0,52
(9,64)
4,19
(3,28)
11,26
(16,22)
52,44
(20,81)
20,99
(28,08)
13,11
(2,04)
3,25
(3,91)
8,84
(11,52)
121
922
Overall
1,49
(2,24)
0,74
(6,46)
4,86
(3,59)
9,45
(12,58)
54,77
(19,77)
24,73
(32,51)
13,43
(2,29)
3,06
(3,76)
6,67
(8,75)
249
2179
Note: The descriptive statistics comprise the mean and in parentheses the standard
deviation; N stands for the number of cases (financial institutions); Obs. stands for the
number of observations for each financial institution.
(Source: Author’s calculations)
The implications of the unfavourable macroeconomic context have
manifested primarily by enhancing the level of risks in the financial markets.
Moreover, the period studied, particularly after 2007, was exposed to several
vulnerabilities. Therefore, the external climate has influenced the financial
sector analysed by worsening risk perception, contracting the financial markets,
doubling the risks present in the financial markets etc. Consequently, the
deterioration of the economic environment has determined an economic
contraction, implying a worsening of the loan portfolio quality; thus credit risk
became one of the main concerns of the financial authorities. In the last year,
the credit risk phenomenon has diminished, therefore bad loans are at a
97
manageable level, but as we can note in Table 2, the financial institutions from
EU candidate countries have to ensure a more careful management and a more
cautious behaviour. In terms of liquidity, and size there weren’t found large
differences between the two regions studied. Though, in the case of the
solvency ratio, the descriptive statistics is suggesting that the financial
institutions in the EU non-euro countries are more solvent than the ones from
EU candidate countries, and this can be explained by the amplified efforts of the
European Central Bank and national authorities from these countries to ensure a
proper level of soundness and stability.
3.2 Empirical results
The empirical results are exposed in Tables 3-7, for the overall sample, but
also for the sample divided after several criteria.
3.2.1 Empirical results for the overall sample
In the overall sample analysis, we have employed four types of statistical
methods, namely fixed effects unbalanced panel regression (FE model), random
effects unbalanced panel regression (RE model), between effects unbalanced
panel regression (BE model), and maximum likelihood unbalanced panel
regression (ML model). In order to check which method is more statistically
significant we have employed the classical Hausman test1, and the results
showed initially that between random and fixed effects, the fixed effects are
more suitable (see Table 3, Appendix).
When studying the results for credit risk, we can note some statistically
significant results only for the BE model. In this case, the ratio of nonperforming loans negatively impacts return on assets, result which is
statistically significant for the level of 10%. In the second case, we can note
some more significant results. The best results for the liquidity risk were
obtained for the FE model and ML model, where the impact of the liquidity
ratio is positive and statistically significant on all the profitability indicators. In
this latter case, the results are in line with those obtained by Garcia-Herrero et
al. (2009).
For solvency risk, the results are similar with those obtained for credit risk,
thus the alternative Z score has a positive and statistically significant impact on
the profitability ratios only in the BE model. Consequently, when we register a
higher level of capitalization, we will record a greater profitability, and these
results are in the same line as those obtained by Athanasaglou et al. (2008). We
consider that this positive influence can be explained by the role of capital, as
safety cushion, in case that some adversative fluctuations will be registered.
This relationship will allow a financial institution to fund its assets at a more
favourable interest rate, which will generate an amplification of the profitability,
and a counterbalance for the cost of capital.
Continuing, the size of the financial institutions seems to have a significant
role in the evolution of profitability. In this respect, the results point out a
98
positive and statistically significant impact of this variable on the financial
institution’s returns. Thus, we support the view of Iannotta et al. (2007), and
Mercieca et al. (2007) which say that a larger financial institution should
register in normal economic periods, larger economies of scale. Though, some
contradictory results were obtained for the net interest margin, result which is
statistically significant at the level of 1%.
The macroeconomic environment is another issue considered important in
our study. The impact of the external factors is according to our initial
expectations, namely a positive influence from the growth of GDP and a
negative impact of inflation. In this regarding, we consider that a period of
economic development will positively influence the loan portfolio of a financial
institution, which amplifies the profitability level. Our results are in line with
those obtained by Claessens et al. (2001), Bikker and Hu (2002), Athanasoglou
et al. (2008), Naceur and Kandil (2009).
3.2.2 Empirical results after the national criteria
In this sub-section there are going to be discussed the results obtained after
applying a first discriminating criterion, namely the national one. There are
exposed only the most relevant results; thus there were again applied four
statistical methods, but only two of them were exposed in Table 4.1 and Table
4.2 (Appendix).
In the first case, credit risk had a negative and statistically significant
impact on the performance of the financial institutions from EU candidate
countries. For example, in the case of Turkey, the results suggest that an
increase with one monetary unit of the ratio of non-performing loans will
generate a decrease with 0.24 monetary units of return on assets, this results
being statistically significant at the level of 1%. A distinct situation was
registered for FYROM and Montenegro, where the increase in the nonperforming loans will determine an upsurge in the profitability ratio, results
which is contrary to our expectations. This result can be motivated by the
mutation observed in the financial markets from the last years. Nonetheless,
these kinds of changes were not identified in the EU non-euro countries, where
it is clearly delimitated the negative impact of the non-performing loans on
financial institution’s profitability (see Table 4.1 and Table 4.2, Appendix).
Liquidity risk is the second issue addressed. On average, liquidity risk
proved to have a positive impact on the performance of the financial
institutions, outlining the idea that a higher volume of loans will implicitly
generate a higher profitability of the financial institutions. Also, the same result
was observed in the case of the solvency risk, which is expressed by the
alternative Z score. An opposing result was detected in the case of Bulgaria,
where alternative Z score had a negative influence on the profitability indices.
In this case we consider that the results were determined by the monetary
authorities’ measures, which implied a higher capitalization (see Table 5.1 and
Table 5.2, Appendix). This result is in accordance with the risk-return
99
hypothesis, namely that a higher level of capitalization will be accompanied by
a lower level of expected returns.
Some mixed results were obtained when studying the impact of size on the
profitability of the financial institutions. From one perspective, the
amplification of a financial institutions’ size will conduct to an increase of their
performance, because of the extended segment of services and products that the
financial institution can offer. From another perspective, an increase in the size
of a financial institution can also generate some alternative costs, thus outlining
the non-linear impact of size. This result is in line with that obtained by Barros
et al. (2007), pointing out that, in some cases, the smaller and more specialized
financial institution can be more performing than the big ones because they can
solve the information asymmetry and moral hazard issues.
Continuing we are discussing the results for the macroeconomic
determining factors. Overall, we consider that the influence of these factors is a
cyclical one. In line with Demirguç-Kunt and Huizinga (1999) and Dietrich and
Wanzenried (2011) our results suggests that an economic upsurge can draw
both positive and negative implications for the financial institutions. With
regard to the impact of inflation, we highlight the importance of the capability
of a financial institution’s management to predict the evolution of this indicator,
namely to adapt to the financial markets trends. In some cases, namely Bulgaria,
Czech Republic, Romania and Turkey, inflation rate had a positive and
statistically significant impact on the performance of the financial institutions,
results which are in line with those obtained by Molyneux and Thornton (1992),
Claessens et al. (2001), Staikouras and Wood (2004), Athanasoglou et al.
(2008), Claeys and Vander Vennet (2008), Garcia-Herrerro et al. (2009) etc.
3.2.3 Empirical results after the size of the financial institutions
In this sub-section there are going to be discussed the results after the
second differentiation criterion applied in this analysis, respectively the size of
the financial institutions. Our sample is divided in three main groups, after the
size of the financial institutions: big, medium and small. The size was
determined by the natural logarithm of total assets registered in the last
available year, and after divided equally in three main groups. There were
applied four statistical methods but only two of them were exposed.
First, we debate the impact of credit risk on financial institution’s
performance. Paradoxically, the most statistically significant results were
registered for the small financial institutions. In this case, the impact of the ratio
of non-performing loans on return on assets is negative and statistically
significant for the level of 1% (see Table 6, Appendix). Moreover, in the case of
the big financial institutions the results were not statistically significant in
neither of the cases. We believe that these results outlined the fact that big
financial institutions are not affected by the NPLs as much as the small financial
institutions, mainly because of the higher capacity of risk diversification of the
big financial institutions.
100
In terms of liquidity, the results are statistically significant only for the
medium and big financial institutions. Moreover, the impact of liquidity ratio on
the performance indicators is, in both cases, a positive one. Even so, when
studying the impact of the solvency risk on financial institution’s performance,
we can note that the results are statistically significant only for the big
institutions.
From the study of the external factors, we can draw the attention towards
the direct and statistically significant relationship between GDP growth rate and
financial institution’s profitability for all three categories of financial
institutions studied. Our results are in the same line as those achieved by
Claessens et al. (2001), and Bikker and Hu (2002). In the case of the inflation
rate the results are mixed. Therefore, on the one hand inflation rate could have a
positive impact on the profitability indicators, because of the forecasting ability
of the financial institutions. On the other hand, inflation could also have a
negative impact on the profitability indicators by amplifying the uncertainty in
the financial sphere and diminishing the demand of financial loans.
3.2.4
Empirical results after the specialization of the financial
institutions
In this section there are going to be discussed the results after the third
differentiation criterion applied, namely after the specialization of the financial
institutions.
In Table 7.1, and Table 7.2 (Appendix) we can distinguish the results for
six categories of financial institutions. When studying the results for the first
independent variable, namely credit risk, we can note that the results are
statistically significant only for cooperative, real estate and mortgage, savings
and other types of financial institutions, while for commercial and investment
banks the impact of this variable on the profitability indicators is not
statistically significant. In most of the cases, the impact of this variable on the
profitability indicators is a negative one.
Continuing, in the case of the liquidity risk, the impact on financial
institution’s profitability is, on average, a positive and statistically significant
one. Though, we register some exceptions, namely investment and savings
banks, where the result is not statistically significant, and also real estate and
mortgage banks where the liquidity ratio has a negative and statistically
significant impact on return on equity. This latter results is in accordance with
those obtained by McKenzie and Thomas (1983), Angbazo (1997), Barros et al.
(2007), Chiorazzo et al. (2008), DeYoung and Rice (2004), Goddard et al.
(2004b), Iannotta et al. (2007), Molyneux and Thornton (1992), Pasiouras and
Kosmidou (2007), and Wagner (2007).
Solvency risk, which is expressed by the alternative Z score, has, on
average, a negative and statistically significant impact on the performance of
various financial institutions. Although, in the cooperative banks we can note
again the risk-return hypothesis, observing that the volatility of return on assets
101
overcomes the capitalization, which leads to a negative impact on the overall
profitability.
Continuing we argue the impact of size on the performance of various
types of financial institutions, registering again some mixed results. On the one
side, because of the developed services and products the big financial
institutions register higher incomes, but on the other side the big financial
institutions are also exposed to an amplified volume of risks which can cause
additional costs, negatively affecting the overall performance.
The impact of the macroeconomic variables on the performance of the
financial institutions is similar to the one identified in the literature. Therefore,
we note a direct and statistically significant relationship between the GDP
growth rate and the profitability indicators for most of the financial institutions
analysed. In the case of the inflation rate, a positive impact was registered only
for the commercial banks which have proved a higher ability for predicting the
evolutions in the financial markets, and a higher flexibility to adapt to the new
economic conditions. In this case, when we record an increase with one
monetary unit of the inflation rate, we also observe an upsurge with 0.1
monetary units of the net interest margin, result which is statistically significant
for the level of 1%. Conversely, for the cooperative, investment, real estate and
mortgage, and savings banks, inflation rate has rather a negative and statistically
significant impact on the performance of the financial institutions. In this
regard, we consider that an increased level of inflation can amplify the
uncertainty in the financial sphere, which will influence the behaviour of the
participants in the financial market towards a more cautious direction.
4. CONCLUSIONS
The last period reveals the severe consequences of the recent economic
turmoil on the overall European financial sector, noticing the deterioration of
the risk perception and profitability indicators, the tightening of banking
regulation and supervision framework and other aspects. Our study aimed to
evaluate the impact of several categories of risks on the performance of 240
European financial institutions, from the EU non-euro and EU candidate
countries.
In general the results of the study reveal a heterogeneous impact of the
independent variables on the performance of the financial institutions taken into
the study. We consider that these results are dictated by the national and
regional particularities of each country, particularly with reference to the
monetary, fiscal and regulatory practices. On average, credit risk was and
remains one of the main determining factors of financial institution’s
performance, and it was noted that this relationship was exacerbated during the
subprime crisis and sovereign debt crisis. And yet, liquidity risk is another
important aspect to be taken into account when discussing the activity of a
financial institution. We believe that this risk should not be underestimated, thus
a careful monitoring is absolutely necessary, particularly in the EU candidate
102
countries. In terms of size, we have perceived that during the recent financial
crises the big financial institutions had to face much more risks, compared to the
medium and small financial institutions, mainly because of their larger exposure
to the international financial pressures. Therefore, we consider that it’s vital to
cautiously supervise these institutions because several risks can materialize at
eventual international financial gaps. With reference to the macroeconomic
factors, we have registered results similar to those identified previously in the
literature. Therefore, an increase in the economic activity will obviously
determine a development of the financial services and will generate a higher
profitability for the financial institutions.
In general, we have observed large and persistent disparities between the
two regions studied, particularly regarding the development of the financial
sector. We consider that these disparities corroborated with the international
financial pressures can affect the long-term growth potential of the European
Union. Despite that the accession to the European Union was considered as an
anchor for progress, both the non-euro and candidate countries are still lagging
behind, therefore there are imposed greater efforts to achieve the initial goals
established.
ACKNOWLEDGEMENT
This work was supported by the project “Excellence academic routes in the
doctoral and postdoctoral research – READ” co-funded from the European
Social Fund through the Development of Human Resources Operational
Programme 2007-2013, contract no. POSDRU/159/1.5/S/137926.
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Note
1. The Hausman statistic is: H = (b1 - b0)’ (Var (b0) –Var (b1)) † (b1 - b0), where † denotes
the Moore-Penrose pseudo inverse. Under the null hypothesis, this test has
asymptotically the chi-squared distribution with the number of degrees of freedom equal
to the rank of matrix Var (b0) – Var (b1). If we reject the null hypothesis, it means that
b1 is inconsistent.
107
APPENDIX
Table 3. Empirical results for the overall sample
Variables
NPL
LIQ
Zalt
SIZE
RGDP
INF
c
Hausman
R.sq. within
Rho
Obs.
(1)
-0.0001
(0.0006)
0.0014***
(0.0004)
-0.0001
(0.0004)
-0.0930
(0.1083)
0.1653***
(0.0390)
-0.0326*
(0.0192)
0.4048
(1.5653)
16.93
(0.0096)
0.0164
FE
(2)
-0.0001
(0.0001)
0.0001*
(0.0001)
-0.0001
(0.0001)
0.0102
(0.0169)
0.0625***
(0.0061)
-0.0027
(0.0029)
1.1621***
(0.2436)
360.65
(0.000)
0.0550
2179
2179
(3)
-0.0001
(0.0001)
0.0001**
(0.0001)
0.0001
(0.0001)
-0.0831***
(0.0170)
0.0138**
(0.0061)
0.0143***
(0.0030)
5.7080***
(0.2461)
-86.76
Model specification
BE
(1)
(2)
(3)
-0.0015*
0.0002
0.0015
(0.0009)
(0.0007)
(0.0012)
0.0004
0.0002
0.0001*
(0.0004)
(0.0003)
(0.0005)
0.0012***
0.0012***
0.0016***
(0.0004)
(0.0003)
(0.0005)
0.2641***
0.4898***
0.3953***
(0.0889)
(0.0687)
(0.1106)
0.3803***
0.3499***
0.1798
(0.1154)
(0.0892)
(0.1436)
0.0014
-0.0925***
-0.2915***
(0.0379)
(0.0294)
(0.0473)
-4.6986***
-6.7880***
-1.8049
(1.4068)
(1.0884)
(1.7506)
0.0308
0.0073
0.0316
0.0120
2179
2179
2179
2179
(1)
-0.0004
(0.0005)
0.0008***
(0.0003)
0.0006**
(0.0002)
0.1294**
(0.0660)
0.1888***
(0.0368)
-0.0259*
(0.0164)
-2.4979***
(1.0020)
MLE
(2)
-0.0001
(0.0001)
0.0001*
(0.0001)
-0.0001
(0.0001)
0.0331**
(0.0166)
0.0649***
(0.0061)
-0.0029
(0.0029)
0.9374***
(0.2821)
(3)
-0.0001
(0.0001)
0.0001**
(0.0001)
0.0001
(0.0001)
-0.0755***
(0.0169)
0.0145***
(0.0061)
0.0136***
(0.0030)
5.7423***
(0.3398)
0.0389
2179
0.8418
2179
0.9311
2179
Note: Absolute value of t statistic significant at * 10%; ** 5%; *** 1%. In parentheses we have the standard deviation.. Model specification depends on the dependant
variable, namely: (1) – ROAA; (2) - ROAE; (3 )- NIM. For Hausman test in parentheses we have the probability.
108
Table 4.1. Empirical results after the national criteria – EU candidate countries
Variabiles
Albania
(1)
-0,19***
(0,06)
0,02
LIQ
(0,04)
0,05*
Zalt
(0,03)
-0,29
SIZE
(0,73)
-0,17
RGDP
(0,46)
-0,35
INF
(0,61)
4,76
c
(10,06)
Hausman -26,89
NPL
RE
(2)
(3)
(1)
MLE
(2)
(3)
(1)
Model specification
Iceland
RE
MLE
(2)
(3)
(1)
(2)
FYROM
(3)
(1)
RE
(2)
(3)
(1)
MLE
(2)
(3)
-0,04*** -0,01 -0,19*** -0,04*** -0,01
-0,39
0,01
0,02
-0,39*
0,01
0,01
-0,02
0,01*
0,01
0,01
0,01*
0,01
(0,01)
(0,01)
(0,06)
(0,01)
(0,01)
(0,25)
(0,01) (0,02) (0,24)
(0,01) (0,03) (0,02)
(0,01)
(0,01)
(0,01)
(0,08)
(0,01)
-0,01 0,03***
0,02
-0,01 0,03*** -0,06
-0,01
-0,01
-0,06
-0,01
-0,01
0,01
0,01
0,01
0,01
0,01
0,01
(0,01)
(0,01)
(0,04)
(0,01)
(0,01)
(0,09)
(0,01) (0,01) (0,09)
(0,01) (0,01) (0,02)
(0,01)
(0,01)
(0,01)
(0,01)
(0,01)
0,02***
0,02
0,05** 0,02***
0,02
0,06
0,03*** 0,02
0,06
0,03*** 0,02 0,09*** 0,03***
0,01
0,01
0,03***
0,01
(0,01)
(0,01)
(0,02)
(0,01)
(0,01)
(0,12)
(0,01) (0,03) (0,11)
(0,01) (0,03) (0,03)
(0,01)
(0,01)
(0,01)
(0,01)
(0,01)
0,48***
0,04
-0,29 0,49***
0,04
-0,16
0,09
-0,04
-0,16
0,09
-0,11
0,37
0,19*** -0,16** -0,15** 0,19*** -0,15**
(0,16)
(0,27)
(0,71)
(0,15)
(0,26)
(0,93)
(0,09) (0,12) (0,91)
(0,08) (0,19) (0,26)
(0,08)
(0,08)
(0,08)
(0,08)
(0,08)
0,11** 0,13*** -0,17
0,12** 0,13*** -0,29 0,09*** -0,02
-0,29 0,09*** -0,02
0,08
0,12***
0,01
0,01
0,12***
0,01
(0,05)
(0,05)
(0,45)
(0,05)
(0,05)
(0,64)
(0,03) (0,03) (0,62)
(0,03) (0,05) (0,11)
(0,03)
(0,03)
(0,02)
(0,03)
(0,03)
0,02
-0,05
-0,35
0,02
-0,05 -2,54*** 0,01
-0,07* -2,54*** 0,01
-0,07
0,05
-0,01
0,03
0,03
-0,01
0,03
(0,07)
(0,07)
(0,59)
(0,07)
(0,06)
(0,84)
(0,04) (0,04) (0,81)
(0,04) (0,07) (0,12)
(0,03)
(0,03)
(0,03)
(0,03)
(0,03)
-5,21*** 4,85
4,76 -5,47*** 4,90
28,25*
-0,81 4,28** 28,25*
-0,86
5,03* -6,81* -2,63** 5,49*** 5,47*** -2,55** 5,47***
(1,89)
(3,35)
(9,72)
(1,76)
(3,20) (17,38) (1,46) (2,12) (16,86) (1,39) (3,21) (3,66)
(1,14)
(1,38)
(1,32)
(1,14)
(1,32)
4,33
0,43
6,73
6,19 -188,94
10,29
16,58
2,44
(0,63)
(0,99)
(0,35)
(0,40)
(0,11)
(0,01)
(0,88)
0,22
0,27
0,12
0,12
0,13
0,02
0,16
0,07
0,06
R.sq.
within
0,49
0,96 8,19e-29 0,41
0,95
0,55
0,93
21,91
0,49
0,83
0,13
0,62
0,90
0,88
0,66
0,89
Rho
107
107
107
107
107
107
119
119
119
119
119
119
162
162
162
162
162
162
Obs.
109
Table 4.2. Empirical results after the national criteria – EU candidate countries
Variables
Montenegro
(1)
RE
(2)
(3)
(1)
MLE
(2)
(3)
(1)
Model specification
Serbia
RE
MLE
(2)
(3)
(1)
(2)
Turkey
RE
(3)
NPL
-0,12*** -0,04*** 0,13*** -0,16*** -0,05*** 0,04***
(0,03)
(0,02)
(0,03)
(0,02)
(0,02)
(0,02)
0,01
(0,01)
0,01
(0,01)
0,01
(0,01)
0,01
(0,01)
0,01
(0,01)
0,01
(0,01)
LIQ
0,04***
(0,02)
0,01
(0,01)
0,08***
(0,02)
0,02
(0,02)
0,01
(0,01)
0,02
(0,01)
-0,01
(0,03)
0,01
(0,01)
0,01
(0,01)
-0,01
(0,03)
0,01
(0,01)
0,01
(0,01)
Zalt
0,04*
(0,02)
0,01
(0,01)
0,19***
(0,03)
0,05**
(0,02)
0,01
(0,02)
0,06***
(0,02)
0,01
(0,04)
0,03*** 0,07***
(0,01)
(0,01)
0,01
(0,04)
SIZE
0,03
(0,20)
0,01
(0,13)
0,15
(0,24)
0,25
(0,17)
0,15
(0,13)
-0,29**
(0,14)
0,77**
(0,37)
0,37***
(0,08)
0,10
(0,09)
RGDP
0,07
(0,05)
0,08***
(0,03)
0,06
(0,06)
0,05
(0,04)
0,07***
(0,03)
-0,01
(0,03)
0,16
(0,11)
0,06***
(0,02)
INF
-0,01
(0,08)
-0,01
(0,05)
-0,02
(0,09)
-0,04
(0,06)
-0,03
(0,04)
-0,01
(0,04)
0,03
(0,02)
0,01
(0,01)
c
-1,99
(2,58)
0,30
(1,64)
-8,49***
(3,03)
-2,75
(2,59)
-1,11
(1,79)
6,12** -10,19** -5,30*** 1,15
(2,94)
(4,81)
(1,09)
(1,25)
Hausman 159,18
(0,00)
0,59
9,20
(0,16)
0,39
84,60
(0,00)
0,24
42
42
42
R.sq.
within
Rho
Obs.
(1)
MLE
(2)
-0,24*** -0,06***
(0,03)
(0,01)
(3)
-0,02
(0,01)
(1)
(2)
(3)
-0,26*** -0,06*** -0,02
(0,03)
(0,01)
(0,01)
-0,01*
(0,01)
-0,01
(0,01)
0,011
(0,01)
-0,01*
(0,01)
-0,01
(0,01)
0,01
(0,01)
0,03*** 0,06***
(0,01)
(0,01)
-0,01*
(0,01)
-0,01
(0,01)
0,01
(0,01)
-0,01**
(0,01)
-0,01
(0,01)
0,01
(0,01)
0,77**
(0,36)
0,38***
(0,08)
0,09
(0,09)
-0,18* -0,17***
(0,10)
(0,07)
-0,02
(0,07)
-0,22** -0,18*** -0,07
(0,11)
(0,06)
(0,06)
0,02
(0,02)
0,16
(0,11)
0,06***
(0,02)
0,02
(0,02)
0,06**
(0,03)
-0,01
(0,01)
0,05**
(0,03)
-0,01**
(0,01)
0,03
(0,02)
0,01
(0,01)
3,21
(0,78)
0,02
3,22
(0,78)
0,06
11,28
(0,08)
0,09
10,13** -5,35***
(4,72)
(1,09)
0,01
(0,01)
0,01
(0,01)
-0,01
(0,01)
-0,01** -0,11*** -0,03*** 0,03*** -0,10*** -0,03*** 0,03***
(0,01)
(0,01)
(0,01)
(0,01)
(0,01)
(0,01)
(0,01)
1,38
(1,27)
8,07*** 7,08*** 4,01*** 8,94*** 7,16*** 4,85***
(1,74)
(1,21)
(1,11)
(1,90)
(1,23)
(1,09)
-41,26
-29,73
-48,01
0,45
0,21
0,19
0,43
0,27
0,96
0,24
0,48
0,77
0,22
0,45
0,81
0,14
0,94
0,76
0,25
0,96
0,89
42
42
42
235
235
235
235
235
235
257
257
257
257
257
257
110
Table 5.1. Empirical results after the national criteria – EU non-euro countries
Variables
Bulgaria
(1)
NPL
LIQ
RE
(2)
0,09*** 0,03***
(0,01)
(0,01)
0,01**
-0,01
(0,01)
(0,01)
Zalt
-0,02*
(001)
SIZE
(3)
-0,01
(0,01)
-0,01
(0,01)
(1)
MLE
(2)
(3)
(1)
Model specification
Czech Republic
RE
MLE
(2)
(3)
(1)
(2)
0,01
(0,02)
(1)
0,01
(0,01)
-0,02
(0,02)
0,01
(0,01)
0,01
(0,01)
-0,01
(0,01)
-0,01
(0,01)
-0,01
(0,01)
0,01*
(0,01)
0,01
(0,01)
0,01
(0,01)
0,01*
(0,01)
0,01
(0,01)
0,01
(0,02)
0,15***
(0,06)
0,04
(0,07)
-0,02
(0,07)
-0,07
(0,09)
0,04
(0,07)
0,02
(0,07)
0,01
(0,01)
0,49*** 0,05***
(0,02)
(0,01)
0,01
0,01
(0,01)
(0,01)
(3)
0,09*** 0,03***
(0,01)
(0,01)
0,01**
-0,01
(0,01)
(0,01)
-0,01
(0,01)
0,11*** 0,05***
(0,02)
(0,01)
-001
0,01
(0,01)
(0,01)
Croatia
RE
(2)
0,05***
(0,01)
-0,01
(0,01)
(3)
(1)
0,01
(0,01)
-0,02
(0,02)
0,01**
(0,01)
0,01
(0,01)
MLE
(2)
(3)
0,01
0,05*** (0,01)
(0,01)
-0,01
0,02***
(0,01)
(0,01)
-0,01
(0,01)
-0,01
(0,03)
0,02***
(0,01)
0,01
(0,02)
0,01
(0,02)
-0,02**
(0,01) 0,02***
(0,01)
-0,01
0,01
(0,03)
(0,02)
RGDP
0,07**
(0,03)
0,03
(0,02)
0,04*
(0,03)
0,07**
(0,03)
0,03
(0,02)
0,04*
(0,03)
0,01
(0,03)
0,01 -0,06*** -0,02
(0,02)
(0,02)
(0,03)
0,01
(0,02)
-0,05** 0,12*** 0,09***
(0,02) (0,03)
(0,02)
0,01
(0,02)
INF
0,02
(0,04)
0,06**
(0,03)
0,03
(0,03)
0,02
(0,04)
0,06***
(0,03)
0,03
(0,03)
-0,06
(0,07)
-0,01
(0,04)
0,09**
(0,05)
-0,04
(0,06)
-0,01
(0,04)
0,09**
(0,04)
-0,02
(0,07)
-0,01
(0,04)
0,09**
(0,04)
-0,02
(0,07)
-0,01
(0,04)
0,09***
(0,04)
-0,46
(0,93)
1,70*
(1,05)
7,13*** 2,79**
(1,54)
(1,36)
1,64*
(1,02)
-10,27
0,22
(1,40)
1,24
(1,16)
15,21***
(1,68)
0,06
(1,38)
2,12
(0,52)
16,96***
(1,79)
114,35
(0,00)
0,21
1,71
(0,94)
0,08
-14,52
8,67
(0,19)
0,11
35,63
(0,00)
0,26
56,67
(0,00)
0,30
c
1,63*** 1,64*** 4,68*** 1,66*** 1,69*** 4,70***
(0,62)
(0,49)
(0,62)
(0,61)
(0,49)
(0,62)
Hausman 12,89
R.sq.
within
Rho
Obs.
0,02*** 0,02*** 0,02*** 0,02*** 0,02**
(0,01)
(0,01)
(0,01)
(0,01)
(0,01)
-0,05
(0,10)
0,03
(0,09)
-0,86***
(0,13)
-0,04
(0,09)
-0,03
(0,11)
0,12*** 0,09***
(0,03)
(0,02)
0,02**
(0,01)
-0,99***
(0,13)
-0,01
(0,02)
(0,05)
0,40
45,95
(0,00)
0,28
14,16
(0,03)
0,09
0,40
0,54
0,75
0,45
0,65
0,77
0,05
0,82
0,96
0,42
0,78
0,99
0,19
0,52
0,89
0,17
0,64
0,96
199
199
199
199
199
199
207
207
207
207
207
207
272
272
272
272
272
272
0,07
111
Table 5.2. Empirical results after the national criteria – EU non-euro countries
Variables
Hungary
(1)
RE
(2)
(3)
-0,08** -0,08*** 9,47e-06
(0,03)
(0,01)
(0,02)
0,03*
-0,01 0,03***
LIQ
(0,02)
(0,01)
(0,01)
0,03 0,04***
0,01
Zalt
(0,02)
(0,01)
(0,01)
-0,01
0,05
-0,06
SIZE
(0,15)
(0,06)
(0,08)
0,01
0,04
0,09***
RGDP
(0,07)
(0,03)
(0,03)
0,01
0,01
0,04
INF
(0,12)
(0,05)
(0,05)
-0,44
0,11
4,41***
c
(2,68)
(1,09)
(1,43)
7,51
28,73
Hausman 7,81
(0,25)
(0,28)
(0,01)
0,03
0,22
0,14
R.sq.
NPL
(1)
MLE
(2)
(3)
(1)
Model specification
Poland
RE
MLE
(2)
(3)
(1)
(2)
Romania
(3)
(1)
RE
(2)
(3)
(1)
-0,08** -0,08*** -0,01
-0,39
0,01
0,01
-0,39
0,01
0,01 -0,03** -0,03*** -0,01
-0,04**
(0,03) (0,01)
(0,01)
(0,25)
(0,01) (0,02)
(0,24)
(0,01) (0,03) (0,02)
(0,01)
(0,01)
(0,02)
0,02
-0,01 0,02*** -0,06
-0,01
-0,01
-0,06
-0,01
-0,01 0,05*** 0,01***
0,01
0,05***
(0,02) (0,01)
(0,01)
(0,09)
(0,01) (0,01)
(0,09)
(0,01) (0,01) (0,01)
(0,01)
(0,01)
(0,01)
0,03 0,03***
0,01
0,06
0,03*** 0,02
0,06
0,03*** 0,02
-0,01
-0,01 -0,02*** -0,01
(0,02) (0,01)
(0,01)
(0,12)
(0,01) (0,03)
(0,11)
(0,09) (0,03) (0,01)
(0,01)
(0,01)
(0,01)
-0,01
0,05
-0,08
-0,16
0,09
-0,04
-0,16
0,09
-0,11 0,41***
0,07 -0,15*** 0,35***
(0,15) (0,06)
(0,07)
(0,93)
(0,09) (0,12)
(0,91)
(0,08) (0,19) (0,09)
(0,05)
(0,05)
(0,11)
0,01
0,03
0,09*** -0,29 0,09*** -0,02
-0,29 0,09*** -0,02 0,12*** 0,05***
0,01
0,11***
(0,07) (0,03)
(0,03)
(0,64)
(0,03) (0,03)
(0,62)
(0,03) (0,05) (0,03)
(0,02)
(0,01)
(0,03)
0,01
-0,01
0,03 -2,54*** 0,01
-0,07* -2,54*** 0,01
-0,07 0,05*** 0,02*** 0,04*** 0,05***
(0,12) (0,04)
(0,05)
(0,84)
(0,04) (0,04)
(0,81)
(0,04) (0,07) (0,02)
(0,01)
(0,01)
(0,02)
-0,45
0,31
4,96*** 28,25*
-0,81 4,28** 28,25*
-0,86
5,03 -8,39*** -1,25 4,84*** -7,88***
(2,64) (1,09)
(1,49) (17,38) (1,46) (2,12) (16,86) (1,39) (3,21) (1,63)
(0,84)
(0,87)
(1,75)
6,73
6,19 -188,94
51,46
26,27
52,21
(0,35)
(0,40)
(0,01)
(0,01)
(0,01)
0,12
0,12
0,13
0,17
0,22
0,33
MLE
(2)
(3)
-0,03***
(0,01)
0,02***
(0,01)
-0,01**
(0,01)
-0,01
(0,06)
0,05***
(0,02)
0,02**
(0,01)
-0,39
(0,90)
-0,01
(0,01)
0,01
(0,01)
-0,02***
(0,01)
-0,16***
(0,05)
0,01
(0,01)
0,04***
(0,01)
4,92***
(0,88)
within
0,18
0,29
0,77
0,19
0,43
0,92
0,55
0,93
0,49
0,83
0,12
0,32
0,71
0,23
0,56
0,76
Rho
148
148
148
148
148
148
119
119
119
119
119
119
219
219
219
219
219
219
Obs.
variable, namely: (1) – ROAA; (2) - ROAE; (3 )- NIM. For Hausman test in parentheses we have the probability. (Source: Author’s calculations)
112
Table 6. Empirical results after the size of the financial institutions
Variables
Model specification
Medium
Big
(1)
RE
(2)
(3)
NPL
0,01
(0,01)
-0,01
(001)
0,01
(0,01)
LIQ
0,01**
(0,01)
0,01
(001)
0,01 0,01*** 0,01**
(0,01)
(0,01)
(0,01)
0,01** 0,01**
0,01
(0,01)
(0,01)
(0,01)
8,82
(0,18)
0,01
14,40
(0,03)
0,04
Zalt
SIZE
RGDP
INF
c
Hausman
(1)
MLE
(2)
(3)
0,01
(0,01)
-0,01
(0,01)
0,01
(0,01)
(1)
RE
(2)
(3)
-0,01
(0,01)
0,03*
(0,02)
-0,01
(0,01)
Small
(1)
MLE
(2)
(3)
-0,01
(0,01)
0,03*
(0,02)
-0,01
(0,01)
(1)
0,14***
(0,04)
0,01** -0,04
(0,01) (0,04)
0,01
0,03
(0,01) (0,05)
RE
(2)
-0,01
(0,01)
(3)
(1)
-0,01
(0,01) 0,14***
(0,03)
-0,01
-0,04
(0,01) (0,03)
-0,01
0,01
(0,01) (0,04)
MLE
(2)
(3)
-0,01
(0,01)
0,01
(0,01)
0,01 0,01*** 0,02**
-0,03
0,01** 0,02**
-0,02
0,01
0,01
0,01
(0,01) (0,01) (0,01)
(0,18)
(0,01) (0,01)
(0,18)
(0,01)
(0,01) (0,01)
0,01** 0,01** 4,34e-0,01
0,01
0,01
-0,01
0,01
0,01
0,01
(0,01) (0,01)
06
(0,01)
(0,01) (0,01)
(0,01)
(0,01)
(0,01) (0,01)
(0,01)
-0,01
-0,03
-0,01
-0,03
0,03
3,81**
0,04
3,64**
-0,72
-0,06
0,03
-0,81*
-0,06
-0,09
(0,016) (0,03) 0009*** (0,16) (0,03) 0,09*** (0,08)
(1,69) 0,08*** (0,08)
(1,68) 0,08*** (0,47) (0,08) (0,11) (0,44) (0,08) (0,09)
(0,03)
(0,03)
(0,02)
(0,02)
0,21*** 0,04*** 0,01 0,20*** 0,04*** 0,01 0,13*** 6,21*** 0,02*** 0,13*** 6,18*** 0,02*** 0,65*** 0,12*** 0,08** 0,67*** 0,12*** 0,07**
(0,07) (0,01)
(0,01)
(0,07) (0,01) (0,01) (0,03)
(0,67)
(0,01) (0,03)
(0,66)
(0,01) (0,17) (0,03) (0,04) (0,16) (0,03) (0,03)
-0,04
0,04*** -0,04
0,04*** -0,01
0,39
0,01
-0,01
0,43
0,01
0,51** -0,08** -0,02 -0,45** -0,08** -0,02
(0,03) 0,01*** (0,01)
(0,03) 0,01*** (0,01) (0,01)
(0,29)
(0,01) (0,01)
(0,29)
(0,01) (0,22) (0,04) (0,05) (0,19) (0,04) (0,04)
(0,01)
(0,01)
-0,45 2,79*** 6,31*** -0,45 2,84*** 6,34*** -0,89 166,77*** 5,36*** -0,91 168,87*** 5,36*** 9,75*
-0,19
2,28* 11,11** -0,05 2,53**
(2,55) (0,50)
(0,56)
(2,54) (0,51) (0,58) (1,13)
(25,57)
(0,41) (0,11)
(25,66)
(0,42) (6,03) (1,09) (1,34) (5,54) (1,04) (1,23)
-15,15
11,45
(0,08)
0,02
358,95
(0,01)
0,08
56,34
(0,01)
0,03
4,53
(0,61)
0,38
2,87
(0,82)
0,41
19,26
(0,01)
0,06
0,09
R.sq.
within
0,86
0,93
0,88
0,95
0,26
0,57
0,89
0,21
0,62
0,91
0,14
0,55
0,39
0,49
Rho
936
936
936
936
936
936
1176
1176
1176
1176
1176
1176
67
67
67
67
67
67
Obs.
113
Table 7.1. Empirical results after the specialization of the financial institutions
Variables
Model specification
Cooperative
Commercial
(1)
NPL
LIQ
Zalt
SIZE
RGDP
INF
c
RE
(2)
(3)
(1)
MLE
(2)
(3)
(1)
-0.01
-0.01 7.71e-06 -0.01
-0.01 6.64e-06 0.06
(0.01)
(0.01)
(0.01)
(0.01)
(0.01)
(0.01)
(0.08)
0.01***
0.01
0.01
0.01***
0.01
0.01
0.02
(0.01)
(0.01)
(0.01)
(0.01)
(0.01)
(0.01)
(0.02)
0.02*** 0.01*** 0.01*** 0.02*** 0.01*** 0.01*** -0.04***
(0.01)
(0.01)
(0.01)
(0.01)
(0.01)
(0.01)
(0.01)
0.04 0.04*** -0.06*** 0.05
0.03 -0.06*** -0.40
(0.08)
(0.02)
(0.02)
(0.08)
(0.02)
(0.02)
(0.27)
0.17*** 0.07*** 0.02** 0.17*** 0.07*** 0.02**
-0.05
(0.05)
(0.01)
(0.01)
(0.05)
(0.01)
(0.01)
(0.06)
-0.01
-0.01 0.01*** -0.01
-0.01 0.01*** -0.03*
(0.02)
(0.01)
(0.01)
(0.02)
(0.01)
(0.01)
(0.02)
-1.76
0.25 5.56*** -1.82
0.55* 5.59*** 7.24*
(1.21)
(0.28)
(0.37)
(1.18)
(0.29)
(0.38)
(4.01)
Hausman 10.32
(0.11)
0.01
214.04
(0.01)
0.05
21.43
(0.01)
0.03
48.19
(0.01)
0.28
RE
(2)
-0.13**
(0.06)
0.04***
(0.01)
0.01
(0.01)
-0.48**
(0.21)
0.07
(0.05)
-0.02
(0.01)
7.17**
(3.19)
1.87
(0.93)
0.56
(3)
(1)
Investment
MLE
(2)
-0.20***
0.06 -0.13***
(0.08)
(0.07)
(0.05)
0.01
0.02 0.04***
(0.02)
(0.02)
(0.01)
0.12*** -0.04*** 0.01
(0.02)
(0.01)
(0.01)
1.33*** -0.40* -0.48***
(0.29)
(0.23)
(0.18)
-0.01
-0.05
0.07*
(0.07)
(0.05)
(0.04)
0.01
-0.03** -0.01*
(0.02)
(0.01)
(0.01)
7.24** 7.17***
17.04*** (3.43)
(2.72)
(4.33)
14.25
(0.03)
0.36
(3)
(1)
RE
(2)
-0.20***
(0.07)
0.01
(0.02)
0.12***
(0.01)
1.33***
(0.25)
-0.01
(0.06)
0.01
(0.02)
17.04***
(3.70)
0.18
(0.22)
-0.03
(0.05)
0.22**
(0.09)
2.15***
(0.75)
0.62**
(0.33)
-0.68*
(0.43)
-29.86**
(13.28)
0.03
(0.04)
0.01
(0.01)
0.04**
(0.02)
0.34***
(0.14)
0.05
(0.05)
-0.06
(0.07)
-4.30*
(2.46)
10.37
(0.11)
0.33
7.44
(0.28)
0.19
(3)
(1)
MLE
(2)
0.06
0.18
0.03
(0.05) (0.21)
(0.04)
-0.01
-0.03
0.01
(0.01) (0.05)
(0.01)
0.05* 0.22*** 0.04**
(0.02) (0.09)
(0.02)
-0.01 2.15*** 0.34***
(0.16) (0.69)
(0.13)
-0.01 0.62**
0.05
(0.06) (0.31)
(0.05)
-0.01
-0.68*
-0.06
(0.08) (0.39)
(0.06)
1.68
-4.30*
(2.72) 29.86*** (2.30)
(12.32)
1.20
(0.98)
0.08
(3)
0.05
(0.04)
-0.01
(0.01)
0.03
(0.02)
0.03
(0.14)
-0.01
(0.05)
0.02
(0.07)
1.89
(2.40)
R.sq.
within
0.05
0.65
0.92
0.04
0.75
0.93
0.89
0.81
0.89
0.91
Rho
1727
1727
1727
1727
1727
1727
26
26
26
26
26
26
50
50
50
50
50
50
Obs.
114
Table 7.2. Empirical results after the specialization of the financial institutions
Variables
(1)
NPL
LIQ
Zalt
SIZE
RGDP
INF
c
Hausman
Real estate & mortgage
RE
MLE
(2)
(3)
(1)
(2)
0.02
-0.09* -0.15*** -0.03 -0.09*
(0.04) (0.05)
(0.06) (0.05) (0.05)
-0.01 -0.04*** -0.01
-0.01 -0.03**
(0.01) (0.01)
(0.01) (0.01) (0.01)
0.01 0.03*** 0.03*** 0.01 0.03***
(0.01) (0.01)
(0.01) (0.01) (0.01)
0.01
(0.08)
-0.02
(0.05)
0.02
(0.08)
0.48
(1.58)
-3.64
0.10
0.06
0.07
(0.08)
(0.09) (0.08)
-0.06
0.07
-0.01
(0.05)
(0.06) (0.05)
-0.19** -0.28*** 0.02
(0.08)
(0.09) (0.07)
3.42** 5.04*** -0.71
(1.67)
(1.85) (1.58)
8.51
(0.20)
0.01
7.93
(0.24)
0.72
0.08
(0.08)
-0.07
(0.05)
-0.15*
(0.08)
2.63
(1.65)
(3)
(1)
RE
(2)
-0.05
(0.05)
0.01
(0.01)
0.02
(0.01)
-0.03
(0.05)
0.01
(0.04)
-0.03
(0.05)
-0.03***
(0.01)
0.01
(0.01)
0.04***
(0.01)
Model specification
Savings
MLE
(3)
(1)
(2)
10.73
(0.09)
0.20
-0.04
(0.05)
-0.01
(0.03)
-0.03
(0.03)
-0.03***
(0.01)
0.01
(0.01)
0.04***
(0.01)
(3)
(1)
-0.02
(0.02)
0.01
(0.02)
0.06
(0.04)
-0.09***
(0.03)
001
(0.01)
0.01
(0.01)
-0.01 -0.09*** -0.02
(0.01)
(0.03)
(0.01)
0.02***
0.01
0.01
(0.01)
(0.01)
(0.01)
0.01***
0.01
8.07e(0.01)
(0.01)
06
(0.01)
-0.13*
0.22
0.26*** -0.14
0.29
0.26*** -0.19 0.43*** 0.19*** -0.23*** 0.42*** 0.19**
(0.07)
(0.38)
(0.09)
(0.15)
(0.22)
(0.09)
(0.25)
(0.14)
(0.08)
(0.08)
(0.15)
(0.08)
0.04
0.46*** 0.09***
0.01
0.47*** 0.09***
0.02
0.06
0.02
0.01
0.05
0.02
(0.04)
(0.13)
(0.03)
(0.03)
(0.12)
(0.03)
(0.06)
(0.04)
(0.02)
(0.02)
(0.04)
(0.02)
-0.10
-0.18**
-0.02
0.01
-0.18**
-0.02
0.02 -0.11*** -0.02** 0.03*** -0.11*** -0.02**
(0.07)
(0.09)
(0.02)
(0.02)
(0.08)
(0.02)
(0.04)
(0.02)
(0.01)
(0.01)
(0.02)
(0.01)
5.08***
-1.08
-2.69** 7.68*** -1.76
-2.75** 7.61*** -3.76**
0.10
5.64*** -3.69*
0.17
(1.67)
(4.97)
(1.27)
(2.18)
(3.06)
(1.21)
(3.22)
(1.99)
(1.36)
(1.09)
(2.05)
(1.37)
1.41
(0.97)
0.21
-0.02
(0.01)
-0.01
(001)
0.03
(0.03)
Other financial institutions
RE
MLE
(2)
(3)
(1)
(2)
1.91
(0.93)
0.05
13.61
(0.03)
0.19
-0.01
(0.01)
0.01
(0.01)
0.01
(0.01)
9.57
(0.14)
0.07
496.84
(0.01)
0.15
(3)
-0.01
(0.01)
0.01***
(0.01)
0.01***
(0.01)
-0.29***
(0.08)
0.01
(0.02)
0.03***
(0.01)
6.53***
(1.14)
0.01
R.sq.
within
0.18
0.27
0.72
0.29
0.43
0.93
2.37e-55
0.39
0.80
0.25
0.94
0.70
0.31
0.94
0.86
Rho
50
50
50
50
50
50
95
95
95
95
95
95
231
231
231
231
231
231
Obs.
115
MONETARY POLICY IN THE CONTEXT OF AN
ENLARGED EUROPEAN UNION
IONUŢ MARIUS CROITORU
Romanian Academy, National Institute for Economic Research “Costin C.
Kiriţescu”
Bucharest, Romania
[email protected]
Abstract
Greater coordination of fiscal policy should provide support EU policy objectives
through wider fiscal policies of the Member States, according to the latest provisions of
the Europe 2020 strategy is well one aspect of fiscal policy that is treated as a priority
in the work program the EU's evasion and tax fraud.
Member States shall adopt and publish, by 1 January 2016, the laws, regulations and
administrative provisions necessary to comply with this Directive. They shall forthwith
communicate to the Commission the text of those provisions. When Member States
adopt those provisions, they shall contain a reference to this Directive or be
accompanied by such a reference on the occasion of their official publication. Member
States shall determine how such reference is to be made.
Keywords: Enlarged EU, Tax policy, Council Directive
Classification JEL: E61, E62
1. INTRODUCTION
Defining general tax policy
Fiscal sovereignty of Member States is among their fundamental sovereign
rights in this area have only limited powers conferred Union. At EU level, fiscal
policy is geared towards the smooth functioning of the single market; EU
efforts to further harmonization in this area focuses therefore mainly on indirect
taxation.
In the process of EU accession of each Member State, which had different
durations depending on the objectives, involved measures had to be taken by
these countries to adapt to local and central administration for compatibility
with specific operating mechanisms European institutions derived from
European legislation (Nicolaescu, 2012).
116
Financial public phenomens are always complex phenomens, thereby
realizing that they are the result of interactions of any kind, making intervence a
wide variety of structures, which makes them very sensitive to changes taking
place in society (Brezeanu, 1999).
The European Union is stepping up its fight against tax evasion and tax
fraud, which constitutes a threat to fair competition and is the cause of a major
budget deficit. Under the Treaty, the tax measures should be adopted by
Member States unanimously. While fiscal policy is influenced largely by the
European Court of Justice, the European Parliament has in this respect than the
right to be consulted, except budgetary matters, where, as the authority budget
Parliament shares decision-making powers with the Council.
2. METHODOLOGY
Legal basis - Articles number 110-115 of the Treaty on the Functioning of
the European Union (TFEU).
Objectives
EU tax policy strategy is explained in the Commission Communication
"Tax policy in the European Union Priorities for the years ahead" (COM
(2001) 0260). Each Member State is free to choose the system of taxation which
it considers most appropriate, provided they comply with EU rules. In this
framework, the main priorities of EU tax policy are removing tax obstacles that
hinder cross-border economic activity, combating harmful tax competition and
promoting broad cooperation in the tax administrations to ensure control over
fraud and to combat it.
Commission Communication "Tax policy in the European Union
Priorities for the years ahead" provide that the Community must ensure that
tax policy underpins the Lisbon goals, that supports the continued success and
development of the internal market, contributes to a durable reduction in the
overall tax burden, reinforces other agreed EU policies and supports the
modernisation of the European social model. In recent years, there has been an
increased trend towards closer cooperation on tax policy. The priority now is to
ensure the smooth functioning of the internal market and EMU. In particular,
the EU must focus on the practical problems for individuals and businesses
operating within the internal market, and the level of coordination between
Member States necessary to deal with these problems. This work must be
accompanied by steps to assist Member States in combating fraud and tax
evasion. Double taxation due simply to the cross-border nature of economic
activity cannot be accepted, but its elimination should not create opportunities
for tax avoidance and evasion.
Greater coordination of fiscal policy should provide support EU policy
objectives through wider fiscal policies of the Member States, according to the
latest provisions of the Europe 2020 strategy, which adopted by the European
Council in June 2010, aims at establishing a smart, sustainable and inclusive
economy with high levels of employment, productivity and social cohesion.
117
Eurostat has published in 2 March, the 2015 edition of the publication
“Smarter, greener, more inclusive?”, which present past trends and latest
statistics useful to support the Europe 2020 strategy and to back up the
monitoring towards its headline targets.
After thematic chapters of publication follows a country profile for each
Member State.These country profiles provides an overview of the situation in
terms of achieving national objectives of the Europe 2020. National profiles
provide a table for each Member State with national indicators 2020, illustrates
the situation in each Member State as a radar chart, showing the distance
between the latest data and national targets defined.
3.
RESULTS
Achievements
Commission Communication "Removing cross-border tax obstacles for
EU citizen" (COM (2010) 0769) outlines the most serious tax problems facing
EU citizens in cross-border situations (eg, discrimination, double taxation,
difficulties in refunding and difficulties in obtaining information on foreign tax
rules). Eliminating tax obstacles can play an important role in strengthening EU
citizens' ability and confidence to cross borders to work, retire, invest and buy
goods and services.
”Commission proposes for its part :
• Actively pursue complaints and ensure greater transparency and
information for citizens on the results of complaints about Member States’ tax
laws and infringement cases in the tax field. This will be done in particular by
publishing information on the European website on an annual basis;
• Access easier to the” Commission's Europe Direct and Your Europe
citizens' advice services” and ensure that these services can deal with tax related
questions and that citizens can more directly get help and advice. Information
available on the” Your Europe” website will be provided in a user-friendly
format;
• Present a detailed analysis of double taxation problems in 2011 and
work on a definitive solution for 2012, on the basis of the results of an impact
assessment;
• Propose solutions to cross-border inheritance tax problems in 2011, on
the basis of the results of an impact assessment;
• Propose solutions in 2012 to problems arising from the taxes applied to
cross border payments of dividends, on the basis of the results of an impact
assessment;
• Propose solutions concerning the cross-border problems for EU
citizens in the fields of passenger car taxation and online purchases of goods
and services”.
A series of coordinated actions to eliminate tax obstacles and inefficiencies
in the tax were implemented in areas such as corporate taxation, VAT, excise
and taxation of cars.
118
Also adopted measures to combat tax evasion through Council Directive
on taxation of savings income in the form of interest payments of 3 June
2003 (2003/48/EC) and the directives governing mutual assistance between tax
administrations. In addition, the European Commission adopted a more
proactive approach in terms of initiating legal proceedings where national tax
rules or practices do not comply with the treaty.
Among the major policy initiatives in the field of indirect taxation are:
GREEN PAPER, On the future of VAT, Towards a simpler, more robust
and efficient VAT system (COM (2010) 0695)0, followed by a communication
on the reform of the VAT (COM ( 2011) 0851), a proposal for a Directive
(COM (2011) 0169), accompanied by a Communication (COM (2011) 0168),
which amends the Energy Taxation Directive (Directive 2003/96/EC) in order
to achieve a tax Smarter energy in the EU; a proposal for a Common
Consolidated Corporate Tax Base (CCCTB) with uniform rules designed to
enable companies operating in the EU to calculate their taxable profits
(COM(2011)0121); a proposal for a financial transactions tax
(COM(2011)0594); Directive (2008/7/EC) on the capital increase; Directive
(1999/62/EC) on the charging of heavy goods vehicles for the use of
infrastructure; a proposal for a directive of the Commission on car taxes
(COM(2005)0261); Directive (2006/112/EC) on the common system of value
added tax; and numerous individual measures on excise duties (eg alcohol,
tobacco and energy).
Policy measures adopted in the field of direct taxation focused mainly on
the harmonization of corporate taxation rules through legislation are such as:
•
Directive Concerning mutual assistance by the competent Authorities of
the Member States in the field of direct Taxation (Directive 77/799/EEC)
• Recovery Directive (Directive 76/308/EEC)
• The Merger Directive - common system of Taxation applicable to
mergers, divisions, Transfers of Assets and exchanges of shares Concerning
companies of different Member States (Directive 90/434/EEC)
• Directive on the common system of Taxation applicable in the case of
parent companies of different Member States and Subsidiaries (Directive
90/435/EEC)[27] CONVENTION on the elimination of double Taxation in
connection with the adjustment of profits of Associated Enterprises
(90/436/EEC)
• Directive (2003/49/EC) on the common system of Taxation applicable
to interest and royalty Payments made the Associated companies of different
Member between States.
Among the most important measures are related to personal taxation
Taxation Directive on savings income in the form of interest of Payments
(Directive 2003/48/EC) and on Dividend Taxation of Individuals
communications in the Internal Market (COM (2003) 0810) and The
elimination of tax obstacles to the cross-border Provision of Occupational
119
Pensions (COM (2001) 0214). The Court of Justice has adopted numerous
resolutions on direct taxation of EU citizens.
One aspect of fiscal policy that is treated as a priority in the work program
of the EU is to combat tax evasion and tax fraud. In the EU, every year there are
one billion euro loss due to tax evasion and fraud, which is a threat to fair
competition and a huge loss of tax revenue. To combat tax fraud, the
Commission adopted an Action Plan to strengthen the Year fight against tax
fraud and tax evasion (COM (2012) 0722) and two recommendations: one on
on aggressive tax planning (C (2012) 8806) and another on Measures Intended
to Encourage promotion regarding Third countries to Apply minimum
Standards of good governance in tax Matters (C (2012) 8805). This was the
result of a communication in June 2012 on the concrete ways to reinforce the
fight against tax fraud and tax evasion in relation to third Including Countries
(COM (2012) 0351)
In May 2013, the Council adopted conclusions on tax evasion and tax
fraud, which highlights the need to combine efforts at national, EU and global
and confirming support for the activities of the G8, the G20 and OECD on
automatic exchange of information. On the same occasion, the Council
discussed a revision of the Directive on the taxation of savings following the
broadening of its scope to include all savings income and products that generate
interest. On 24 March 2014, the Council adopted a Directive (2014/48/EC) hich
amends the EU Savings Tax Directive (2003/48 / EC). Directive as amended
will broaden the scope of current rules to remove certain loopholes,
strengthening EU rules regarding the exchange of information on savings
income and allowing Member States to combat in an effective tax evasion and
fraud.
This Directive shall require the Member States:
-Member States shall adopt and publish, by 1 January 2016, the laws,
regulations and administrative provisions necessary to comply with this
Directive.
-They shall forthwith communicate to the Commission the text of those
provisions. When Member States adopt those provisions, they shall contain a
reference to this Directive or be accompanied by such a reference on the
occasion of their official publication.
-Member States shall determine how such reference is to be made.
-Member States shall communicate to the Commission the text of the main
provisions of national law which they adopt in the field covered by this
Directive.
4. CONCLUSIONS
Fiscal Union should not mean a unification of all taxes.Fiscal Union should
involve allowing federal control over state budgets, as happens lately in Europe
through initiatives such as the European Semester, Six Pack legislation, etc. To
be credible (previous approaches) such checks should be accompanied by
120
penalties that may be imposed by a majority (not unanimity) Member States'
fiscal union.
ACKNOWLEDGEMENT
This paper is supported by the Sectorial Operational Programme Human
Resources Development (SOP HRD), financed from the European Social Fund
and by the Romanian Government under the contract number SOP
HRD/159/1.5/S/136077.
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[8] European Commission (2010). Commission Communication (COM(2011)0851)
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2020
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121
[11] European Commission (2001). Tax policy in the European Union Priorities for the
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occupational
pensions.
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Retrieved
from
[13] Eurostat. Retrieved from
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http://ec.europa.eu/eurostat/product?code=KS-EZ-14-001
[15] Nicolaescu, E. (2012). Fiscalitate comparată. București: Editura Pro Universitaria.
[16] ***CONVENTION on the elimination of double taxation in connection with the
adjustment of profits of associated enterprises (90/436/CEE). Retrieved from
http://eur-lex.europa.eu/resource.html?uri=cellar:ba007830-4ed1-43f9-8c98c397c79373d8.0008.02/DOC_1&format=PDF
[17] ***Council Directive (2014/48/CE) amending Directive 2003/48/EC on taxation
of savings income in the form of interest payments. Retrieved from http://eurlex.europa.eu/legalcontent/EN/TXT/PDF/?uri=CELEX:32014L0048&qid=1429703050194&from=R
O
[18] ***Council Directive (COM (2011) 0169) amending Directive 2003/96/EC
restructuring the Community framework for the taxation of energy products and
electricity. Retrieved from
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[19] ***Council Directive (2003/96/CE) restructuring the Community framework for
the taxation of energy products and electricity. Retrieved from http://eurlex.europa.eu/legalcontent/EN/TXT/PDF/?uri=CELEX:32003L0096&qid=1429701247087&from=R
O
[20] ***Council Directive (COM(2011)0121) on a Common Consolidated Corporate
Tax Base. Retrieved from
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IN
[21] ***Council Directive (2008/7/CE). Concerning indirect taxes on the raising of
capital. Retrieved from
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O
[22] ***Council Directive (2006/112/CE). On the common system of value added tax.
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O
122
[23] ***Council Directive (2003/48/CE). On taxation of savings income in the form of
interest payments. Retrieved from
O
[24] ***Council Directive (2003/49/CE). On a common system of taxation applicable
to interest and royalty payments made between associated companies of different
Member
Stat.
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from
http://eur-lex.europa.eu/legalcontent/EN/TXT/PDF/?uri=CELEX:02003L004920070101&qid=1429702271321&from=RO
[25] ***Council Directive (2003/48/CE). On taxation of savings income in the form of
interest
payments.
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from
http://eur-lex.europa.eu/legalcontent/EN/TXT/PDF/?uri=CELEX:02003L004820140415&qid=1429702410127&from=RO
[26] ***Council Directive (1999/62/CE). On the charging of heavy goods vehicles for
the use of certain infrastructures. Retrieved from http://eur-lex.europa.eu/legalcontent/EN/TXT/PDF/?uri=CELEX:31999L0062&qid=1429701429593&from=R
O
[27] ***Council Directive (90/434/CEE). On the common system of taxation
applicable to mergers, divisions, transfers of assets and exchanges of shares
concerning companies of different Member States. Retrieved from http://eurlex.europa.eu/legalcontent/EN/TXT/PDF/?uri=CELEX:31990L0434&qid=1429701986603&from=R
O
[28] ***Council Directive (90/435/CEE). On the common system of taxation
applicable in the case of parent companies and subsidiaries of different Member
States.
Retrieved
from
O
[29] ***Council Directive (77/799/CEE) Concerning mutual assistance by the
competent authorities of the Member States in the field of direct taxation.
Retrieved from
O
[30] ***Council Directive (76/308/CEE) on mutual assistance for the recovery of
claims resulting from operations forming part of the system of financing the
European Agricultural Guidance and Guarantee Fund, and of agricultural levies
and
customs
duties.
Retrieved
from
http://eur-lex.europa.eu/legalcontent/EN/TXT/PDF/?uri=CELEX:31976L0308&from=en
[31] ***Proposal for a Council Directive (COM(2011)0594) on a common system of
financial transaction tax and amending Directive 2008/7/EC. Retrieved from
http://www.ipex.eu/IPEXLWEB/dossier/document.do?code=COM&year=2011&number=0594
[32] ***Proposal for a Council Directive (COM(2005)0261). On passenger car related
taxes. Retrieved from
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123
[33] ***Treaty on European Union (Treaty of Rome 1957). Retrieved from http://eurlex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:12012M/TXT&from=RO
[34] ***Treaty of fiscal governance. Retrieved from http://europa.eu/rapid/pressrelease_DOC-12-2_en.htm
[35] ***Treaty on the Functioning of the European Union. Retrieved from http://eurlex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:12012E/TXT&from=EN
[36] http://ec.europa.eu
124
IS THE BANKING UNION CATERING FOR
SUSTAINABILITY ORIENTED BANKING SYSTEM?
LILIANA EVA DONATH
West University of Timisoara
Timisoara, Romania
[email protected]
VERONICA MIHUȚESCU CERNA
Timisoara, Romania
[email protected]
IONELA OPREA
Timisoara, Romania
[email protected]
Abstract
Sustainable development has raised, in recent decades, the interest of academics,
decision makers and businesses as well. As a multifaceted concept, it cannot exclude the
financial and banking institutions as main intermediaries that channel funds and
support an efficient resource allocation in the economy. The new paradigm comes to
meet the challenges induced by the equity requirements as the main pillar of future
development trends.
The paper argues that, in a globalised market system, the architecture of the financial
institutions and the monetary policy stance become significant in inducing a
sustainability oriented banking policy, and that the Banking Union can play a major
role in shaping the future sustainable development trends.
Keywords: sustainable development, resource allocation, Banking Union
JEL Classification: E50, F33
1. INTRODUCTION
Sustainable development has become one of the major themes in modern
economies, deeply affected by negative externalities, frequent crises, shorter
cycles and the apparent inability to resume growth without affecting future
generations. Under these circumstances, the role of banking institutions has
become more important since they can induce, through specific policies, a
125
sustainability oriented behaviour.
Mainstream economic literature argues that a sound financial sector is able
to support sustainable development by funding productive investments
(Schumpeter, 1942). Further on Pagano (Pagano, 1993) shows that there are
three channels through which a sound banking system can induce durable
growth: 1) by increasing the productivity of investments, 2) by reducing the
transaction costs, 3) by triggering or inhibiting savings. Greenwood and
Jovanovic (Greenwood & Jovanovic 1990), Levine (1998) also argue that
efficient markets are the main pillars of productive investments and growth.
Calderon and Liu’s 2003 study shows the importance of financial consolidation
on sustainable development and the strong correlation between economic and
financial growth.
A shift in the classical paradigm is noticeable in Bouma and Jeucken works
(Bouma and Jeucken, 1999) that introduce social and environmental
responsibility in banking operations as well as sustainable development in bank
policies. They identify four major stages in incorporating sustainability in
banking activity: defensive, preventive, offensive and sustainable stages (fig. 1).
Figure 1. Stages towards sustainable banking
(Source Jeucken, M.A. & Bouma, J.J., 1999)
Under post-crises circumstances, it has become obvious that banks are to
abandon the one sided profit driven business perspective and pursue the holistic,
more equitable approach to support sustainable investments (Pisano and
Martinuzzi, 2012).
In order to accelerate the transition towards the new business path, the
monetary authorities as well as the new architecture of the European financial
institutions, mainly the Banking Union, should create the appropriate frame for
a sustainability oriented banking activity.
2. SUSTAINABLE BANKING
2.1 The principles of sustainable banking
According to Lydenberg (2007), there is an intense debate in the financial
and business world on the negative externalities that financial markets can
126
induce in the real economy, the environment and the society. The most
important spillover effects were identified by Tonello (Tonello, 2006) as:
- the short term business approach that deepens volatility of the financial
markets and the instability of financial institutions;
- short term investment strategies require short term business decisions
embedding negative effects, themselves.
Since the financial sector considers profit maximisation as its main
objective, there is little concern about the quality of financial assets and, thus, a
sustainable approach is often disregarded as well as the negative externalities
that impact on the economic and financial decisions of businesses. Moreover,
Schmidheiny and Zorraquín (Schmidheiny & Zorraquín, 1996) show that the
financial and accounting reports should clearly and transparently disclose the
potential risks and the business opportunities as well.
In addition, a sustainable approach in the financial and banking business
recognises that most of the transactions take place under bounded rationality,
selflessness and willpower. Under sustainability requirements, cautiousness and
good governance are among its most important principles.
Therefore, the financial market, at large, should reconsider the underlying
concept of efficiency by embracing a holistic long term perspective of
investments effectiveness that transgresses the present short term, one-sided
approach. Since banks are intermediaries that have the ability to channel
resources towards sustainable investments in large economic and social areas,
they may play an important part in reducing asymmetric information, moral
hazard and risk contagion.
In recognition of the ability of the banking sector to influence
quantitatively and qualitatively economic and financial behaviours on the
market, The Global Association of Value Based Banks (GAVB) has published
the main principles of sustainable banking:
- the three folded (economic, social and environmental) approach is at the
core of the business model,
- long term relations with the clients to understand their needs and risk
approach, a long term shock resistant business view,
- inclusive and transparent governance, reshaping the bank business culture
(Global Alliance for Banking on Values, 2012).
The value based banking model is concentrating on the needs of the real
economy, supports growth, considers the best interest of the society and pursues
stable, long term gains.
2.2 Sustainability oriented banking models
Sustainability oriented banks are considered those that provide benefits for
the industry, for investors and clients. It is proven that these banks constantly
provide financial products that support the development of the real economy,
concentrating on dynamic small and medium size companies, but also on
environmental and community needs.
127
As statistics show, sustainability oriented banks have recorded a significant
stability over the cycle compared to the Globally Systemically Important
Financial Institutions (GSIFI) considered too big to fail. According to the
GAVB study during 2007-2010 sustainability oriented banks proved to be more
solid financially.
Figure 2. Loans/asset ratio
Figure 3. Deposits/Asset ratio
Sustainable banking
80
60
40
60
40.7
39.8
41.6
42
40
20
0
Sustainable banking
80
42.8
41.1
20
72.4
Over the
cycle
71.7
73.2
0
Post-crisis Pre-crisis
Over the
cycle
(Source: GABV, 2012)
73.1
71.9
Post-crisis Pre-crisis
Figure 4. Capital/asset ratio
0.4 Sustainable banking
72.5
Figure 5. Return on assets
GSIFIs
0.8 Sustainable banking
0.3
0.6
0.2
0.4
0.1
0.2
0
0
Over the Post-crisis Pre-crisis
cycle
GSIFIs
Over the Post-crisis Pre-crisis
cycle
The stability of sustainable banks over the cycle is proven by the level of
post crises returns (fig. 5) and a lower volatility (fig. 4) than the systemically
important banks.
128
Figure 6. Indicators - annual growth rates
25
20
15
Sustainable banking
Over
the…
10
5
0
12
10
8
6
4
2
0
GSIFIs
Over
the…
It seems that the stability of the banking system is supported by three
pillars: transparency, sustainability, diversity.
Since decision makers acknowledge the necessity to change the banking
paradigm, the new architecture of the European financial institutions should
create the frame to extend the sustainability approach as the main pillar of
banking stability.
3. THE ROLE OF THE BANKING UNION IN SUSTAINABILITY
ORIENTED BANKING
The post-crises requirements of sustainability oriented banking ask for a
decisive reorganisation of international financial institutions enabling them to
enforce the new paradigm for the banking systems worldwide. According to
Goodhart (Goodhart, 2011), the new set of regulations and of supervision
should exceed the prevention of systemic risks, rather concentrating on the
limitation of externalities and contagion.
Under these circumstances, the Banking Union, as a major European
project, is meant to create a safe European banking system that is supporting
sustainable development. The Banking Union relies on the Single rule book that
includes the legislation concerning the capital requirements (CRR/CRD IV), the
regulations for the recovery of banks in distress (BRRD) and for deposit
guarantee system (DGS).
The construction of the Banking Union started from the huge amount paid
out of public money during 2008-2012 (40% of the European GDP) to bail out
banks and to create a sustainability oriented banking system.
Moreover, the Banking Union project is a solution for the overbanking
problem that hinders development, increases the probability of economic crises
and misallocation of resources, once the total loans/GDP exceeds the
equilibrium threshold (Rousseau & Wachtel, 2011).
129
The new EU legislation (Basel III) provides the necessary tools to
implement counter cyclical bank policies and risk requirements: reserve
requirements, provisions against risks, loan-to-value, debt-to-income thresholds,
taxing excess capital, ceiling of excessive risk exposure, etc.
From the Bank Union perspective, understanding economic and financial
cycles is the key for choosing the appropriate macro prudential intervention
tools.
According to Constâncio (Constâncio, 2014) macro prudential
regulations should rather concentrate on the financial cycle as a strong
endogenous variable in banks behaviour than to reinforce the resilience of the
financial system.
Recently, models have been developed to integrate financial cycles in
macro-models underlying the introduction of preventive macro prudential tools
or control measures in the context of a credit or asset price boom.
Following his empirical analysis, Hiebert et al. (2014), suggest that
financial cycles tend to be more volatile than business cycles in the Euro area,
albeit with strong cross-country heterogeneity.
Figure 7. Determinants of cyclical fluctuations across selected
Euro area countries
(Source: ECB, Financial Stability Review, November 2014)
130
Figure 8. Financial cycle and cycles of constituent indicators
(Source: ECB, Financial Stability Review, November 2014)
According to the authors, the most appropriate method for measuring the
financial cycle is based on the following macroeconomic indicators (fig.7): for
the financial cycle (credit, house prices, reference interest rate and stock price)
and for the business cycle (GDP, consumer price inflation and interest rate).
The information provided refers to the various properties of financial
cycles, including their amplitude and their persistence (fig. 8).
The main macro prudential instrument, the countercyclical capital damper,
is used to protect the banking system from the negative effects of the financial
cycle (Basel Committee on Banking Supervision, 2010), which aims to increase
the strength of the banking system against of potential significant losses induced
by excessive credit growth.
This tool is used in order to achieve an intermediate objective of macroprudential policy, "prevention of excessive credit and leverage". Giese et al.,
2012 argue that this indicator has provided signals in time for macro prudential
policy tightening. Further, Drehmann and Tsatsaronis (Drehmann & Tsatsaronis
2014) showed that credit/GDP gap is a very useful reference in any economy,
including the emerging ones. Alongside the combination of rules with discretion
in activating this indicator, policymakers must use judgment along with
quantitative analyses. However, the practical effectiveness of this tool is
limited.
The Banking Union construction and other initiatives launched for public
debate by the European Commission related to the structural reform of the
European banking system seem to be the answers to the problem of
"excessiveness of the european banking system."
The new EU legislative package (Basel III) provides monetary authorities
with a number of tools regarding additional capital requirements (systemic risk
131
requirement, countercyclical capital requirement), which are designed to
prevent and mitigate systemic risks.
However, the centralised supervision at ECB level means an arm’s length
position from political influence in the supervision and approval of bank
recovery while the resolution directive ensures monetary authorities ex/ante
intervention for an orderly exit from the market of troubled banks avoiding
distortions on the financial system.
Moreover, structural reform, based on the recommendations of "Liikanen
report", published in October 2012, aimed at separation of banks in order to
limit banks’ exposure and systemic risk control. Countercyclical capital buffers
set up in times of lending growth will also help to mitigate pro cyclicality
inherent to banking systems.
4. CONCLUSIONS
Theoretical and empirical research has shown that a sound and effective
financial system is critical for economic development and growth. The financial
system, however, is also subject to boom and bust cycles and fragility, with
negative repercussions for the real economy. Further, the political structure of
societies, often pre-determined by historic experience, is critical for the
structure and development of the financial system.
Under the general global trend toward sustainable development, the banking
sector has been involved as a significant player due to its role as financial
intermediary. Therefore, the interest in sustainable banking has gradually grown
and has come to be regarded as a goal for the banks to pursue. Lately, the
banking sector has taken steps to stimulate sustainable development, but much
needs still to be done.
The global financial crisis has demonstrated the need for tighter regulations
to improve the stability and resilience of banking systems. Moreover, it became
evident that banking supervision requires international coordination better
placed in this world of globalization.
One of the key goals of the new macro-prudential mandates around the
world is to mitigate financial cycles. In the Euro area, there is a need for
country-level financial cycle estimates to provide a clear and consistent
yardstick to guide forward-looking macro-prudential policy. The features of
financial cycles tend to differ considerably from their business cycle
counterparts. The relevance of measures of credit and asset prices in effectively
capturing a synthetic financial cycle appears to vary at the country level,
reflecting cross-country heterogeneity and idiosyncrasies in underlying driving
forces.
Mitigation of financial cycles is a fundamental objective of the macro and
financial cycles and their estimation has become important in the context of
macro prudential supervision of European Central Bank (ECB) within the single
supervisory mechanism (MUS).
132
Therefore, the new supervisory architecture in the EU – the Banking Union
is considered as the result of financial dynamics and the main challenge is to
achieve and maintain a stable and solid European banking sector that brings
sustainable prosperity.
ACKNOWLEDGEMENT
This work was supported from the European Social Fund through Sectorial
Operational Programme Human Resources Development 2007 –2013, project
number POSDRU/159/1.5/S/134197, project title “Performance and Excellence
Doctoral and Postdoctoral Research in Romanian Economics Science
Domain”.
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operating the countercyclical capital buffer. Basel Committee on Banking
Supervision. Retrieved from http://www.bis.org/publ/bcbs187.pdf
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implementation. Speach at the Third Conference of macro-prudential Research
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Distribution of Income. The Journal of Political Economy, vol. 98, no. 5, Part 1
(Oct., 1990), 1076-1107.
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Financial Stability Review, November, 109-117.
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Theme Issue: Sustainable Banking: The Greening of Finance.
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133
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implement long-term investing. Summit on the Future of the Corporation, Paper
No. 5. Retrieved from
http://www.corporation2020.org/pdfs/SummitPaperSeries.pdf.
[15] Pagano, M. (1993). Financial Markets and Macro economy. European Economic
Review, vol. 37, 613-622.
[16] Pisano, U., Martinuzzi, A. (2012). The Financial Sector and Sustainable
Development. Logics, principles and actors. ESDN Quarterly Report, no. 27.
[17] Rousseau, P., & Wachtel, P. (2011). What is happening to the impact of financial
deepening on economic growth?. Economic Inquiry, vol. 49, 276-288.
[18] Schmidheiny, S. & Zorraquín, J.L. (1996). Financing Change. The Financial
Community. Eco-efficiency, and Sustainable Development.
[19] Schumpeter, J.A. (1942). Capitalism, Socialism, and Democracy, Introduction by
Richard Swedberg. London: Stockholm University.
[20] Tonello, M. (2006). Revisiting Stock-Market Short-Termism. The Conference
Board, New York, 42.
134
TOWARD INVESTIGATING THE CORPORATE SOCIAL
RESPONSIBILITY (CSR) ACTIVITIES IN THE BANKING
INDUSTRY FROM ROMANIA
DALINA DUMITRESCU
PhD Professor, Bucharest University of Economic Studies
Bucharest, Romania
[email protected]
LILIANA SIMIONESCU
Doctoral Student, Bucharest University of Economic Studies
Bucharest, Romania
[email protected]
Abstract
In recent years, researchers, academicians and practitioners showed an increased
attention as regard the significant influence of corporate social responsibility (CSR)
practices on stakeholders. By definition, CSR includes companies’ responsibilities
towards its shareholders, environment, community, customers, and employees.
Notwithstanding of several efforts to measure the cost of CSR, it remains ambiguous
how stakeholders perceive CSR activities. Thus, this paper aim to develop a scale
measurement for CSR activities in the Romanian banking industry based on stakeholder
framework. In order to develop a valid and consistent scale, items were generated for
our theoretical model. This study contributes and enhances the literature on CSR by
providing a reliable and valid scale of measurement for CSR activities in Romanian
banking industry.
Keywords: Corporate social responsibility, Banking industry, Scale development,
Stakeholder
1. INTRODUCTION
Corporate social responsibility (CSR) concept has gained the attention of
both academicians and business practitioners’ (Maignan and Ferrell, 2004; Sen
and Bhattacharya, 2001), because of its benefits such as: increased levels of
credibility of the company (Lin et al., 2011), improved firm image or reputation
(Tewari, 2011), a higher level of employee satisfaction as well as retention of
skilled employees (Kim and Perk, 2011), and builds the relationships companycustomer (Peloza and Shang, 2011; Matute et al., 2010). This growing attention
135
toward CSR has resulted in literature in a large number of definitions regarding
this concept (Carroll, 1979; Panwar et al., 2006; van Marrewijk, 2003). CSR is
defined as the “companies’ activities demonstrating the inclusion of social and
environmental concerns in business operations, and in interaction with
stakeholders, also according to the ambition level of corporate sustainability”
(van Marrewijk, 2003).
CSR is frequently measured from one-dimensional perspective (Marin and
Ruiz, 2007; Lichtenstein et al., 2004), respectively legal and philanthropic
responsibilities. Only a few studies have adopted the perspective of multi
dimensional CSR in order to measure it (Maignan, 2001; Decker, 2004; Garcia
de los Salmones et al., 2005). A multi dimensional perspective of measuring
CSR highlights a better differentiation of theoretical dimensions. Incidentally,
studies that considered this perspective based their approach on a different CSR
definition and measures resulting in a lack of consensus (Turker, 2009). These
perspectives have raised critics in literature on CSR. Moreover, it has been
acknowledged that CSR is regarded differently from the point of view of all
stakeholders concerns as well as its conceptualization that varies between every
industry (Decker, 2004). Therefore, a more detailed instrument is needed in
order to understand the point of view of stakeholder in a specific industry
context.
Banking industry plays an important role in a country economy (Beck et
al., 1999) as well as the nation welfare and financial and economic stability
(Simionescu and Dumitrescu, 2014). Many banks are proactively engaged in
CSR activities (Marin et al., 2009; Truscott et al., 2009) whereas other
industries are reactive as regard CSR activities due to external stakeholder
pressure (Decker, 2004). According to Poolthong and Mandhachitara (2009),
financial institutions reputation and image depend strongly on their CSR
programs, and this is the reason why banking institutions have a tendency to
enclose a high ranking in the international CSR investment ranking index (Perez
et al., 2013). Regardless of the growing interest of CSR in banking industry, no
study or research have measured CSR activities in this industry in a developing
economy by considering multi-dimensional perspective. Thus, this paper aims
at fill in this gap by studying the baking sector in Romania in association with
CSR and internal stakeholders.
The banking sector in Romania is intensified with competition and CSR
practices started to be taken seriously being considered a competitive advantage
(Porter and Kramer, 2002). As underlined by Fatma and Rahman (2014), in a
developing country such as India, the Reserve bank of India has advised all
banks to invest in CSR activities two percent of their profit. In Romania, CSR
activities are on the beginning of the road and many companies understood that
become imperative for them to know better how their CSR activities can help in
building the relationship company-stakeholders. In this study, we propose a
CSR measurement scale beginning with a broader view, used in recent studies,
based on stakeholder framework (Turker, 2009; Mercer, 2003). The majority of
136
the studies on this topic have a theoretical approach, allowing for the
researchers and business practitioners to value the normative case of CSR.
Though, studies regarding the perception of internal stakeholder are scarce so
far. We developed a scale that measure CSR activities for baking organizations
in Romania in order to fill in this gap in this area, from internal stakeholder
point of view and, thus to enhance the literature on CSR.
Nowadays, CSR become a notion well established in financial service
industry because of its huge impact on society (Scholtens, 2009). Several
authors have underlined that banks increased their CSR spending on socially
responsible programs (Truscott et al., 2009; Marin and Ruiz, 2007) and
implement CSR practices into business strategies as part of daily business
practices (Decker, 2004) such as microcredit schemes for the poor (Hermes et
al., 2005), and credit access to the deprived (Prior and Argandona, 2008),
becoming socially responsible banking defined by their business actions
(Scholtens, 2009). Compare with other companies, banks are more exposed to
negative reactions coming from stakeholders and more likely to be subjective to
reputational risk (Thompson and Cowton, 2004). According to Flavian et al.,
(2005), for banking sector reputation is very important to mange in order to
maintain stakeholder confidence and to differentiate themselves from
competitors. Through CSR programs, retail banks spend millions of dollars in
order to reinforce their reputation (McDonald and Rundle-Thiele, 2008). As
underlined by Perez et al., (2013), reputation is highly important to build and
manage in service sector due to the product intangible nature as well as the need
of building trust between stakeholders.
McDonald and Lai (2011) considered that the implementation of CSR
activities into business strategies leads to socially responsible decisions which
are meant to improve banking sector public image and, of course, customer
related outcomes (Bhattacharya and Sen, 2004). Though, it is not
comprehensible which CSR activities are likely to build positive stakeholder
responses (Chomvilailuk and Butcher, 2013). With CSR trend growing
worldwide, Lindgreen et al., (2009) raises the question whether stakeholder
responses toward CSR activities in developing country will be consistent with
those as in developed country. This paper aim is to attend to fill in this gap by
considering the relationship CSR - stakeholder responses in baking sector from
Romania.
In the last few years, the banking sector made considerable changes as
regard its business strategies and become one of the central proactive investors
in CSR practices worldwide (Marin et al., 2009; Truscott et al., 2009) with the
reputational financial institutions relying on their socially responsible activities
(Poolthong and Mandhachitara, 2009). Banks approaches toward CSR activities
has considerably changed and are now more careful to social and environmental
issues (Carnevale et al., 2012), they became to have a much wider role in the
137
society where they operate and considering CSR principals into their operations,
their business are more transparent creating thus value for society (Prior and
Argandona, 2008; King and Levine, 1993). Banks adopting CSR annually
publish their sustainability reports (Vigano and Nicolai, 2009) and their number
is increasing every year. Hence, our proposed new measurement scale is an
applicable and timely study. On the other hand, “nowadays the banking industry
faces threats and opportunities resulting from the current worldwide economic
crisis. One of these challenges stems from the negative effect of individual
perceptions of financial institutions” (Matute et al. 2010).
CSR practices play an essential role in banking sector and a growing
concern is given as regards the communication of these activities throughout
different communication channels toward stakeholders (Peterson and Hermans,
2004).
Regardless of the fact that CSR is of a greater importance to business as
well as its benefits, there is a limited investigation regarding stakeholder
responses toward these activities (McDonald and Rundle-Thiele, 2008). How
CSR activities in the banking sector are seen by their stakeholders is yet vague
because of the limited amount of research as regard stakeholder responses
toward CSR activities (Rugimbana et al., 2008). Consequently, it is important to
value the banks efforts to report their CSR actions. Compared to other
economical sectors, banks have a higher visibility in a society (Mandell et al.,
1981) and more product involvement. Studies made on CSR practices and
banks are a few (Carnevale et al., 2012), and not enough framework available to
determine the banks effort as regard the CSR activities, as well as stakeholder
assessment and understanding of these practices (Scholtens, 2009).
3. THEORETICAL MODEL
Carroll (2000) underlined that CSR must be measured because “it is an
important topic to business and to society, and measurement is one part dealing
seriously with an important matter. The real question is whether valid and
reliable measure can be developed” (Carroll, 2000). Both academics and
business practitioners use a variety of methodologies to measure CSR (Turker,
2009) such as survey instruments (Aupperle, 1985), content analysis (Wolfe and
Aupperle, 1991), reputation indices or scales (McGuire et al., 1988), and case
study methodologies (Clarkson, 1995). Other three methods are suggested by
Maignan and Ferrell (2000) according to CSR can be measured from the point
of view of - (1) expert evaluation, or (2) managers survey, and (3) single
concern and multiple concern indicators. Conversely, there is no single
approach that can best measure CSR activities (Wolfe and Aupperle, 1991). So
far the approaches considered to be useful to measure CSR includes the analysis
content of publication, and single and multiple problem indicator, as well as the
reputation indices or scales at individual and organizational level.
In the academic literature, the analysis content was the most frequently
used method to measure CSR practices (Tewari, 2011), because it helps in
138
development of new measure for CSR activities (Abbott and Monsen, 1979).
This method has an “objective rating of companies since once the social
attributes are selected, the process of rating is standardized” (Ruiz et al.,
2009). Once companies reveal their social disclosure as regarding their social
and environmental activities, these information’s about CSR has turn out to be
more accessible (Gray et al., 1995).Thus, many studies on CSR have used as
methodology in their in research, sustainability reports to measure CSR
activities (Bravo et al., 2012). Still, the information provided by the banks on
their websites in their annual report might be over or underestimated from their
actual performance (McGuire et al., 1988). Several authors have supported the
evidence according to which studies that used the information’s from the banks
websites found no association between the actual performance and reported
performance (Ingram and Frazier, 1980; Wiseman, 1982).
The reputation indices are extensively used in the literature on CSR to
evaluate the company’s social performance (Spencer and Taylor, 1987;
McGuire et al., 1988; Waddock and Graves, 1997). A large amount of studies
use the most databases such as Fortune’s reputation index and KLD (Maignan
and Ferrell, 2000). While Fortune index evaluates CSR activities from the point
of view of company’s management, KLD asses companies CSR based on nine
attributes respectively employee relation, environment, community relations,
product, nuclear power, military contracting, treatment of women’s and
minorities, and involvement in South African humanitarian programs (Maignan
and Ferrell, 2000; Turker,2009). These indices can be used to expand a new
scale of measuring CSR (Abbott and Monsen, 1979). In their study, Ruiz et al.,
(2009) developed a scale measure based on the KLD nine dimensions and
underlined that these extents of scale measures overlap with Carroll’s (1979)
CSR framework.
On the other hand, Maignan and Ferrell (2000), argue that, both of these
indices are limited as the items used don’t have a base in theoretical arguments
and thus, there not representing the economic, ethical, legal, and philanthropic
dimensions of CSR (Maignan and Ferrell, 2000).
Another alternative approach used by many scholars is employing a single
issue indicator for instance pollution control performance (Bragdon and Marlin,
1972) or the corporate crime rate (Davidson and Worrell, 1990; Baucus and
Baucus, 1997), and manifold issue indicators (Stanwick and Stanwick, 1998;
Griffin and Mahon, 1997). The constraint of this method is that its results show
only one dimension (Maignan and Ferrell, 2000). Accordingly, scholars ought
to use a combination of all these indicators (Griffin and Mahon, 1997; Turban
and Greening, 1996) that still does not embody the entire scale of CSR
(Maignan and Ferrell, 2000). Furthermore, these indicators are not accepted
worldwide and companies that report their CSR activities are in a limited
number of countries, thus this is the reason why researchers are confronting
with a lack database especially in developing countries and studies are limited.
139
The method relevant for the present study is the use of scale measurement
as regarding the CSR activities perceptions by the consumers. Aupperle (1984)
developed the first multidimensional scale measurement of CSR. This scale is
based on Carroll’s (1979) CSR framework and is the most accepted both
theoretically and empirically in lieterature on CSR (Maignan et al., 1999;
Maignan, 2001; Maignan and Ferrell., 2000; Garcia de los Salmones et al.,
2005). Consistent with Carroll (1979) pyramid, CSR includes four dimensions,
namely economic, legal, ethical, and philanthropic. In literature is argued that in
many cases these CSR dimensions are strongly related to each other (Perez et
al., 2013). Peterson (2004) consider, that “this instrument would not be useful
for assessing an organization’s performance in the four domain independently,
that is the instrument would not be helpful for assessing organizational
performance by employees who view their work organization as highly
responsible on all four CSR domains” (p. 306).
Quazi and O’Brien, (2000) developed in their study a scale to measure the
manager’s attitude to the CSR activities by creating two CSR dimension
ranging from the responsibilities duration to CSR outcomes. But, this scale was
not designed to measure the contribution of an organization in CSR activities.
Carroll’s conceptual framework (1979, 1991) and the Brown and Dacin’s
(1997) framework as regards the company association with CSR practices have
not been subjected to analysis by the stakeholders (Maignan and Ferrell, 2004),
as well as to what degree these conceptual frameworks reflect their perceptive
of CSR.
CSR has its roots in stakeholder theory and thus CSR measures and
analysis should be based on stakeholders. By definition stakeholders are “a
group or individual who can affect or be affected by the actions or performance
of the objectives of the firm” (Freeman, 1984). Subsequent this theory,
identifies several dimensions of CSR such as: customers, employees,
shareholders, society, environment, and others (Turker, 2009; Decker, 2004;
Maignan et al., 1999). According to several researchers, stakeholder theory is
appropriate in the context of banking sector approach toward CSR (Perez et al.,
2013; Ruiz et al., 2009).
Incidentally, “new successful formula of commercial banking has arisen as
a result of banks” investing in environmental and social sustainability by using
stakeholder management approaches’ (Matute et al., 2010). The stakeholder
theory perspective has gained attention in the literature as it follows a trend for a
better understanding of CSR research in the future (Turker, 2009; Boal and
Peery, 1985). In this paper we propose multi dimension items to bring into the
light the CSR concept which is still a debatable term as regarding its nature
(Decker, 2004). A specific industry understanding of CSR is a first step should
take into consideration (Decker, 2004) for CSR scale measurement. Therefore,
the need for an instrument to measure CSR starts from stakeholder’s point of
view in the banking industry. Thus we propose the following items for banking
140
industry from the perspective of multi dimension issues for CSR to be
measured:
Customers: Policy for customer protection and privacy (Pomering and Dolnicar
(2009)
Customer treats with honestly (Garcia de los Salmons et al., 2005)
Institute system to fulfill with customer complaints (Maignan et al.,1999;
Mercer, 2003; Decker, 2004).
Employees: Employees safety at their work place (Maignan et al.,1999; Mercer,
2003; Turker, 2009)
Propose/sustain employees training and carrier opportunity (Boal and
Perry,1985; Maignan et. al., 1999; Mercer, 2003; David et al., 2005)
Policies on respect for human rights and elimination of discrimination as
regards the employment and occupation (Boal and Peery, 1985; Maignan et al.,
1999; Mercer, 2003)
Shareholders: Tries to ensure companies survival and its long term success
(Maignan, 2001);
Obligation fulfillment toward shareholders Maignan et al., (1999); Maignan,
(2001); Mercer, 2003)
Environmental: Consumption reduction of natural resources Martínez et
al.,(2013)
Replacement of finite resources with renewable resources (Martínez et al.,2013)
Environmental healthy practices and safety management system towars al
stakeholders (Bigne et al., 2005; Knowles et al., 1999; Manaktola and Jauhari,
2007)
Society: Concerning as regard the improvement of society general well being
(Maignan et al., 1999;
Maignan, 2001; Garcıá de los Salmones, 2005), David et al., 2005)
Employ in philanthropic activities such as the art, social services and education
4. CONCLUSIONS AND FURTHER RESEARCH
In line with Carroll (2000), developing a scale measure for social activities
to address the company social performance it is a challenge and “if we do less
than this, we should not call it a social performance” (Carroll, 2000, p. 74).
Regardless of noticeable risks linked with other measures, stakeholders’
perception represents a more consistent method to measure CSR activities. In
order to confine a company’s different responsibilities assumed towards its
stakeholders, we considered as reference the stakeholder theory. This paper
contrasted Carroll’s (1979) CSR context, according to CSR embodies
philanthropic, economic, legal, and ethical activities and calls as reference the
Freeman (1984) stakeholder theory as frame. Thus, we propose reliable items
for a specific economic industry, respectively banking sector as scale
measurement as regarding consumer perceptions concerning CSR activities.
Moreover we provide reliable multiple dimensions identified in the literature on
141
CSR having a theoretical background. This scale measurement validity through
empirical methods would bring CSR a step forward in understanding and will
help managers in their decisions regarding CSR activities communication.
ACKNOWLEDGEMENT
This work was cofinanced from the European Social Fund through
Sectoral Operational Programme Human Resources Development 2007-2013,
project number POSDRU/159/1.5/S/142115 „Performance and excellence in
doctoral and postdoctoral research in Romanian economics science domain”.
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145
DETERMINANTS OF NON-PERFORMING LOANS IN
WESTERN EUROPEAN COUNTRIES
BOGDAN FLORIN FILIP
“Alexandru Ioan Cuza” University of Iaşi
Iaşi, Romania
[email protected]
Abstract
The paper highlights the necessity for identifying and analysing the determinants of the
non-performing bank loans in the context of the existence of strong interdependencies
between the banking systems’ functioning and the performance of the economy, since
the accumulation of such loans can lead to malfunctions on macroeconomic level. Thus,
there are identified several determinants of NPLs, both internal, such bank size, capital
adequacy, cost efficiency and bank risk taking behaviour, but also external, such GDP
growth, inflation and unemployment and there is considered also the impact of the
financial and economic crisis. The analysis is developed by processing the data of 13
Western European countries for the period 2000-2011, using econometric methods.
Empirical results showed expected significant positive linkages of NPLs ratio with
determinants like bank size, cost efficiency, unemployment and crisis, but also
significant negative linkages NPLs ratio with GDP growth and capital adequacy.
Deepening the analysis by building an testing a regression model for NPLs ratio
determination it resulted that the main determinants of NPLs ratio rising are
unemployment, crisis, bank size and cost efficiency management, while the GDP
growth, capital adequacy and bank credit to private sector as percentage to GDP are
acting against the formation of NPLs. The results leaded to the conclusion that banks
need to improve their cost efficiency management and invest in departments for
following and recovering the granted loans. Also, the governments should focus on
encouraging employment as base for improving the borrowers’ repayment capacity and
of generating GDP growth.
Keywords: non-performing loans, macroeconomic determinants, bank-level
determinants, crisis
JEL Classification: C23, G01, G21
1. INTRODUCTION
The performant functioning of the banking system is undoubtedly an
essential condition for assuring the development of the entire economy of a
country, primarily because banks provide in a significant proportion the
financing of the activities which generate added value and hence GDP. At the
same time, however, there is also a reverse determination relationship, since the
146
macroeconomic environment produces effects on the functioning and
performance of the banking system, the two elements stimulating each other.
On the other hand, it is equally true also the negative interconditioning
between the economy and the banking activity, in which the negative
performance of each of the two is transmitted over the other. This may
eventually lead also to the manifestation of the twin crises phenomenon
(Kaminsky and Reinhart, 1999), when the banking crisis and the economic and
financial crisis are mutually empowering themselves and are contributing to the
deepening of each other.
From a statistical point of view, it can be observed that the occurrence of
the banking crises is closely related to the accumulation of a large volume of
non-performing bank loans (NPLs) and implicitly to the rapid growth of NPLs
ratio. In addition, the recent financial and economic crisis, by the amplitude and
expanding of its effects, but also by the mode it has appeared - closely related to
the functioning of the banking system and especially to the deterioration of the
quality of bank loans - has brought to the foreground the need to evaluate the
factors that impact on the size of NPLs. In this context, our work aims to
identify and analyze the impact of the determinants of non-performing loans in
the economies of Western Europe.
In the literature there can be found several studies, both theoretical, and
especially, lately, empirical, which addresses the issue of non-performing loans
and search their possible causes. Thus, we remark some empirical studies that
analyze the determinants of non-performing bank loans in the banking system
of a specific country (Salas and Saurina, 2002; Khemraj and Pasha, 2009;
Louzis, Vouldis and Metaxas, 2011; Filip, 2014), and other works aiming
analyzes on groups of countries (Fofack, 2005; Espinoza and Prasad, 2010;
Nkusu, 2011; Klein, 2013; Chaibi and Ftiti, 2015).
In terms of factors that determine the occurrence and the dimensions of the
non-performing loans, which are most often assessed by the NPLs ratio, we
notice that the majority of studies group these factors into two broad categories.
The first category includes factors whose actions are concentrated at the level of
the banks, consisting of bank size (Khemraj and Pasha, 2009; Chaibi and Ftiti,
2015), cost efficiency (Espinoza and Prasad, 2010, Klein, 2013), capital
adequacy (Fofack, 2005; Nkusu, 2011; Klein, 2013), excessive lending (Salas
and Saurina, 2002) or bank risk taking control behaviour (Nkusu, 2011) etc.
The second category includes factors of external nature, expressing usually
macroeconomic conditions reflected by economic indicators (Fofack, 2005;
Nkusu, 2011; Klein, 2013) such as GDP growth, inflation and unemployment,
which generate effects on the ability borrowers to repay loans.
Bank size is considered in several empirical studies as one of the factors
that may impact on the non-performing loans ratio. However, although most
studies have shown the relevance of this factor, while some of them identify a
147
negative influence of it on the NPLs ratio (Espinoza and Prasad, 2010), there
are also studies highlight a positive determination relationship between the two
(Khemraj and Pasha, 2009; Chaibi and Ftiti, 2015) and others which do not
identify a significant effect (Klein, 2013). These facts show, in my view, that
the size of banks can play a key role in determining the size of non-performing
loans, but only if it facilitates a better regulation and supervision of bank
lending activity.
On the other hand, capital adequacy is considered by researchers as a factor
impacting negatively on the NPL, acting in the direction of diminishing them
(Fofack, 2005; Klein, 2013) and protecting the stability of the bank against the
potential negative effects of NPLs.
The research papers also indicate that the cost efficiency factor has a
significant impact on the NPLs ratio, but while some studies observed a positive
determination relationship (Espinoza and Prasad, 2010), other studies, more
recent, identify the possibility of an effect of reduction of NPLs ratio (Chaibi
and Ftiti, 2015). From our point of view, on the one hand, one may appreciate
that the existence of some high expenses of the bank confirms its concern and
financial effort for rigorous tracking and recovery of the granted loans, while
from another perspective it may be the case of a poor management of the
resources, that causes excessive expenses, whose coverage is requires bank to
grant loans with higher interest rates, but more risky.
In the context of the risks assumed by banks, some authors (Salas and
Saurina, 2002) consider excessive lending as an enhancer factor for
nonperforming bank loans, sustaining that a rapid increase in loan volume
results normally on the background of easing the regulations regarding the
eligibility of loan applicants. Also, in terms of bank risk taking behaviour,
reflected through the bank credit to private sector as percentage of GDP
indicator, literature estimates a negative effect of this factor on the level of nonperforming loans (Nkusu, 2011). However, we believe that the effect of
reducing NPLs can appear only if the loans are used efficiently, leading to
creating added value and GDP growth, or otherwise, rationally, excessive
lending not compensated by a substantial increase in GDP can not only lead to
an increase in bad loans.
Analyzing the external factors, most authors (Salas and Saurina, 2002;
Khemraj and Pasha, 2009; Louzis, Vouldis and Metaxas, 2011; Filip, 2014)
found and support the existence of a negative influence of GDP growth on the
level of NPLs ratio, GDP growth acting in the direction of diminishing that
level. The explanation of such causality relationship, which we consider to be
correct, lies in the idea that GDP growth is reflected in principle in an increase
in the increase of the income of the borrowers, which means an improvement in
their ability to repay their loans, including the reducing the existing bad ones.
On the other hand, a reduction in GDP has naturally adverse effects.
The impact of inflation on the NPLs ratio appears to be ambiguous in
literature. On the one hand, an increase in inflation rate generates mutations in
148
the same sense of the NPL ratio, resulting a positive determination relationship
(Khemraj and Pasha, 2009; Fofack, 2005), because inflation erodes the debtors'
ability to pay. On the other hand, also, an increase in inflation rate makes more
advantageous the repayment of due amounts by the borrowers (Nkusu, 2011;
Klein, 2013), given that the creditor banks are not updating their claims with the
inflation rate and so, it may result a reduction in the real value of the loans and
specifically of the NPLs.
Unemployment rate normally causes changes in NPLs ratio, in the same
direction with its own variations (Nkusu 2011; Klein, 2013; Chaibi and Ftiti,
2015, Bilan and Roman, 2015). In our opinion, an increase in unemployment
rate affects the income of the borrowers and thus their capacity of
reimbursement leading to the transformation of current loans into NPLs.
Moreover, the income reduction leads to lower demand of goods and services,
determining the reduction of production and sales of the companies and
diminishing also those companies repayment capacity (Louzis, Vouldis and
Metaxas, 2011), which favours another increase of NPLs.
3. DATA AND METHODOLOGY
Our research focuses on the selection and analysis of some relevant
determinants of NPLs ratio level in Western European countries, aiming to find
out the amplitude of their effects and to draw conclusions regarding necessary
actions for preventing the accumulation of such bad loans.
Considering NPLs ratio as dependent variable in the econometric analysis
that we develop, we use annual data corresponding to 13 banking systems in
Austria, Belgium, Denmark, Finland, France, Germany, Italy, Luxembourg,
Netherlands, Portugal, Spain, Sweden and the United Kingdom, taken from
international databases Global Financial Development Databank (GFDD) of
World Bank, World Bank Databank and the European Banking Federation
(EBF) Database, for the period 2000-2011. On this basis, the development of
the analysis aims processing and interpretation of the panel data of Western
European countries by using Pearson correlations, respectively, by building an
econometric model and testing it using the Least Squares Panel method.
Starting from the literature and the observations mentioned before, we take
into consideration, in our turn, that there are two main categories of NPLs
determinants, namely: a) bankspecific (internal) – bank size, capital adequacy,
cost efficiency, bank risk taking behaviour; and b) macroeconomic (external) GDP growth, inflation, unemployment, etc.. Thus, we will use as independent
variables, the financial indicators listed in Table 1, where we included also their
expected effect.
Beside the mentioned variables, we consider necessary to take into account
also the global economic environment, which in the last part of the period under
review was marked by the financial crisis manifestation. This is why we
introduce in analysis, as additional determinant, the dummy variable "crisis", in
order to mark the potential impact of the crisis on banks' NPL ratio.
149
Table 1. Determinants of non-performing loans ratio – independent
variables
Independent
Indicator
variable/
Determinant
Internal (bank-specific) determinants
Bank size
Logarithm
of
Total Assets
Abbreviation
log(TA)
Capital
adequacy
Regulatory
C_AS
Capital to Risk
Weighted Assets
Ratio (%)
Cost efficiency
Bank overheads OV_TA
costs to total
assets (%)
Bank risk taking Bank Credit To BC_PV
behaviour
private sector (%)
External (macroeconomic) determinants
Economic
GDP growth rate GDPGR
growth
(%)
Inflation
Inflation rate - INFLR
CPI (%)
Unemployment
Unemployment
UNEM
rate (%)
Crisis
dummy
Crisis
manifestation
Expected
relationship
(+/-)
Source
+/-
EBF – New
Bankstat
Database
IMF
–
GFSR-FSI
Tables
-
+/-
+/-
+/+
World Bank
GFDD
database
World Bank
Databank
World Bank
Databank
World Bank
Databank
World Bank
Databank
-
4. RESULTS AND COMMENTS
A first part of the analysis is based on using Pearson correlations to
identify the existence of the linkages between NPLs ratio evolution and the
considered determinants. Thus, after processing the data for the 2000-2011
period, the resulting correlations between NPLs ratio and the considered
determinants are those reflected in Table 2.
Data in Table 2 confirm the existence of significant negative correlations
of NPLs ratio with banks' capital adequacy ratio (coef. = -0.2312, prob. =
0.0039) and GDP growth rate (coef. = -0.3208, prob. = 0.0000), which suggest
that this factors have a negative impact on NPLs ratio, contributing to its
reduction, in accordance with the expected results. In addition, it appears
significant positive correlations of NPLs ratio with bank size (coef. = 0.4432,
prob. = 0.0000), cost efficiency (coef. = 0.3432, prob. = 0.0000) and
unemployment rate (coef. = 0.3681, prob. = 0.0000), all these factors having an
impact of increasing NPLs ratio. We also remark the positive significant
correlation between NLSs ratio and crisis, confirming the strong bidirectional
linkage of them, while crisis accelerates the accumulation of NPLs and the
150
increase of NPLs ratio determines a contraction of the credit market and thus
contributes to deepening the crisis. On the other hand bank credit to private
sector and inflation rate appear to be negatively but insignificantly correlated
with NPLs ratio.
Table 2. The correlation matrix
Covariance Analysis: Ordinary
Sample: 2000 2011
Included observations: 154
Balanced sample
Correlation/ Probability
NPLR log(TA) C_AS OV_TA BC_PV GDPGR INFLR UNEM Crisis
NPLR
1.0000
----log(TA) 0.4432*** 1.0000
0.0000
----C_AS -0.2312*** -0.0173 1.0000
0.0039 0.8315
----OV_TA 0.3432*** 0.2012 -0.2775 1.0000
0.0000 0.0124 0.0005
----BC_PV
-0.0645 0.1911 0.0802 -0.1335 1.0000
0.4269 0.0176 0.3227 0.0988
-----
GDPGR -0.3208
***
-0.1189 -0.0539 0.0389 0.1741 1.0000
0.0000 0.1418 0.5064 0.6319 0.0309
-----
INFLR -0.063922 -0.0786 -0.1322 -0.0795 -0.0759 0.3036 1.0000
0.4309 0.3328 0.1023 0.3272 0.3492 0.0001
----UNEM 0.3681*** 0.2078 -0.1467 0.0633 0.0385 -0.1467 -0.0753 1.0000
0.0000 0.0097 0.0694 0.4357 0.6359 0.0694 0.3534
----1.000
0.2127*** 0.1938 0.3206 -0.2711 -0.1458 -0.4809 0.0028 0.1657
0
0.0081 0.0161 0.0001 0.0007 0.0713 0.0000 0.9728 0.0400 ----***, **,* - denotes significance at 1%, 5%, respectively 10% level
Crisis
In relation to the above considerations and with the results obtained in
Table 2, we consider that further analysis of the determinants of NPLs in the
Western European countries can be performed using the Least Squares Panel
method by building and testing an econometric regression model for
151
emphasizing the relationships between the dependent variable, NPLs ratio, with
the other variables, considered independent. Thus, we build and use an
econometric model whose regression equation is the following one (1):
(1) ( y j ,t = c + β i , j ,t • X i , j ,t + β e , j ,t • X e , j ,t + β c , j ,t • crisis
where, j stands for the specific country, t stands for the year, y represents
NPLs ratio, Xi are internal determinants, Xe are macroeconomic (external)
determinants, “crisis” is the dummy variable for crisis manifestation, βi are the
coefficients of the internal determinants, βe are the coefficients of the external
determinants, βc is crisis coefficient and ε stands for the error term.
Testing the model for determining the effects of the impact factors on
NPLs ratio, during the period 2000- 2011, in the Western European countries,
led to the results presented in Table 3:
Table 3. Results of testing the model for NPLs ratio determination
Dependent Variable: NPLR
Method: Panel Least Squares
Sample: 2000 2011
Periods included: 12
Cross-sections included: 13
Total panel observations: 154
Variable
Coefficient
Std. Error
t-Statistic
Prob.
log(TA)
C_AS
OV_TA
BC_PV
GDPGR
INFLR
UNEM
Crisis
C
0.639636
-0.180017
0.975109
-0.011525
-0.203492
0.129211
0.125626
1.010975
-5.127012
0.128594
0.065872
0.249253
0.003562
0.063978
0.140034
0.045625
0.373120
2.027682
4.974094
-2.732822
3.912132
-3.235303
-3.180664
0.922710
2.753458
2.709520
-2.528509
0.0000
0.0071
0.0001
0.0015
0.0018
0.3577
0.0067
0.0076
0.0125
R-squared
Adjusted R-squared
0.476669 F-statistic
0.447796 Prob(F-statistic)
16.50892
0.000000
The data in Table 3 confirm a good degree of viability of the proposed and
tested model (R-squared = 0.4767, Adjusted R-squared = 0.4478), which
expresses the fact that the dependent variable NPLs ratio is relevantly
determined by the independent variables.
We note, once again, the negative impact, statistically significant under the
threshold of 1%, of the capital adequacy ratio (coef. = -0.1800) and GDP
growth rate (coef. = -0.2035), confirming the correlation results, but also of the
bank credit to private sector (coef. = -0.0115) on the NPLs ratio.
152
On the other hand, bank size (coef. = 0.6396), cost efficiency (coef. =
0.9751), unemployment (coef. = 0.1256) and, especially, crisis manifestation
(coef. = 1.0110) resulted as very significant determinants (below the threshold
of 1%) of the increase of NPLs ratio, confirming the former theoretical
considerations, while inflation appears again as an insignificant determinant.
Based on the results, we can conclude, first, that in the analysed banking
systems both the capital adequacy and the economic growth have a significant
impact on keeping the NPLs ratio low.
At the same time, we note that there is a strong impact of increasing the
Npls ratio generated by the manifestation of the economic and financial crisis,
in general, and in particular through the increase of unemployment, which can
be amplified by internal factors as is the case of the inadequate cost efficiency
management, but also by the size of the banks. Thus, in our opinion, there are
necessary both measures taken by the banks and also measures of the
governments, in order to limit the accumulation of NPLs.
Banks in the analyzed area should focus their efforts into improving cost
efficiency, by cutting off the unnecessary or excessive expenses and use more
money for following and recovering the granted loans and also for creating
specialized departments in loans supervision and recovery.
On the other hand, based on the results from the analysis, in our opinion
there are needed efforts of the governments for encouraging an increase of
employment, which should have effects both on improving the repayment
capacity of the borrowers of all kind, but also on GDP growth.
5. CONCLUSIONS
Our research starts from the idea that non-performing loans are affecting
seriously both the financial condition of the creditor banks, and also the
functionality of the economy, by determining a contraction of the lending
activity and diminishing thus the financing of the economy. At the same time,
we agree that their accelerated ascending trend can indicate an imminent onset
of a financial and economic crisis, which can determine the accumulation of
even more NPLs, generating a dangerous spiral. In this context, it is of a very
high interest the analysis of the possible determinants of NPLs and finding out
those measures necessary to counteract their formation and their increase.
Our analysis, based on econometric tools such as Pearson correlations and
Panel Least Squares method, is focused on 13 countries from Western Europe,
on 2000-2011 period, which is marked in its last part by the manifestation of the
economic and financial crisis. We considered as determinants of the NPLs ratio,
both internal factors (bank size, capital adequacy, cost efficiency, bank risk
taking behaviour) and external ones (GDP growth, inflation, unemployment),
adding also a dummy variable in order to catch the manifestation of the crisis.
In the first stage of the analysis, using Pearson correlations we found, that
for the considered data panel, it results that there are significant positive
linkages between the NPLs ratio, on the one hand, and bank size, cost
153
efficiency, unemployment and the crisis manifestation, on the other hand, all of
the latter appearing to sustain the accumulation of NPLs. We also noticed that,
capital adequacy and GDP growth are significantly and negatively correlated
with NPLs rate, acting against the NPLs growth.
We have deepened the analysis further, by building and testing a regression
model for the determination of the NPLs rate, considered as dependent variable,
determined by the other factors, in the position of independent variables. Thus,
the results of testing this model confirmed again that proper capital adequacy
and GDP growth are acting against the increase of the NPLs proportions, along
with the banks orientation for lending to private sector. On the other hand, yet,
bank size, cost efficiency, unemployment and the crisis manifestation resulted
to be the main drivers of the increase of the NPLs.
Based on the previous results we can conclude that there are strong
influences on the NPLs ratio level coming both from the banking system but
also from the macroeconomic environment. We consider that, in the specific
case of the banking systems from the Western European countries that we have
analyzed, banks need to improve the management of the cost efficiency, by
cutting off the unnecessary or excessive expenses and use more money for
following and recovering the granted loans and also for creating specialized
departments in loans supervision and recovery. At the same time, in our opinion
there the governments should focus on encouraging employment, which will
have effects both on improving the repayment capacity of the borrowers of all
kind, but also on the desired growth of the GDP.
References
[1] Bilan, I., Roman, A. (2015). Effects of macroeconomic factors on bank loans
quality: Evidence from Central and Eastern Europe Countries, 15th EBES
Conference, Lisbon Portugal, January 2015.
[2] Chaibi, H., Ftiti, Z. (2015). Credit risk determinants: Evidence from a cross-country
study, Research in International Business and Finance, 33(2015), pp.1-16.
[3] Espinoza, R., Prasad, A. (2010). Non-performing Loans in the GCC Banking
System and their Macroeconomic Effects. IMF Working Paper WP/10/224.
[4] Filip, B.F. (2014). Non-performing loans - dimension of the non-quality of bank
lending/loans and their specific connections, Theoretical and Applied Economics,
no 5(594), pp. 127-146.
[5] Fofack, H. (2005). Nonperforming Loans in Sub-Saharan Africa: Causal Analysis
and Macroeconomic Implications. World Bank Policy Research Working Paper No.
3769.
[6] Kaminsky, G., Reinhart, C. (1999). The Twin Crises: the Causes of Banking and
Balance of Payments Problems. The American Economic Review, Vol. 89 (3), pp.
473–500.
[7] Khemraj T., Pasha, S. (2009). The determinants of non-performing loans: an
econometric case study of Guyana. The Caribbean Centre for Banking and Finance
Bi-annual Conference on Banking and Finance, St. Augustine, Trinidad.
154
[8] Klein, N. (2013). Non-Performing Loans in CESEE: Determinants and Impact on
Macroeconomic Performance. IMF Working Paper WP/13/72.
[9] Louzis, D. P., Vouldis, A.T., Metaxas, V.L. (2010). Macroeconomic and Bankspecific Determinants of Nonperforming Loans in Greece: A Comparative Study of
Mortgage, Business, and Consumer Loan Portfolios. Bank of Greece Working
Paper 118.
[10] Nkusu, M. (2011). Nonperforming Loans and Macrofinancial Vulnerabilities in
Advanced Economies. IMF Working Paper No 11/161.
[11] Salas, V., Saurina, J. (2002). Credit risk in two institutional regimes: Spanish
commercial and savings banks. Journal of Financial Services Research 22, pp.
203–224.
155
INFLUENCE OF SOME INSURANCE MARKET FIGURES
ON GDP
BOGDAN FIRTESCU
Faculty of Economics and Business Administration, University Alexandru Ioan
Cuza of Iasi
Iasi, Romania
[email protected]
Abstract
Insurance market is composed by the demand for insurance, derived from persons and
business who wishes to buy insurance products and insurance offer that comes from
specialized insurance companies authorized in this field. The insurance market
approach must be analysed in the broader development of insurance business, which, in
turn, should be included in the global economy, the economy of a group of countries or
a certain state. On the other hand, the whole insurance system itself was also due to
factors occurs only within it. Thus, the factors leading to increase or decrease in
economic activity will positively influence and/or negative evolution of the whole
insurance. The inverse effect - the influence of the insurance system on economic
growth, is analysed by taken into discussion the benefits or claims paid by insurance
companies, being the core premise for continuous business activities and maintain of
people’s health. Our paper wants to investigate the role of insurance market in
economy, trying to find out the effects of the benefits or claims paid and its impact to
GDP. In this approach, we investigate the effects of the benefits or claims paid for life
insurance, health, property and motor.
Keywords: European insurance market, economic growth, insurance financial system,
claims paid, benefits paid
1. THEORETICAL APPROACH ON INSURANCE MARKET
CHARACTERISTICS
As any competitive market, insurance market is composed by the demand
for insurance, derived from persons and business who wishes to buy insurance
products and insurance offer that comes from specialized insurance companies
authorized in this field. An insurance market is often characterized by its size.
Decisive element for the size of the insurance market is demand driven by both
objective factors (economic strength and financial capacity to purchase
insurance) and subjective factors (organizational culture, understanding the
usefulness and necessity of practicing insurance). Insurance market size can be
156
expressed by several indicators, such as the number of contracts concluded
during the reporting period, the number of active contracts during the period,
the amount of premiums written and earned, the total commitments made by
insurers at a time (Lungu, 2002).
In the framework of actual mutations, analysis performed on the insurance
market has relevant to particular elements of its assessment, which differ from
the event focused on supply and demand relations in other fields. Thus, it was
found that overall insurance market is actually composed of many national
markets, regional branches of insurance markets, each with its own
characteristics, determined by: the participation to varying degrees, the players
market, the predominance of sectors or types of contracts, its own regulations,
the share of insurance and reinsurance activities in total.
Insurance market, characterized primarily by its size, is described by
several indicators, such as the number of contracts concluded during the
reporting period, the number of active contracts during this period, the amount
of premiums written and earned, the total the commitments made by insurers at
a time (Văcărel, Bercea, 2000).
The insurance market approach must be analysed in the broader
development of insurance business, which, in turn, should be included in the
global economy, the economy of a group of countries or a certain state. On the
other hand, the whole insurance system itself was also due to factors occurs
only within it. Thus, the factors leading to increase or decrease in economic
activity will positively influence and/or negative evolution of the whole
insurance. Other influences only insurance business concern: increasing or
decreasing real incomes of the population leads, directly, to mutations in the
insurance business in all its sectors. Instead, the protection of the population
through social security or private pension funds influence directly on the
evolution of life insurance only (Firtescu, 2010).
Our paper wants to investigate the role of insurance market, as parts of the
financial system, focusing on positive effects that the benefits and claims paid
have on GDP. In this approach, we investigate the effects of the benefits paid
for life insurance, health, property and motor. Health insurance is designed to
cover the medical costs of illnesses or accidents for individuals or groups. In
addition to providing cover for medical costs, health insurers also offer other
products such as critical illness, disability or long-term care insurance. National
variations can largely be explained by the specific features of the individual
health protection schemes that exist in Europe. The type of cover varies as a
result of the diverse social security systems in place in different countries.
Private health insurance in Europe takes four basic forms: additional
(complementary and supplementary) private health insurance: a voluntary cover
to complete the health insurance needs of the statutory insured; substitute
private health insurance: replaces publicly funded healthcare; duplicate private
health insurance: operates in parallel to the public system, offering a private
alternative or duplicate cover (as in the UK and Spain); mandatory private
157
health insurance: the Dutch and Swiss health systems are examples of
mandatory regimes in Europe, with some public aspects and fully private
voluntary complementary cover. Due to the vast diversity of private health
insurance provision across Europe, the allocation of the benefits paid varies
greatly from one country to another. However, in general, benefits are mostly
dedicated to the reimbursement of hospital care and outpatient services (nonhospital care, such as the reimbursement of doctors’ and dentists’ fees).
Property insurance provides protection against risks to property such as fire,
theft and some weather damage. Motor insurance is insurance purchased for
cars, trucks, motorcycles, and other road vehicles. Its primary use is to provide
financial protection against physical damage and/or bodily injury resulting from
traffic collisions. To a lesser degree, motor insurance may additionally offer
financial protection against events not arising from traffic collisions, such as
theft and damage to the vehicle (Insuranceeurope, 2014, p. 18-29).
2. DATA AND MODEL
2.1 Data
The data is obtained from Insuranceeurope database, representing values
for: gdpcmp - GDP at current market prices - 2003-2012 (€m), hbp - Health
benefits paid - 2003-2012 (€m), lbp - Life benefits paid - 2003-2012 (€m), mcp
- Motor claims paid - 2003-2012 (€m), pcp - Property claims paid - 2003-2012
(€m).
The summary of the data is shown below:
Table 1. Data description
Statistic
N
Mean
St. Dev.
Min
Max
Year
GDPCMP
320
320
2,007.500
404,241.700
2.877
610,179.200
2,003
2,718
2,012
2,666,400
hbp
lbp
mcp
pcp
210
290
281
264
2,931.238
18,413.110
3,313.833
1,770.159
6,886.667
39,272.750
5,322.502
3,251.320
0
4
26
4
37,685
248,640
20,444
14,300
(Source: Statistics N°48: European Insurance in Figures dataset (2012 data)
14 Feb 2014 - Statistical publication)
Panel data is unbalanced, being obtained from 32 countries (Austria,
Belgium, Bulgaria, Croatia, Cyprus, Czech Republic, Denmark, Estonia,
Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Latvia,
Liechtenstein, Luxembourg, Malta, Netherlands, Norway, Poland, Portugal,
Romania, Slovakia, Slovenia, Spain, Sweden, Switzerland, Turkey, United
Kingdom) for a period between 2003 and 2012.
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2.2. The model
The model is shown below:
n
Dv t = c + ∑ α i IVit + µ
i =1
where:
Dvt – Dependent variable, represented by Gross Domestic product, current
market prices ;
IV – Independent variables, represented by hbp - Health benefits paid - 20032012 (€m), lbp - Life benefits paid - 2003-2012 (€m), mcp - Motor claims paid 2003-2012 (€m), pcp - Property claims paid - 2003-2012 (€m);
i – counter by category in independent variables;
t – Time period (2003-2012);
n – number of independent variables (4 variables);
α – Coefficients (estimated parameters);
c-constant;
u – Idiosyncratic errors.
a.
Results of multiple linear regression model
Multiple linear regression model (robust standard errors) is summarized as
follow:
Table 2. Results of multiple linear regression (robust)
Dependent variable: gdpcmp
lbp
0.573
(0.443)
hbp
4.541***
(0.729)
mcp
78.063***
(2.477)
pcp
64.244***
(4.956)
Constant
58,830.780***
(6.625.425)
*
**
Note: p<0.1; p<0.05; ***p<0.01
(Source: author’s calculation)
Multiple linear regression (no panel data) shows that independent variables
hbp (health benefits paid), mcp (motor claims paid) and pcp (property claims
paid) are statistically significant and have positive effects (the expected effect)
on dependent variable gdpcmp (GDP at current market prices). In conducted
regression, independent variable lbp (life benefits paid) has the expected sign,
but is not statistically significant.
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2.4. Results of panel data multiple linear regression model
In panel data model, panel id variable is Country, and time variable is
Year. The results of fixed effects (within) regression and random effects
regression, robust standard errors, are shown below:
Table 3. Results of Panel Data Multiple Linear Regression Model (fixed
and random effects)
Statistic
Lbp
Hbp
Mcp
Pcp
Dependent variable: gdpcmp
fixed effects
(1)
2.922***
(0.234)
t=12.504
p=0.000
29.530***
(14.303)
t=2.065
p=0.041
46.109***
(23.054)
t=2.000
p=0.048
16.772
(15.072)
t=1.113
p=0.268
Constant
Random effects
(2)
2.684***
(0.314)
t=8.551
p=0.000
10.529
(8.115)
t=1.298
p=0.196
75.743***
(9.005)
t=8.411
p=0.000
30.271
(19.177)
t=1.578
p=0.117
66,417.200***
(21,861.610)
t=3.038
p=0.003
Note: *p<0.1; **p<0.05; ***p<0.01
(Source: author’s calculation)
Multiple linear regression (panel data model with 0.7377 R-sq value)
shows that independent variables lbp (life benefits paid), hbp (health benefits
paid), and mcp (motor claims paid) are statistically significant and have positive
effects (the expected effect) on dependent variable gdpcmp (GDP at current
market prices). In conducted panel data multiple linear regression, independent
variable pcp (property claims paid) has the expected sign, but is not statistically
significant.
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2.5. Results of the statistical tests
First, we have run VIF and collinearity diagnostics, results suggesting that
there are no problems. The results are shown below:
VIF
lbp
hbp
mcp
pcp
3.121053
1.355103
3.960677
4.589735
For choosing Fixed or OLS, we conducted the poolability test, results
showing that we should accept the presence of individual effects, so panel data
estimation is better than OLS model (see results below).
F test for individual effects
formula: gdpcmp ~ lbp + hbp + mcp + pcp
F = 28.1238, df1 = 24, df2 = 170, p-value < 2.2e-16
alternative hypothesis: significant effects
In order to choose between Random or OLS, The Breusch-Pagan Lagrange
multiplier (LM) test was done, suggests that there are significant differences
across units, so random effects regression is better than a simple OLS
regression.
Lagrange Multiplier Test - (Breusch-Pagan)
chisq = 483.3622, df = 1, p-value < 2.2e-16
alternative hypothesis: significant effects
Hausman Test suggests (results below) that random model is more
appropriate. We choose to estimate both models (fixed and random), based on
Baltagi's suggestion to also use the information criteria in order to choose
between FE and RE models (Baltagi, 2008).
Hausman Test
chisq = 2.7983, df = 4, p-value = 0.5921
alternative hypothesis: one model is inconsistent
The Breusch-Pagan BP test (results below) confirms the presence of
heteroskedasticity, so robust option (as used) is necessary.
Breusch-Pagan test
formula: gdpcmp ~ lbp + hbp + mcp + pcp + factor(Country)
BP = 199.9705, df = 35, p-value < 2.2e-16
All tests suggest that the results obtained from panel data regression are
better than OLS, some of the independent variables are statistically significant,
and have the expected signs.
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3. CONCLUSIONS
The paper concentrate on the role of insurance market, as parts of the
financial system, in actual economy (providing risk dissemination and
reconstruction after losses), focusing on investigating the positive effects that
the benefits and claims paid have on GDP. In this approach, we investigate the
effects of the benefits paid for life insurance, health, property and motor. Our
findings suggest that a linear panel data random effects model with robust
standard errors is appropriate (based on Hausman test). The model’ results
shows then following: life benefits paid has, as expected, a positive sign, an
average growth in benefits paid having a positive effect, being statistically
significant at 5% level; motor claims paid has, as expected, a positive sign, an
average growth in claims paid having a positive effect, being statistically
significant at 5% level. As expected, we find that the claims and benefits paid
by the insurance system have an important role in actual economy, where
insurance market is an important actor, along with capital market and banking
system.
References
[1] Baltagi, B.H. (2008). Econometric Analysis of Panel Data. Chichester: John Wiley
& Sons Ltd.
[2] Fîrțescu, B. (2010). Sistemul financiar al României. Iași: Editura Universității
Alexandru Ioan Cuza.
[3] Insuranceeurope, (2014). Statistics N°50, European Insurance in Figures,
December
2014.
Retrieved
from
http://www.insuranceeurope.eu/factsfigures/statistical-publications/european-insurance-in-figures
[4] Lungu, N. (2002). Bazele asigurarilor de bunuri și personae. Iași: Sedcom Libris.
[5] Văcărel, I., Bercea, F. (2000). Asigurări și reasigurări, Ed. a II-a. București:
Editura Expert.
162
THE ROLE OF SPECIAL CLAUSES WITHIN MOTORS’
INSURANCE CONTRACT
MARIUS DAN GAVRILETEA
Babeș-Bolyai University, Faculty of Business
Cluj-Napoca, Romania
[email protected]
CORNELIU BENTE
University of Oradea, Faculty of Economic Sciences
Oradea, Romania
[email protected]
Abstract
Insurance contract represents the main juridical act that connects insurance companies
to their clients. Entire insurance industry is relying on the effects of this contract:
insurance subscribing (clients will pay insurance premiums if they agree the terms of
the insurance contract) and compensation of the losses (insurance companies will pay
losses caused by insured risks mentioned in the insurance contract). Usually insurance
contracts include all the juridical terms that are related to the transferred risks and
compensation, but sometimes for supplementary coverings of special risks there added
included special clauses. During this paper, we will analyse these clauses, their effects
on insurance contract and how they can be used as a marketing instrument by
insurance companies. Some risks are covered on the basis insurance contract, while
other risks are covered on special clauses. Clients need to analyse carefully the
coverage they need protection for, in order to see if they are covered or no on the main
contract. In this way special clauses will legally have the same importance as insurance
contract. We will have proposal both for clients and for insurance companies, in order
to see the real benefits of these special clauses.
Keywords: Insurance contract, special clause, premium, compensation
JEL Classification: G22
1. INTRODUCTION
It is generally known that all insurances that are subscribed have a juridical
base – insurance contract. Insurance contract has different definitions in
insurance literature. The insurance contract is consider a promise that the
insurer, in the exchange of a premium, will pay for a loss that may occur in the
future (Seog, 2010).
163
Another author, when refers to insurance contract, mentions the risks and
its’ possible effects – or risk may happen or may not (Rausand, 2011). Also, he
is referring more to hazards as a source of danger that may cause losses.
Insurance contract is also describe as a legally binding agreement that creates
rights and duties for involved parties (Dorfmann & Cather, 2013). More they
suggest the important role of standardization of insurance policies (having a
standard format, clients are familiar with any contract no matter if they choose
an insurer or other).
Other authors (Rejda, 2003) beside the risk transfer process use in
definition of insurance contract four basic requirements: offer and acceptance,
consideration, competent parties and legal purpose.
As a rule, specialists in insurance from most developed countries
appreciate the importance of the insurance contract – it refers to coverage of
insurable risks (mostly general/common risks), the cases when an occurred loss
is compensated and includes all terms definition and some standard parts
(Dionne, 2013).
In Romania, Insurance contract its’ component/structure is defined by Law
136/1995 (and modifications), Law 32/2000 (and modifications), Law 403/2004
(and modifications).
After juridical character, insurance contracts can be simply divided in two
major categories:
- Contracts for mandatory insurances – in this case insurance contract is
established by law, all insurance companies must use it as required (ex: contract
for Motors’ Third Party Liability; contract for Pool Against Disaster contracts),
there are no extra clauses to be added
- Contracts for facultative insurances – insurance companies follows the
requirements for general parts, and then it appears particularities of each
insurance and each insurer – in this case there are options for extra clauses to be
added.
2. SPECIAL CLAUSES – ANNEXES TO INSURANCE CONTRACTS
Insurance clients have different insurable needs. All these needs rely on the
way they are feeling the exposure to the risks. The risk exposure differs for each
insurance class: property, third party liability, life insurance (Gupta, 2009). And
also there are significant differences even within the same insurance class: the
risks that an individual is exposed to cannot be compared to the risks a company
is exposed to. These differences seems to be minor in case of vehicle insurances
(all of vehicles are exposed to the same category of risks), but the facts prove
that risks are higher for a company vehicle because the frequency of utilization
is higher than in case of individual (at least referring to occurrence part)
(Weisburd, 2015).
Simply following this example, insurance facultative contracts for vehicles,
differs from an individual to a company (Moreover, even within the same
insurance companies these contracts are different) (Richaudeau, 1999). The
164
differences appear when we analyzed the insured risks and exclusions, the way
of compensating partial and total losses.
2.1 Special Clause – Extra coverage
Because motor/vehicle facultative insurance contracts offer the most
known in the Romanian insurance market, the analysis in this paper will be
focused mostly on this type of insurance. In many cases facultative insurance’
contracts are made in order to cover the basis risks that clients are exposed to.
The insured risks are usually grouped within different groups. So, from 3 or 4
groups of risks each client will choose only the groups that include the risks
they are exposed to. For example, in case of a vehicle facultative contract, theft
and risks related to theft may be included into a specific group. In case the
owner of the car has supplementary measures against theft (alarm, GPS
monitoring) there may be no reason to pay insurance premium for theft. Or in
case the vehicle is a cheap one, a vehicle that is not so expensive or it is parked
always in secure places – the judgement may be similar. Another example may
be risks that are generated only by natural phenomenon – they are included in
other group, individuals and companies that estimate are not exposed won’t but
this group.
Following the example for facultative insurance for vehicles, a very
common and with high frequency of occurrence is vandalism risk. Within its’
description, we can find also mention “vehicle was found hit” (hit and run
principle in US insurance system). Many insurance companies in Romania do
not include this risk as insurable on basis facultative motors’ own insurance
contract. This risk may be included as insured just with a Special Clause for
vandalism. So, most of clients choose to add this clause to the basic contract.
Within the same insurance contract for vehicles another option when a
special clause is offered by insurance companies refers to the risks that are not
so common – not all clients are exposed to these risks: driving the vehicle on
other roads than public ones. This clause is used only by clients that use to drive
in bumpy/forestry roads.
Another very sensible special clause refers to the service where the vehicle
should be repaired after an insured event. Clients may choose to repair the
damaged vehicle to the garage of the dealer of their car (in this case they will
have a supplementary premium) or within the contracted garages (in different
contracts/clauses may be found as partner garage) of the insurance companies.
There are two aspects to be discussed related to this special clause in case of
vehicles older than 5-6 year:
- If there is a minor damage, the client may not be interested in this
clause
- In case of a total loss there are significant financial differences in
compensation of the loss. Let assume the Insured Sum is 10,000 EUR. The total
loss is declared in case when the value of repairing is higher, usually than 75%
of Insured Sum. In this case, based on the mentions from insurance contract, the
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compensation offered by insurance company to the client will be 75% of the
insured sum (7.500 EUR) and the wreck of the vehicle. The problem differs on
the way this repairing is calculated. If the client did not choose for special
clause of a the garage of the dealer, the repairing may cost less than 75% of the
Insured Sum, and in this case insurance company will only repair the vehicle
because this is not a total loss. Otherwise, a client that pays supplementary for
this clause, in case of a similar loss may reach the level of repairing of 75% of
Insured Sum because the prices of the pieces and labour costs are significantly
higher (the differences between these two types of garages are given by the fact
that the garage of the dealer use only original pieces and a partner garage use
similar pieces that are not original). In this case, the client will record a total
loss and he will be reimbursed based on the contract and special loss with 7.500
EUR Sum and the wreck. Further, the client may take the wreck and go to other
garage, where the car will be repaired with 5.500 EUR (let assume this amount).
In this case the client will have the car repaired and remains with almost 2.000
EUR.
This second part of the example (total loss case) shows us how the client
may take advantages of a special clause. This advantage for client represents a
financial disadvantage for insurance company. Insurance companies noticed too
the important differences between the repairing offers. Based on this, some
insurance companies changed insurance contract only in the part of the total loss
compensation. They mention that in case of a total loss, insurance company will
sell the wreck on the market, and then will compensate the difference to the
client until the level of the Insured Sum (Ciobanu, 2013). Following our
example, insurance company will organize an auction for the wreck and let
assume it will be sold for 4.000 EURO. In this case, the client with total loss
will receive 4.000 EUR from the winner of the auction and 6.000 EURO from
the insurance company (clients receives Insured Sum and insurance company
save 1.500 EUR). Anyway, this new statement in the contract may be risky for
insurance companies: They are forced to pay Insured Sum to the client – no
matter if they sell the wreck or its’ selling price. If the wreck it is sold only for
2.000 EURO, insurance company will be forced to compensate with 8.000
EURO.
So, the decision of compensating a total loss entirely by the insurance
company may be carefully analysed by actuaries within each insurance
company. Anyway, this “business with wrecks” seems to have a close end.
Based on EU normative when a vehicle is declared wreck it must be officially
destroyed by an authorized company that will issue a certificate (Phillips &
Chippendale, 2002). Having this mention introduced and respected also in
Romania, insurance companies will be forced to pay entire Insured Sum.
2.2 Special Clauses – Strategy used by insurance companies
Insurance companies are into a continuous competition in the Romanian
Insurance market. Because motors’ own vehicle insurance represents a very
166
common and easy selling contract, insurance companies use different strategies
to attract the clients. They hope that later will be able to sell other insurance
policies – especially non motor classes (property and homeowners insurance,
travel, health insurance, life insurance) (Siepel, 2007). In order to attract a
client, they need to have a product that may fit the requirements of the market.
So, each insurance company, try to offer different insurance than competitors.
First of all, insurance companies give a name to that contract in order to be
easily recognized in the market. We will use within this research Allianz Tiriac,
Generali and Groupama as Romanian insurance companies that have own
motors insurance contracts. In order to differ one from other, they are offering
different type of motors’ own damages insurance policies with different
coverages:
- Allianz Tiriac uses 4 types of online possible contracts – offering
different of coverages: Direct Essential, Direct Assist, Direct Plus, Direct
Premium (the most important differences are referring to road assistance,
passengers accidents)
- Groupama uses 5 types of online possible contracts: Arret, BonCourage, Contre-Pied, Defense, Extreme (in this way the offer is very carefully
presented – from risks with low frequency of occurrence and low severity – to
all risks – each possible driver having an option that may be suitable for its’
profile)
- Generali uses only 2 types of online possible contracts: Perfecto and
Completo
In order to observe how these prices differs we assumed an example: an
individual of 34 years old, domicile in Cluj Napoca (high frequency of traffic
accidents), 15 year of driving experience, vehicle is an 5 year old one, 1.8
cylinder, 85 horse powers, 75000 kilometres usage, new value 18000 EURO.
The prices offered by these insurance companies are:
- Allianz Tiriac - 453 EUR, deductible 100 EURO (but if the loss is
higher than almost 1600 EURO there will be no deductible), Insured Sum is
7.965 EURO – option Direct
- Groupama – 85 – 755 EUR (option Arret to Extreme), deductible 100
EURO and 10% of Insured Sum in case of total loss, Insured Sum is 8.800
EURO
- Generali - 640 EUR, deductible 100 EUR, option Completo – Insured
Sum 8.200 EURO
In our simulations we used official calculators from these insurance
companies, with a very important remark: all insurance companies mentioned
that the prices may differ in case of error in marking completed fields. If we
judge after the price and most of the risk covered by insurance contract Allianz
seems to be the best option. In case we analyse the risks, it can be noticed two
major risks covered by the rest of competitors and not covered by Allianz:
- Generali covers damages to the tyres of the car, damages resulted from
driving outside of public roads
167
- Groupama covers damages caused by vandalism even with chemical
and corrosive agents
Allianz has the advantage that in case the loss is higher than 7.000 RON
(aprox: 1.600 EURO) there is no deductible. Generali has the advantage that
offers a self-service clause for windshields and rear and lateral windows (clients
only presents photo with loss and the original receipt and invoice).
Unfortunately, there is no mention where the vehicle will be repaired (official
garage or partner garage). Also, when we analyse the risks extension outside of
Romania, only Generali Insurance covers them. Allianz and Groupama will
cover them on special clause. This special clause can be offered for free if the
clients has M.T.P.L. paid to the same insurance company, or it will cost a
supplementary otherwise.
Following these analyses it can easily be noticed that insurance companies
offer different insurance contracts that can be tailored with special clauses as
each client may need. This strategy is very aggressive, because insurance
companies offer for the first time a possible contract with lower coverage and
low insurance premium. In this way the client may choose that insurance
company, and before signing the contract, realizing that there are also other
options available on extra clauses, it is very possible just to add it in that
moment.
Also, insurance companies estimate that clients may not have enough time
to do prior price research in the insurance market, so offering extra clauses even
if they are not needed may represent an extra source of increasing the gross
written premiums.
An alternative to this situation is represented by insurance brokers. The
clients may choose to eliminate the analysis of various offers and extra clauses
that may be added, by choosing the services of the broker. Intermediating many
insurance companies, knowing their products, brokers will offer the product and
the clauses that suits better to the needs of the clients.
3. CONCLUSIONS
Special clauses represent an active part of the insurance contract. It is used
both as a strategy by the insurance companies (to offer tailored products to
different risk exposures of the clients) and to attract the clients with low prices
that will increase later by supplementary premiums.
For clients, the most important thing is to realize what theirs’ exposures are
and then to buy protection only for needed risks. Also, they must be aware of
the fact that extra clauses are full part of a contract and in case they do not have
the knowledge to manage these juridical aspects, they can easily use the
services of an insurance broker.
Special clauses represent a normal thing in the insurance market and it
must be accepted as they are. Insurance companies that will use them for the
purpose they were created (extension of the risk coverage) are the one that are
168
successful in the market and it will be appreciated by the clients for the way
they are covering different exposures.
References
[1] Ciobanu, I. (2013). Atentie la Asigurari. Retrieved from http://masini-siutilaje.masinisiutilaje.ro/numarul27/atentie-la-asigurari.html
[2] Dionne, G. (2013). Handbook of Insurance, 2nd edition. New York: Springer.
[3] Dorfmann, S.M., Cather D. (2013). Introduction to Risk Management and
Insurance. 10th. USA: Pearson.
[4] Gupta, P. (2009). Principles and practice of non life insurance (Rev. ed.). Mumbai:
Himalaya Pub. House.
[5] Phillips, J., & Chippendale, S. (2002). Who pays for car accidents?: The fault
versus no-fault insurance debate. Washington: Georgetown University Press.
[6] Rausand M. (2011). Risk Assessment – Theory, Methods and Applications. N.J. J.
Wiley & Sons.
[7] Richaudeau, D. (1999). Automobile insurance contracts and risk of accident: An
Empirical Test Using French Individual Data. The Geneva Papers on Risk and
Insurance Theory, vol. 24, 97-114.
[8] Rejda, G.E. (2003). Principles of Risk Management and Insurance, 8th Edition.
USA: Pearson.
[9] Seog S.H. (2010). The Economics of Risk and Insurance. USA: Wiley-Blackwell.
[10] Siepel, S. (2007). Essential survival guide to living on your own: Money,
relationships, house & car hunting, health care, insurance, voting, cleaning, and
much more. New York: Howard Books.
[11] Romanian Law 136/1995
[14] Weisburd, S. (2015). Identifying Moral Hazard in Car Insurance Contracts. Review
of Economics and Statistics, vol. 97, issue 2, 301-313.
169
SHADOW BANKING IN ROMANIA. DOES’IT COUNT?
SILVIA GHITA-MITRESCU
Ovidius University of Constanta
Constanta, Romania
[email protected]
CRISTINA DUHNEA
Constanta, Romania
[email protected]
Abstract
This paper aims at finding the answer to a question raise in the financial literature in
the recent years regarding financial intermediation: does shadow banking count in the
Romanian financial system? To find the answer to this question we cleared the concept
of the shadow banking and we used several quantitative and qualitative indicators in
order to determine the importance of the shadow banking in Romania. The findings of
the research conducted allowed us to draw the conclusion that the credit intermediation
on the Romanian financial market is more than 99% carried out by the traditional
banks and the shadow banking activities are poorly developed.
Keywords: shadow banking, Romanian financial system, non-bank financial
institutions
1. INTRODUCTION
The concern for the development of the financial intermediation activities
that ensure a proper functioning of the national financial systems is not new but
the financial crisis triggered in 2007 - 2008 put in a new light the need to build a
balanced structure of these systems.
The banking system and the credit institutions were, since the 19th century,
subject to ongoing preoccupations to provide a proper regulation in order to
limit the risks entailed by the credit intermediation activity but other
components of the financial system were given too little attention, especially in
terms of supervision and regulation.
This paper aims to analyse the importance it has in the Romanian financial
system a segment poorly considered by literature – the shadow banking system,
using quantitative and qualitative indicators in a comparative approach to the
financial system components.
170
The financial crisis has brought to the attention of the monetary authorities,
international organizations and specialists the shadow banking activity. On one
side were highlighted the risks brought forward by the functioning of this
system with minimal regulation, and on the other hand the benefits it can
provide to investors and borrowers when the traditional banking system faces a
contraction as it was the case during the recent international financial crisis.
The paper is divided into several chapters: an approach to the concept of
the shadow banking, an analysis of the Romanian financial system components
aiming at identify the place occupied by the shadow banking system, a brief
analysis of risks and benefits that shadow banking activities brings to the
Romanian financial system and conclusions.
2. DEFINING THE SHADOWS
With the increasing attention paid to credit intermediation activities outside
the traditional banking system appeared in the literature the preoccupation to
identify methodologies allowing a correctly estimation of the size and dynamics
of this sector. The first step in this direction implied a clear definition of the
activities circumscribed to the shadow banking concept on the one hand and
identify those entities which, by virtue of the nature of the financial market
activities, can be considered part of this system on the other hand.
Among the economists who used the term “shadow banking” was Paul
McCulley trying to find answers regarding the triggers of the global financial
crisis developed since 2007 and pointing out that due to a strict regulation and
supervision of the banking system a more creative financing process rose
outside banks “flying below the radar of traditional bank regulation”
(McCulley, 2009).
The promoter of the efforts to conceptualize this segment of the financial
system is the Financial Stability Board that initiated since 2011, a periodical
monitoring activity of this sector and an effort to crystallize tighter regulatory
directions of the activity carried out by the shadow banking entities.
According to the FSB (2011b, p. 1) the “shadow banking system” can
broadly be described as “credit intermediation involving entities and activities
outside the regular banking system”. The name of shadow banking is sustained
by the FSB with the fact that after 2007 (the starting point of the global
financial turmoil) can be identified a ”increased recognition of the importance
of entities and activities structured outside the regular banking system that
perform bank-like functions (“banking”)” (FSB, 2011b, p. 1). Even the content
of the activity carried out by these entities is commonly accepted by the
economic literature and the institutions as European Commission, Federal
Reserve and Financial Stability Board the sector was named differently in
several occasions as “market-based financing system”, “non-bank credit
activity”, “parallel banking system” or “shadow banking system” as we will
continue to refer to.
171
Following the increased interest regarding the conceptualization and the
evaluation of the shadow banking system activity the European Commission in
its Green Paper from March 2012 (p. 2) point out two important functions of
shadow banking in the financial system (it creates additional sources of funding
and offers investors alternatives to bank deposits) but draws attention to the
need of intensifying prudential regulation and supervision.
According to European Commission there are several entities that can be
consider part of shadow banking system (fig. 1) and in some cases activities
developed by entities outside the shadow system that can be take into
consideration as shadow banking activity such as securitisation and securities
lending and repo.
Figure 1. Shadow banking entities from European Commission point of
view
Money Market Funds
(MMFs) and other types
of investment funds or
products with depositlike characteristics, which
make them vulnerable to
massive redemptions
Special purpose
entities which
perform liquidity
and/or maturity
transformation
Entities
Investment
funds, including
Exchange Traded Funds
(ETFs), that provide
credit or are leveraged
Finance companies and
securities entities
providing credit or
credit guarantees, or
performing liquidity
and/or maturity
transformation without
being regulated like a
bank
Insurance and
reinsurance
undertakings which
issue or guarantee
credit products
(Source: European Commission, 2012, p. 4)
Willem Buiter (2008) synthetize the concept of shadow banking entities
“they are functionally very similar to banks but are barely supervised or
regulated; they hold very little capital, are not subject to any meaningful
prudential requirements as regards liquidity, leverage or any other feature of
their assets and liabilities”.
3. SHADOW BANKING IN THE ROMANIAN BANKING SYSTEM
The Romania's financial system has evolved in recent decades under the
influence of both the internal economic factors and because of the trends of
financial systems in the EU countries. The restructuring of the financial system
in Romania was aimed at integration into the European financial system.
172
Seen in the light of its structure, the financial system is dominated by the
Romanian credit institutions, the share of assets in GDP of the banking system
is predominant over the past 10 years (fig. 2).
In terms of the financial system assets to GDP ratio, the period 2004-2013
can be divided into two phases: first, between 2004 and 2010, when the
financial system has doubled the value of assets in GDP from 42.3% to 90.07%,
and after 2010 when a decrease in asset values up to 81.5% in 2013 was
registered.
At the start of the analysed period, the share of assets of credit institutions
in GDP was 36.6%, increasing its value until 2010 to 73.56%. Subsequently,
during the financial crisis, the assets of credit institutions decreased as a
percentage of GDP to 65.1% in 2013, the same trend being recorded for the
whole financial system.
Figure 2. The structure of the Romanian financial system (assets as a share
of GDP)
100
%
50
0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
credit institutions
non-bank financial institutions
insurance companies
private pension funds
investment funds
(Source: NBR, Data sets, Financial Stability Report)
The non- bank financial institutions accounted for the entire period
analysed a share between 3.6% and 8.26% of assets in GDP and followed the
same trends as credit institutions, except that they reached a maximum of the
percentage of assets GDP in 2008, falling by 2010 to 6.89%, while credit
institutions recorded in the same years the maximum level of assets in GDP.
This demonstrates that the NBFIs are more exposed to a restriction of activity
during a financial crisis. At the end of 2013, the NBFIs assets represented
5.19% of GDP, the evolutionary tendency being one downward.
The assets of the insurance companies represented in the last 10 years a
percentage from 1.9 to 3.27% of GDP, reaching the highest value in 2009 and
subsequently enter a descendent trend, with a slight recovery in 2012.
A different situation in terms of evolution registered the private pension
funds and the investment funds. Although insignificant compared to other
components of the financial system, the share of their assets to GDP increased
173
in the period under review reaching maximum levels in 2013, which may be due
to investors shifting to alternative forms of investment, given that
intermediation of credit institutions decreased.
In terms of the share of each component in the system structure in the
recent three years we can notice a decrease in the importance of credit
institutions and an increase in the role of other components (Fig. 3).
Figure 3. Quarterly changes in sectoral share of the financial system
components
p
e
r
c
e
n
t
a
g
e
p
o
i
n
t
s
0.80
0.60
0.40
0.20
0.00
-0.20
-0.40
-0.60
-0.80
-1.00
Credit institutions
Non-bank financial institutions
Insurance companies
Private pension funds
Investment funds
These trends are, in our opinion, a sufficient reason to consider an analysis
of the shadow banking activity and its impact on the Romanian financial
system.
One aspect to take into consideration in order to determine the importance
of shadow banking activity in Romania is the value of assets of each component
of the financial system (fig. 4).
174
Figure 4. Total assets of credit institutions and shadow banking in
Romania (Lei bill.)
The credit institutions have experienced an upward trend of the value of
assets between 2008 and 2012, followed by a slight decrease in 2013, while the
assets of NBFIs have evolved contrarily. The insurance companies have
registered an increasing trend of their assets value until 2012, and subsequently
entered a downward trend, the value of assets in 2013 decreasing by 3.2%. The
only sector of the financial system showed a steady upward trend in the period
under review is that of the private pension funds, whose assets have increased
by an average annual rate of 1.8% every year amid the collection of new
contributions and an increase of the participants number, both in privatelymanaged pension funds (Pillar II) and the optional pension funds (Pillar III).
Amid this development of the assets value, the profitability of the
components of the Romanian financial system, assessed by considering ROA
had divergent dynamics (fig. 5).
175
Figure 5. The evoluation of ROA for credit institutions, NBFIs and
insurance companies
6.00
4.00
2.00
0.00
%
-2.00
2008
2009
2010
2011
2012
2013
-4.00
-6.00
-8.00
credit institutions
non-bank financial institutions
insurance companies
While the credit institutions have registered negative values of ROA
between 2010 and 2012 and a slight recovery in 2013 to a value of only 0.01%
and the insurance companies reached a value of -6.99% in 2013 , the NBFIs
started in 2008 with a ROA of -3.13% and ended the period under review with
a value of 3.51%.
Following this brief analysis we can conclude that shadow banking, despite
the low weight that it has in the structure of the financial system in Romania,
presents relevance to the system evolution, manifesting as a counterbalance to
the evolution of credit institutions.
4. THE SHADOW BANKING – BENEFITS FOR THE FINANCIAL
SYSTEM
The increased interest in recent years for the shadow banking activity is
due, on one hand, to the potential advantages that could bring to the proper
functioning of the financial system and on the other hand to the risks related to
the developing of this sector.
Both international bodies and experts have expressed concerns about the
rapid growth of this activity without a strict regulation but also highlighted the
benefits that shadow banking brings to the financial system with the condition
of a careful supervision and an intensified regulation.
Among the benefits of shadow banking activity in an economy we can
identify ((Institute of International Finance, 2012), (EU Green Paper, 2012)):
1. Efficiency, innovation, and specialization (they channel resources
towards specific needs more efficiently due to increased specialization)
2. Diversification and mitigation of risk (alternatives for investors to bank
deposits)
176
3. Greater flexibility and investment opportunities
4. Increased liquidity and funding (they constitute alternative funding for
the real economy, which is particularly useful when traditional banking
or market channels become temporarily impaired).
Due to all these potential benefits the entities subject to shadow banking
activities can have a real contribution to a healthy financial system.
In Romania the NBFIs help increase financial intermediation both by
lending in sectors where credit institutions are reluctant and by offering
different crediting conditions than those offered by the traditional banking
system , which may lead to increased competition in the financial system.
Figure 6. Balance of loans and market share of NBFIs between 2008 and
2014
Lei bill.
18.0
16.0
14.0
12.0
10.0
8.0
6.0
4.0
2.0
0.0
40.0
35.0
30.0
25.0
20.0
15.0
10.0
5.0
0.0
Balance of loans
%
Market share (rhs)
The NBFIs lending activity intensified in the period immediately preceding
the financial crisis, the volume of loans granted in December 2008 was the
biggest in the whole period analysed, but after this moment the lending activity
shrank amid the deepening of the financial crisis and due to the delay of
economic recovery. In this context, the market share of NBFIs reached in June
2013 a minimum of 8.9%, a figure which increased slightly to 9.3% in June
2014.
The most important benefit to having NBFIs in the Romanian financial
system, in our opinion, is the increasing access to credit for certain categories of
individuals and businesses that do not fit the criteria of credit institutions. An
analysis of the structure of loans granted by the two categories institutions
reveals the following sectorial distribution of debtors (fig. 7).
177
Figure 7. Structure of credits granted by credit institutions and NBFIs by
borrowers in 2013
In 2013 the credit institutions granted loans mainly to the trade and
manufacturing sectors while NBFIs loans were directed towards the services,
trade and agriculture. The real estate sector preferred to borrow from credit
institutions, while the share of loans granted to constructions sector was
approximately the same for credit institutions and NBFIs.
5. THE SHADOW BANKING SYSTEM - RISKS
Considering the rapid development of the shadow banking system, the Financial
Stability Board draw attention that these activities raise “systemic risk concerns,
in particular by maturity/liquidity transformation, leverage and flawed credit
risk transfer, and/or regulatory arbitrage concerns” (FSB, 2011a, p. 3).
European Commission synthetized in its Green Paper the main directions
in which the shadow banking system can affect the stability of the financial
system (European Commission, 2012, p. 5): Deposit-like funding structures
may lead to "runs"; Build-up of high, hidden leverage; Circumvention of rules
and regulatory arbitrage; Disorderly failures affecting the banking system
through direct borrowing from the banking system and banking contingent
liabilities (credit enhancements and liquidity lines); and, massive sales of assets
with repercussions on prices of financial and real assets.
If in the previous section we mentioned that the biggest advantage of
NBFIs activity in the Romanian economy is the increase of the financial
intermediation by expanding the lending opportunities, we equally believe that
easier access to loans can also be a potential risk to the financial system
stability. The evolution of non-performing loans (NPLs) of the credit
institutions and NBFIs it is an indication in this regard (fig. 8).
178
Figure 8. Non-performing loans granted by credit institutions and NBFIs
30.00
25.00
20.00
%
15.00
10.00
5.00
iun.2008
sep.2008
dec.2008
mar.2009
iun.2009
sep.2009
dec.2009
mar.2010
iun.2010
sep.2010
dec.2010
mar.2011
iun.2011
sep.2011
dec.2011
mar.2012
iun.2012
sep.2012
dec.2012
mar.2013
iun.2013
sep.2013
dec.2013
mar.2014
iun.2014
0.00
NPL ratio - credit institutions
NPL ratio - NBFIs
The NPLs ratio was growing both for the banking system and the NBFIs
for most of the period under review, but the level of non-performing loans
granted by NBFIs was greater than the credit institutions percentage of NPLs.
The smallest difference between the NPLs ratio for the two sectors was
achieved in December 2013 after this moment the difference increasing at the
expense of the NBFIs.
At the end of the period, the credit institutions registered a decreased value
of NPLs ratio of 19.2% while NBFIs faced an increase of the NPLs ratio to
23.09%. The NPL situation, although it represents a risk to the financial system
stability is not alarming, given the fact that both the traditional banking system
and the shadow banking system set up sufficient provisions to cover the risk of
non-payment.
6. CONCLUSIONS
Following the analysis conducted in this paper we can conclude that for the
Romanian financial system the shadow banking sector is underdeveloped
compared to the traditional banking system but ranks second ahead of the
private pension funds and the insurance companies considering the value of
total assets.
In Romania we cannot speak about a notable influence of the shadow
banking entities in the financial intermediation activity. In addition we can say
that the presence of the shadow banking system in the Romanian financial
system does not affect its stability because the activity is extremely narrowed
and in early stages of development if we consider the complexity of credit
intermediation activity.
179
However an analysis of the percentage of non-performing loans show that
the shadow banking system closely follows the trend of credit institutions but
reported to a much lower level of assets which show a potential source of
financial internal market imbalances.
For a better understanding of the advantages but also the risks of the
shadow banking sector growth in Romania as part of the financial system that
has proven it could still perform (as shown by the analysis of the ROA
indicator) issues regarding shadow banking activities as structure, volume and
regulation framework will be subject for futures research developments.
References
[1] Buiter, W. (2008). Lessons from Northern Rock: Banking and Shadow Banking,
March. Retrieved from http://www.voxeu.org/article/lessons-northern-rockbanking-and-shadow-banking
[2] European Commission (2012). Green Paper on Shadow Banking, March. Retrieved
from http://ec.europa.eu/internal_market/bank/docs/shadow/green-paper_en.pdf
[3] Financial Stability Board (2011a). Shadow Banking: Scoping the Issues. A
Background Note of the Financial Stability Board. April.
[4] Financial Stability Board (2011b). Shadow Banking - Strengthening Oversight and
Regulation. Consultative Document, October.
[5] Institute of International Finance (2012). Shadow banking: a forwardlooking
framework for effective policy, June. Retrieved from
https://www.iif.com/system/files/IIF_ShadowBankingPaper_06012012.pdf
[6] McCulley, P. (2009). The Shadow Banking System and Hyman Minsky’s
Economic Journey. PIMCO Global Central Bank Focus, May. Retrieved from
http://media.pimco.com/Documents/GCB%20Focus%20May%2009.pdf
[7] National Bank of Romania. Financial Stability Report – Data set.
180
THE INFLUENCE OF THE SWISS FRANC
FLUCTUATIONS ON THE ROMANIANS AND THE
ROMANIAN ECONOMY
ALINA HAGIU
University of Piteşti, Piteşti, Romania
[email protected]
MARINELA BĂRBULESCU
[email protected]
ROXANA MADALINA POPA
[email protected]
Abstract
Both literature and economic practice strengthened the idea that the Swiss franc is a
safety currency, which is why investors prefer to transfer their capital in Switzerland in
the emergence of international economic or political problems. This idea, however, was
demolished when the Swiss National Bank's decided to cancel the ceiling of 1.2 Swiss
francs per 1 euro, which led to immediate and significant appreciation of the Swiss
franc against the euro, US dollar and other currencies.
In this paper we intend to highlight the situation of the Swiss francs loans in Romania
and also to analyze the effects that the Swiss franc appreciation it has on the Romanian
economy as a result of the trade relations between Romania and Switzerland as well as
on the banking system and on population that benefited from loans in that currency.
Another objective was to highlight the realistic solutions to support those holding loans
in Swiss francs, focusing on the analysis of the solutions proposed by the National Bank
of Romania, the most responsible authority for making decisions in this respect,
regardless the suggestions and opinions more or less endorsed that were promoted by
media means since the crisis triggering.
Key words: crisis, currency, exchange rate, loan, solutions
JEL Classification: F31, G18, G28
1. INTRODUCTION
From the start we must say that the theory teaches us that the exchange rate
is the price at which changes one currency to another currency. A currency is
required on international markets if the goods of that economy are sought. A
181
strong currency can acquire this status only if has behind it a strong and
competitive economy. For example, America is strong not because on its dollars
is a special ink relative to other currencies, but because the American economy
is extremely strong and competitive. The product produced there is competitive,
ie has quality and recognition in the hands of any user. By the ratio between
currencies are measured the economies and their competitiveness, each in
relation to any other. A country with an unstable exchange rate, of depreciation
relative to the euro, for example, is a country which loses economic competition
with the euro area. Depreciation against the euro is a sign of weakness for that
economy. There is no fixed exchange rate when comparing two economies
going in different directions (Chiritescu, 2015).
Money itself is nothing. They are simple pieces of paper which has little
value. Goods endorse and empowers money. When through the exchange rate
we relate one currency to another we compare two economies and not two
pieces of paper. There are currencies and currencies as there are countries and
countries but never a weak state with a weak economy, will not have a strong
currency, as well as a powerful state will never have a weak currency. Romans
named their imperial gold currency Solidus just for the world to know that, that
was their currency and not of any lost provinces of the East or North Africa
(Pană, 2015).
After giving up the gold as a monetary standard, paper currency is printed
only in relation to traffic needs. A state with a world trade, imperialist, can
afford to own a planetary, imperialist, currency. Behind this expansion is
competitiveness and quality of goods coming from there. We want dollars in
our pockets because only with them we can buy a Boeing 747, and we do not
want in our pockets scallops from the African State, because with those shells
we can not buy anything or almost nothing. Currency and trade are today big
guns in front of which capitulates entire territories. War for better between
nations behave intense even on money territory. We are in the middle World
War of money, in which, as Switzerland demonstrated, may be used any
weapon, including the weapon of a simulated neutrality (Phillips, 2015).
2. THE ECONOMIC RELATIONS BETWEEN ROMANIA AND
SWITZERLAND
Romanian-Swiss relations are very good, not only based on cultural
affinities or economic interests, but also on shared values such as respect for
fundamental rights and freedoms or promoting democracy and the rule of law.
Switzerland is one of the leading foreign investors in Romania, occupying
31 place on December 2014, ranking 12th in the foreign investors with a
subscribed capital of 939 million and a total of 2564 companies (according to
National Office of Trade Register statistics, 31.12.2014 ) (MAE, 2015).
The main areas on which have turned the Swiss investors in Romania are:
building materials, chemical and petrochemical, electrical and electronic parts
182
manufacturing, food industry, trade, production of footwear, textiles, energy,
media etc.
The main Swiss investors in Romania are: Holcim - the largest investor
(cement), Swisspor, Sika (construction materials), ABB (Energy), Greenfiber,
Ameropa
(petrochemicals),
Roche,
Sandoz,
Helvetica
Profarm
(pharmaceutical), Nestlé, Pacovis, Carpalat, Valvis (food industry), Philipp
Morris (tobacco), Karpaten Meat (agriculture - animal husbandry),
TransGourmet (trade cash & carry), Rieker (shoes), Seco, Inter-Spitzen (textile
industry), Insta - ELBET Holding, Acceleris (EEE), Ringier, Edipress,
Romanian-Swiss Multimedia Institute (media) etc.
On 31.12.2014, the Romanian-Swiss trade value was 776.35 million euros,
of which 296.67 million euros export and 479,68 million euro import,
Romania's trade balance being unfavorable with -183.01 million Euros.
Compared to the same period of 2013, at 31.12.2014, the total volume of
Romanian-Swiss commercial trade increased by + 13.4%, of which Romanian
exports increased by + 10.74%, while imports increased by 15.119%. The
negative balance for Romania increased by + 22.96% over the same period last
year (148.83 million from. EUR to 183.01 million. Euros). On 31.12.2014,
Switzerland was ranked in the top 15 of Romanian export destination countries
with non-EU countries (1.96% share), 6th place among the countries of origin
of imports by non-EU countries (weight 3.33 %) and 4th among non-EU
countries trade deficit (after Kazakhstan, China and Russian Federation).
Table 1. Bilateral trade (million Euro)
Total
Export
Import
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
211,8
222,6
225,9
321,8
467,33
589,9
578,8
578,1
715,25
604,4
689,44
58,1
53,9
71,1
106,3
141,60
186,5
157,5
221,5
302,25
254,40
260,46
153,7
168,7
154,8
215,5
325,72
403,4
421,3
356,5
413
349,90
428,98
2011
706,9 (+2,5%)
299,6 (+15,39%)
407,3 (-5,26%)
2012
2013
741,75
277,27
464,49
684.92
268,26 (-3,25%)
416,66 (10,3%)
(Source: http://www.mae.ro/bilateral-relations/1695)
Balance
- 95,5
- 114,8
- 83,7
- 109,2
- 184,1
- 216,9
- 263,8
- 135
- 110
- 95,5
- 168,52
- 107,7
- 187,22
-148,4
The import from Switzerland is dominated by the chemical and allied
products group (pharmaceutical), encompassing 67.7% of total imports,
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followed at a great distance from the machinery, appliances and electrical
equipment by 15.6%. The two groups of goods represent 83.3% of total imports
from Switzerland. The first category of Romanian export goods in Switzerland
are: machinery, mechanical appliances and electrical equipment (with a share of
26.1%), followed by vehicles, aircraft and transport equipment (15.2%), mineral
products (13%) , metals and metal products (8.9%), furniture and miscellaneous
(8%), textiles (8%) etc.
3. THE SITUATION OF SWISS FRANCS LOANS
Before presenting the current status of loans in Swiss francs, we must
specify that in the period of granting loans in Swiss francs, 2005-2008, there
were on banking market simultaneously offers loans in euros, dollars and lei,
including from the five - six banks that have granted loans in Swiss francs. The
main difference between the four currencies was represented by the interest
rate: the highest at lei and the lowest at Swiss francs. Those who took loans in
Swiss francs were attracted by lower interest rates, leading to the possibility of
taking a higher nominal credit and as such, a bigger home or more rooms,
neglecting the superior currency risk compared with the loans in other
currencies which, in turn, carry higher interest.
Although the interest at Swiss francs was the smallest, the proportion of
those who took loans in this currency was low: about 100,000 people,
representing approximately 2.5% of those who contacted retail loans in those
days and less than 10 % of those with mortgage, the majority opting for loans in
EURO. For this reason, supporting ones, according to which loans in Swiss
francs would have been imposed or suggested by banks, is totally unfounded.
Banks do not grant loans from its own funds, but from the funds raised.
Moreover, from prudential reasons, usually banks grant loans to a certain
currency taking into consideration a refinance in the same currency. During this
collective lament regarding the fate of bank borrowers in Swiss francs, it is lost
from the view the fact that banks have to repay their creditors also in Swiss
francs and as any artificial change of the rate to borrowers would create huge
losses. Precisely for this reason, the rule in banking is that the debtor, if he
wants a loan in a currency other than that in which he has income, he assumes
the risk of exchange, while the bank assumes the risk of interest (especially
when granting loans with long maturities, with fixed interest rate).
At the time of contracting loans, no one knew how will evolve the
exchange rate EUR / RON, Swiss franc / RON, Swiss franc / euro, EUR / USD
and EUR / RON, nor commercial banks, nor National Bank of Romania or the
Swiss National Bank, neither the US Federal Reserve or the European Central
Bank, as no one predicted the financial crisis that began at the end of 2008.
Moreover, the crisis has affected the Swiss franc and prestigious financial
institutions, some brokerage firms registering losses that compel them to cease
activity.
Turning to the current situation, at the macroeconomic level, loans in
184
Swiss francs (CHF) has no systemic risk. These loans have a low share of GDP
(1.4 percent in Romania) and a low share in total loans in banks' balance sheets.
The share of CHF lending in total lending of non-financial corporations and
households in Romania was on a downward trend since 2012 (Figure 1),
reaching 4.7 percent of total lending to these sectors. The developments
occurred amid the significant reduction of loans in CHF in 2009. Currently,
Romania loans in CHF is exceeding 2.1 billion euros
Figure 1. The share of CHF loans in total loans granted to the private
sector
(Source: Central of the Credit Risk, NBR calculations)
Regarding the creditors, banks with significant exposures in the segment
of loans in Swiss francs are: Bancpost, Volksbank, Piraeus Bank, the Bank,
Romanian Bank and OTP Bank. Of the 75,000 individuals included in loans in
Swiss francs recorded in banks' balance sheets, almost a third (32%) are found
in Bancpost, 24% to Volksbank, 20% at Piraeus Bank, 11% to Raiffeisen Bank,
7% in Romanian Bank and 2% at OTP.
Table 2. Distribution of the number of customers and of the amount by the
main banks that granted loans in Swiss francs
Bank
Number of Clients
Value of Swiss franc
credits (ecquivalent in
Euros)
Volksbank
18.500
1 billion
Raiffeisen Bank
880
360 millions
Piraeus Bank
15.000
280 millions
Bancpost
25.000
270 millions
Banca Romaneasca
5.500
255 millions
(Source: http://www.bankingnews.ro/problema-credite-franci-elvetieni.html)
185
NBR has estimated an accounting loss of nearly 4.3 billion lei (950 million
Euros) for the 11 banks that have lent francs, if they apply to existing portfolio
the conversion in lei at the rate in time of granting the loan. (CorectBusiness,
2015)
Figure 2. The structure of household loans by currency of denomination
(Source: Monetary balance sheet, NBR calculations)
At the borrowers level, CHF lending presents an important aspect: it was
almost exclusively given to population. The share of these loans amounts to
about 10 percent of total loans to households and the number of individuals who
took loans in CHF represents 2.1 percent of all borrowers in this category.
Swiss franc loans were granted specially to population, as the cost of borrowing
in that currency was lower when granting, respectively on peak years 2007 and
2008. But the number of borrowers with loans in Swiss francs falls by 31.8% in
November 2014 compared to December 2008, with about 35 200 persons, due
to repayment of loans, off-balance sheet removal and thereof conversion in
another currency. Analysis of the distribution of these loans is made based on
several criteria: the purpose of the loan, the loan amount, the income of
borrowers and loan maturity.
About 35% of all loans in Swiss francs were granted for housing, and 58%
fall into the category of consumer loans secured by mortgages. (Figure 3)
186
Figure 3. Structure of loans in CHF granted to individuals by destination
(Source: Central of the Credit Risk, NBR calculations)
A quarter of borrowers have loans with high value (over 47 000 CHF)
holding two thirds of the loans. (Figure 4) Another quarter of borrowers have
loans with low values (below 4 000 CHF) accounting for only 1% of the
volume of loans. (Figure 5)
Figure 4. The distribution of CHF borrowers after the size of the loan
(Source: Central of the Credit Risk, Credit Bureau, NAFA, NBR calculations)
187
Figure 5. Distribution of CHF borrowers after the monthly net income
Swiss franc loans are usually granted on long-term, with an average
residual maturity of 13.2 years. About 40% of loans in Swiss francs have a
residual maturity under 5 years, and another 40% have a residual maturity
exceeding 15 years. The average value of loans in Swiss francs is in fact
significantly higher than that of credits in lei, but this also varies greatly
depending on the level of borrowers income (NBR, 2015).
Figure 6. Distribution of loans in CHF by residual maturity
Such disparities do not advocate for a similar behavior in solving the
defaulting problems of borrowers: there are many specific individual situations
188
and an overall solution can’t be adopted, requiring the identification of
differentiated solutions.
4. SOLUTIONS TO OVERCOME THE SWISS FRANC CRISIS
We will not discuss what the NBR had to do in 2007-2008 when there
were contracted most Swiss franc loans primarily because it is late and do not
help, and secondly, in a free market, as we all want, the NBR couldn’t ban
foreign currency loans. The only thing it could have done and did was
decelerating their expansion through monetary policy measures, such as
minimum reserves. Let's not forget that at one time, these deposits in foreign
currency reserves were applied to 40%, the highest in Europe. Also, the central
bank governor has attracted attention in various public interventions, about the
risk of contracting the loan in a currency other than that in which the debtor
obtains revenues.
The proposal that has been publicized, that the state to support the rate
differences for the approximately 75,000 existing borrowers on Swiss franc is
also immoral and improper. First, to others about one million borrowers in
EURO and lei, who accepted from the start credits with higher interest rates, but
lower currency risks. Second, to the rest of over 20 million Romanians who
have taken loans of any kind. When they took loans in Swiss francs, the
100,000 borrowers have relied on a lower interest rate and hoped that it will not
change the exchange rate, ie have taken some risk. If the Swiss Franc remained
the same course as the loans are confident that borrowers would not have agreed
to share the winnings with other Romanians, but now expects socializing losses
so that they are supported by the nearly 22 million compatriots. (Banita, 2015)
Another solution circulated, namely ordered by state to banks that provided
loans in Swiss francs to support the rate difference that would be, first of all,
unconstitutional and, as such, no chance to win, because between banks and
borrowers there were contracts awarded in accordance with the legislation. If
there would be unfair clauses in the contracts, the debtors have at hand the
solution of action in court the banks. Moreover, ordered by state to banks to
withstand rate difference would be downright dangerous, as it could lead to
bankruptcy of some of them, thus generating financial instability. However,
financial stability is one of the most important public goods that the state is
obliged to provide.
It is totally counterproductive to take emotional decisions under the
influence of maximum rate volatility of the Swiss franc. At one time, this
volatility will decrease because they are not favorable either to Swiss exporters
and, after stabilization, will be able to see the real impact. Also, is totally
counterproductive to take or to impose measures that could be precedent for
other categories of borrowers.
Romanian Banking Association can not intervene in this case because not
all banks have granted loans in Swiss francs and as such, it would be wrong to
rule on behalf of the entire banking system (Gros, 2015).
189
The urge of some lawyers, addressed borrowers in foreign currency, to
make banks criminal complaints DNA and DIOCT is not only unprofessional
and with obvious personal interest, but also extremely dangerous, because it
increases, in an inappropriate moment, the moral hazard.
Another solution that circulated, personal insolvency law can not solve the
problem either on short-term nor long-term for all borrowers in Swiss francs,
but only for extreme cases. Unfortunately, it was promoted and publicized, with
much populism, as a saving solution for borrowers, encouraging laxity in
repayment of loans, further contributing to increased moral hazard. Experience
so far in the application of insolvency law of legal persons was extremely
negative because of abuses in the use of this tool by many companies.
Therefore, before adopting a similar law for individuals, it is necessary to assess
serious impact on financial stability and its management capacity of the
judiciary. (Dinu, 2015)
Therefore, the only legal way, viable and professional to come in
welcoming this category of borrowers, as well as to any borrower with loans in
foreign currency, is finding individual solutions between the bank and the
borrower, by renegotiating the interest and / or term lending, such as monthly
rate paid by the latter to be one bearable in relation to disposable income.
Individuals credited in CHF is not a homogeneous group. Analysis of the
distribution of these loans show a great variety, showing that there is a
multitude of specific individual situations advocating different approaches. One
general solution is not effective in terms of solving the problem debtors.
Determination of any solution will consider the following principles (NBR,
2015):
• to be well targeted to people who have a real need to be supported;
• to rely on a reasonable sharing of costs;
• to not create moral hazard - that is, to not create unreasonable
expectations for the future (the non-payment of debt service) and to not
discriminate against borrowers in other currencies (RON, EUR, USD);
• to not affect the stability of financial and banking system;
• to not violate the Treaty on European Union and the conditions of
accession of Romania - unrestrictioning free movement of capital.
In order not to end up with an explosion of arrears, but also to earn capital
image, banks that granted loans in Swiss francs came, one by one, with
solutions for their customers. Some low rate of interest accruals by updating
variables (Raiffeisen Bank, Piraeus Bank, Romanian), some interest margin
decreased by 1.5 percentage points (OTP Bank, Millennium Bank) or other
fixed exchange rate (Volksbank - 3.8 euro / franc). The measures are temporary,
however. Banks recommends that customers affected by higher franc employees
of agencies to address individual solutions (Pascariu, 2015).
The measures that the National Bank of Romania can take to influence the
exchange rate of the national currency against the Swiss franc are limited. The
exchange rate between the two currencies shall be established indirectly. Given
190
the intensity of the Romanian trade links with the euro area countries, EU
membership and Romania's intention to adopt the euro in the future, foreign
currency exchange market benchmark in Romania is the euro. In this context,
among which Romania relist solutions can be used to overcome the crisis are
(Isarescu, 2015):
A. Conversion of loans in Swiss francs in lei during the day exchange rate
and / or grant by the creditor of a discount on the amount of debt service;
B. The temporary reduction of the interest rate on CHF loans to offset the
effects of the stronger CHF (this solution is feasible in the context of negative
values of the reference rate of the Swiss National Bank and the market for Swiss
franc. NBR made an impact analysis to estimate the interest rates applicable to
loans in CHF which would fully compensate the effect of exchange rate
appreciation);
C. Implementing a rescheduling scheme of loans for allocating
compensation from the state (such a solution would be effective in terms of at
least four reasons: it would help increase the disposable income of the
beneficiaries of this scheme with favorable effects on consumption and
economic growth, is an approach to burden sharing among creditors, debtors
and state, enforcing the bill mentioned has favorable effects in the management
of structural excess of liquidity in the banking system and targeting the
vulnerable borrowers segment or borrowers with gross monthly income of up to
3000 lei, in the context of high household indebtedness and an uneven
distribution of this indicator in the different categories of income);
D. Also, to address Swiss franc credit, Ministry of Finance has initiated
efforts to improve the legal framework (GEO no. 46/2014) in order to facilitate
rescheduling (including those in CHF) with support from the state (approach of
burden sharing type) between lenders, borrowers and state), resulting relieve
tensions arising as a result of adverse developments in the course CHF. NBR
has initiated steps to ensure that prudential regulations are adapted to new
requirements of the financial market.
5. CONCLUSIONS
Moneys are inextricably linked with the notion of risk. Everything
regarding money, whether we talk of hoarding, handling or their borrowing has
a higher or lower dose of risk: the loss, theft, destruction, restitution,
depreciation, devaluation etc. For this reason, each of us understands to manage
risks of money depending on the degree of financial literacy and appetite or risk
aversion.
Decisions about money, sometimes even for educated people or initiate,
are based on cognitive biases, empirical methods, stereotypes, rumors or
emotional motivations as greed, fear or herd instinct. Unfortunately, money
amplify our tendencies to over-react, the pendulum between exuberance when
things were going well and depression or despair when things go wrong.
191
Conventionally, it is believed that money is a medium of exchange, a store
of value and a unit of account, is, in other words, a symbol of value, when in
fact they are a symbol of trust. And borrowers should not forget that trust is
always based on a promise, implicit or explicit, and therefore, money is not a
commodity but a contract.
The entire system scaffolding lending by banks is based on a dual system
of trust: on the one hand, the confidence of depositors in banks, which it
entrusts temporary funds available that will return the deposit as agreed and, on
the other hand, confidence in banks grant loans borrowers whom, as they will
be returned at maturity agreed. The very etymology of the term credit comes
from trust, in the absence of bank intermediation function can not be fulfilled.
Unlike centralized economy, specific to communist regimes, market
economy, specific to liberal democracies, offers a huge range of opportunities
and solutions to people's problems, giving them the freedom to choose. We
need to understand that the freedom must be accompanied by responsibility,
including that to assume risks derived from our choices.
From my point of view, concrete, structured and consistent actions to
increase the financial and economic literacy of the population are needed. NBR
with the commercial banks system, the Romanian Banking Association and the
Banking Employers must be in first line.
References
[1]
[2]
[3]
[4]
[5]
[6]
[7]
[8]
Banita, M. (2015). The Swiss franc crises and how the NBR failed in the foreign
currency credit settlement, Economica. Net, 21. Jan. Available at:
http://www.economica.net/criza-francului-cum-a-esuat-bnr-in-reglementareacreditelor-in-valuta_94865.html#ixzz3XaEXxzCB
Balan, I. (2014). Will Switzerland adhere to EU and will adopt Euro?, Jurnalul.
Ro, December, available at: http://jurnalul.ro/editorial/va-intra-elvetia-in-ue-si-vaadopta-euro-682283.html
Chiritescu, D. (2015). World War of money, Dilema veche, January, available at:
http://dilemaveche.ro/sectiune/dileme-line/articol/razboiul-mondial-al-banilor
Dinu, C. (2015). How do we manage the Swiss franc issue and why do we risk to
transform it in a form of discrimination, Banking News, November 27, available
at: http://www.bankingnews.ro/problema-credite-franci-elvetieni.html
Gros, D. (2015). The end of an overlooked European currency war, CEPS Centre
for
European
Policy
Studies,
January
21;
http://www.ceps.eu/system/files/COM%20DG%20Overlooked%20Currency%20
War.pdf
Isărescu, M. (2015). The problem of the Swiss franc credits, NBR, January 30,
available at: http://www.bnro.ro/Prezentari-si-interviuri--1332.aspx
MAE, ROMANIA –SWITZERLAND – bilateral trade, available at:
http://bern.mae.ro/node/1353
National Bank of Romania. (2015). The Analysis of the Swiss franc credits”,
February 2015, available at: http://www.bnro.ro/Prezentarea-guvernatorului-BNR192
sus%C8%9Binuta-in-fa%C8%9Ba-comisiei-de-specialitate-din-Parlament-cuprivire-la-situa%C8%9Bia-creditelor-in-franci-elve%C8%9Bieni-12013.aspx
[9] Pană, M. (2015). Why the Swiss franc appreciated. The Leu in line with the region
currencies”,
January 15, available at: http://cursdeguvernare.ro/de-ce-s-aapreciat-francul-elvetian-leul-in-linie-cu-monedele-din-regiune.html
[10] Pascariu, D. (2015). Choosing risky and freedom - embody (lessons from the
Swiss
franc
crisis),
Contriburors.ro,
January,
available
at:
http://www.contributors.ro/economie/alegerea-comporta-riscuri-iar-libertateareponsabilitate-invatamintele-crizei-francului-elvetian/
[11] Phillips, M. (2015). Absolutely everything you need to understand what happened
to the Swiss franc this week, 18 January 2015 available at:
http://qz.com/327410/absolutely-everything-you-need-to-understand-whathappened-to-the-swiss-franc-this-week/
[12] http://www.snb.ch/en/
193
REDEFINED BANKING ACTIVITY UNDER EUROPEAN
SOVEREIGN DEBT CRISIS
SIMONA ELENA IAGĂR
Bucharest University of Economic Studies
Faculty of International Business and Economics
Bucharest, Romania
[email protected]
Abstract
The so called ‘sovereign debt crisis’ and its continuing effects throughout the Eurozone for the
last five years provides an intriguing setup for theorizing on the changing nature and role of
banking as important liquidity trigger for the real economy.
Set within a fractional reserve banking system along with the existence of the institution of a
central European bank operating under the main objective of controlling liquidity across
European financial markets and within both international and European banking regulation
frameworks, questioning the extent to which European banks entertain and amplify the sovereign
debt crisis constitutes the challenge of the present paper.
The paper is underlying the flawed vulnerable structure of the current European banking system
making use of a praxeological analysis strengthen by use of quantitative secondary data..
Keywords: banking supervision, banking risk assessment, Eurozone
JEL Classification: F33, F36, G21
1. INTRODUCTION
The aim of this paper is to examine the banking activity in the Eurozone in
the aftermath of the sovereign debt crisis. The paper is structured as follows:
section 1 lays the theoretical grounds on the nature of banking in light with the
Austrian school of economics. Section 2 reviews the current regulatory and
supervisory framework that set the play field in which Eurozone banks are
running their activities, with a focus in addressing the implications of Basel III
and ECB provisions and their impact on credit supply and on competition.
Section 3 investigates the trends in terms of risk and stability of European
banking environment. Section 4 concludes and provides recommendations.
2. ON THE NATURE OF BANKING
As any other activity run in a free market system, banking is broadly
defined as the business of connecting credit and debit transactions with the
purpose of earning the profit derived from the difference in the rates of interest.
The business of banking falls into two distinct branches: credit or loan banking
194
and deposit banking with no necessary legal connection between the two of
them. Banking is, in other words, the negotiation between granters of credit and
grantees of credit. Banking institutions borrow money in order to lend it; as
negotiators of credit, banks face the existence of a risk from which acceptance it
derives its profits and incurs its losses.
The golden rule stressed by the Austrian School of Economics here is that
the credit that the banks grant must correspond quantitatively and qualitatively
to the credit that it takes up in order to avoid insolvency (Mises, 1981).
Through times, there have been other activities that the business of banking
included aside the above mentioned. Among these, one can name the business
of exchanging money, dealings of purchase and sell of Stock Exchange
securities and governmental bonds for their customers, to name a few. These
activities have no inherent connection with banking as properly defined above.
If ran in a competitive free market system, these activities remain productive,
noninflationary activities serving the benefit of society. If truly competitive,
credit expansion by one bank would quickly be redeemed by the other banks in
the system averting inflation from spreading in the market (Rothbard, 1968).
Worth highlighting here is the fact that, as any other economical agent
playing in a free market system, competition is important in the financial sector
as well. As in other industries, the degree of competition in the financial sector
can matter for the efficiency of the production of financial services, the quality
of financial products, and the degree of innovation in the sector. Specific to the
financial sector is the link between competition and stability, long recognized in
theoretical and empirical research and, most importantly, in the actual conduct
of prudential policy towards banks (Vives, 2010).
Having laid the foundations for what is called banking, last but not least
worth mentioned is the role that banking activity has for the real economy:
specifically the role that the credit supply plays as vital trigger for the business
development and investments. Everything that is interfering with the smooth
running of businesses comes as a cost for the entire community. It has been
shown, theoretically as well as empirically, that the degree of competition in the
financial sector can matter for the access of firms and households to financial
services and external financing, in turn affecting overall economic growth
(Claessen & Laeven, 2004).
However, a glance at the modern banking institution reveals a structure
quite different from what has been described so far. Set not in a free market
system, but rather in a framework characterized by governmental
interventionism along with the body of a Central Bank in place, modern
banking activity is no longer bounded to limit credit expansion as it is now
secured by a fractional reserve banking system. The institution of central
banking in the modern world has acquired control over the banking system by
governmental imposed measures such as: “making its own liabilities legal
tender for all debts and receivable in taxes, granting the central bank monopoly
of the issue of bank notes, as contrasted to deposits or through the outright
195
forcing of banks to use the central bank as their client for keeping their reserves
of cash” (Rothbard, 1969). Acting in this setting, commercial banks now have
the capacity to expand credit and money supply with no fear of bankruptcy. The
result is inflation and a boom within the respective area.
Another bank credit expansion effect of pouring new loan funds into the
business world consists in artificially lowering the rate of interest in the
economy below its free market level. On the free and unhampered market, the
interest rate is determined purely by the “time-preferences” of all the
individuals that make up the market economy.
3. EUROZONE REGULATORY AND SUPERVISION SET-UP
Ever since the global financial crisis, bankers across Europe still find
themselves waging battle on many fronts. Low interest rates, a loss of
customers’ trust, stiff new target capital requirements and regulatory mandates
have compounded the difficulty of operating in weak Eurozone economies. The
financial and sovereign crises in Europe affected many banks` balance sheets
and left stakeholders doubts the quality of the banks` assets. In June 2012 the
European Council proposed the establishment of a banking union under the long
term target for economic integration in the Eurozone (Deloitte, 2014).
In order to build financial integration, the banking union has started with a
single supervisory mechanism (SSM, Single Supervisory Mechanism, in place
since November 2014, directly supervises 123 banking groups, comprising
about 1,200 credit institutions in the euro area, covering close to 85% of total
banking assets and another 3,500 smaller institutions are supervised indirectly
through the NCAs, national competent authorities), a single bank resolution
mechanism (SRM, Single Resolution Mechanism, a mechanism establishing
uniform rules and a uniform procedure for the resolution of credit institutions
established in the banking union, operational since 1 January 2015), and a
single rulebook, including for harmonized deposit guarantee schemes, which
may evolve into a common European deposit guarantee (ECB, 2015).
Assessing banking stability within EMU, major Eurozone banks were
subject to two empirically designed measurements in this regard by the ECB:
one is the comprehensive assessment run by the FSM and the other is the stress
test configured by EBA of which results were published on October 2014.
The comprehensive assessment of the banks that fall under direct ECB
supervision as set out in the SSM Regulation, consisted of an asset quality
review (AQR) and a stress test. We will further analyse the results of the EUwide stress tests run by EBA rather than the Comprehensive Assessment as the
former stress test were conducted for all EU‐countries and not limited to the
euro‐zone.
The stress test were based on an adverse macroeconomic scenario covering
the years from 2014 to 2016 while the baseline scenario was based on the winter
forecast by extended by one year. The adverse scenario provides
forward‐looking paths for key macroeconomic and financial variables for all EU
196
countries and a large number of non‐EU countries. It reflects the systemic risks
that were assessed as representing the most pertinent threats to the stability of
the EU banking sector: an increase in global bond yields amplified by an abrupt
reversal in risk assessment, especially towards emerging market economies, a
further deterioration of credit quality in countries with feeble demand, stalling
policy reforms jeopardizing confidence in the sustainability of public finances,
an increase in banks’ funding costs and the lack of necessary bank balance sheet
repair to maintain affordable market funding.
The EU‐wide stress test were mainly aiming to assess the impact of risk
factors on the solvency of banks therefore banks were required to stress test the
following risks: credit risk, market risk, sovereign risk, securitization risk, cost
of funding and interest income (EBA, 2014).
The results highlights that for the capital side, the most important drivers
for the stress impact were given by credit risk losses, specifically impaired
financial assets and for the increase of total risk exposure amount due to
stressed risk parameters.
Other drivers with less significant impact are impairments on other
financial assets, and nonfinancial assets, for instance value reductions of real
estate held by banks. Transitional adjustments, other than those concerning the
treatment of sovereign exposure held as Available for Sale, have a negative
effect on capital that is included in the overall impact (EBA, 2014).
Banks already took actions that mitigate the stress test capital impact and
shortfall across the sample. Overall 53 billion euros of Common Equity Tier 1
Capital was raised or resulted from the conversion of hybrid instruments by
banks in the sample between January and September 2014. Although the focus
of the exercise remained on credit and market risk, banks were also requested to
assess the impact on interest income, including the increase in the cost of
funding, over the stress‐test time horizon (EBA, 2014).
Fig. 1 Evolution of Core Tier 1 Capital ratios from 2011 stress test to 2013
for major EU banks
(Source: ECB Results of 2014 EU‐ wide stress test (2014))
197
More broadly in the architecture of supervising activities run by the ECB,
there is currently a significant number of institutions closely cooperating under
the same goal: maintaining financial stability and avoiding systemic risk under
all price: European Banking Authority (EBA), European Systemic Board
(ESRB), Basel Committee on Banking Supervision (BCBS). As regard to the
last of these institutions, worth mentioning is also the fact that ECB fully
committed to assure implementation of Basel III recommendations throughout
the Eurozone banking system on 1st January 2014.
Under Basel III, banks are required higher capital, consequence of which
the financial institutions themselves have reduced risk-taking activities,
although “the fundamental risks remained and the efforts of regulators and
politicians were simply rearranging the deckchairs on the Titanic” (Baily and
Elliott, 2013). Other research in this regard highlights the changing nature of
financial institution risk noting that while these institutions have become less
risky individually, the financial market has become more vulnerable to systemic
contagion and suggests that the ever more integrated financial system might
experience more synchronized contractions in future crises (Calluzzoa &
Dongb, 2015). Empirical evidence shows that in the process of mobilizing
pricing assets and cutting costs in order to meet Basel III requirements, bank`s
profits lowered with a return on equity (ROE) for the average European bank
between 3.7 and 4.3 percentage points from the pre-crisis ROE average of 15
percent (pre-tax) (Härle et. al., 2010).
Other literature examines the impact of Basel III bank regulations on bank
fragility and risk showing that bank supervision and regulation have very little
effect on bank risk. Broader research using World Bank survey data shows that
countries with higher regulatory restrictions have a higher probability of
experiencing a banking crisis and that banking restrictions are negatively related
to bank efficiency (Barth et al., 2013). To the best of our knowledge, no prior
studies examine the impact of ECB regulations on Eurozone bank risk and
return during the recent sovereign debt crises.
Alternative explanations for regulation include: ideology; redistribution of
wealth among industry participants, consumers and competitors; and regulation
as a source of governmental finance.
4. BANKING SYSTEM TRENDS ACROSS EUROZONE
Consequences of previously described regulatory and supervisory context,
current section will address a series of trends characterizing the European
banking system. These trends can be summarized as follows: restructuring,
deleveraging, pressuring of strengthen capital and returns.
During sovereign debt crisis burst, a series of “too big to fail” banking
groups received financial support from ECB against the set-up of certain
restrictions and conditions among which the requirement to divest assets in
order to increase liquidity and be able to return the aid. Consequently, European
banks are subject to restructuring programs designed to meet the terms of
198
agreements signed with European and national regulators. Predictions forecast a
half cut on banks asset base (McKinsey, 2010).
Another factor impacting the European banking system setting a painful
trend for banks profitability is the growing alarming public deficits stripping off
banks of their holdings as bailouts directs financial-services assets to
government ownership.
Additionally, banks are strongly advised to clean their balance sheets of
toxic assets holdings. For instance, in Spain, the European Union asked for the
establishment of a “bad bank” as a precondition in exchange for aid up to 100
billion euros to the Spanish banking sector, institution that had acquired 52
billion euros of property-development loan assets from Spanish institutions
(McKinsey, 2012).
Despite efforts to deleverage and improve capital ratios (figures 1 and 2),
banks are still in need of capital and selling assets is the most practical and
necessary step towards this direction unless investors are confident again in the
Eurozone market. Estimations are that European banks need to raise more than
100 billion euros of equity to meet their capital needs (Beitel & Carvalho,
2013).
Fig. 2 Eurozone banks` leverage ratio (total assets / capital)
(Source: Deutsche Bank Research (2014))
199
Finally, industry returns are expected to be substantially (and structurally)
lower than before 2008. To boost them, financial institutions must build critical
mass in their core businesses and divest subscale, noncore, and capitalconsuming operations. Consequently, there will be a shift toward scale and to
having business lines run by their best natural owner. This will result in the
unraveling of some acquisitions made in the last M&A wave and, perhaps, a
spate of mergers among equals looking to create scale in their core business.
5.
CONCLUSIONS
European banking system is currently heavily controlled impeding the
banks to adapt to conditions dictated by the market.
Risk is targeted as a threat for the financial stability within Eurozone
therefore a series of ECB undertakings have been directed to minimize it as less
possible. The author points out in section one that banks as negotiators of credit
create an organic connection between the credit transactions and the debit
transactions. The credit that the bank grants must correspond quantitatively and
qualitatively to the credit that it takes up. Expressed differently, the date on
which the bank's obligations fall due must not precede the date on which its
corresponding claims can be realized, this being the only way for a bank to
avoid the danger of insolvency. As regards with the risk, this remains solely in
the case of imprudent granting of credit being just as dangerous to a bank as to
any other merchant. In fact, risk is inherent to a free market system and banks
are no excepted business from market conditions. Considering the legal
structure of banks` business, there is no legal connection between credit and
debit transactions as the obligation to return the money borrowed is not affected
by the state of banks` investments, rather this obligation continues despite the
investments proving dead losses. By contrast, it is the existence of this risk
which makes it worthwhile for the bank to play the part of an intermediary
between the granter of credit and the grantee of it. It is from the acceptance of
this risk that the bank derives its profits and incurs its losses.
The main factor hampering broad money and private credit growth in the
Eurozone is the ECB pressures that has been put on banks as a result of the
Basel III’s capital-asset ratio strokes. By requiring banks to hold more capital
per monetary unit of risk assets (usually loans), the regulators have put a
constraint on banks’ balance sheets, which limits their ability to lend (create
private credit). In consequence, money supply and private credit growth has
been slower than it would have otherwise been.
The deleveraging trends that the banking system within Eurozone has
registered and the shrink of banks` balance sheets in order to maintain financial
stability, erodes money balances and creates a credit crunch. This, in turn,
affects banks liquidity and their asset prices. It also reduces spending relative to
where it would have been without higher capital-asset ratios. In the end,
economic activity remains weak and unemployment continues to climb, which
makes banks less resilient.
200
Multitude of supervising initiatives lead to complexity and uncertainty,
create competitive distortions, lead to lack of effectiveness and regulatory
discretionary market playing field, all these large cumulative effects increasing
the danger of recession.
References
[1] Baily, M., Elliott, D. (2013). Five Years After Lehman We Are Much Safer.
Retreived from http://www.brookings.edu/research/opinions/2013/09/09-fiveyears-after-lehman-safer-baily-elliott
[2] Barth, J.R.; Caprio, G.; Levine, R. (2013). Bank regulation and supervision in 180
countries from 1999 to 2011, Journal of Financial Economic Policy, Emerald
Group Publishing, Volume 5;
[3] Beitel P., Carvalho P. (2013). What is next for the restructuring of Europe`s banks,
McKinsey Insights & Publications;
[4] Calluzzoa, P.; Dognb (2015), G.N. Has the financial system become safer after the
crisis? The changing nature of financial institution risk, Journal of Banking &
Finance, Volume 53;
[5] Claessen, S; Laeven, L. (2004). What Drives Bank Competition? Some
International Evidence, Journal of Money, Credit and Banking, No. 3, Volume 36;
[6] Deloitte (2014). The Single Supervisory Mechanism Mind the (capital) gap,
EMEA Center for Development Strategy;
[7] Deutsche Bank (2014). Banking & Regulatory Trends in Europe, Deutsche Bank
Research,
Stockholm.
Retrieved
from
https://www.dbresearch.de/PROD/DBR_INTERNET_ENPROD/PROD0000000000344799/Presentation%3A+Banking+%26+regulatory+tr
ends+in+Europ.PDF
[8] EBA, (2014). Results of 2014 EU-wide Stress Test. Aggregate Results;
[9] ECB, (2015). Annual Report on supervisory activities 2014;
[10] ECB, (2015). Stress test in the 2014 SSM Comprehensive Assessment,
Washington
[11] Härle, P.; Pepanides, T.; Pfetsch, S. (2010). Basel III: Now the hard part for
European banks; McKinsey Insights & Publications;
[12] McKinsey report (2010). Basel III and European banking: Its impact, how
banks might respond, and the challenges of implementation, McKinsey Insights &
Publications;
[13] McKinsey report (2012). How Europe’s banks can navigate a regulatory
squeeze, McKinsey Insights & Publications;
[14] Mises, von L. (1981). Theory of Money and Credit, Indianapolis, Liberty Fund;
[15] Rothbard, M. (1968). The Mistery of Banking, 2nd Edition, Auburn, Alabama,
Ludwig von Mises Institute;
[16] Rothbard, M. (1969). Economic Depressions, their Cause and Cure; Auburn,
Alabama, Ludwig von Mises Institute;
[17] Vives, X. (2010). Competition and Stability in Banking; Barcelona, IESE
Business School.
201
MODELING INFLATION IN ROMANIA: A MARKOV
SWITCHING APPROACH
DAN LUPU
Alexandru Ioan Cuza University
Iasi, Romania
[email protected]
Abstract
In this article, we modeled the phenomenon of inflation in Romania for the period 19902014, using the Markov switching model. The time series used are monthly CPI. The
model has superior results then classical models of time series analysis, identifying
precisely the rise and fall times of the inflation.
Keywords: inflation, Markov model, regime
JEL Classification: E31, E37
1. INTRODUCTION
Inflation in Romania, during 1990-2014, was conducted simultaneously
with the process of transition from centralized state economy to the market
private economy, creating the false impression of part of this transition.
Although inflation appears as a product of institutional and legislative,
economic and social changes, it was not objectively inherent in these
transformations. The causes for aberrant growth of prices lie in inconsistent
economic policies (Viorica, 2015), without continuity in the management of the
economy, the abandonment of public property management in a wave of waste
and theft in the state assets, both at governmental and corporate levels (Lupu
&Asandului, 2014).
In terms of inflation, over the period 1990-2014, Romania has experienced
all kinds of inflation presented in the literature: hyperinflation (with increases of
over 200% in 1991, 1993, 1997), galloping inflation (10% increase over the
period 1990-1999, with some exceptions), mild (a single digit, 2000-2008) and
even deflation (values lower than 0, 2014-2015).
Inflation in Romania in the period 1990-2000 has known seven periods:
lull in prices during the months of January to October 1990 (1); the period
between November 1990 and December 1993, a period characterized by a threedigit galloping inflation (2); period of disinflation during the years 1994-1996
(3); the year 1997 marked by rampant inflation (4); disinflation period 19982002 (5); moderate inflation during the housing boom due to inflation and credit
(2003-2008) (6); deflation period (2014-present).
202
Inflationary process stands strong, increasing until 1993, when it reaches
its peak of 256.1% compared to 1992, decreasing thereafter to 32.3% in 1995,
and following another round of growth in 1996 and 1997, in order to decrease
again, until 2000, to 45.7%, with subsequent significant reduction trend. As you
can see from the figure 1, we conclude that the highest level reached inflation
rate (during the period analyzed) was recorded in 1993, and the lowest value in
2014. As the chart shows us remark that in the period 1992-1993 were recorded
the highest imbalances on inflation, to "manage" surpassing 200%. Similarly,
high levels of inflation of over 136% existed in 1991, 1994, 1997. But
eventually, through a higher interest for this imbalance of the economy, it was
smaller and values chose to continue in the direction of decreasing inflation or
at least relatively stagnant, around 46%.
Due to conditions imposed by the European Union accession, one of the
main targets of action of the state in this regard, were measures taken on
inflation. Thus, since 2002 in the below figure we can see major changes
regarding the inflation rate from a rate of 22.5% recorded in 2002, it was 1.64% in 2014.
Figure 1. The evolution of inflation in Romania 1990-2014
INFLATIONLN
350
300
250
200
150
100
50
0
-50
90
92
94
96
98
00
02
04
06
08
10
12
14
(Source: own calculations using Eviews 7)
Literature on the phenomenon of inflation in Romania is extremely sparse.
Thus, to this date, there are little than 5 studies that treat this economic
phenomenon, and none that addresses Markov Switching model. In most studies
are used the ARCH /GARCH analysis. Brada et al. (2005) examines the Eastern
European countries in the EU new entrants using cointegration technique, and
discovers that the prices between the EU and NMS are similar, inflation levels
are correlated. Becker and Hall (2009) analyze the Eastern European countries
in terms of fulfilling the Maastricht criteria on inflation and show that between
203
them, there are quite a few signs of convergence. Siklos (2010) also analyzes
inflation in New Member States (NMS) that joined the EU in 2004. The author
reaches the surprising results: the eastern countries reached a nominal
convergence. Jemna et al. (2014), using GARCH models and Granger
Causality, analyzes the evolution of inflation in Romania, and discovers that
this process is self-sustaining: increased volatility increases the nominal value
of inflation.
Markov Switching model was used only in two studies on inflation, but for
inflation persistence analysis in CEE Countries. Mladenović and Nojković
(2012) study and conclude that this economic phenomenon occurs to a moderate
rate in Hungary, Poland, Romania and a small one in Czech Republic and
Slovakia. In turn, Nath & Tochkov (2012) find that changes have occurred in
the inflation convergence of Eastern European States according to economic
time: before joining the EU, after, and during the recent financial crisis.
3. THE MARKOV SWITCHING AUTOREGRESSIVE MODEL
Hamilton is the first author who develop type Markov Switching model
Autoregressive Model (1989). Consider a time series yt, MS-AR model can be
written:
Yt =μ(St)+[Σi=1pφi(yt- μ(St-i))]+εt
εt→iid(0, σ2(St))
(1)
previous equation, φi is MS-AR model coefficients, μ mean and σ standard
deviation. All these calculated parameters depend from the existing regime at
time t, ie St. St follows in practice a Markov process that takes the value of 1 or
2, and the probability matrix is the following:
 P11P 21 

 P12 P 22
P= 
(2)
where:
P(S t

P( S t

P( S t
P( S
t

= 1 S t −1 = 1) = P11
= 1 S t −1 = 2) = P12 = 1 − P11
= 2 S t −1 = 1) = P21 = 1 − P22
(3)
= 2 S t −1 = 2) = P22
and Σj=12Pij=1 for i,j which belongs to the interval 1-2.
Solving equation 3, we calculate the duration D of a state as:
E(D)=
1
1 − Pij
204
(4)
MS-AR model described above assumes St regime changes, in both
average and variance, and can be calculated using the algorithm proposed by
Hamilton. Finally, the procedure for estimating parameters dedicated to model
is to maximize the log-likelihood function and subsequently to filter results in
regime St.
4. RESULTS
For estimation, we used monthly CPI data, from January 1990 to
December 2014, taken from the IMF Statistics Database. The series are
seasonally adjusted and inflation is calculated as inflation = [ln (CPIt /CPIt1)]*1200.
Markov model used has two states (St): a state refers to expansion and a
state refers to a decrease. The number of lags for the model was developed in
the range 1-12, considering the monthly CPI data. Choosing the best model MS
was based on maximum likelihood function combined with total expected
duration of regimes. The results are presented in table 1.
Table 1. MS-AR Models for inflation
Lags
1
2
3
4
5
6
7
8
9
10
11
12
Model MS-AR
Log-Likelihood
Expected
duration regime
1
MS(2)-AR(1)
-1083.326
69.62142
MS(2)-AR(2)
-1069.737
70.13380
MS(2)-AR(3)
-1063.326
1.000000
MS(2)-AR(4)
-1053.624
94.97070
MS(2)-AR(5)
-1057.893
67.30571
MS(2)-AR(6)
-1035.724
66.37433
MS(2)-AR(7)
-1030.519
3.661244
MS(2)-AR(8)
-1024.332
2.560064
MS(2)-AR(9)
-1012.240
3.345026
MS(2)-AR(10)
-1011.261
2.559399
MS(2)-AR(11)
-1006.106
80.25836
MS(2)-AR(12)
-1016.740
2.026098
Expected
duration regime
2
2.727822
2.727793
89.78795
1. 809170
1.726444
1.803772
55.05712
38.83839
91.87777
38.47837
1.976183
29.45919
Based on the results in Table 1, we see that adding a unit in the range 1-5,
log-likelihood function does not change substantially. For the next 5 models (610) values are similar and do not substantially improve the model. For the last
two models, 11 and 12, even if they have higher values in Log-Likelihood
function, duration models expected duration is less than 1-5. So, choosing the
optimum model of the models will be 1-5. The model shows the best LogLikelihood function and cumulative duration largest model for the two regimes
is 4, so the model for inflation in Romania is MS(2)-AR(4).
205
Identifying optimal MS model, we calculate the model parameters, which
are presented in table 2.
According to the results in table 2, the calculated coefficients are
statistically significant. The mean of regime 1, for low inflation, is 11.73, and
the probability is <0.05. The mea n regime 2, growth is extremely high
compared to previous media, being 101.0345. This shows that the average
growth periods was a hyperinflation.
Table 2. The parameter estimates for the MS(2)-AR(4) model
Estimates
Regime 1 Coefficient
11.73558
Regime 2 Coefficient
101.0345
Common
AR(1)
0.771377
AR(2)
-0.051004
AR(3)
0.146723
AR(4)
0.016031
LOG(SIGMA)
2.206888
Probability 1
0.989470
Probability 2
0.366597
Probability
0.0127
0.0000
0.0000
0.4891
0.0390
0.7611
0.0000
To identify the inflection moments, we realized the graphics for MS-AR
model (fig. 1). Thus, it can be seen that in higher inflation periods, specific to
the regime 1, the 3 periods overlap in practice on the periods known of
hyperinflation. The three growth periods are in M11.1991-M5.1992; M6.1993M12.1993 and M2.1997-M10.1997.
206
Figure 1. Smoothed probabilities of recessions and expansions for inflation
in Romania 1990-2014
P(S(t)= 1)
P(S(t)= 2)
1.0
1.0
0.8
0.8
0.6
0.6
0.4
0.4
0.2
0.2
0.0
0.0
92
94
96
98
00
02
04
06
08
10
12
14
92
94
96
98
00
02
04
06
08
10
12
14
5. CONCLUSIONS
Crossing a tumultuous transition, Romania managed to join the EU in 2007
and in that time has become obligatory also the adoption of the euro, and thus
compliance with the Maastricht criteria on inflation. This article has analyzed
the evolution of inflation in our country in the period 1990-2014, showing that
inflation has experienced all forms described in theory: hyperinflation, rampant
and moderate inflation, and in the end to reach deflation.
In this article, we have shown that Markov switching model can be used
with satisfactory results in modeling the phenomenon of inflation in Romania.
Using the model MS(2)-AR(4) we have identified periods of economic
transition that our country has come since 1990. We have also successfully
identified periods of high inflation and those with low inflation, showing that
these periods were they took place in 1991, 1993 and 1997. Also, for periods of
disinflation, using the MS model showed that can be successfully.
References
[1] Becker, B. and Hall, S. (2009). How far from the Euro Area? Measuring convergence
of inflation rates in Eastern Europe. Economic Modelling, vol. 26, 788-798.
[2] Brada, J., Kutan, A. and Zhou, S. (2005). Real and monetary convergence between
the European Union’s core and recent member countries: A rolling cointegration
approach. Journal of Banking & Finance, vol. 29, 249-270.
[3] Jemna, D. V., Pintilescu, C., Viorica, E. D., & Asandului, M. (2014). Inflation and
inflation uncertainty in Romania. Economic Computation and Economic Cybernetics
Studies and Research, vol. 48, issue 1, 181-199.
207
[4] Lupu, D., Asandului, M. (2014). Considerations on the relationship between
exchange rates and stock markets in Eastern Europe in time of crisis. Transformation
in Business & Economics, vol. 13.
[5] Mladenović, Z., Nojković, A. (2012). Inflation persistence in central and southeastern
Europe: evidence from univariate and structural time series approaches.
Panoeconomicus, vol. 59, issue 2, 235-266.
[6] Nath, H. K., Tochkov, K. (2010). Relative Inflation Dynamics in the EU Accession
Countries of Central and Eastern Europe. Empirical Economics, vol. 45, issue 1, 122.
[7] Siklos, P. (2010). Meeting Maastricht: Nominal convergence of the new member
states toward EMU. Economic Modelling, vol. 27, 507-515.
[8] Viorica, E.D. (2015). Econometric Analysis of Foreign Trade Efficiency of EU
Members Using Gravity Equations. Procedia Economics and Finance, vol. 20, 670678.
208
DEVELOPMENT OF THE CAPITAL MARKET AFTER
THE INTRODUCTION OF MIFID IN THE CZECH
REPUBLIC AND SLOVENIA
LUCIE MEIXNEROVÁ
Moravian University College Olomouc
Olomouc, Czech Republic
[email protected]
Abstract
After the entrance of the Czech Republic and Slovenia to the European Union it was
necessary to accept community legislative regulation of capital markets, due to which
the Czech and Slovenian markets joined in an integrated European capital market. In
2004 a directive MiFID (Directive on Markets in Financial Instruments) was accepted,
this directive has set new policies, processes and rules of negotiations in relation to
customers and control measures in the daily negotiations with securities of the
customer. The contribution evaluates success of implemented regulation and
development of capital markets in the Czech Republic and Slovenia, and points to
similar developments of both capital markets. With respect to the implemented "safer"
legal protection of investors can be stated that the introduction of MiFID is no
guarantee for future growth of capital markets and we can follow a slow growth trend
at both markets.
Keywords: Capital markets, the Market in Financial Instrument (MiFID), stock
exchange
JEL Classification: G15, G23, K22
1. INTRODUCTION
The Czech Republic and Slovenia as well as each member state of the EU
(European Union), introduced in their law framework directive MiFID and its
implementing directives relating primarily to improve the quality of principles
for the provision of investment services to customers. The purpose of the
directive is to improve the transparency of services offered, promoting
competitive environment and enhancing investor protection. Directive brings
improvements and new opportunities as well as cheaper and better services for
investors. The directive was accepted in 2004, the Czech legal code entered in
2008 and in the same year in Slovenia. For existing directive, however, began to
lag behind the market and was not able to respond to the constantly developing
aspects of the capital market, so in 2011 the European Commission published a
new directive on markets in financial instruments directive (MiFID II) and the
209
regulation on markets in financial instruments (MiFIR). In 2014 the European
Parliament accepted the proposals of publications MiFID II and was established
an obligation transposition of the new rules accepted by mid-2016 (European
Commission, 2015).
Based on the research of domestic and foreign research intentions, a gap is
considered in research projects on the subject of MiFID and the capital markets
and how their development has changed. In the empirical literature the author
(Inderst, 2009) wrote that despite legal changes in Europe, such as MiFID, there
is still much scope for the improvement of both legal norms and supervisory
activity. To obtain a logically consistent and workable framework, consumer
protection, both generally and applied to the field of retail finance, must be put
on a sound economic basis. The authors (Ferrarini and Molonev, 2012) showed
important reforms in context by examining the impact of MiFID I since its
application to EU financial markets in November 2007 until 2011 and they
suggested give for the design of MiFID II. The authors described how MiFID I
reshaped the EU share trading market place and how interest groups of markets
are seeking to shape MiFID II, and the implications. The article suggests that
the influence of interest groups may have led to overly ambitious MiFID II
Proposals which are excessively concerned with investment firm and trading
platform interests, and not sufficiently focused on the overall efficiency and
effectiveness of EU share trading markets. The author (Marjosola, 2014)
assessed the European Union's post-crisis approach to regulating financial
markets. In first part article the author described that dealing with the modified
disclosure regime of the revised Transparency Directive and in second part the
author described implementation of the Alternative Investment Funds Directive.
The article demonstrate the techniques used by the European Securities Markets
Authority (ESMA) and the Commission, which involve both formal and
informal implementing measures, utilize the procedural flexibility of the postLisbon EU rule-making. The article also discusses the ambiguous limits of the
system's flexibility in constitutional terms and addresses certain trade-offs and
risks of the emerging mode of governance and the author wrote own opinion
that the market need more flexible EU legislation.
Currently it has passed 11 years since the approval in 2004, so it is
appropriate to evaluate success of implemented directive in practice and focus
on the development of the capital market in the Czech Republic and Slovenia,
which have a similar history of stock exchanges and countries. Both countries
belong to the group of state CEE (Central Eastern Europe) and are part of the
CEESEG (CEE Stock Exchange Group), but compared to other states, both
countries are lagging behind, and both countries are known for small regional
stock exchanges, which has an impact on issuers placing their securities on
more liquid markets. MiFID is intended to help restore confidence in capital
markets in CEE countries, brings unification legislation and a series of rules that
were introduced in Western countries already before 2004.
210
The paper deals with the comparison of both markets and in connection
with the implementation of MiFID assesses how their development has
changed. Because the current legislation has significantly improved the level of
protection and the position of investors and was obliged to securities traders to
execute orders of the customer under the best conditions, it is appropriate at this
time to assess the situation created by the Lamfalussy process affecting the
development of capital markets.
In the first part of the paper is presented a brief description of the MiFID
and clarification of its significance because it affects all aspects of the capital
market and represents a kind of comprehensive framework legislation in this
area. The second part of the contribution is devoted to the development of
capital markets in the Czech Republic and Slovenia from 2004 to 2014 and in
the final part of this work is to evaluate the development of both capital markets
affected by the introduction of the European capital market regulation.
1.1 The Market in Financial Instrument
MiFID has introduced new requirements that firms are required to adopt
and makes significant changes to the regulatory framework, reflecting recent
developments in financial services industry. MiFID sets out new policies,
processes and the conduct of business rules with clients and controls around
how an investment firm works on a daily basis with clients. These rules are
different depending on the classification of the clients themselves (retail client,
professional client or eligible counterparty). MiFID sets out the basic
information requirements and fiduciary duties of investment firms towards their
customers. The need for MiFID is being driven by the increasing number of
financial and investment services being provided to customers and the
increasing sophistication of financial instruments. MiFID sets out new and
tougher requirements relating to the organization of business in regulated
investment firms, particularly in the areas of compliance, internal audit, risk
management, outsourcing, systems and controls and record-keeping. The
directive sets out a high-level “lowest common denominator” approach to
organisational requirements and approach to the areas of compliance, the
directive also allows firms to apply the organisational requirements in a manner
proportionate to the nature, size and complexity of the firm´s business. In cases
where the client states from the outset that they wish to transact on execution
only basis and do not require any advice from the investment firm and declines
to complete the profiling form, the investment firm still needs to determine the
appropriateness of the product by using the appropriateness test. Where
suitability cannot be assessed due to insufficient information or client’s refusal
to receive advice, procedures for execution only transactions include a further
responsibility for the investment firm to determine the appropriateness of the
product, due to the complex nature of these products. In these cases, the
knowledge and experience test can be used in isolation (only the
appropriateness part of the profiling form), to determine whether the product is
211
appropriate or not for the individual client. In each case, investment firms must
understand differences between appropriateness and suitability, i.e. when and
under which conditions investment advisory is provided. If the client asks the
investment firm to go ahead with the transaction despite being given this verbal
warning the investment firm must consider whether or not the purchase of the
product would be in the client’s “best interest”, as an extra level of caution.
“Best interest” rule entails the fact that a firm must act honestly, fairly and
professionally in accordance with the best interests of its clients. For example if
the investment firm recognizes that the client has never purchased a structured
product before and does not understand financial products at all, he/she should
not proceed with the transaction.
However, in all firms, the general requirements (legal and organisational
requirements) for all areas must be adhered to. In summarising the requirements
relating to the organization of MiFID for compliance, risk management, internal
audit and outsourcing, we can show that a flexible solution is possible. The cost
and resource elements are many of the requirements set out above and could be
restrictive for smaller firms. Ensuring an effective organisational solution for
the MiFID requirements can help to minimise the cost impacts on individual
firms.
The MiFID directive also brought fundamental changes in the organization
of capital market such as the unification and change of the status of the stock
exchange. Individual regional stock exchanges in the country became the stock
exchange and competitors. The market has ceased to divide stock exchange and
OTC, after the transposition of directive MiFID began to fulfill this task single
entity that is the organizer of regulated market. As a result of these changes
there has been the reduction of stock exchanges at the expense of other trading
venues and the remaining stock exchanges were integrated into the major
European stock exchanges, which brought a hazard for small and medium
businesses, for which it was easier to trade through regional stock exchange.
The entire infrastructure of the capital market changed, in addition to the
regulated market, there are multilateral trading systems MFT (Muliurateral
trading facilities) and systematic internalisation. MiFID is focusing on it in
order to attain that for all transactions with financial instruments will be the
same rules regardless of where the transaction was concluded and created
favorable conditions for all investors and firms on the market and also to deepen
integration of the European capital market and strengthen its competitiveness.
1.2 The Czech capital market
The Czech economy has been liberated for 25 years from communist
influence, in 2004 joined the European Union (EU), which affected a number of
changes in the capital markets. The aim of joining the EU besides other things
was to include the Czech capital market in the European capital market (Czech
national bank, 2015). There are still some specific features on the Czech market
that distinguish from other European economies, eg. the investing public
212
distrust in the capital markets, which was disrupted by negative experience of
coupon privatization, which was accompanied by a series of fraud and in 2009 it
was the financial crisis in the world, during which investors lost their
investments. Although since that time the situation has changed and the
government accepted a number of measures this area, strengthened the capital
market supervision, yet subconsciously investors remain a lack of confidence in
the capital market and investors or institutions acting on it, prefer for their
investment banking sector. Although financing through the capital market is an
important way of raising funds in the world (Mishkin, 2009), alternative
financing through capital market lags behind banking sector in the Czech
Republic and we can say that on the Czech market there is continuing distrust of
both investors and issuers of securities acting on the capital market (Nývltová et
al., 2007). In 2008 the majority owner of the Prague Stock Exchange became
Vienna Stock Exchange with a share of 92.74%.
1.3 Slovenian capital market
One of the important historical milestones is the entrance to the EU in 2004
and the introduction of the euro in 2007.
In the historical development the stock exchange transactions with shares
prevail and in 2008 the majority owner of Ljubljana Exchange Stock became
Vienna Stock Exchange with a share of 80.01%. These last years have been
marked by great market internationalization as most of the turnover on the
market has been realized by international investors. There are still many
challenges they are facing, in the last period they have been experiencing
nationalization and renewed privatization. The Ljubljana Stock Exchange not
rely merely on international investors, they have view of numerous:
privatization of state owned companies through the market, stronger presence of
local and international pension funds on the capital market and thus increased
interest of other companies to enter the market (Ljublana Stock Exchange,
2015).
2. METHODS
The primary aim of this paper was to determine whether capital markets
characterized by the stock exchange in two European countries exhibit after
implementation MiFID distinct characteristics of the development. The
comparison was carried out for the period from 2004 to 2014. The basic
prerequisites for selection of capital markets in the two countries of the
countries regard to the goal of this work was, that:
- they are european capital markets,
- they are a member of the Federation of European Securities Exchanges
(FESE)
- stock exchanges are part of the CEE Stock Exchange Group (CEESEG).
The starting point for the implementation of the research was carried out
documentary analysis of the data, i.e. an analysis of selected indicators the
213
Czech Republic and Slovenia. Data was obtained through a database accessible
through the website of Eurostat and of the stock exchanges in selected
countries: the Czech Republic – Prague Stock Exchange (PSE) and Slovenia –
Ljubljana Stock Exchange Stock (LSE). Within the analysis, the indicators have
been monitored and studied: number of emissions on the stock market, the
volume of stock trades, the market capitalization of shares and and the gross
domestic product of selected countries. PSE provides data only about market
capitalization of shares than about market capitalization of bonds and other
instruments. This article compares only the market capitalization of shares,
although LSE publishes data about market capitalization of shares, bonds and
other investment instruments than only market capitalization of shares as on the
Czech market. Qualitative data obtained by primary research has been evaluated
using Microsoft Office Excel and SPSS statistical software and methods of
analysis, description and comparison.
3. RESULTS
Descriptive analysis confirms the long-term upward trend of gross
domestic product (GDP), fig. 1. It is shown that positive GDP significantly
affects the development of stock markets and its growth creates an optimistic
atmosphere. In terms of economic advancement two of the analyzed economics
the Czech Republic and Slovenia show lower gross, both markets have specifics
of transition economics and it is clear that there is an area for further growth and
development of the market.
GDP (mil. EUR)
Figure 1. Development of gross domestic product
200000
150000
100000
50000
0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Czech R.
Slovenia
Years
(Source: own processing by Eurostat)
By comparing the volume of stock trades, fig. 2, is a development on the
Czech and Slovenian capital market low. By joining the European countries and
the adoption of legal and regulatory rules, legislative measures changed in 2004
for investors and firms doing business and are using financial and capital
214
markets. Simplified access to capital, were precisely defined rules of
functioning capital market-to-market for issuers and investment protection for
investors and it is for companies easier to deal with the entry and acting on the
capital markets (Meixnerová, 2009; Meixnerová, 2011). The period of 2006 2007 is characterized by a significant increase in activity on the capital markets
and in almost all markets and its characteristics. Trend on both exchanges is
rather declining, the volume of stock trades is far below the values of the
previous years and compare the development of the Prague Stock Exchange
with Ljubljana Exchange Stock expires and appropriate instrument is more to
compare other investment instruments between both markets.
Trade value by share markets
(tril.EUR)
Figure 2. Trade value by share markets
40
30
20
10
0
2004
2006
2008
LSE
2010
PSE
2012
2014
Years
(Source: own processing by the stock exchanges: Prague Stock Exchange and
Ljubljana Stock Exchange)
Maturity of the stock market is not only determined by the volume of
transactions but also the number of listed issues, fig. 3. The early stage of the
development of capital markets in Eastern Europe (the Czech Republic and
Slovenia) was connected with the policy of voucher privatization as an
indication of a large number of marketable securities of companies (Beim et al.,
2001). The vast majority of companies, however, did not have the prerequisites
for long-term effects on the market and to consolidate ownership structures and
slow outflow of companies from these markets. At present, from the perspective
of history, we can say that the voucher privatization did not produce markets
good reputation, because the market was confusing and lacked the authority to
supervise over it (Mládek, 2002). The decline in the number of share issues on
the Ljubljana Stock Exchange was not as dramatic as on the PSE. LSE in their
statistics states that the exclusion of certain emissions was due to the acquisition
of other companies. PSE does not explain why it was in 2005 eliminated a large
number of shares, it can be said that this step was to contribute to liquidation by
215
the stock market. MiFID should provide investors a high level of protection that
it should help the capital markets to restore confidence.
As shown in fig. 2, we still consider the stock exchange in the Czech
Republic and Slovenia to be small. Deficiencies can mainly be seen in the
number of quality small and medium enterprises on the capital market, their
extension would have significantly increased capitalization and trading volumes
mainly on the domestic market, strengthening its competitive position on the
market and the growth of the country's GDP influence on the growth of the
volume of available funding sources.
Number of Issues
Figure 3. Number of Issues by share markets
140
90
40
-10
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
LSE
PSE
Years
(Source: own processing by Eurostat and the stock exchanges: Prague Stock
Exchange and Ljubljana Stock Exchange)
As shown in fig. 4, the market capitalization of shares as a share of GDP
has increased development, which was interrupted by a decline in the years
2009 - 2010, that caused the European debt crisis, which has gradually
developed since 2009. In the course of funding on the financial market has
become for countries and companies too expensive or even impossible.
216
Figure 4. Market capitalization of shares on GDP
600000
500000
400000
300000
200000
100000
0
2002
2004
2006
Slovenia
2008
2010
Czech R.
2012
Years
(Source: own processing by Eurostat and the stock exchanges: Prague Stock
Exchange and Ljubljana Stock Exchange)
A comparison of the market capitalization of the two markets means that
the Ljubljana Stock Exchange copies the Prague Stock Exchange, only a few
rules lower. Both trends are developing roughly the same, their maximum
market capitalization achieved in shares in 2007, since then they have had a
decreasing trend. In an international comparison of interrelationships market
capitalization and trading volume and the number of new issuers belong the
Czech Republic and Slovenia among the least developed and it can be said that
both countries are still insufficiently using the advantage of relatively wellfunctioning financial system. Strengthening the positions of both countries is
still in the indicator of quality of small and medium sized enterprises on the
capital market. There is still a concern among the firms about losing control or
restrictions in society, dominate negative or no experience on the capital
markets or unwillingness to accept the company's demands for greater
transparency and the related time and organizational and legislative
requirements of the process.
Table 1 and table 2 shows that statistically significant dependence of the
estimated parameters at a significance level of 0.01 and 0.05 and between some
variables is a positive correlation. In the case of Slovenian capital market in
terms of trading volume, we see a strong degree of interconnection with the
market and it can be argued that the capital market country is irreplaceable and
that it has own importance and positive influence on the growth of the economic
performance of the country. At LSE defines significant relationship between
logarithms trading volume and GDP and the market capitalization has small
interconnection market. At LSE and PSE are significant relationships between
logarithms issues and GDP and we can be said that their support is tied to
supporting the development of new issues on the capital market.
217
Table 1. Correlation analysis of Slovenian capital market
Turnover
LSE
Turnover
PearsonCorr.
Sig. (2-tailed)
1,00
PearsonCorr.
0,10
0,01
0,16
0,78
10,00
10,00
10,00
10,00
** 0,74
1,00
*** -0,89
0,15
0,00
0,67
.
0,01 .
N
10,00
10,00
10,00
10,00
PearsonCorr.
-0,48
*** -0,89
1,00
-0,03
Sig. (2-tailed)
0,16
N
MarketCap
0,00 .
0,94
10,00
10,00
10,00
10,00
PearsonCorr.
0,10
0,15
-0,03
1,00
Sig. (2-tailed)
0,78
0,67
10,00
10,00
N
**
MarketCap
-0,48
Sig. (2-tailed)
Issues
Issues
** 0,74
N
GDP
GDP
0,94 .
10,00
10,00
Correlation is significant at the 0.05 level (2-tailed)
***
(Source: own processing by Eurostat and Ljubljana Stock Exchange)
Table 2. Correlation analysis of the Czech capital market
PSE
Turnover
GDP
Issues
MarketCap
***
Turnover
GDP
Issues
MarketCap
PearsonCorr.
1,00
-0,33
0,14
0,01
Sig. (2-tailed)
.
0,36
0,71
0,99
N
10,00
10,00
10,00
10,00
PearsonCorr.
-0,33
1,00
*** -0,9
0,48
Sig. (2-tailed)
0,36
.
0,00
0,16
N
10,00
10,00
10,00
10,00
PearsonCorr.
0,14
*** -0,9
1,00
-0,49
Sig. (2-tailed)
0,71
0,00
.
0,15
N
10,00
10,00
10,00
10,00
PearsonCorr.
0,01
0,48
-0,49
1,00
Sig. (2-tailed)
0,99
0,16
0,15
.
N
10,00
10,00
10,00
10,00
(Source: own processing by Eurostat and Prague Stock)
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4. CONCLUSIONS
Directive MiFID represents a revolution in the field of regulation of capital
markets. It is the first legislative instrument which includes the capital market
comprehensively and regulates almost all aspects of the market. It can be stated
that its regulation tends primarily on the investor side, there is a space for
increasing trade and investment in capital markets, which should have a positive
effect on the investing public in the long term. As deficiencies revealed
extensive modifications to a number of innovations mainly for securities
traders.
This paper points out the minimum difference of Czech and Slovenian
capital market and the comparison shows that both are very similar markets.
The last common milestone in the historical development is the 2008 takeover
of the Vienna Stock Exchange, which is the majority owner. The Czech and
Slovenia capital markets can´t still be considered sufficiently liquid, since there
is little primary issues, as well as and with it the related lower trading volumes.
Indicators of both capital markets are while maintaining the dynamics of large
capital markets low and the markets are to still be small. The analysis showed a
statistically significant relationship between the volume of trading on the stock
exchange and gross domestic product and confirmed that the increase in trading
volume lead to a GDP growth of Slovenia and a well-functioning capital market
is an indicator of the health of the economy of each country.
With regard to "safer" legal protection of investors can be stated that
introduction of MiFID is no guarantee for future market growth and at both
markets we follow slowly emerging increasing trend and similar response to
unfavorable market situation. The analysis shows that the equity market in both
countries remains below its initial value and volume of trades in shares far
below the value of previous years.
References
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McGraw-Hill Irwin.
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bank
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&
MiFID 2).
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220
USING CUSTOMER RELATIONSHIP MANAGEMENT TO
INCREASE CUSTOMER LOYALTY IN BANKS
LARISA MISTREAN
Academy of Economic Studies of Moldova
Chisinau, Moldova
[email protected]
Abstract
Customer relationship management is considered a key element of business strategy of
a modern bank and is based on the creation and development of personalized
relationships with customers in order to increase their satisfaction and the company
profitability. Banks need to look at customers as true financial assets that must be
managed so as to maximize their value. They need to redefine marketing strategies to
increase customer share and the value obtained in the three stages of their life cycle:
attraction, retention and development of relations. Marketing has gone from a time
when trying to maximize profit from each transaction at a time when is seeking to
maximize profits from each personalized relationship with a client.
Keywords: Customer Relationship Management, customer loyalty, consumer’s
behaviour, customer satisfaction
JEL Classification: G21
1. INTRODUCTION
The term consumer is king became increasingly circulated in the world of
marketing people. Today more than ever we live in an environment where the
consumer is free to choose any product, and the fight for the attention has
become fierce. Differentiation is challenging and digital revolution is rapidly
changing consumer’s behavior.
Having a quality product or service is no longer enough to attract
customers to the bank. They need the story behind the brand - a true story,
which can be identified - and personalized.
Ensuring continuous quality relationships with customers is a very
important goal for banks. The level of requirements of customers continuously
increases and total satisfaction is difficult to be achieved.
In the age of technology, fierce competition and individualism that leaves
its significantly increasing mark, traditional marketing concept disappears and
there are new flexible solutions that are designed to meet the demanding
clientele and also to control market trends. From the classic four P - price,
221
product, promotion, like switching to three C, Customer Value, Customer
satisfaction, customer loyalty.
The secret lies in managing customer relationships because their
expectations and requirements change very quickly, moreover, the client
becomes the master of the market because it is who knows exactly what kind of
product is required and has the right to express positive or negative opinion in
this regard.
2. ESSENCE OF CUSTOMER RELATIONSHIP MANAGEMENT
Managers believe that it is easier to produce than to sell you product and
customer loyalty is the key issue. Client-centered model implies a unified
strategy promoted by the highest levels of management, which focuses on
quality customer relationships. Here arises the need to implement and use in
practice the principles of CRM (Customer Relationship Management).
CRM is a concept, methodology and also a process used to learn more
about customer requirements, how they behave in general. CRM is a strategic
solution for bank management in order to continuously improve customer
relations in a competitive market where having success is not only to provide a
variety of products and services, but at the same time differentiation of products
and services from which competitors are offering.
CRM system can be defined as a process of continuous adaptation to
market requirements, improving marketing decisions, optimize the sales
process, primarily aimed at knowing your customer and thus increasing its
satisfaction by promoting products and services appropriate to the activity
profile and product profitability. However, CRM is the process of continuous
adaptation to market requirements, improving marketing decisions, optimizing
sales, primarily aimed for more detailed knowledge of customers and thus its
satisfaction by delivering higher quality products or services at a price as low as
possible.
The main objectives of CRM system is:
- increasing the number of customers and their profitability;
- a simplified internal organization (restriction workflow, shortening the
business cycle and eliminate unproductive information flow);
- maximizing lifetime customer relationships through cross-selling;
- identification of high-risk clients and to adjust products and services;
- making it possible to meet customer needs with the right offer at the
right time;
- increase the profit generated by investment in marketing initiatives.
The goal, said by any institution using Customer Relationship
Management, is essentially to know as many details about her customers,
develop relationships with them and how meet at the highest level and
conditions their needs. So now, a CRM system should help banks to understand
customer behavior including items related to them and how it can be influenced.
222
CRM philosophy is to recognize that a long-term relationship with
customers can be one of the most important assets of a bank offering
competitive advantages and improved profitability.
Diversification of products, services and computer applications allowed for
specialization in banking and thus the emergence of new categories of banks.
Banking System of the Republic of Moldova has also led to greater competition,
which depends on the type of operations performed, the categories of customers
and the quality of services.
The determining factors that led to the need to implement modern
management system customer relationship in Moldovan banks were:
- banking competition;
- increased risk;
- the need for customer loyalty;
- customer focus;
- new applications;
- diversification and specialization of banking;
- planning, control and better use of resources.
Customer Relationship Management is crucial for making policies and
strategies by banks shareholders.
CRM uses technology, strategic planning and personalized marketing
techniques to build a relationship that will increase productivity and profit of a
bank.
It is a business strategy that puts the customer at the center of the
company's processes and practices.
For CRM to have a satisfactory outcome in the market and economic
needs, it requires total involvement of the bank. Customer is the greatest enemy
because it can switch to another bank with products closer to her expectations if
not given what he wanted, so the core of the problem lies in knowing exactly
what to offer.
CRM technology is the essence of the entire image (or profile), client
image must be unique within the bank and available to all employees of the
departments concerned. Client image must contain all data collected about the
customer and the history of its relationship with the bank.
Uniqueness is important because without a CRM strategy, various
information relating to a client is spread in various operational subsystems.
Contact details are at various agendas, data related to previous transactions
(items, interest payments) are either the sales department or from financial
accounting and so on ... In addition, some information is not collected
(especially those from informal interactions with client: phone calls, emails,
etc.).
Availability is important because virtually the whole bank is implied. First,
there are the departments that have direct contact with customers: sales,
technical support, advertising and public relations. The marketing department is
somewhere in between, having a central role in harnessing customer
223
information. This is usually achieved segmenting the customer base and
establish target groups for marketing campaigns based on specific metrics. It
also performs analysis and synthesis that is decision support for the higher level
of management. Finally, the client image is important for bank management as
the basis of analysis that supplies strategic decisions on policy and operational
decisions of financial institution focus on products and customer service,
pricing policy etc. (Verhoef et al., 2009).
Also, CRM is a very costly and requires the application of a highperformance technologies, specifically Business Intelligence, which is the ideal
solution consisting of the ability to provide reports, data and statistics, in a time
as short as possible. Business Intelligence is using logistic and economic aims
to find the most effective solutions to the problems faced by the bank, is an
increasingly accurate because it includes the departments of sales, production,
human resources, executive, financial, supply.
For best results the bank must identify profitable customer categories.
Banks often find that a weight between 10 and 20% of their clientele can be
unprofitable. However, to have a conclusive picture must be analyzed customer
portfolio which provides, according to certain criteria, potential profitability of
customers. Banks may consider the following criteria:
- disposable income;
- the average duration of the relationship with the client;
- the value of sales made to date by the customer review;
- utility for cross-selling;
- possible depending thought leader;
- the scope for future collaboration with the client.
A key concept in evaluating customer profitability is the CustomerLifetime-Value. The individual is higher this value the more valuable is the
client for the bank and the more to be invested in maintaining the relationship
with the client.
For a bank to be competitive must be able to have the following
capabilities:
- understanding Customer Value;
- creating value for the customer;
- providing value to the customer;
- capturing customer value;
- support for customer value.
This means keeping customers with satisfaction and value. Banks need to
look at customers as true financial assets that must be managed so as to
maximize their value. They need to redefine marketing strategies to increase
customer share and the value obtained in the three stages of their life cycle:
attraction, retention and development of relations (Johns, 1998).
Attracting new customers requires from banks a high consumption of
resources and time. To attract new customers bank shall have the following
possibilities:
224
- design and placement of advertisements in the media that will reach
potential customers;
- send offers by mail;
- telephone contact;
- price reduction;
- addition of other advantages;
- providing complex services;
- participation in exhibitions, public events, etc.
Customer retention is a must for any bank. The imperative to increase
customer retention rate is derived from the customer lifetime value, forecast
profit of purchases over the life of the client and the difficulty of attracting new
customers. Loss of customers must determine to seriously analyze the causes
leading to the departure of customers. This analysis is based on internal records
and continuing customer surveys.
Losing a stable client causes a loss equal to the revenue from that.
Ways for keeping a customer are different and must be reviewed and
updated periodically by results.
1) Accounting complaints from customers. Only 5% of unsatisfied
customers complain. Of all customers who file complaints only 50% will buy
again products and services, even if the complaint has been resolved favorably.
2) Guarantees.
3) Motivating employees to better serve customers:
- the customer is the most important person;
- we depend on client;
- the customer is the goal of our work and activity;
- nobody wins from a fight with a customer;
- it is our duty to deal with customer wishes profitably for all.
Marketing has gone from a time when trying to maximize profit from each
transaction at a time when is seeking to maximize profits in each personalized
relationship with a client.
CRM business covers four components:
- Front-Office Operations - refers to the direct interaction with the client:
meetings, presentations, phone calls, emails, online services, etc.
- Back-Office Operations - processes that implied effects on front-office
activities (marketing, prospecting, service);
- Management of business relationships with other companies: partners,
suppliers, vendors, retailers, influencer, opinion leaders, media. This component
includes activities for front-office and back-office;
- Analysis - Centralized data to develop marketing campaigns, sales
strategies, intuitive and efficient work flows.
The scope of use of CRM can be structured as follows:
- SFA (Sales Force Automation) - of a bank;
- Contact management;
- Lead management - management of potential customers;
225
- Call Center;
- Help Desk - contact management, complaints;
- Customer Survey Management - management responses obtained from
customers through market research or direct questionnaires;
- Partner relationship management - managing relationships with business
partners.
Through effective management of customer information, banks can
improve their methods and techniques of attraction, retention and development
of customer relationships.
3. BENEFITS OF CUSTOMER RELATIONSHIP MANAGEMENT
IMPLEMENTATION IN MOLDOVAN BANKS
Implementation of Customer Relationship Management has significant and
profound effects on bank activity, causing changes in strategy, organizational
structures, processes, systems. Banks wishing to implement CRM system must
meet the following requirements:
- rethinking and developing new customer-oriented banking strategy;
- involving all stakeholders leading and coordinating the project.
Adoption by bank of policies regarding clients includes:
- continuous training of personnel;
- working atmosphere in the bank;
- attitude of employees;
- auxiliary services provided;
- programs for determining customer satisfaction;
- internal codes of conduct of employees;
- the presentation of products and services;
- quality and safety policy and consumer products.
In the process of creation, implementation and control of a concept of
CRM are very important two aspects:
1) Performance in CRM involves:
- product quality and service;
- quality processes related to the client;
- quality Consultancy;
- degree of flexibility in sales
2) Interaction in CRM involves:
- feed-back;
- dialogue;
- personal;
- consulting Sales
A properly implemented CRM system can bring many benefits to the bank.
It will help to "acquire" new customers to serve their old customers, to increase
the value of the latter, keep and determine which customers are loyal and they
226
are interested in more complex services. Benefits that can bring a CRM system
are:
- reduce costs - a great advantage of CRM is that it makes the customer a
partner. It is more efficient to keep your customers and develop relationships
with them than to win new customers who do not feel anything special for the
bank;
- improve customer service - all customer interaction data are centralized.
Easier routing is performed by the information that the client wants and often
the customer can achieve this alone because the CRM system is able to
anticipate customer needs.
- increase customer loyalty - the customer feels more and more like part of
the team, his needs are anticipated. Customers interrelate with the bank and are
less likely to migrate to the competition.
- more profit from existing customers - when you know what customers
want from you, it is much easier to sell other products or services.
Thus, implementation of the system allows a reduction in the total cost of
customer management by reducing the time of sale, sales force targeting
customers that bring more value on the bank, marketing campaigns are better
organized, making cross-selling centralization of customer data in single
database.
The implementation enables proactive management of the client by its
retention, enhancement and effective integration of distribution channels;
raising customer satisfaction and continuous control of the risks associated
categories of customers. Also, we conclude the need of redesigning business
processes of sale, which contributed to increased sales performance
management through proper planning and sales forecasting.
We can identify three areas of action of CRM systems, namely:
- increase customer loyalty by providing information about the life cycle of
each customer and product profitability obtained;
- facilitating processes by binding operations with the front office back
office in real time;
- predictions and scenarios about customer behavior, bank profitability and
the need for new products and services.
4. METHODS TO BUILD BANKING CUSTOMER LOYALTY
Lately, most banks have begun to realize that keeping existing customers is
as important, perhaps more important than attracting new customers. This is due
to the enormous costs required to attract customers who may be five times
higher than the costs loyalty. However, the profitability of old clients proves to
be higher than that of new customers.
Consumers have a wide range of banking products and services that you
can purchase, and their choice is based on how you perceive the concepts of
quality, value, service. They evaluate their performance in terms of
expectations, being satisfied when expectations are fulfilled and excited when
227
they are exceeded. Satisfied customers remain loyal longer, buy in larger
quantity, are less influenced by price and show others the bank in a favorable
light.
Thus, loyalty means analysis, planning, implementation and systematic
monitoring of assembly of measures oriented to current customers of the
institution, in order to maintain and develop the future of its business
relationships with them.
Currently, banks believe that customer loyalty is a strategic priority for
development, representing, in fact, a source of competitive advantage.
To build customer loyalty banks must go through several levels, as follows:
Figure 1. Banking customer loyalty levels
Elementary - employees sells product
Reagent - employees sell the product and encourages customers to
call, to ask, to complain comment
Responsible - employees who sell product makes a telephone call
to see if the customer is satisfied with the product and makes
Proactiv - employees sell the product and periodically contacts the
customer to ask for suggestions for new products or to improve the
Partnership - permanent cooperates with large customers to help
them improve their performanceprestării serviciului
(Source: Bruhn & Homburg, 2010, p. 68)
Ways to build customer loyalty:
1) Create strong ties with customers by:
- interdepartmental participation in planning and management of customer
satisfaction;
- integration of customer desires in all bank management decisions;
- creating superior products and services to market;
- making the database available on the needs, preferences, ways of contact,
the frequency of customer acquisition;
- to facilitate customer access to bank employees;
- rewarding employees based on outstanding performance.
2) Addition of financial benefits;
3) Adding social benefits;
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4) Addition of structural links:
- provide its clients with special equipment, computers;
- concluding long-term contracts;
- converting the product into a long term product.
We highlight the following methods oriented to build banking customer
loyalty:
Figure 2. Methods oriented to build banking customer loyalty
service
policy
new products
advertising
personalize
relations with
service
parameters
methods oriented to build
banking customer loyalty
public
customers
customer
informing
special
offers
operation of
subsidiaries
staff
administration
(Source: Bruhn & Homburg, 2010, p. 53)
In order to establish and develop the bank's customer service is necessary
to implement the policy of each client, the format required by a special
subdivision in bank structure and assign to each VIP client one personal
manager. It replaced the word partner bank's customer. That award is part of the
corporate culture for customers and cooperation partners -Part standards of
conduct bank workers. The personal manager bonds should include the
following: research attractiveness for bank customer, customer training
database, analyze the business, determine its requirements, researching
information on the client banks have opened accounts by establishing strengths
in the work of these banks and training client of special offers etc.
Must have personalized bank customer relationships in order to minimize
operating costs, administrative and other expenses in customer activity.
Particular attention is drawn to the improvement of quality of servicing
parameters, treating clients with courtesy by employees, bank employees
professionalism, lack of congestion, a comfortable, convenient working
schedule, speed operations servicing the possibility of receiving a
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comprehensive consultation, the existence of advertising material, promotional
campaigns.
The need to develop remote servicing and new financial intermediaries. To
maintain customer database is necessary to elaborate special offers for a large
segment of customers, sensitive to the choice of bank pricing. In this case it is
important to find solutions to decrease costs, lower prices and implementing a
new approach to pricing, not at the expense of quality, which is achieved at the
expense of good services remotely. Electronic services allow increasing the
number of transactions with minimal cost and high precision. This technology
allows the formation and management of customer database.
Despite the technological revolution and the emergence of remote
servicing role in the customer service, subsidiaries have not decreased, but
received another form. Branches should become centers for advice and sales of
banking products. But many internet services may be transferred,
multifunctional ATMs, call centers. This allows reducing the workload in
subsidiaries and determines the concentration on sale and advice.
Quality Management work done by employees is an effective way of
raising customer loyalty. Systematically is necessary to improve the skills of
employees wearing business discussions and managing conflict situations,
motivation system development, both individual and group, taking into account
the quality of work and career aspirations.
The client must know the strengths of the bank to ensure high stability to
external factors and competitiveness. For this it is necessary to inform the
customer about the bank's market positioning, key indicators of activity and
development priorities.
The presence among bank customers of public figures reputable bank
allows positioning in top rankings.
Particular attention should be given to advertising, which we can divide
into two types:
- Brand advertising
- Advertising products and services.
Brand advertising is necessary to maintain customers and to attract new
customers - advertising of products and services.
Lately occurs focusing on increasing the efficiency of branch network.
Evaluation of efficiency of branch network paves the way for cost optimization.
However it is actually to implement new products that meet the needs of
different customers. These proposals will be conducive to the development of
customer retention mechanism.
The reasons why a bank should focus on its customer loyalty are:
Increase of repeated transactions. A satisfied customer of product or
service supplied by the bank will be prone to buy repeatedly from it because:
- Confidence that previous purchase warrants him. At the same time, avoid
potential risks of an acquisition of another bank;
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- Efficiency of time. The purchase process reduces this time to the final
stage decision.
Possibility sales Cross selling. Once the bank managed to build customer
loyalty through satisfaction that the product or service they brought, a transfer
of trust will come quickly to the entire range of products in its portfolio.
In this case, the bank needs a CRM system with which to track purchase
history made by each client and to provide products complementary to those
already purchased.
Increase the buying intensity. A higher purchase volume from the client
draws a number of advantages for the bank as savings (increased purchasing
volume results in increased production thus fixed costs remain the same results
in significant savings budget).
Increased tolerance for price increases. Compared to a potential customer,
loyal customer will consider increasing the price a logical step in the evolution
of the bank or trust business, and not an attempt speculation.
Reduction in the rate of customer migration. Analyzed in terms of
competition, this advantage becomes a double value: by stopping the customers
migration is the base of bank development and at the same time, it freezes the
competitor’s evolution.
The reports generated by an application highlights, real-time customer
situation and the degree of their development (generated profit opportunities
completed projects developed).
Getting customer loyalty and generate recommendations. In this case the
customer will not only be pleased to make repeated purchases from the same
bank, but will encourage this and among acquaintances.
Bank management is aware that the information coming from among other
clients, acquaintances have the greatest relevance to potential customers. Managers consider them to be the best salespeople.
Thus, any strategy of customer loyalty must not deprive the basic
instrument: CRM application.
5. CONCLUSIONS
The basis of any successful business is the number of customers and their
degree of loyalty.
It follows, therefore, that customer satisfaction is very important for the
bank and profitability. However, the bank must know very well the customer’s
needs, preferences, expectations and stay one step ahead of the competition. It is
very useful to know on which category of bank customers to focus efforts
knowing that there are unprofitable customers that the bank may even remove.
Given the current regulatory framework of the banking system,
development of competition, the current state of implementation of CRM
systems to international development system, Moldovan banks must rethink and
adapt continuously to customers, implement the latest profitability calculation
models, using distribution channels that generate increased customer
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profitability and effective use of human resources through the implementation
of new organizational structures, allowing their specialization.
Implementation of CRM system allows banks transformation of institutions
perceived as operations centers in service-oriented companies effective
alternative sales channels and advising clients.
Given the Customer Relationship Management presented, we conclude that
significant and profound effects on the entire banking system providing
database to maintain a healthy economic system with a responsible approach to
avoiding the risk of illicit funds entering the system and early detection of
insolvency.
Therefore, to develop the process of building customers loyalty, knowledge
of consumer behavior is needed.
References
[1] Bruhn, M., Homburg, C. (2010). Handbuch Kundenbindungsmanagement:
Strategien und Instrumente für ein erfolgreiches CRM. Gebundene Ausgabe.
[2] Johns, T. (1998). Relațiile perfecte cu clienții. Bucuresti: Editura Național.
[3] Verhoef, P.C., Lemon, K.N., Parasuraman, A., Roggeveen, A., Tsiros, M.,
Schlesinger, L.A. (2009). Customer experience creation: Determinants, dynamics
and management strategies. Journal of retailing, vol. 85, 31-41.
232
THE STUDY OF THE ASSET PRICE CHANNEL IN THE
CONTEXT OF A MONETARY UNION
MIHAELA NICOLAU
University of Poitiers, CRIEF
Poitiers, France
[email protected]
Abstract
The asset price channel may function differently from one country to another because of
specific characteristics in the structures of their economies and psychological and
cultural diversity of consumers. Given the fact that the financial system’s structure may
be of a great importance in the process of the transmission of variations in asset prices
to consumption, controlling for it in an empirical framework could give supplementary
insights into wealth effect aspects. The market-based financial system characterising the
USA and the Commonwealth countries is larger, more liquid and more capitalized stock
market than the bank-based financial systems which are prevalent in continental,
central and south-eastern Europe. This research examines the existing literature on the
relationship between private consumption, housing wealth, stock market wealth and
income comparing different methods that were used by different authors in order to
illustrate this relationship. Also, we suggest further research in order to improve the
existing literature and to study the asset price channel in the context of contemporary
economic and financial crisis in the Eurozone and the CEEC countries.
Keywords: monetary union, EU, asset price channel, wealth effect, CEEC, financial
crisis
JEL Classification: E21, E52, F45, G01
1. INTRODUCTION AND PROBLEM STATEMENT
An economic and monetary Union must meet certain criteria in order to be
economically efficient. A key issue for such a Union is heterogeneity. The
problem arises when a single monetary policy can have different effects for the
countries within the same Union. Decision-makers in different policy areas act
independently and are whilst interdependent. The recent crisis in Europe has
demonstrated that policy interactions can be more profound and implicate
additionally financial and structural policies. If other policies act in support,
monetary policy is more efficient in having an impact on the real economy. Else
ways, it impacts less and expansionary policy has to last longer.
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To analyse this problem we confront with two aspects: the monetary union
management and the opportunity for one or more countries to join it. These two
aspects can be analysed by the effects of monetary policy in the context of the
European Union. The transmission channels, that are responsible for sending
the monetary policy impulses to the real economy (Lavigne & Pollin, 1997),
deal with this approach. A channel of a particular interest is that of asset prices.
One may wonder if this channel has become the most effective of all the
transmission channels of monetary policy since the recent crisis (Artus, 2013).
It is this channel that explains the USA economy reboot and the lack of
restarting the Eurozone economy, despite of its highly expansionary monetary
policy. Expansionary monetary policy in an under-employment situation raises
the asset prices. This is true in the case of the United States. The favourable
effects of rising asset prices can be well seen in the USA, while the weakness of
the asset price recovery penalizes the euro area.
The effects generated by the monetary policy decisions made by the central
bank affect the price of assets. The monetary transmission channel through
which these effects are spread is the asset price channel. Important aspects of
monetary policy transmission, related to the market value of asset and
individual wealth, are controlled by this channel. These values have a key
impact on both consumption and investment.
In this paper we will examine the existing literature on the link between
wealth and consumption, known as the wealth effect which has been of interest
to economists for decades. The term wealth effect indicates a modification in
spending that leads to either an actual wealth or a perceived wealth change. This
implies that consumers generally spend more when they are either indeed
wealthier or identify themselves to be so. Furthermore, consumption is
generally attached to relative wealth (and income). This means that a
consumer’s capacity to achieve particular goods may depend on the amount of
his wealth compared to that of other consumers in the economy (Sorensen &
Whitta-Jacobsen, 2010).
It is very important to understand the behaviour of private consumption
decisions in order to explain and estimate the fluctuations of economic activities
in general and private aggregate consumption in particular. Traditional
macroeconomic models analysing private consumption normally entail
household wealth and income variables. Several well-known theories, including
the permanent income theory (Friedman, 1957) and the life-cycle hypothesis
(Ando & Modigliani, 1963) motivate this simple consumption function model
with household income and wealth as endogenous variables.
The importance of wealth in establishing not only the behaviour of
consumption, but also the behaviour of savings was emphasized by the recent
boom-bust behaviour of housing and equity markets. This consequence has
therefore determined many authors to put the wealth effects back to the research
agenda. Thus, because of various choices of the consumers and different asset
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liquidity, researchers began to differentiate between housing and financial assets
(wealth).
The aim of this article is to answer to the following questions:
(1) What methods were used in the existing literature in order to analyse
the wealth effects?
(2) How can we improve the existing literature on the asset price channel?
The reminder of the paper proceeds as follows. In Section 2, we provide
the prior literature in this field of study. In Section 3 we draw the conclusions
and we discuss further research that would be necessary to answer the questions
raised by the article and to analyse the wealth effect in the EU countries, by
comparing the Eurozone countries with the CEEC countries.
2. OVERVIEW OF THE PREVIOUS LITERATURE
Table 1 displays the main features of econometric studies of the wealth
effect on the aggregate data.
The empirical studies on the impact of wealth effect on private
consumption are primarily centred on advanced economies. Poterba (2000)
focuses on researches that determine stock market wealth effects, whilst Paiella
(2009) renovates the previous literature analysing both stock market and
housing wealth in countries with advanced economy. The global conclusion is
that both wealth components have significant explanatory influence related to
the consumption. Nonetheless, the estimations of the intensity and the channel
of the effects vary, mostly because of the usage of different methodology, of the
type of the data (aggregate or micro), of data sampling, and the period of study
(Paiella, 2009).
Paiella (2009) studies the accelerated and sharp variations of stock and
housing prices in the previous years of her article and finds that policy makers
paid more attention on them and that they raised various concerns on the
implications for household expenditure. This is the reason why the scientific
interest in the size and the sources of the ‘wealth effects’ on consumer spending
has been renewed. Generally, the majority of the researches recognize a
statistically significant relationship between stock and house prices and
consumption. The general perspective is that financial wealth effects are explicit
and the elasticity of consumption to financial asset prices in Anglo-Saxon
countries is bigger than that in Europe, where financial asset holdings are
considerably lower. With respect to the amount of the housing wealth effects,
evidence says that they may be similar in both regions and bigger than the
financial wealth effects. Regarding the size of the effects and the nature of the
channel through which changes in housing wealth affect the consumption, the
authors do not come to an agreement. The estimates of the effects differ if the
authors use aggregate or micro-data and authors find big differences for the
countries, for which there is narrow theoretical rationale. The differences show
apparently a failure to account for cross-country heterogeneity in the nature of
the shocks to consumption and wealth, and more generally come from
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differences in the measurement of wealth and in the sample definition. This,
together with the policy relevance of the size and nature of the wealth effects on
consumer spending, calls for devoting efforts to improve the collection of data
on household savings and spending patterns.
Paiella’s paper discusses also that the evidence based on time-series data
and that based on surveys are complementary. No source is ‘ideal’ because both
of them have strengths and weaknesses in the studies for the wealth effects.
Time-series data have several advantages like: allowing the author to compare
long- and short-run link between wealth and consumption, verifying which
variables adapt to reestablish the long-run equilibrium in the event of a shock
and determining the timing of responses, which is an important point when
analysing wealth effects, as presented by Poterba (2000). Still, it is difficult for
Paiella (2009) to determine the very different concentration of ownership by
asset category by using aggregate data, this fact suggesting that the same
aggregate wealth shock may affect very differently aggregate consumption
according to the asset category analysed. They do not allow for response
heterogeneity either as a result of observed and unobserved characteristics.
Moreover, the household category macro-data are derived as residual for many
financial instruments. This is the reason why the quality of the macro time
series is regularly being put to question. Subsequently, there is an inconvenient
when it comes to the condition for the time series to be long. This fact makes
the analysis made on aggregate data not viable for most countries because the
data are often unavailable, along with the problems associated to the hypothesis
of a durable long-run relation between consumption, income and wealth.
On the contrary, household-level data help the author Paiella (2009) find
response heterogeneity and differentiate the alternative assumption of direct
wealth effects, common causality and collateral channel. Still, with surveys,
most variation is cross-sectional, this fact providing at best information about
the long-run relationship. Mainly, the variation probably confounds various
effects, like cohort effects and the fact of introducing households at very
different moments of their life cycle, among others.
In the next paragraphs we will present the studies that show the important
characteristics of empirical researches made on the wealth effect where the
aggregate data were used. Many studies (Davis & Palumbo, 2001; Lettau &
Ludvigson, 2001, 2004; Ludvigson & Steindl, 1999) confirm a positive and
important long-run relationship between aggregate wealth and consumption in
the USA. The studies of the authors Fisher & Voss (2004) and Tan & Voss
(2003) suggest related evidence for Australia and Fernandez-Corugedo et al.
(2003) for the UK. Generally, wealth effects in continental Europe countries
with developed market-based financial sectors are exceeded by Anglo-Saxon
ones (Bertaut, 2002; Hamburg et al., 2008; Labhard et al., 2005).
Hamburg et al. (2008) studied the link between consumption and wealth in
Germany during 1980–2003. As previous researches for other countries, the
authors find an empirical approximation of the consumption which is called the
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“cay” residual – wealth ratio as a co-integrating relation between consumption,
asset wealth and income. Hamburg et al. (2008) find that consumption
principally responds to constant innovations in asset wealth and income. The
results from earlier research for the USA, Australia and the UK have shown that
this co-integrating relation forecasts variations in asset prices, specifically risk
premia in the stock market, the authors find that cay residual primarily predicts
income variations in German data. The authors’ interpretation of this
phenomenon is that—apparently because of structural differences in the
financial and pension structures—stock market wealth explains a lower share of
household net worth in Germany than in the Anglo Saxon countries. This is
why temporary variations in stock markets impact very limitedly the German
private household net worth.
Hamburg et al. (2008) demonstrate that the consumption–wealth ratio
predicts income better than stock market fluctuations. This is the reason why
one may think that cay residual have estimating ability for several
macroeconomic indicators during the business cycle. The authors have
confirmed the latter idea by using several macroeconomic variables for
Germany. On the other hand, Hamburg et al. (2008) show that transitory
elements in the German stock market can be described as periodic variation in
the U.S. consumption–wealth ratio (fluctuation in the German equity premium
during a business cycle appears to be mostly directed by international forces).
The results of Kishor’s (2007) study suggest that transitory shocks make up
half the movements in financial wealth at all horizons, while permanent shocks
influence the housing wealth. Because consumption responds solely to
permanent changes in wealth, it is normal to differentiate wealth components
and consider that housing (real) and stock (financial) wealth impact differently
the consumption. The empirical studies’ findings analysing this problem are
often incomplete, primarily because of multi-colinearities of the two wealth
categories. The Case et al. (2005) results show a higher housing wealth effect in
the USA and 14 OECD countries, whilst Carroll et al. (2011) make a similar
conclusion for a list of the US states.
Case et al. (2005) analyse the importance of each wealth effect (housing
and financial) in influencing consumption and the authors find that it is an
empirical matter. The authors have studied these wealth effects with two lists of
cross-sectional time-series data that are more complex than any other method
used before and it also contains a several econometric conditions. When using
different econometric specifications, the numerical results differ to some extent,
therefore any statistical conclusion should be tentative. Case et al. (2005) find at
best poor evidence of a stock market wealth effect. Nonetheless, the authors do
find robust results that changes in housing market wealth have relevant effects
for the consumption. This evidence is consistent when using panels of U.S.
states and industrial countries and it is robust to differences in model
specification.
237
The results of Carroll et al. (2011) show that, in U.S. historical experience,
housing price changes have generally been related to high subsequent changes
in consumer spending. The immediate (first quarter) effect is estimated to have
been somewhat weak (the immediate quarterly MPC in their preferred model is
about 2 cents on the dollar). But over a period of time of various years the
authors find that it has on average of 4–10 cents. These results are consistent
with those from other studies and the U.S. states evidence. Whether the housing
wealth effect is considerably higher than the financial one is not certain, whilst
the recent literature seems to point in that direction, in Carroll et al. (2011)
estimates the size of the differences is not big enough to yield confidence in the
conclusion.
In what monetary policy purposes concern, these results imply that
policymakers should keep a close eye on housing markets developments
independently from equity markets, because even the possibility of a
significantly higher MPC out of housing wealth can change the balance of risks
in a macroeconomic estimation. This kind of point of view, for example, could
have improved the understanding and interpreting the fact that the U.S.
consumption and residential investment spending was surprisingly strength in
the early 2000s even if the stock market had a historic decline.
Other research articles find that the housing wealth effect is less
pronounced than the financial one (Dvornak & Kohler, 2003, for Australia;
Ludwig & Sløk, 2004, for 16 OECD countries; Dreger & Reimers, 2009, for 14
industrial countries; De Bonis & Silvestrini, 2012, for 11 OECD countries). The
authors Ludwig & Sløk (2004) and Carroll et al. (2011) find evidence that, for
countries with market-based systems, the financial wealth effect is larger than
for those with bank-based financial systems.
The Dreger & Reimers’ (2009) study analyses the long- and short-run
relation between private consumption, disposable income and housing and
financial wealth for a list of industrialized economies. They find that
consumption, income and wealth are co-integrated in their common, and
possibly not in their idiosyncratic characteristics. The co-integrating vector
seems to be somewhat robust in the case of different model characteristics and
in line with the life cycle constant income hypothesis. The income elasticity is
not different from unity, and the wealth elasticities are not very big but positive.
In what the error correction mechanism concerns, consumption could not be
interpreted as a weakly exogenous series. This fact suggests that an asset prices
adjustment would lower in some way consumption spending. Their results are
also linked to the research on international business cycles. The co-integration
evidence for the common components stresses the importance of international
spill overs to analyse aggregate consumption behaviour.
De Bonis & Silvestrini (2012) analysed the impact of household financial
wealth and real wealth on consumption, examining eleven OECD countries with
quarterly data between 1997 and 2008. All the analysed series are stationary
different and co-integrated, looking to the panel unit root test results. Thus, the
238
authors used an estimation approach to conclude about the long-run
relationships between consumption, financial and real wealth.
Generally, dynamic panel data regressions indicate that financial assets and
real wealth have a positive impact on household consumption. The estimate of
the propensity to consume from financial wealth is greater than the propensity
to consume from real wealth. De Bonis & Silvestrini (2012) examine the
robustness of their estimates in different ways. The authors introduce two
means in order to measure household financial wealth: the first is developed
from flow of funds data, and the second is related to share price indices.
Additionally, they use a number of estimation techniques: fixed-effects, pooled
mean group estimation and single-country level ARDL estimation. Fixedeffects estimation allows intercept heterogeneity among countries, whilst
estimating a single slope coefficient in the pooled estimation. Pooled mean
group is an estimation method that constrains the long-run coefficients to be
identical across countries, whilst the short-run coefficients and error variances
are not restricted. The last approach, based on single-country level ARDL lets
long-run and short-run coefficients to be different across countries. The
empirical results are statistically significant and theoretically consistent. Thus,
restricting the marginal propensities to consume, the number of unknown
parameters is diminished, and this fact provides more degrees of freedom and
therefore more efficiency in estimation.
Looking at individual countries results (single-country level ARDL
approach), the unrestricted coefficients of financial and real assets are generally
positive, even though not statistically significant for all countries. The empirical
results of De Bonis & Silvestrini’s (2012) study support the idea of a difference
between Anglo-Saxon financial systems and more traditional bank-oriented
financial systems. Still, approximatively small time series dimension of the data
might have influenced the estimation results, as it is by some means reflected by
large standard errors and large confidence intervals around the parameter
estimates. This is an important warning to their empirical results on the
heterogeneity across countries.
The housing market boom during the last twenty years inspired the late
research in the housing wealth effect, principally highlighting the experience of
advanced economies. Empirical studies made in the late 1990s and the 2000s
identify a small but statistically significant effect of housing wealth on
consumption in the USA and the UK (Attanasio et al., 2009; Campbell &
Cocco, 2007; Disney et al., 2010; Engelhardt, 1996; Skinner, 1996).
There are still insufficient studies that were made to analyse the impact of
stock and housing wealth on consumption in the emerging countries in general,
and in the post-transition European countries in particular. To our knowledge,
Funke (2004) was the first author who analysed the question, studying only the
stock wealth effect. His results show a small but statistically significant effect of
stock wealth on consumer expenditure in a panel of 16 emerging markets which
exclude post-transitional European countries.
239
There are few studies that contribute to the literature providing evidence of
significant housing wealth effects in European post transitional countries. The
authors Sec & Zemcik (2007) show that the house price growth in the Czech
Republic contributed to consumption growth for householders, but not for home
renters. Aben et al. (2012) find some evidence of a solid relationship between
housing equity withdrawals and consumption in Estonia, whilst Ahec Sonje et
al. (2012) provide evidence of significant housing wealth effects in countries
like Bulgaria, Croatia, the Czech Republic and Estonia, similar in size with the
advanced countries.
Ahec Sonje et al. (2012) made a study on Bulgaria, Croatia, the Czech
Republic and Estonia and showed that private consumption react to movements
in housing wealth in the long run and the short run. In Bulgaria, Croatia and
Estonia they showed that the reaction of private consumption to movements in
income and housing wealth is defined by nonlinear characteristics. Particularly,
estimating factors from threshold error correction model of consumption
indicate that the adjustment of long run changes from equilibrium appears
exclusively in one out of two regimes defined by the threshold value.
Adjustment is therefore specific to only one regime, i.e. it is only active when
consumption is lower than the long run equilibrium level, whilst it is absent
when consumption is above the equilibrium value.
Taking into consideration the long-run marginal propensities to consume
out of housing wealth, their long run estimates for Bulgaria, Estonia, and
Croatia are similar to estimates for developed economies and take values from
0.04 to 0.1. As far as the Czech Republic is concerned, the marginal propensity
is somewhat high (0.46), but it is not statistically significant. For several
countries, short run marginal propensities to consume out of housing wealth
also have related values: 0.14 for Croatia, 0.12 for the Czech Republic and
0.075-0.11 for Estonia. In Bulgaria though, there does not appear to exist short
run relationship between housing wealth and private consumption spending.
The approximately big consumption persistence in Bulgaria, Croatia, and
Estonia could modify significantly households´ response to policy shocks and
business cycle innovations. This characteristic can be specifically challenging
for formulation and the efficiency of countercyclical policy measures that
operate through household spending. The fact that should also not be ignored is
the one where not only persistence, but also wealth effect exists in the
consumption behaviour in post-transition European countries. This implies that
housing wealth movements together with factors that constitute consumption
persistence must be taken into account if the policy objective is to stabilize the
level of output via consumption or to boost output via long-lasting growth in
consumption.
Two studies compare the strength of housing and stock wealth impacts in
emerging countries. Peltonen et al. (2012) analyse the reaction of consumption
to variation in housing, stock market and income-level effects in a group of
Asian and Latin American emerging countries. The results show rather
240
important and statistically significant housing and stock market wealth impact
in both areas. Yet, as predicted, the two effects are more significant for Asian
countries, whilst stock market capitalizations are greater per unit of GDP than in
Latin America. Ciarlione (2011) as well finds that both housing and financial
wealth have a positive impact on consumption in the long run for a list of 17
emerging countries from Asia and post-transitional Central and Eastern Europe
(CEE). Nonetheless, three countries from the sample (Hong Kong, Singapore,
and South Korea) are not considered emerging or developing economies and are
also identified as countries with prevalent stock market financing (in contrast
with the all the other countries in the group, which are predominantly bankbased). Therefore, Ciarlione’s (2011) results are as follows: the elasticity of
consumption to housing prices is greatly larger than that of stock market prices.
Also, the elasticity of housing wealth for the CEE countries is larger than that
for the Asian ones.
The most important objective of Ceh Casni’s (2014) study was to analyse
the primary elements of housing and financial (stock market) wealth effects in
the emerging countries (paying more attention on post-transition European
countries) and to examine them in contrast to the developed ones. It is very
important to make this comparison between developed and emerging countries
if we consider the fact that in the last twenty years both equity and housing
price booms were more prominent in a lot of post transition European countries
related to developed European countries that experienced asset prices booms
(Posedel & Vizek, 2009, 2011; Syriopoulos, 2006). But the impact of those
booms and the following busts on personal consumption in the latter group of
countries is not explored sufficiently.
Table 1: Macro-econometric studies of wealth effects
Authors
Ludvigson &
Steindl (1999)
Davis & Palumbo
(2001)
Mehra (2001)
Bertaut (2002)
FernandezCorugedo et al.
(2003)
Tan & Voss
(2003)
Lettau &
Ludvigson (2004)
Period of
study
1953-1997
Country
Method
USA
Cointegration/VECM
1960–2000
USA
Cointegration
1960–2000
1960–2000
Cointegration/ECM
Cointegration/ECM
1975-2000
USA
USA
Australia
Canada
UK
Cointegration/VECM
1988–1999
Australia
Cointegration/ECM
1951–2003
USA
Cointegration/VECM
241
Hamburg et al.
(2008)
Carroll et al.
(2011)
1980-2003
Germany
Cointegration/VECM
1960–2004
USA
Dvornak & Kohler
(2003)
Ludwig & Sløk
(2004)
1984–2001
Australia
1985–2000
Funke (2004)
1985–2000
Labhard et al.
(2005)
1970–2002
Case et al. (2005)
1975–1996
Dreger & Reimers
(2009)
Peltonen et al.
(2012)
1991–2007
Ciarlione (2011)
1995–2009
De Bonis &
Silvestrini (2012)
Ahec Šonje et al.
(2012)
1997–2008
Market-based
developed countries
Bank-based
developed countries
16 non-European
emerging
economies
USA
UK
Denmark
Canada
France
Italy
Japan
USA
UK
Denmark
Canada
France
14 developed
economies
14 non-European
emerging
economies
Emerging Asian
countries
CEEC countries
11 OECD countries
Simulation based on
stickiness of
consumption growth
Static panel/Panel
cointegration
Panel cointegration
1990–2008
1997–2010
Static panel
Structural VAR
Dynamic panel
Panel cointegration
Dynamic panel
Panel cointegration
Panel cointegration
Bulgaria
Threshold cointegration
Croatia
Estonia
Ahec Šonje et al.
1970-2012
30 developed and
Panel cointegration
(2014)
emerging
economies from
Europe, the Middle
East, Asia, North
America and
Oceania
Note: The last raw of the table was added by the author
(Source: Sonje et al., 2014, p. 436)
242
Additionally, we have to note that asset markets in emerging countries are
highly illiquid and sensitive to greater transaction costs. This fact could in turn
generate a smaller propensity to consume wealth in emerging countries
compared to the developed ones despite the fact that wealth increases in the
examined period have been highly large.
The first paper that studies and directly compares the impact of housing
and stock market wealth effects on personal consumption in emerging and
developed countries was that of Ahec Sonje (2014). In addition, because the
studies that are made to analyse how the wealth effects influence the private
consumption in European post-transition countries is relatively narrow, this
research also completes previous results for those countries. In comparison with
the other research on emerging markets, Ahec Sonje’s (2014) article separates
short-run and long-run wealth effects, analysing also the latest asset price boom
and bust cycle.
3. CONCLUSIONS AND FURTHER RESEARCH
This paper selectively reviews recent empirical work on wealth effect. In
particular, we discuss three main conclusions reached by different authors.
Although many empirical studies exploring wealth effects have been
published in recent decades, (1) most of them refer to advanced economies. (2)
Studies of post-transition European economies and emerging markets are
surprisingly rare given the importance consumer expenditures exhibit in the
overall GDP development. (3) The impact of stock and housing wealth on
consumption is still insufficiently explored by comparing developed countries
with the emerging ones.
In the following paragraphs we will give proposals to the further research
to be made to the asset price channel. In general, the “perfect” data set to
analyse the impact of changes in wealth on consumption should encompass
more details both on household assets and liabilities and on the various types of
consumption expenditure. Actually, wealth effects are expected to be asset
specific to a great extent, the reason for this may be mental accounts or choice
for acquiring wealth in a precise form for tax, bequest or other intentions. In
addition, they may differ for various sorts of spending (e.g. non-durables,
durables and luxury goods). Information on labour supply could also be of great
use considering that some supplementary and heterogeneous reaction to wealth
shocks can be anticipated in terms of labour supply, this fact may affect both the
intensive (hours worked) and extensive margins (retirement). Furthermore, in
order to conduct a correct analysis of wealth effects, evidence on socioeconomic features, attitudes and expectations are necessary to control for
observable and unobservable heterogeneity that may have an impact on both
expenditure and wealth. Subsequently, the “perfect” set of data should also
contain international evidence to provide comparison of results among countries
and to determine the institutions’ role in the transmission system from asset
markets to the real economy. When evaluating the policy implications of a
243
variation in asset prices, it is indeed very important for policy makers to be
capable of examining the accurate extent and nature of the cross-country
comparisons.
In order to analyse the asset price channel in the Eurozone and the CEEC
countries and to make comparisons between these two areas, we will first
analyse their wealth channel. Moreover, by comparing the countries already in
the euro area and those who are intended to enter, the research will lighten the
reflection on the monetary policy management in a context of economic and
monetary union. By analysing the results of the tests on the characteristics of
monetary policy mechanisms on some CEEC countries, we will also study their
vocation to enter the Euro Zone.
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246
PEOPLE`S ATTITUDES REGARDING CONSUMPTION
AND SAVINGS
OANA NIŢU
Constanta, Romania
[email protected]
CLAUDIU VALENTIN NIŢU
Faculty of tourism and commercial management,
„Dimitrie Cantemir” University
Bucharest, Romania
[email protected]
COSMIN TILEAGĂ
"Lucian Blaga" University, Faculty of Economics
Sibiu, Romania
[email protected]
Abstract
Consumers have different attitudes regarding consumption and saving. In this paper is
presented a model starting from Keynes, by introducing the behavior function that
characterizes agent behavior from the point of view of consumption and saving at the
same time, the analysis of this new system and conditions that are determined such as
the parameters of the model satisfy these conditions and a flip or Neimark-Sacker
bifurcation appears.
Key words: behavior, saving, function, attitudes, parameters, model
JEL Classification: E12, E32, E62
1. INTRODUCTION
Empirical analysis, using economic agents behavior, were undertaken by
Carroll (Carroll, Fuhrer, Wilcox, 1994), Souleles (2004), Doms and Morin
(2004). These analysis suggest that agents' attitude regarding the consumption
and saving determines fluctuations in economic activity and confirms the
Keynes' suspicion that fluctuations depend on agents' "attitudes" and "animal
spirits". These attitudes and animal spirits are normal characteristics taking into
consideration the desire for consumption and for saving, also the impact of new
products that appear on the market, and the way of saving. In the (economic)
247
literature these characteristics are called "sticky expectation" and "rational
inattention" (Doms and Morin, 2004) and they are characterized by agents'
sentimental behavior.
Following these observations, in this paper is described a dynamical
mathematical model, using a function that is called behavior. If we don't take
into consideration this behavior function, our model becomes Keynes classic
dynamical model.
The analysis of the new model shows that this behavior function makes the
economic process more complex, joining the business cycle and the flip type
bifurcation (Mircea, Neamtu, Opris¸ 2004).
2. THE MATHEMATICAL MODEL
The variables of this model are terms of the real number sequence {yt}, t =
0, l,...,n, where yt represents agents' income at a moment t. Consumption and
saving are described by the real number sequence {ct}, t = 0,1,n and {et}, t =
0,1, ...,n such that
y t = c t + e t t = 0,1 ,...,n
(2.1)
In this model, agent's behavior function is described by the real number
sequence st-i, where
st −1 =
1
, t = 1,2,..............n
1 + exp( yt − 2 − yt −1 )
(2.2)
1
that describes behavior function is a S1 + exp( z − y )
shaped function which is presented in figure 1. This function confirms the
empiric studies.
The function
s ( y, z ) =
248
Figure 1. Behavior function
Using function (2.2), the consumption and the saving are defined by:
ct = a + (b + cst −1 ) y t −1
(2.3)
et = d ( y t − 2 − y t −1 ) + mst −1
where a > 0, 0 < b < 1, 0 ≤ c < 1, 0 ≤ d ≤ 1, m > 0 are the parameters of
the model. These parameters have the following economic interpretation:
• a - represents living consumption;
• d - coefficient correlated with saving;
• b - coefficient correlated with available income;
• c - coefficient that characterizes the behavior related with the consumption;
• m - coefficient that characterizes the behavior related with the saving.
In this model we considered that the behavior function for consumption
and saving is of the same type. It is possible to consider a model with behavior
function given by (2.2) but different from saving function.
From (2.1), (2.2) and (2.3) results:
y t = a + (b − d ) y t −1 + dy t − 2 +
cy t −1 + m
, t = 1,2,....n
1 + exp( y t − 2 − y t −1 )
(2.4)
Equation (2.4) is a recurrence equation of the sequence that describes
agent's income and determines the dynamics of the income considering behavior function.
If the agent does not consider behavior function, neither for saving, nor for
consumption, that means m=0, c=0, equation (2.4) is:
yt = a + (b − d ) yt −1 + dyt − 2 , t = 1,2,......n
249
(2.5)
Equation (2.5) is the equation of classical dynamical Keynes model. If the
agent considers behavior function only for consumption, that means,
m = 0, c ≠ 0 then equation (2.4) is:
y t = a + (b − d ) y t −1 + dy t − 2 +
cyt −1
, t = 1,2,....n (2.6)
1 + exp( y t − 2 − y t −1 )
Equation (2.6) was simulated in [6].
If the agent considers behavior function only for saving, that means
m ≠ 0, c = 0 , then equation (2.4) is:
m
(2.7)
y t = a + (b − d ) y t −1 + dy t − 2 +
, t = 1,2,.....n
1 + exp( y t − 2 − y t −1 )
The equations (2.6) and (2.7) characterize aspects concerning agent's optimism or pessimism related to consumption or saving.
The model described by (2.4), contains five parameters. Model analysis
related to living existence "a" in the case when b, c, d, m are fixed.
3. QUALITATIVE ANALYSIS OF THE MODEL (2.4)
Qualitative analysis of the model (2.4) consists of establishing the behavior
of the sequence y t , t = 1 , 2,...,n, solution for the equation (2.4) in terms of
parameter a.
Let zt = yt-1. Equation (2.4) can be written as:
y t = a + (b − d ) y t −1 + dz t −1 +
cyt −1 + m
1 + exp( z t −1 − y t −1 )
(3.1)
z t = y t −1
Sistem (3.1) is a discrete dynamical system. The analysis of system (3.1)
can be done by carrying out the following steps (Westerhoff, 2009):
E1 Determine the stationary state;
E2 Study the type of stationary state in terms of a;
E3 Determine the values of parameter a for which the solution of the
system is asymptotically stable;
E4 In the case of a value for which a bifurcation appears, passing from an
unstable state to a stable state or vice versa, conditions are imposed such that we
get a flip bifurcation or a Neimark-Sacker bifurcation;
E5 Determine the normal form of the system (3.1) in the bifurcation points;
E6 Determine solution properties for (3.1) in the bifurcation points in terms
of normal form invariants;
E7 Interpret the results in economic terms.
250
We will present the results of the qualitative analysis of the system (3.1).
The proofs of these analysis are in the annex. Analysis method is the one
presented in (Souleles, 2004).
1. The stationary state of the system (3.1) is the constant sequence y t =y ,
y > 0, t = 1 , 2,...n and it is given by:
y =
2a + m
2 − 2b − c
(3.2)
with the condition 2 — 2b — c> 0.
The stationary state y represents the economic state in which the income is
the same at each step of the analysis.
2. The stationary state of the system (3.1), given by (3.2) is asymptotically
stable if and only if the coefficient a takes values between a2 and ai, where
(2 − 2b − c)(4d − 2 − 2b − c) − 2m(i − b)
2c
2(i + d )(2 − 2b − c) − m(i − b)
a3 =
c
a2 =
(3.3)
and the coefficients b, c, d, m satisfy the inequalities
2 + 2b + c
(4d - 2 - 2b - c)(2 - 2b - c)
≤ d < 1, 0 ≤ m ≤
4
2(1 - b)
(3.4)
So, if parameters d and m satisfy the conditions (3.4), for each value a from
the interval ( a 2, a i), the solution of the system (3.1) is "closed" to the
stationary state y starting from a period t 0 .
3. If the value of a is a 2 and the parameters d, m satisfy conditions (3.4),
then in a 2 takes place a flip bifurcation. For a E ( 0 ,a 2 ), solution of system
(3.1), ( y t ) t = i } ...,n, has a complex behavior which consists of doubling the
period. For a E (a 2 , a i ) solution of the system (3.1) is asymptotically stable.
4. If the value of a is ai and the parameters d, m satisfy conditions (3.4),
then in a i aNeimark-Sacker bifurcation takes place. For a E (a 2 ,a i ) solution
of the system (3.1) is asymptotically stable, for a E [a i ,a i - e ) where e >
0 , the solution of the system (3.1) is a closed curve called limit cycle, with the
Lyapunov coefficient l 0 . If l 0 < 0 the limit cycle curve is stable, and if l 0 > 0
the limit cycle is unstable. Solution of the system (3.1) in the neighborhood of
stationary state y is given by:
yt = y + 2giixit-i - 2gi2X2t-i + (ri2 + T22)x\-i - (ri2 - T22)x21-1 - 2ii2xit-i
where x i t - i , x 2 t - i satisfy the equation:
ut = fiut-i + 1 g20u2-i + giiUt-iUt-i + 2 go2U2-i + 2 g2iv2t-iût-i
251
ut = xi
t
+ ix 2 1 and the coefficients are given in (Chis, Oprisan, Opris).
From the above qualitative analysis result the following economic interpretation.
1. If the living consumption is between a 2 and a i , the income y t is asymptotically stable, and so is the saving e t .
2. If the living consumption is between 0 and a 2 , the income y t is
unstable, and so is the saving e t . Moreover, this situation leads to instability.
3. If the living consumption is a i , then the income tends to a periodic
curve, called limit cycle. If the living consumption a is grater than a i , the
solution is unstable. In the case of instability, we can use specific economic
methods for the parameter a (increasing of credits usury) such that this value
of a to decrease to a value from the interval (a 2 , a i ).
4.If m=0, c=0, the agent does not take into account behavior function, the
solution of equation (2.5) is asymptotically stable, and we get the results of
classical Keynes model.
5. If m = 0 , c=0, the agent takes into account behavior function only for
saving , the solution of the model (2.7) is asymptotically stable if m e
(m 2 ,m i ), where m i = 4 (d + 1 ) , m 2 = 2 ( 2 d — 1 — b). For m equals to
m, m i , respective m 2 we obtain a flip bifurcation, respective a Neimark-Sacker
bifurcation. An economical interpretation is obtain in the same manner like in 1,
2, 3 for the values of m.
6. If m=0, c = 0 , the agent takes into consideration behavior function
only for consumption. Economical interpretation can be obtain like in 1, 2, 3, by
taking m=0.
4. NUMERIC EXAMPLE. NUMERIC SIMULATION
For the numeric simulation, we considered the following values for the
parameters b, c, d, m.
b = 0.45, c = 0 . l , m = 0.03, d = 0.76.
The following results can be pointed out:
If a = a 2 = 0.035 the system (3.1) has a flip bifurcation. For a e ( 0 ,
0.035) the solution of the system (3.1) is unstable. If a e (0.035, 35.03) the
solution of the system (3.1) is stable. If a = a i = 335.05 the system (3.1) has a
limit cycle.
In figure 2 is presented the income relative to t=0..550,
252
Figure 2. Income relative to t, a=a1
(Source: EViews 5.0)
in figure 3 is presented the saving relative to t=0..550,
Figure 3. Saving relative to t, a=a1
in figure 4 is presented the limit cycle. If a > 335.0335 the solution of the
system (3.1) is unstable.
253
Figure 4. Limite cycle, a = a1
5. CONCLUSIONS
Consumer sentiment is often discussed but rarely modeled. We estimate a
large set of consumer sentiment models, drawing on numerous recent
contributions in the field such as sticky expectations, rational inattention, and
bounded rationality. This body of literature proposes that gathering and
processing information about the economy is far from a costless process. As a
result, expectations may not be continuously updated, and when they are
updated, imperfect information may be used. Further, the proportion of the
population that updates their expectations each period as new information
arrives can vary tremendously over time.
Empiric studies show that consumer’s behavior plays an important role in
economic process. In this paper it is presented a Keynes-type model in which
agent’s behavior, sentiment, is described using a S-shaped function, called
behavior function. Considering the living consumption as parameter, it is shown
that this model has a flip bifurcation point and a Neimark-Sacker bifurcation
point. The values of living consumption, which are out of the interval
determined by the bifurcation points make the solution unstable. In the paper
are presented simulations for parameter values which are compatible with
concrete situations.
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household spending? If so, why?. American Economic Review, vol. 84, 1397- 1408.
254
[2] Chis, O., Oprisan, O., Opris, D. The Kenyes model with consumer sentiment (to be
published).
[3] Doms, M., Morin N. (2004). Consumer sentiment, the economy, and the news
media. Working Paper 2004-09, Federal Reserve Bank of San Francisco.
[4] Mircea, G., Neamtu M., Opris¸ D. (2004). Bifurcatii Hopf pentru sisteme dinamice
cu argument întârziat şi aplicaţii. Timisoara: Mirton.
[5] Souleles, N. (2004). Expectations, heterogeneous forecast errors, and consumption:
Micro evidence from the Michigan Consumer Sentiment Survey. Journal of Money,
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255
INTERCONNECTEDNESS OF FINANCIAL
INSTITUTIONS: A POSSIBLE CAUSE FOR SYSTEMIC
RISK
DUMITRU-CRISTIAN OANEA
Bucharest, Romania
[email protected]
Abstract
Capital market are more and more important, because of the available capital for economy, but
also for facilitating the capital distribution between companies, regions or countries.
Globalization process encouraged capital movement, but also spreading of financial and
economic crises. Based on this, the interconnectedness of financial institutions facilitate the
increase of probability of triggering systemic risk.
Through this paper, based on Granger causality, we will highlight the interconnectedness of
financial institutions on Romanian capital market for period 2005 – 2014, in order to analyze the
financial crisis effects on this topic. The main results of the paper, pointed out that during
financial crises period there was recorded a high level of interconnectedness between financial
institutions. This means that the probability of triggering systemic risk, has also increased
Keywords: Financial institutions, capital market, Grange causality, systemic risk
JEL Classification: G12, G29, C51
1. INTRODUCTION
We are witnesses to many changes which affect our world we know. The
most of these changes are financial changes, which modified the past 20 years.
Among the most important events, we can mention the attack from
September 11th, 2001, which cause a huge financial loss of about 21.4 billion
USD (IMF, 2001), conflict from Iraq which has cost United States of America
over 3 trillion USD (Stiglitz, 2008), financial crises from 2008 which caused the
bankruptcy of 10 financial institution in September 2008 (Thomas et al., 2011),
and also the earthquake of 8.9 on Richter scale, from March 11th, 2011, located
on the North-East coast of Japan, which resulted in a significant decrease of
23.6% on short term of the Tokyo Electric Power Company (TEPCO) share
price and a decrease of 6.2% in market index Nikkei 225 (Slodkowski, 2011).
This short review of the main events in the past 20 year, represent the
motivation of our paper, through which we want to analyze the risk notion, by
highlighting the systemic risk. We are witnesses on many critical events, which
256
can cause many risks, both social and financial, and which can reorganize the
world we know today.
That’s why, through this paper, we want to understand better the notion of
systemic risk, and also the situations which can be a trigger for such kind of
risks. For this purpose we will use the methodology presented by Billio et al.
(2012), and we will focus our analyses on Romanian capital market, in order to
identify the existence and the evolution of the interconnectedness between
financial institutions during financial crisis period. Moreover, our paper is
differentiating by the others through the fact that we took into account all the
financial institution which was listed on the Bucharest Stock Exchange during
the analyzed period 2005 – 2014. Based on this the results will pointed out,
financial crisis effect and also the new financial institutions which were listed
on the market.
The paper is structured as follows: second section review de literature
regarding the risk notion and interconnectedness of financial institutions, in
section three we will present the methodology, while in the fourth section we
will present the data used and the main descriptive statistics. The results will be
presented in the fifth section, and the last section will conclude the paper.
Uncertainty is a fundamental aspect which characterizes all the aspect of
our lives: daily activities, financial activities, social activities, cultural activities
and other types of activities.
Risks’ typology is wide, and directly depends by the area of appearance.
The area where the risk is most representative is the financial area, because the
financial operation and financial instruments are risky, that’s why in many cases
the profit recorded by some investors is the loss of others. In financial domain,
the risk is the probability that the return of an investment to be less than investor
expected return (Moretto, 2000). Besides this general definition for risk, we can
go more specific and define the risk of insurance activities and also the risk of
financial transactions from financial markets. Regarding this, the risk of
insurance activity, is the probability of manifestation of the hazard for which the
insured person pays the insurance premiums in order to protect (Jones et al.,
1994). On the other side, the risk of financial transactions from financial
markets, is the risk of price’s decrease of a financial instrument (Abdullah and
Hayworth, 1993).
Due to fact that the risk level directly depends by the interconnectedness
between financial institutions, we will try to analyze this aspect more closely.
Interconnectedness was analyzed by many researchers from different
domains such as the interconnectedness of energetically networks (Boffa et al.,
2010; Pican et al., 2011; Ionescu, 2014), telecommunication network (Kim, S.
and Kim, H, 2001; Weiss and Shin, 2004) or transportation networks (Galbi,
2000).
257
We consider that the interconnectedness between financial institutions is
the most important, due to its implication on real economy. These
interconnectedness appeared due to the relationships created between the main
financial centers, which as Tschoegl (2000) said, are not randomly. These
centers depends by several factors: historical factors, economical factors or
social factors.
Moreover, in order that a location to become a financial center, it must be
accomplished several criteria such as: economic stability, free market, open
economy, stable exchange rates, good infrastructure, no entry barriers on the
market, and also an independent justice system (Kaufman, 2001).
Despite this, there are many negative aspects which can be associated with
financial networks. An example for this is represented by financial crises which
begun in United States of America in 2008. Among the main triggers of this
crisis we can mention the real estate bubble from U.S.A., unconventional
mortgages, toxic financial derivatives such as collateralized debt obligations –
CDO, collateralized loan obligations – CLO or structured investment vehicles –
SIV (Fostel and Geanakoplos, 2011), contagion risk, and also the panic and
shock triggered by the bankruptcy of 10 financial institution in September 2008
(Thomas et al., 2011). Moreover, there are some voices which say that the
U.S.A. was affected by this crisis because of the costly intervention in Iraq and
Afghanistan (Stiglitz, 2008).
Financial crisis highlighted the importance of systemic risk, and that’s why
several institution tried to define the notion of systemic risk. Regarding this the
International Monetary Fund, Bank for International Settlements and Financial
Stability Board state that the systemic risk is that particular risk which can
trigger financial turbulence, due to some financial problems recorded by a
financial institution or financial sector, and which can have negative effects on
real economy (IMF et al., 2011).
Moreover, several researchers tried to delimit the area of systemic risk.
Systemic risk can be defined as the high level of interconnectedness between
financial institutions (Eisenberg and Noe, 2001) which allow the transition of
financial shocks and which can affect the entire financial system and trigger a
crisis. (De Bandt and Hartmann, 2000; Minderhoud, 2006).
Going further, Martínez-Jaramil et al., (2010) pointed out two main points
which are essential in defining systemic risk: an initial shock which can affect
one or more financial institutions, and the existence of a transition channel,
which facilitate the shock spreading.
Due to systemic risk, the financial networks must be rethinking, because
they are very complex and contains many interconnectedness. (Haldane, 2009).
3. METHODOLOGY
In order to measure the interconnectedness of financial institutions, we will
use the Granger causality test (Granger, 1969) based on which we can identify
the dependences and also the direction of this dependence between financial
258
institution. We will say that the data series i will Granger cause data series j if
the historical value for i can explain the evolution of j values, and opposite.
Econometrically, this will be tested based on linear regression between the
values of data series i for moment t and the data series i, and data series j from
the previous moments t-1, t-2, ..., t-k, where k is the lag value. Of course both
data series must be stationary. In case of financial instruments traded on capital
market, data series will be represented by the returns of selected financial
instruments.
For two return series for financial instruments, the linear regression will be
written as follows:
l
l
k =1
l
k =1
l
k =1
k =1
(1) rti = α 0i + ∑ α ki ⋅ rti− k + ∑ β kij ⋅ rt −j k + ε ti
(2) rt j = α 0j + ∑ α kj ⋅ rt −j k + ∑ β kji ⋅ rti− k + ε t j
where ε t j and ε ti are uncorrelated error term, α 0i , α ki , β kij , α 0j , α kj , β kji are the
coefficients of linear regression, t – time indicator, and l – is the number of
selected lag for applying the test.
We will say that the data series i Granger cause the data series j if β kji is
different significant by 0, and similar data series j Granger cause data series i if
β kij is different significant by 0. In both β kji , and β kij are different significant
by 0, then there is recorded a bilateral causality relation.
Moreover we will use the indicators proposed by Billio et al. (2012)
regarding the causality level between analyzed series. Regarding this we will
define the following Ganger causality indicator based on formula (3):
(3)
Particular situation I (i →i ) and I ( j → j ) will be considered to be equal to 0.
Based on this indicator we will be able to construct a network between all
N financial institutions. Before we will define the maximum number of Granger
causality relations between selected financial institutions as:
N!
(4) No max = 2 ⋅ C N2 = 2 ⋅
= N ( N − 1)
( N − 2)!⋅2!
Next we will apply the indicator proposed by Billio et al. (2012):
A. Granger Causality Degree (GCD), show us the percentage of
significant Granger causality relations from the total possible number based on
relation (5):
N
(5) GCD =
∑∑ I
(i → j )
i =1 i ≠ j
No max
259
=
1
N ( N − 1)
N
∑∑ I
i =1 i ≠ j
(i → j )
B. Number of connections (NoC), which highlight the systemic
importance of a financial institution. In this way, based on this indicator, we
will calculate the number of financial institutions which are Granger caused by
the financial institution i (NoC-out), number of financial institutions which
Granger cause the financial institution i (NoC-in), and the sum of this two
indicators (NoC-out&in), based on the following relations (where S – is the
system formed by selected financial institutions):
(6) NoC − out = I (i → S ) =
∑I
(i → j )
j ≠i
1
N −1
∑I
1
2( N − 1)
∑I
(7) NoC − in = I ( S →i ) =
(8) NoC − out & in = I (i ↔ S ) =
1
N −1
( j →i )
j ≠i
(i → j )
+ I ( j →i )
j ≠i
4. DATA AND DESCRIPTIVE STATISTICS
For our analysis we will use daily data for a sample of 14 financial
institutions listed at Bucharest Stock Exchange, as it is presented in table 1, for
the period January 2005 – December 2014. Daily value for the stock prices for
selected financial institutions were obtain from the BSE official web site.
When analyzing the interdependence of financial institutions from
Romanian capital market, we are also interesting in highlighting the financial
crisis impact on this evolution. Regarding this, we used the GDP growth in
order to delimitate the financial crisis period, as it is presented in figure 1.
Figure 1. Romania GDP growth (%, quarter values for period 2005–2014)
(Source: based on values obtain from Romanian Statistical Institute)
Based on these values, we were able to identify 3 periods: pre-crisis period
between first quarter of 2005 and second quarter of 2008, financial crisis period
between third quarter of 2008 and last quarter of 2012, and also the post-crisis
period between first quarter of 2013 and last quarter of 2014.
260
The main descriptive statistics are presented in table 2. Based on these
values we can see that for period before financial crisis the most of financial
institutions recorded a positive annual mean, except Carpatica bank,
Transilvania bank and SSIF Broker which recorded negative returns. Moreover,
we see a significant decrease in the mean return during financial crisis period,
and a significant increase of the risk.
Table 1. Financial institutions selected for analysis
Type
Symbol
First
trading
day
BCC
09.06.2004
BRD
15.01.2001
Banca Transilvania
TLV
15.10.1997
SIF Banat Crișana
SIF1
01.11.1999
SIF Moldova
SIF2
01.11.1999
SIF Transilvania
SIF3
01.11.1999
SIF Muntenia
SIF4
01.11.1999
SIF Oltenia
SIF5
01.11.1999
SSIF Broker
BRK
04.02.2005
STK Emergent
STK
22.09.2008
iFond Financial
Romania
IFR
22.09.2010
iFond Gold
IFG
30.12.2010
Financial institution
name
Banca Comercială
Carpatica
Commercial BRD Group Societe
banks
Generale
SIFs
SSIF
Closed
investment
funds
Open
investment ETF BET Tradeville TVBETETF 30.08.2012
funds
Fondul Proprietatea
FP
25.01.2011
Selected period
01.01.2005 –
31.12.2014
01.01.2005 –
31.12.2014
01.01.2005 –
31.12.2014
01.01.2005 –
31.12.2014
01.01.2005 –
31.12.2014
01.01.2005 –
31.12.2014
01.01.2005 –
31.12.2014
01.01.2005 –
31.12.2014
04.02.2005 –
31.12.2014
22.09.2008 –
31.12.2014
22.09.2010 –
31.12.2014
30.12.2010 –
31.12.2014
Obs.
No.
2498
2498
2498
2498
2498
2498
2498
2498
2473
1569
1069
1000
30.08.2012 –
31.12.2014
581
25.01.2011 –
31.12.2014
982
Based on this, we are able to see that during financial crisis all financial
institutions, except Transilvania bank have recorded a negative return, which
mean a decrease in the market stock price for these institutions
261
This atypical evolution for Transilvania bank was caused by numerous
capital increase of the bank, net profit evolution and also by several event of
reorganizing the bank’s activity.
Going further, we can see that the situation is recovering in the post-crisis
period, when from these 14 financial institutions only 3 (SIF Transilvania, SSIF
Broker and iFond Gold) have recorded negative returns. In the same time we
can see a decrease of the risk, based on lower values for standard deviation of
these institutions.
Based on the Augmented Dickey-Fuller test we are able to see that all
series are stationary, for the analyzed period.
The general image for the evolution of returns and risk for all financial
institutions for these 3 sub periods it is presented in figure 2. We see that in the
pre-crisis period the average annual return was around 12.7%, with a value of
48% for standard deviation. During financial crisis period, the average annual
return recorded a huge decrease to value of -14.5%, while the standard deviation
increase to value of 52%.
262
Table 2. Descriptive statistics for selected samples for each financial institution
Symbol
BCC
Pre-crisis period
Mean (%)
-20
SD (%)
36
Max (%)
14
Min (%)
-15
ADF test
-31.4*
Crisis period
Mean (%)
-32
SD (%)
43
Max (%)
14
Min (%)
-16
ADF test
-34.4*
Post-crisis period
Mean (%)
34
SD (%)
32
Max (%)
14
Min (%)
-6
ADF test
-21.1*
BRD
TLV
SIF1
SIF2
SIF3
SIF4
SIF5
BRK
STK
IFR†
IFG††
FP†††
60
64
97
-13
-27.9*
-23
28
32
59
40
40
10
11
13
-56
-13
-13
-29.1* -26.7* -28.1*
9
30
38
-40
55
40
40
59
12
11
14
14
-69
-12
-15
-49
-29.1* -26.8* -29.1* -26.5*
-18
42
14
-16
-30.4*
31
-10
-6
80
53
53
143
14
14
-24
-16
-16
-32.7* -28.8* -29.0*
-14
-13
-13
-33
-20
-22
-31
-8
54
49
52
63
47
45
73
23
14
14
14
16
14
11
14
6
-28
-16
-16
-32
-16
-12
-16
-7
-29.5* -31.9* -29.1* -27.5* -36.0* -27.4* -27.5* -19.4*
4
21
4
-5
-21.3*
22
3
5
24
26
25
6
12
6
-12
-10
-20
-22.1* -21.4* -20.1*
-41
6
8
-3
25
18
-49
28
56
21
20
25
43
27
63
16
6
6
4
7
11
11
14
5
-66
-6
-7
-5
-13
-11
-15
-5
-22.1* -19.5* -23.4* -22.1* -25.7* -24.7* -25.8* -21.7*
TVBETETF
17
14
6
-5
-26.1*
Notes: We present the annualized return mean, annualized value for standard deviation, maximum value, minimum value for each financial institution and analyzed period.
*
- Augmented Dickey-Fuller stationary test is significant at 1%.
†
- Selected values for iFond Financial Romania (IFR) for financial crisis period include the interval between September 22th, 2010 – December 31th, 2012.
††
- Selected values for iFond Gold (IFG) for financial crisis period include the interval between December 30th, 2010 – December 31th, 2012.
†††
- Selected values for Fondul Proprietatea (FP) for financial crisis period include the interval between January 25th, 2010 – December 31th, 2012.
263
Figure 2. Annual mean of risk and returns evolution for financial
institutions
Despite this we are able to see that during post-crisis period (2013-2014)
the situation is recovering. Annual return increases to value of 5.5%, while the
standard deviation decreases to 29%, which pointed out that the risk associated
to Romanian capital market has decreased.
Even if the financial institutions risk during post-crisis period decreased to
a lower value than was recorded in the period before financial crisis, we are able
to see that capital market didn’t reach the maximum potential, due to fact that
the annual mean return is 2.3 times lower than value recorded before 2008.
5. RESULTS
In order to understand better the interconnectedness between each stock
market we apply the Granger causality method based on rolling window
approach, for windows of 500 observations each. Based on this approach we
estimated the Granger causality test for around 2000 rolling windows, based on
which we can construct diagrams similar with those presented in figure 3.
From the diagrams presented in figure 3, we are able to see the
interconnectedness degree between financial institutions in 3 different moments:
for pre-crisis period we include the results for January 2005 – January 2007, for
financial crisis period we include the results for March 2009 – March 2011, and
for post-crisis period we include the results for January 2013 – December 2014.
Just by looking at the figure 3 we can see the high level of
interconnectedness between financial institutions during financial crisis.
Moreover for post-crisis period, we are able to see a decrease of the
interconnectedness degree.
In figure 4 we are able to see the evolution of Granger causality degree for
all 2000 intervals selected into analysis.
264
Figure 3. Network diagrams based on Granger causality relations
a. Period Jan.2005 – Jan.2007
b. Period March.2009 – March.2011
c. Period Jan.2013 – Dec.2014
Note: The diagrams are made based on Granger causality relations which are statistically significant at 5%, for a sub period of 2 years, from each analyzed period.
Regarding this, for the financial crisis period we select the period March 2009 – march 2011, because during this period are recorded the maximum number of Granger
causality relations. Highlighted lines shows us a bilateral causality, while the simple lines show us a unilateral causality relation.
265
Figure 4. Granger causality degree
At a first glance, we see that during financial crisis the value of Granger
causality degree has reached 30%. This is a significant increase, if we take into
account the pre-crisis value of 19%.
The probability of triggering a systemic risk is proportionally with the
value of this indicator. If the value of Granger causality degree is higher, the
probability of triggering a systemic risk is also higher.
Moreover, we are able to see that starting with June 2009 – May 2011, the
value of Granger causality degree is decreasing to 17%, while between 2013
and 2014 this value is decreasing to 13%.
In our opinion this evolution signals the fact that the Romanian Capital
market is more stable, also because of the increasing of the number of financial
institutions which are listed on the market.
Based on the number of Granger causality relations presented in table 3 we
were able to see that in pre-crisis period SIF Transilvania is influenced by 3.6
financial institutions, while SIF Oltenia is influenced by 2.4 financial
institutions. Going further, during financial crisis period we see an increase in
these influences, such that STK Emergent is influenced by 4.08 financial
institutions. For the last period, post-crisis period, 11 financial institutions from
14, received significant influences from less than 3 financial institutions.
If during the pre-crisis period, SIF Banat Crișana and SIF Moldova have
influencing the biggest number of institutions, for crisis period, only SIF Banat
Crișana keep it significant influence on the others.
If we consider the sum of the number of institutions influenced by another
one, and the number of institutions which are influencing another institution, we
are able to see that the higher probability in spreading systemic risk is
associated to SIF Banat Crișana, SIF Moldova and Carpatica bank (pre-crisis
period), STK Emergent, SIF Banat Crișana, SIF Oltenia and Transilvania bank
(crisis period), and iFond Financial Romania, ETF BET Tradeville and BRD
(pre-crisis period).
266
Table 3. Descriptive statistics for the number of Granger causality relations
IN
OUT
IN&
OUT
IN
OUT
IN&
OUT
IN
OUT
IN&
OUT
Symbol BCC
Pre-crisis period
Mean
1.49
Max.
5
Mean
2.44
Max.
7
Mean
3.92
Max.
11
Crisis period
Mean
1.96
Max.
9
Mean
1.63
Max.
5
Mean
3.59
Max.
10
Post-crisis period
Mean
4.10
Max.
7
Mean
0.95
Max.
1
Mean
5.05
Max.
8
BRD
TLV
SIF1
SIF2
SIF3
SIF4
SIF5
BRK
STK
IFR
IFG
FP
1.76
4
1.53
5
3.30
8
1.13
4
0.86
2
1.99
6
1.12
6
3.27
6
4.39
9
1.56
4
2.98
7
4.55
10
3.60
6
0.27
3
3.87
7
2.01
6
1.67
5
3.67
8
2.42
5
1.25
4
3.67
9
1.18
7
1.91
8
2.62
12
1.48
5
2.02
4
3.50
9
3.22
7
2.04
9
5.27
14
2.25
5
3.47
6
5.71
9
1.83
4
2.30
6
4.13
9
2.46
5
2.71
6
5.17
9
2.13
6
2.50
6
4.63
12
1.54
5
4.07
8
5.61
11
2.43
8
2.59
6
5.02
14
4.08
10
2.50
7
6.59
13
3.53
11
0.99
5
4.52
12
1.11
4
0.40
2
1.51
5
0.88
3
1.26
4
2.15
7
1.44
3
3.89
7
5.33
9
2.33
4
2.33
4
4.66
7
2.39
3
2.76
6
5.14
9
0.60
2
3.52
4
4.12
6
1.88
5
2.48
5
4.35
10
0.98
2
1.44
3
2.42
5
0.88
3
2.98
5
3.86
6
0.87
3
2.96
6
3.83
6
1.24
2
0.08
1
1.32
3
6.46
10
1.78
4
8.23
14
1.45
4
0.06
1
1.51
4
0.13
2
1.89
4
2.02
6
TVBETETF
4.12
6
1.72
3
5.84
8
Note: IN show the number of financial institutions which are Granger caused by the financial institution from each column, OUT show the number of institution which
Granger cause the financial institution from each column and IN & OUT is the sum of both indicators.
267
6. CONCLUSIONS
The aim of this paper was to analyze the interconnectedness degree between
financial institutions listed on Bucharest Stock Exchange for period 2005 –
2014, in order to highlight the financial crisis effect on capital market. The
connectedness degree between stock markets is a good proxy for the probability
of triggering systemic risk on financial markets.
Our analyses confirm that the capital markets are vulnerable during
financial crisis periods, when the degree of systemic risk occurrence is
increasing.
Starting with period 2005 – 2007, when all selected financial institutions
recorded a positive return (except Banca Carpatica, Banca Transilvania and SSIF
Broker), during financial crisis the average annual return recorded on these
markets was negative (except Transilvania bank).
In the same time the risk of financial institutions vary between these
periods. For pre-crisis period the standard deviation was around 48%, while for
crisis period this value increased to 52%. Despite this we can see a decreasing of
the risk for post-crisis period, and an increasing of the average return.
The diagrams from figure 3 help us to realize the high degree of
interconnected between financial institutions during financial crisis. Analyzing
the evolution of Granger causality degree, we pointed out that during financial
crisis this indicators is increased to a value of 30% compared with pre-crisis
period
In the same time, we are able to see that in post-crisis period, the value of
Granger causality degree is decreasing up to 13%, for the last 2 years, which
highlight the fact that the capital markets tend to be more stable.
Based on connections number we are able to see that the higher probability
in spreading systemic risk is associated to SIF Banat Crișana, SIF Moldova and
Carpatica bank (pre-crisis period), STK Emergent, SIF Banat Crișana, SIF
Oltenia and Transilvania bank (crisis period), and iFond Financial Romania,
ETF BET Tradeville and BRD (pre-crisis period).
Further research can take into account to extend the analysis and use a
VECM in order to estimate the impulse response function, such that to identify
the impact of each stock market on the other markets from the region.
ACKNOWLEDGEMENT
This work was financially supported by the project "Routes of Academic
Excellence in Doctoral and Post-doctoral Research – READ”, contract no.
POSDRU/159/1.5/S/137926, co-funded by the European Social Fund through
the Development of Human Resources Operational Sectorial Program 20072013.
268
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270
THE DIFFERENCE OF PRODUCTIVITY BETWEEN
SOCIETE GENERALE AND ERSTE GROUP
ANDREEA NICOLETA POPOVICI
“Alexandru Ioan Cuza” University of Iasi
Iasi, Romania
[email protected]
Abstract
The global banks involve in cross-border mergers and acquisitions to improve the number of
clients, of branches, of performance, which will finally end in an increase of their productivity.
The aim is to see, during 2008-2012 period, the difference of productivity between Societe
Generale and Erste Group, two banks that bought local banks especially from Central and Eastern
Europe because their managers decided that the banks should become global, and why not more
visible on the European market. To reach our goal, we used DEA method, by estimating the
productivity achieved by these two banks and their branches from European countries. Using
Malmquist DEA method, we show that, on average, the merger or acquisition in which a bank was
involved did not improved substantially the Total Factor Productivity of all analyzed banks. In the
same time, for the analyzed period of time, using the selected inputs and outputs, we show that
Societe Generale obtained a better productivity than Erste Group.
Keywords: M&A, banks, performance, productivity, efficiency
JEL Classification: G21, G30, G34
1. INTRODUCTION
Banks are looking for new opportunities in foreign markets to replace or to
supplement the decreased growth opportunities. Removing regulatory barriers in
the European Union financial services industry will give further impetus to the
strengthening cross- border activity.
The result of these operations is the emergence of larger financial
companies that offer a wider range of services and operating in multiple markets
simultaneously. Acquisitions and mergers in the banking sector have the
capacity to ensure efficiency, profitability and synergy, also contributing to
increase shareholder value.
In this paper we intend to see how cross-border activity of two large credit
institutions, Erste Bank Group and Groupe Societe Generale helps the increase
of productivity and which could be the differences of performance between the
analyzed banks.
271
To reach our goals we will determine the value of Malmquist index. This
index will help us to determine the total productivity of the factors we included
in this analyze. In our approach we worked with two variables as inputs and
three variables as outputs, inputs are total capital ratio and total assets, and the
outputs are net income, ROAE and ROAA.
For determining the difference of productivity for the banks we have chosen
for this study, we are using data envelopment program (DEA method). DEA
involves the use of linear programming data to construct a non-parametric
frontier over the data selected for the analyses. Because we deal with panel data,
the methodology we will work with is the application called Malmquist Index
method.
This method was used previously to measure the efficiency of banks during
specific periods of banks in different banking system.
One example is the study of Avkiran (1999), who applied DEA
methodology on a sample of 16 Australian banks during 1986-1995. The
purpose of his study was to see the effects brought by acquisitions on bank
efficiency and to determine the benefits of mergers for customers. He preferred
to use the approach intermediation of credit institutions and he concluded that
the bidder banks are more efficient than target banks in the sample of banks he
analyzed in the study.
Liu and triple (2002) quantified the efficiency of six New Zealand bank
mergers that took place between 1989 and 1998. Based on DEA analysis, they
concluded that only some banks obtained a better efficiency post-merger.
Randhawa and Lim (2005) used DEA to investigate the X-efficiency of
banks from Hong Kong and Singapore during 1995-1999 period of time. They
concluded that small banks show higher overall efficiency in the intermediation
approach and also they suggested that pure technical inefficiency dominates the
scale inefficiency in both approaches during the study period.
Sufian (2004) investigates the impact of the mega mergers in the banking
sector of Malaysia. He concludes that banks had an average level of technical
efficiency of 95.9% over the period analyzed in his paper.
Bertrand and Zuniga (2005) conducted an interesting study in terms of
efficiency achieved by credit institutions as a result of their involvement in
mergers and acquisitions. They concluded that in terms of technical efficiency, a
cross-border process registers a better efficiency that a national process.
Taking into consideration the analyzed studies, we will present next data
and methodology.
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3. METHODOLOGY
3.1 The model
Malmquist index helps in determining total factor productivity and is a
technique based on data Envelopment Analysis (DEA). The index measures the
change in productivity of a certain value (increase / decrease rate) between two
time intervals.
The changes in the value of total factor productivity indexes are calculated
for each bank for 2008-20012 period of time.
Temporal development banks productivity and sources are presented in
Malmquist index total factor productivity. To use this method, we have used
Deap 2.1 software program. The productivity index value greater than 1
indicates that the total factor productivity increased from the anterior period to
the current period. Its value less than one says otherwise.
If the score is greater than 1we can identify a progress in efficiency related
to period t + 1 from the analyzed bank, while if the score equals 1 or is lower
than 1 it shows that there are no changes in terms of efficiency, well known as
the phenomenon of "falling behind" (Decanay 2007).
3.2 Data and descriptive statistics
With a sample of ten banks in 2008-2012, we have 50 records, which are
considered sufficient to carry out an analysis of the panel data. We used DEA to
examine the following indices of efficiency: the degree of technical efficiency
change, technological change degree, the degree of modification of pure
efficiency, the degree of scale efficiency change and total factor productivity
efficiency.
The variables used for this study are divided into inputs and outputs, which
are:
 Inputs: Total capital ratio and Total assets.
 Outputs: Net Income, Return on Average Assets (ROAA) and Return on
Average Equity (ROAE).
The banks we considered for this study are 2 global banks and their
subsidiaries from countries of Central and Eastern Europe:
-Société Générale (France) and: BRD-Groupe Societe Generale SA (Romania),
Societe Generale - Splitska Banka dd (Croatia) , Societe Generale Expressbank
(Bulgaria).
-Erste Group Bank AG (Austria) and Erste Bank Hungary Nyrt (Hungary),
Erste & Steiermärkische Bank dd (Croatia), Ceska Sporitelna a.s. (Czech
Republic), Slovenska sporitel'na as-Slovak Savings Bank (Slovakia), Banca
Comercială Română SA (Romania).
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3.3 Results
The results of the DEA analysis are presented in table 1, where we
presented the average efficiency scores of banks for the entire period of time. An
efficiency score of 1 means that the banks are on the efficiency frontier and thus
are technically efficient. However, when interpreting efficiency scores generated
by the DEA analysis, it is important to bear in mind that the scores do not
capture all aspects of efficiency of the institutions.
The results are divided into two categories: the first category includes banks
that have seen an increase in TFP, as is can be seen in the case of Société
Générale, Erste Group Bank AG and the Romanian Commercial Bank SA. In the
case of Société Générale and Erste Group Bank the TFP increased by 77% and
9.1%, due to changes in their technological change, which increased by 77% and
9.1% compared with the earlier period, while other components of TFP
remained constant. This positive result is due to the positive effects of
innovation technology, suggesting that from the previous period till the analyzed
period, banks were able to adopt new frontier of efficiency.
In the case of Romanian Commercial Bank TFP growth with 3.7% was due
to technical efficiency, but was reduced by the decrease in the technological
efficiency. Thus, we can say that the work of the Romanian Commercial Bank
was aided by effective management, but not by the technological innovations.
Table 1. Average effective annual efficiency during 2008-2012
Société
Générale
BRD-Groupe
Societe
Generale SA
Societe
Generale
Splitska Banka
dd
Societe
Generale
Expressbank
Erste
Group
Bank AG
Erste
Bank
Hungary Nyrt
Technical
efficiency
change
Technological
change
Scale
efficiency
change
Total Factor
Productivity
(TFP)
1.768
Pure
technical
efficiency
change
1.000
1.000
1.000
1.768
1.000
0.945
1.000
1.000
0.945
0.958
0.847
0.975
0.983
0.812
1.000
0.835
1.000
1.000
0.835
1.000
1.091
1.000
1.000
1.091
0.986
0.903
0.903
1.092
0.890
274
Erste
&
Steiermärkische
Bank dd
Ceska
Sporitelna a.s.
Slovenska
sporitel'na asSlovak Savings
Bank
BCR (Romania
)
Average
1.004
0.811
1.016
0.988
0.815
1.000
0.983
1.000
1.000
0.983
0.800
0.813
0.737
1.085
0.650
1.061
0.978
1.061
1.000
1.037
0.979
0.970
0.965
1.014
0.949
(Source: output DEAP 2.1)
For the other banks in the analysis, the score less than 1 means they had a
decreased level of efficiency. In this table, we can also see that branches owned
by Erste Bank have a better technical efficiency than the ones Societe Generale
Group has and in terms of pure efficiency Erste Bank branches are a little worse,
especially if we talk about Slovenska sporitel 'na as-Slovak Savings Bank, which
recorded only a level of 0.737 regarding the pure technical efficiency change.
In table 2 we presented the averages of efficiency obtained for each year in
2008-2012 period of time.
Table 2. Average efficiency obtained during 2008-2012 for all the analyzed
banks
Year
2
Technical
efficiency
change
0.841
Technological
change
3
0.862
2.402
0.986
0.874
2.070
4
0.963
0.939
0.824
1.169
0.904
5
1.314
0.430
1.057
1.243
0.565
Average
0.979
0.970
0.965
1.014
0.949
0.913
Pure technical Scale
efficiency
efficiency
change
change
1.009
0.833
Total Factor
Productivity
(TFP)
0.768
The average efficiency of the years covered by the analysis for all banks
had shown that there has been an increase in efficiency in every year. The scale
275
efficiency helped to improve the Total Factor Productivity, while pure
efficiency, technical efficiency and technological registered a decreased level
regarding the previous period.
Given the differences between the difference of efficiency for the global
banks and their branches abroad, we will next see how the two global banks
which we included in this study had their level of TFP.
According to the data in Table 3, where we have Societe Generale and Erste
Bank Group, it can be seen that Societe Generale had an increased d level of
efficiency, while Erste Bank recorded a fall of efficiency.
As we can see in the table, we reached the conclusion that when we
analyzed only the global banks Société Générale registers a increase of TFP with
86.7%, while Erste Group Bank AG registered a fall in efficiency due to the fact
that technological change has been in decline.
Table 3. Total factor productivity efficiency during 2008-2012
Technical
efficiency
change
Société
Générale
Erste
Group
Bank
AG
Average
Technological
change
1.000
1.867
1.000
0.530
1.000
0.994
Pure
technical
efficiency
change
1.000
Scale
efficiency
change
Total Factor
Productivity
(TFP)
1.000
1.867
1.000
1.000
0.530
0.965
1.000
0.994
4. CONCLUSIONS
In order to make a comparison of productivity obtained by different banks,
we had to determine the technical efficiency change, the degree of technological
change, the degree of change in pure efficiency, the degree of change of scale
efficiency and the total factor productivity (TFP).
Regarding the average period under review, for all the analyzed banks, the
total factor productivity decreased compared to the previous period.
The results are divided into two categories: the first category included
banks that have seen an increase in TFP, as is can be seen in the case of Société
Générale, Erste Group Bank AG and the Romanian Commercial Bank SA.
For the others banks, TFP registered a decreased, which is due to decrease
in most of the cases where technical efficiency or degree technological change
276
According to the methodological approach, the aim was to show that the
European Union, banks operating across borders failure to achieve efficiency of
these operations carried to obtain profit, but due to the fact we worked with
small size data and the fact that we used as a working method the total
productivity factor analysis Malmquist index using non-parametric method, we
have not reached a favorable conclusion.
References
[1] Avkiran, N.K. (1999). The Evidence on Efficiency Gains: The Role of Mergers and
the Benefits to the Public. Journal of Banking and Finance, vol. 23, 991-1013.
[2] Bertrand, O. and Zitouna, H. (2005). Trade liberalization and industrial
restructuring: the role of cross-border mergers and acquisitions. Journal of
Economics and Management Strategy.
[3] Decanay, S.J. (2007). Malmquist Index and Technical Efficiency of Philippine
Commercial Banks in the post Asian Financial Crisis Period. Philiphine
Management Review, vol. 14, 93-114, 2007.
[4] Liu, B., Tripe, D. W. L. (2002). New Zealand bank mergers and efficiency gains.
Journal of Asia Pacific Business, vol. 4, issue 4, 61-81.
[5] Randhawa, D. S., Lim, G. (2005). Competition, Liberalisation and efficiency:
evidence from a two-stage banking model on banks in Hong Kong and Singapore.
Managerial Finance , vol. 31, issue 1, 52-77.
[6] Sufian, F. (2004). The Efficiency Effects of Bank Mergers and Acquisitions in a
Developing Economy: Evidence from Malaysia. International Journal of Applied
Econometrics and Quantitative Studies, vol. 1, 53-74.
[7] The financial statements of Erste Group Bank during 2008-2012. Retrieved from
http://www.erstegroup.com
[8] The financial statements of Societe Generale during 2008-2012. Retrieved from
http://www.societegenerale.com/
277
RESHAPING EUROPE`S FINANCIAL SYSTEM:
IMPLEMENTATION OF THE BANKING UNION AND
FUTURE STEPS
MIHAITA-COSMIN POPOVICI
Iasi, Romania
[email protected]
Abstract
The international financial crisis triggered in 2007 in the United States has spread to
Europe through the purchase of bonds by investors, lower global trade flows and panic
in international financial markets. The European Union has been affected by the
financial crisis, a number of banks had difficulties or have filed for bankruptcy. The
states were forced to intervene by rescuing distressed bank to limit contagion and
systemic risk. As a results, the financial crisis turned into a sovereign debt crisis. To
avoid future transformations, the European Union launched Banking Union project. It
consists of three pillars: Single Supervisory Mechanism (SSM), Single Resolution
Mechanism (SRM) and a single rulebook. The objective of the paper is to analyse the
degree of implementation of each pillar in the first quarter of 2015 and to highlight the
next steps. The results showed a satisfactory level of implementation of the first pillar,
but recent geopolitical developments threaten next steps and enforcement of the three
pillars.
Keywords: Banking union, financial system, European Union
JEL Classification: F15, G21, G33
1. INTRODUCTION
The international financial crisis, which started in 2007 in the United States,
was triggered by subprime loans, real estate loans secured by the value of
purchased goods and granted to people who did not meet the standard
creditworthiness conditions. Loans have been transformed by the process of
securitization in bonds that were purchased by banks and investors from
different countries. The decrease in the value of the real estate that were
purchased with subprime loans made it impossible to repay installment and bond
buyers have recorded losses (Totir & Dragotă, 2011).
278
The bonds were purchased by investors from Europe and the effects were
propagated in the European Union. The panic in international financial markets,
coupled with actual transmission through channels such as lowering global trade
flows, triggered effects on the real economy development. European Union GDP
grew by 3.1% in 2007, compared with 3.4% in 2006. The effect was more
pronounced in 2008, 0.5% growth, and in 2009 went into negative territory 4.4% (World Bank, 2015).
To combat the financial crisis and to limit losses a series of measures were
implemented by the EU:
In the European banking system, a number of banks were nationalized:
Bradford & Bingley, Royal Bank of Scotland, HBOS Lloyds TSB (partially) in
the UK, Fortis (partially) in the Netherlands, Belgium and Luxembourg, Glitnir
Bank, Icebank, Landsbanki, Kaupping, Stramur Investment Bank, SPRON
Iceland, Proton Bank in Greece, Anglo Irish Bank in Ireland, Snoras in
Lithuania, Latvia Parex Bank, Banco Portugues de Negocios Portugal
(Creditwritedowns, 2008).
The UK has implemented a financial rescue plan worth 500 billion pounds,
in order to guarantee loans between banks and provide liquidity to the banking
system. Germany has allocated 480 billion euros in funds for liquidity injections
to banks and credit guarantees. Spain has implemented a project to guarantee
interbank loans and provide liquidity worth 100 billion euros. Austria has
provided 100 billion to support banks. Greece supported the banking system
with 28 billion to limit the impact on the real economy (Popescu, n.d.). To
prevent the collapse of the European banking system, governments have
provided emergency aid worth 1.6 trillion, equivalent to 13% of the GDP of the
European Union, which were distributed between 2008 and 2011 (European
Commission, 2014a).
The failure of public sector policy reform, excessive indebtedness of the
member states, increasing budget deficits, fiscal contagion (Pardău & Pascal,
2013), nationalization of banks, allowed the transfer of risk to the state and the
financial crisis turned into a sovereign debt crisis. To avoid future economic
crises to transform into sovereign debt crisis, has been conceptualized the need
for reforms to address weaknesses in the regulatory and supervisory side.
This paper continues the work begun by other economists and updates the
degree of implementation of the Banking Union in the first quarter of 2015. Our
work comprises the introduction part, literature review, the analysis of the
implementation of the Banking Union, conclusion, and references.
Even if the Banking Union is a new subject it was studied by different
economists. Prisecaru (2014) analysed the success of the project, Hodula (2014a,
279
2014b) investigated the effects of the Banking Union and the efficiency
improvements, especially for non-EU countries because they have a larger
number of foreign banks, and the difference between rescuing banks through a
national structure compared with a supra-national one, like in the European
Union, as a cost-benefit analysis. Chorafas (2014) analysed Banking Union and
its stress tests. Deev (2014) analysed the direction of the banking integration in
European Union and the current state of implementation and the effects on
financial stability from the current literature. Onado (2014) reviews the
implementation of the European banking union that consists of a common
supervision framework, a unique mechanism of resolution and a single deposit
guarantee scheme. The study of Cocris et al. (2014) highlights the strengths and
vulnerabilities of the European banking union through different points of view.
Mickisch and Brandt (2014) inspected the new regulatory framework and the
confidence in the European banking system. Gros and Schoenmaker (2014)
illustrated how a gradual transition remove political resistance to a full banking
union and provide new values for the funds required for deposit guarantee
scheme and Single Resolution Fund. Spendzharova (2014) shows that a
supervisor authority of banks domiciled in the country, especially in crisis times,
lead a policy that reduces losses in the domestic banking system to the
disadvantage of foreign banks. Howarth and Quaglia (2014) analysed the
construction of the Single Resolution Mechanism. Moloney (2014) highlights
the uncertainty regarding the banking union, especially those relating to
constitutional resilience, operational effectiveness and internal market/euro zone
asymmetry and Ligere (2015) looks over the main futures of the banking union
among states which have adopted euro currency and shed a light on the
opportunities and the challenges highlighted by the banking union.
3. THE BANKING UNION
Financial and economic global crisis has highlighted the weaknesses of the
European banking system architecture. EU response to these deficiencies was
born as Banking Union. It consists of three pillars (Hauptman & Magnus, 2014):
1. The Single Supervisory Mechanism (SSM);
2. Single Resolution Mechanism (SRM);
3. Related mechanisms, including a Single Resolution Fund (SRF), Single
Deposit Guarantee Schemes (SDGS) and a mechanism for mutual support
(credit line).
The objectives of the Union Banking
The Banking Union is an addition to the Economic and Monetary Union
(EMU) and the internal market, which establishes a common framework for
banks in the euro area (euro area banks are automatically part of Banking Union,
other states may opt to join in) and determining supervisory responsibilities,
280
resolution and funding at level EU. Banks assume measured risks following the
implementation of capital requirements (CRD IV package - Implementation of
the European Basel III requirements) and are responsible for its losses, and in
some cases may be closed (the provisions of the Directive on recovery and
resolution of banking institutions). Until the birth of the Banking Union
taxpayers paid the banking sector losses, as was in the case of sovereign debt
crisis.
3.1 The Single Supervisory Mechanism
European Parliament and the European Union`s Council have concluded on
an agreement to create the first pillar of the Banking Union, The Single
Supervisory Mechanism (SSM) in March 2013 (European Commission, 2013).
SSM is a part of the European Central Bank and is responsible for the direct
supervision of the largest 130 banks holding 85% of total euro zone bank assets
(PricewaterhouseCoopers, 2014), the national supervisory authorities are
responsible for the other banks. The mechanism applies to all banks in the euro
area, but banks outside the euro area can join. SSM is operational starting from 4
November 2014 (The Banker, 2014).
Organisational structure in the European Central Bank
The Supervisory Board is the first body that makes a draft of a decision. It
is made from members of SSM`s participating states with the aid of a chair,
vice-chair and four representatives of the European Central Bank.
The decision is forwarded to the ECB and to the Governing Council which
is the body that has the last word. It includes ECB`s Executive Board and
national central banks of the euro zone (European Central Bank, 2015). The
ECB has responsibilities on the monetary policy, but also supervisory tasks. The
decisions are taken into the same body, the Governing Council, and a strict
administrative separation is implemented.
Membership
Participation on the SSM is mandatory for euro zone countries because
ECB has jurisdiction only over these states. Non-eurozone states can join SSM
by entering into “a close cooperation agreement”, but cannot have the same
rights and obligations as single currency SSM members. The banks outside the
euro area which join the SSM are supervised by the ECB and the country
receives a place in the ECB`s Supervisory Board (Council of the European
Union, 2013). The agreement between ECB and non-euro zone member
countries can be ended by one of the two parties.
The supervision of the European Central Bank includes stress tests on
banking institutions. ECB can use capital requirements, risk limits or require
changes in management to rectify incipient problems highlighted on banks by
281
stress tests. If a bank is in danger of bankruptcy the responsibility is passed to
the SRM.
The ECB published the first stress test on 26 October 2014, including the
130 most significant financial institutions in the euro zone with assets worth 22
trillion euro. The results showed that 105 institutions have passed the test
conditions and from the remaining 25 banks that have trouble fulfilling capital
requirements, 12 already attracted capital from the markets in order to meet the
conditions (European Central Bank, 2014).
The limits of the Single Supervisory Mechanism
Only the states that have adopted the single currency fall under the
incidence of the SSM, so the first limit is geographical and contribute to a twospeed European Union.
The SSM is responsible for supervising the banking system, the rest of the
financial system, capital markets and insurance sector, remain under the
supervision of national authorities.
3.2 Single Resolution Mechanism
EU Regulation No 806/2014 of the European Parliament and of the Council
of 15 July 2014 is the cornerstone for the creation of the Single Resolution
Mechanism. For financing banks` resolutions, a Single Resolution Fund will
be created, but is not currently established because a ratification is needed by EU
member states.
The objective is to enable effective management of potential bank failures
in the Banking Union. The ultimate responsibility for euro area banks belong to
the Single Resolution Mechanism, but in practice there is a separation between
local authority and SRM. Identical with SSM, SRM is directly responsible for
significant banks and cross-border cases.
Theoretically, according to the rules governing banking union, any bank
failure that is a subject to the SRM, shall be borne by the bank and shareholders,
and partly by lenders if necessary, but basically there is an alternative form of
financing by using the Single Resolution Fund (SRF) established by an
intergovernmental agreement.
In contrast with SSM, SRM is still not operational because it requires
ratification by the states which hold 90% of the weighted votes of both
mechanisms. Latvia ratified the intergovernmental agreement in December
2014, and Slovakia in February 2015 of the 26 Member States (except the UK
and Sweden) (European Council, 2014a).
From 1 January 2016, the Single Resolution Fund and the Single Resolution
Mechanism will be enacted if it will be ratified by the Member States and the
contributions will be paid. The fund is constituted by a 1% fee applied to all
282
deposits of banks from member states and is estimated at 55 billion euro
(European Commission, 2014b).
The Single Resolution Mechanism`s management is provided by Single
Resolution Board starting from 1 January 2015 and has the following objectives:
ensuring financial stability, remediation of distressed banks with minimal effects
on taxpayers and avoiding insolvency with adverse effects of the European
banking system.
3.3 Deposit Guarantee Schemes
In March 2014, Parliament and Council kicked off the third pillar of the
Banking Union Directive on Deposit Guarantee Schemes (DGS). The
threshold it covers is 100,000 euros to protect customers` deposits and can
protect high amounts in case of larger temporarily amount. The deadline for the
repayment of deposits as a result of a bankruptcy, will be a maximum of 20
working days starting from the second semester of 2015, and will be gradually
reduced to seven working days by 2024 (European Council, 2014b). Directive is
in force starting June 2014, and Member States have a year to implement it into
national law.
4. CONCLUSIONS
The European Union has experienced the worst financial and sovereign debt
crisis from its creation under its current name in 1993 by Maastricht Treaty. To
avoid turning future financial crisis in sovereign debt crisis, the European Union
launched the Banking Union project.
The first pillar, Single Supervisory Mechanism, is implemented and fully
functional. The first banking system stress test was performed and several
troubled banks were found. The objective of the mechanism is to discover early
troubled banks and implement measures to prevent disorderly bankruptcy. When
a bank goes bankrupt, the second pillar, Single Resolution Mechanism, kicks in.
The current issue is the lack of transfer of countries member states`
contributions and the lack of ratification by all countries. The turmoil on the
political scene in Greece and Russia can cause negative effects on the banking
system and possible failures until the full implementation of the second pillar.
Also forecasted value of the Single Resolution Fund, 1% of covered deposits of
all credit institutions, is lower compared with assets held by big banks. The
2012-2013 Cyprus`s financial crisis showed the discontent of population
regarding imposing a one-time bank deposit levy to cover banks` losses. It is
therefore necessary to establish a resolution`s fund at an appropriate level.
Establishing the Resolution Fund will be gradually during an eight year
establishment phase in which bank failures will not be covered completely.
283
First of all, we reviewed the latest articles on banking union available and
we put together the main findings. Secondly, we analyzed the degree of
implementation in the first part of the 2015 of the three pillars of the Banking
Union. Then, we have built a bridge between Banking Union and past and recent
developments in the European Union: the banking crisis from Cyprus and the
geopolitical situation in the Eastern Europe. The situation in Cyprus showed
people` dissatisfaction in covering losses of banks and the need for a faster
implementation of the Single Resolution Fund. Also, the geopolitical evolution
in Easter Europe may pose a risk for European banking system because banking
business is based on trust and a rapid escalation of the situation can generate a
massive withdrawal of deposits.
The Banking Union is a step in the right direction, but gradual
implementation of the second and third pillar can leave the European banking
system bare-headed against future financial crisis and political will is need for
rapid deployment of the second pillar and at an appropriate level. The paper is
differentiated by the futures highlighted above and the different views of the
author.
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286
THE ROLE OF FINANCIAL INNOVATIONS IN
DEVELOPMENT OF SHADOW BANKING
VICTORIA POSTOLACHE (DOGOTARI)
Alecu Russo Balti State University
Balti, Republic of Moldova
[email protected]
Abstract
In this study, the author intends to analyze the content, role and importance of
derivatives as financial innovation in deepening of shadow banking. Appearing as
innovation of investment banks, derivatives are not the only product of financial
engineering in the last decades. Every financial derivative product is tool for risk
management and for its redistribution, in other words, for insurance (hedging). This fact
is known for all of the theory and practice of financial intermediation.
Key words: financial innovation, credit derivative, shadow banking
JEL Classification: G15, G21, G32
1. INTRODUCTION
The shadow banking, as a specific economic phenomenon of the last years,
should be investigated in the context of changing macroeconomic conditions.
Today new macro global position reflects the economic lagging due to the global
crisis and requires long-term uncertain situations. Current characteristics of the
global economy, in our opinion, are:
- slowing (braking) economic growth and maintaining of global
economy at zero growth level or an insignificant increase. In Republic of
Moldova, according to prognosis, is expecting a GDP decrease based more on
remittances and not on contribution of the manufacturing sector;
- chaotic changes in the market which can not be attributed to any phase
of the crisis. J.A. Schumpeter, in his work Business Cycles: a Theoretical,
Historical and Statistical Analysis of the Capitalist Process, criticized the authors
(special Karl Marx), witch studied crisis only like a phase of fundamental
changes, and argue cycles with technical, political or social innovations
(Schumpeter,1939). Financial innovations, who penetrate into the family at the
end of XX century, have limited the categories already known and contributed to
qualitative changes in the contemporary economy, with unstable and risky
287
character. In general, changing of economic laws confirms the fundamental
postulates of the theory of cycles;
- functional exhaustion of government instruments for regulation and
supervision in financial domain, searching of “good” operating tools;
- centralizing solutions related problems in the financial sector,
involvement in activity macroeconomic regulators;
- impossibility of omission or passing these signs.
In conditions of changing of global macroeconomic conjuncture is updating
problem of shadow banking and its regulation. According to specialized
literature, shadow banking represents a segment of the financial market that
operates outside official supervision and regulation of central banks. This term
has appeared in the U.S.A. and originally meant any organization uncontrollable
or poorly regulated by the Federal Reserve System (FRS).
The structure of the instrument of the shadow operations is represented by
the swaps, credit default swaps (CDS), collateral debtor bonds (CDO) and
derived OTC, REPO operations and other financial products with a complex
structure.
It is necessary to mention that the term „shadow” not means informal or
illegal status of the subjects of sector of financial market, it is only an
establishment of alternative character and of their operation compared with the
banking segment with a rigorous control.
So, the shadow and the investment segment of the financial market, by
structure, can be considered practically identical. But, anyway exist differences
both formal and in content. The term “investment banking” is focusing on the
specific objective of financial market instruments. In the term “shadow
banking”, defining element is institutional moment, namely the specific of its
regulation, counterparty determined with non-banking regulation. In terms of
subjects, shadow banking segment is larger than investment segment- it includes
and institutional investors such as pension funds and insurance companies.
In the specialized literature we find many treatments of the studied subject,
among which we mention the following:
- in shadow banking, credit is market mediated—exchanged and priced in
markets for traded securities—rather than held on the books for a long period at
the originating institution;
- shadow banking is collateral intensive. The extensive use of private
collateral to backstop liabilities provides some of the assurance that might
otherwise come from an explicit government backstop such as insurance of
deposits in commercial banks;
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- the shadow banking system performs extensive credit, liquidity, and
maturity transformation outside of the banking system. That is, shadow bank
intermediation converts illiquid, risky, long-term assets into “safe” and liquid
short-term securities. This made it possible to offer wholesale investors a
combination of attractive securities returns along with seemingly low-risk
“deposit-like” access to liquid funds. Such transformation is enabled by the use
of collateral, and also by diversification, subordination, and guarantees provided
by private parties.
In the scientific plan, highlighting shadow banking, as independent segment
of financial sphere, is not based on some new positions, it is not followed by
submission of new postulates, detection and investigation of new trends and
laws and not cause new scientific discoveries in the field of finance and money.
It can be said that being concentrated in sphere of financial investment,
capital of subjects of shadow banking represent changing of fictitious capital in
changing conditions - caused by financial globalization, integration, increased
volatility and uncertainty, disproportions in the development of the real and
financial sector.
The notion of “shadow banking” not being severely regulated can be treated
in different legal systems differently. In such way, is boarding the interpretation
of this notion, russian economist Dvoretskaya supports the idea that in the
content of the concept of shadow banking can not be included schemes of money
laundering and removal of capital, the flow of illegal profits (Dvoretskaya,
2013).
The IMF said that at the end of 2013, shadow banking accounted for around
30% of systemic risk in the US, the same proportion as its banking sector. It was
lower in the UK and euro zone – 7% and 13% respectively – where the banking
sector posed a greater systemic risk because of its size
(http://www.theguardian.com/business/2014/oct/01/shadow-banking-systemrisk-financial-stability-imf). In the report of Financial Stability Board (FSB)
“Global Shadow Banking Monitoring Report, 2012” are determined the
extraordinary sizes of the segment of financial market. For 2012, the amount of
shadow banking was 67 trillion dollars U.S.A. or 86% of global GDP, compared
to 51 trillion dollars U.S.A. in 2011 and before the crisis beginning in 2007 was
62 trillion dollars U.S.A. (in 2002 this volume was 26 trillion dollars U.S.A.).
On the first plan is observed U.S.A. with about 35% or the equivalent of 23
trillion dollars U.S.A., followed by EU with 22 trillion dollars U.S.A. and UK
with 9 trillion dollars U.S.A. Comparing volume of shadow banking with GDP,
we notice excessive amounts, characteristic for big financial centres’ and
offshore, for Hong Hong - 520%, Netherlands - 490%, Great Britain - 370% and
the U.S.A. - 150% (Financial Stability Board, 2012).
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The most active growth in the segment of shadow banking has
demonstrated the U.S.A., which at the end of 1995 had a turnover of 5 trillion
dollars U.S.A. At the end of 2007 that sum, according to statements made by
SFR was 16 trillion dollars U.S.A. compared with bonds to the banking sector
amounted to 10 trillion dollars U.S.A.
In the content of the report from 2012 is investigating three structural
financial paradigms:
- american system of shadow banking;
- german system of credit based on bank deposit;
- arab system of centralized planning (Financial Stability Board, 2012).
The German system is characteristic for countries with a weight of “nonbank” up to 20% (Australia, Canada, France, Germany, Japan and Spain).
The system of shadow banking is the banking system of the USA, Great
Britain, Netherlands, where the share of non-bank financial institutions is greater
than 20%, and in some cases higher than the share of banks.
The centralized system was formed in developing countries where are
prevailing state banks, central banks and with a small share of non-bank
financial intermediaries (Argentina, China, Indonesia, Russia, Saudi Arabia).
Individual character has the shadow banking in China. Until the crisis, the
banking system has a traditional character and properly regulated. Stormy
economic growth caused activation of lending activity till the over lending in
condition of inflation and inflating “bubble” in the housing market. The need for
capital (especially for small and medium business) has come alive the shadow
sector by keeping key positions of traditional players, being the ones who
control the young shadow sector.
Analytics of Council for Financial Stability think that in the third part of
developing countries operating “a well organized cartel of central banks”. Power
of central banks in developing countries is based on currency reserve funds,
which are formed after a strong balance of payments (Financial Stability Board,
2012).
In this paradigm is observed a danger for the world economy. The danger is
determined by the function of central banks as centers of emission “bad” money
and the only source of credit as the core of massive monetization and inflation
sources because of “infinite policy of zero interest rate”.
Classification described of the financial structure in three categories is
closed to the already well established separation of the national banking
financial sectors (bank based financial system) and the ones of market based on
securities market (market based financial system).
290
3. METHODOLOGY AND DATA SOURCES
Banking system symbolizes financial markets based on mutual relationships
(relationship based), and the one of market represent a direct access, without
intermediaries for resources (arm’s lengths).
Traditional banks are required to possess reserves, constantly being under
the influence of investment risks, related to the regulation of central banks, are
afraid of deposits withdrawal, loss of assets or recapitalization, while the
investment sector, initially, was free of all threats and restrictions mentioned, but
often made nonbanking operations. Shadow banking operators, compared with
traditional banks, are not threatened by restrictions and regulations rules, does
not have direct relation with individuals, people.
Denial of channel of bank lending, of translational resources and their
replacing with non-bank intermediaries channels by unsecured loans was based
on lack of “good” resources for liberation of secured bank loans.
If before the crisis shadow sector received private cash transfers guaranteed,
issuing unsecured bills, then after the fall of the credibility of the private sector,
shadow banking collided with a liquidity crisis, being forced to borrow from
traditional banks or to sell their assets, that not always ensure a favourable result.
In the Shadow Banking Global Monitoring Report from 2012 is mentioned
that “excessive volume of system of shadow banking may become a source of
systemic risk for the global economy and cause an adverse reaction from global
markets in case of sudden reduction in liquidity”. We think that it is need to
achieve an adequate monitoring and creating some forms of regulation of the
shadow banking system. These actions should help to partial decrease the risk in
conditions of gigantic volume of shadow banking system which continues to
grow” (Financial Stability Board, 2012).
Talking about financial innovations, we note that in activity of the
commercial bank, they represent the main concern of the entire bank, beginning
with the stage of product elaboration and finishing with the implementation in
practice and expect the desired effect.
New financial instruments that are designed to reflect the relationships
identified by the “quants” have proliferated. Innovation in the financial markets
can be useful, but also harmful. As with Einstein’s work, some of the
consequences of financial innovations are dangerous and volatile.
Well-regarded scholars have been remarkably tolerant of the emerging
dangers from innovative financial engineering. Notably, Robert Merton, whose
research provided the analytical foundation for derivatives markets, observed as
follows: “As we all know, there have been financial “incidents,” and even crises,
that cause some to raise questions about innovations and the scientific soundness
of the financial theories used to engineer them. There have surely been
individual cases of faulty engineering designs and faulty implementations of
291
those designs in finance just as there have been in building bridges, airplanes,
and silicon chips. Indeed, learning from (sometimes even tragic) mistakes is an
integral part of the process of technical progress?” (Merton, R. and Bodie, Z.,
2004).
Paul Volcker has famously expressed a similar view: “the most important
financial innovation that I have seen the past 20 years is the automatic teller
machine.” Perhaps more telling is a story he recounted that expands on his quip:
A few years ago I happened to be at a conference of business people, not
financial people, and I was making a presentation. The conference was being
addressed by a very vigorous young investment banker from London who was
explaining to all these older executives how their companies would be dust if
they did not realize the joys of financial innovation and financial engineering,
and that they had better get with it.
I was listening to this, and I found myself sitting next to one of the
inventors of financial engineering. I didn’t know him, but I knew who he was
and that he had won a Nobel Prize, and I nudged him and asked what all the
financial engineering does for the economy and what it does for productivity.
Much to my surprise, he leaned over and whispered in my ear that it does
nothing—and this was from a leader in the world of financial engineering. I
asked him what it did do, and he said that it moves around the rents in the
financial system—and besides, it’s a lot of intellectual fun. Now, I have no
doubts that it moves around the rents in the financial system, but not only this, as
it seems to have vastly increased them (Volcker, 2009).
The Gamba and Triantis study explicitly assumes that the swap alternative
under consideration in the study is entered into by the subject company with a
bank. It concludes that no risk of bank default need be considered. The swap
counterparties of Lehman Brothers might find that conclusion particularly
unpersuasive.
In summary, the study by Gamba and Triantis, while it is the most
comprehensive available, still runs afoul of the incredible complexity of even a
relatively simple swap transaction. This illustrates clearly that that derivatives
are difficult to value. More complex derivatives are even more challenging as
additional risks compound the valuation problem. It is completely unrealistic to
believe that participants in the derivatives markets accurately value the
transactions that they enter into. A recent study describes this problem: “The
practical downside of using derivatives is that they are complex assets that are
difficult to price. Since their values depend on complex interaction of numerous
attributes, the issuer can easily tamper derivatives without anybody being able to
detect it within a reasonable amount of time. Studies suggest that valuations for
a given product by different sophisticated investment banks can be easily 17%
apart and that even a single bank’s evaluations of different tranches of the same
292
derivative may be mutually inconsistent” (Arora, Barak, Brunnermeier, Ge,
2009).
Half of the mortgages were securitized and insured by CMO. With the help
of such instruments was selling credit risk (credit - mortgage) as an independent
asset with an unclear price formation, with a multiplication of losses from
opacity of financial players and their dependence on first order creditworthiness
mortgage.
Otherwise speaking “tail - investors - biting dogs - final borrowers”. If they
want to buy mortgage bonds from you, it means that you must release loans, to
collect and sell them to those who need, says Liuis M (Liuis, 2011).
In such way, individual risks were insured, multiple redistributed, but this
did not save the world economy. Investment banker Dj Bernard says that there is
no sense demonizing industry that brings great economic benefit.
In his time, the crisis problem in domain of advanced technologies in the
U.S.A. was blocked by CDS, which distributed risks to energy companies and
from domain of concrete telecommunications and all branches throughout the
financial system.
4. RESULTS OBTAINED
Looking at financial innovations one sees them as the force driving the
global financial system towards its goal of greater economic efficiency. In
particular, innovations involving derivatives can improve efficiency by
expanding opportunities for risk sharing, by lowering transaction costs and by
reducing asymmetric information and agency costs.
Derivatives are an integral part of the trading market intermediation model.
They reconcile mismatches between capital sources and uses, typically maturity,
interest rate, creditworthiness and currency differentials. They act just like bank
capital reserves in the commercial bank intermediation model. This use of
derivatives is neither primary nor secondary market trading. It is a third form of
trading that is integral to capital intermediation, but this role is virtually
unrecognized in the literature. Derivatives are also used to reconcile credit
mismatches. Credit default swaps can be used to transform credit exposures, as a
bank that writes the swap effectively becomes the guarantor of the credit
exposure.
In this context, we will analyze the income dynamic generated by the credit
default swap compared with bank performance indicators in order to highlight
the positive aspects from using financial innovations.
293
Figure 1. Dynamics of ROA, ROE and incomes from transactions with
credit derivatives
20
2000
323 751
16.7
45
15
15
14.21
13.3 13.21
219
193
27
0
13.41
-485
-713
-2000
10.02
9.35
10
7.91
8.78
9.46
-4000
5.79
3.9
5
1.33
0.5
1.3
0.5
1.34
0.6
0.94
1.1
1.62
0.16
1.02 0.63
0.2
0.05
-6000
0.88
0.99
2.189
1.06
0.13
0
2004
2005
2006
2007
-8958 -0.1
2008
-0.1
2009
2010
-0.04
2011
-0.78
-0.08
2012
-1.55
2013
-8000
Anii
-10000
-2.78
-5
-12000
-11780
-7.4
-10
-14000
ROA for USA, %
ROE for USA, %
ROA for EU, %
ROE for EU, %
incomes from transactions with credit derivatives, million USA dollars
(Source: elaborate by author using data from http://www.ebf-fbe.eu/wpcontent/uploads/2014/02/FF2012.pdf and Call Reports)
This graph shows that the EU banking sector had a major impact on the
recording losses from transactions with credit derivatives in 2008 and 2012,
being observed losses of assets and bank capital, while the influence of the US
banking sector was more modest, because ROA and ROE had negative values
only in 2009, after overcoming the peak of the crisis in 2007-2008. This effect
was felt by credit derivatives in 2010, when incomes from these instruments
amounted to - 485 mln. USD. The situation returns to normal in 2013, when was
obtained income from transaction with credit derivatives in the amount of 219
mil. USD in condition of reducing the volume of transactions at 21020 billion
us.
Most commercial banks enter derivatives transactions as hedgers or dealers.
In terms of notional amounts outstanding, derivatives activity is highly
concentrated at dealer banks. In terms of the number of institutions holding any
amount of derivatives, most are hedgers using interest rate contracts. The extent
of speculation within commercial banking is more difficult to determine because
it is not reported as such and speculative-type risks arise from certain dealer
activities.
294
Risk intermediation (risk transfer for financial intermediaries, separation,
aggregation, risk diversification, neutralization by hedging symmetric) allow
economic subjects to finance new business, riskier, including innovative projects
that contribute to economic development. This aspect has another feature - a
high level of economic development creates new tools, including and financial
innovations.
In case when stock market is underdeveloped (the case of Republic of
Moldova) it limits the economic potential and possibilities of a progressive
development. So, is limited not only the increasing in the existing branches, but
is stopped and the development of new areas requiring massive capital
investment. As result, economy is influenced by the emergence of new financial
innovations and even new markets asset. Here we remember that the appearance
of brady bonds in Latin America because of crisis of public debt and of
development, in geometric progression of credit derivatives (CDS), contributed
not only to economic and transactions growth on OTC market, but also caused
the exit on the surface of many gaps in trading these instruments.
We agree with the concept supported by many experts that the global crisis
was caused not by market transactions, its participants, or instruments that are
traded, but by incapacity of the regulatory system to respond promptly to all
attacks that occurred. Namely, poor control from regulators agencies and rating,
opacity and unevenness of transactions on stock trading derivatives was the
source of risks emerging with significant adverse effects.
5. CONCLUSIONS
Finally, detection of segments of financial market with a high level of risk
and tightening the regulations of their activity is the foundation for achieving "in
peace and quiet" negative scenarios that can not be avoided in modern markets
with a complicated organizational level.
Immediately after the crisis, trade with credit derivatives and swaps became
more strictly regulated. In the U.S.A. were introduced restrictions in according
of government aid to dealers - swap (including discount window allowed by
SFR) logical and efficient measure.
According to paragraph 7 of the Dodd Frank Act, trade with derivatives
suppose mandatory centralized clearing on stock markets with giving the pledge
under the transactions (Dodd-Frank Wall Street Reform and Consumer
Protection Act. July 2010). That means that risks will be identified larger. But,
anyway, has appear new risks, witch undermining that ideal measure from
theoretical point of view.
Insufficiency of bonds became a good opportunity for banks to have
advantages due to insufficiency of pledges for operators with financial
derivatives. Big banks, like JP Morgan Chase, Bank of America and others,
295
offered services of pledges transforming. Such an exchange of assets creates
new risks, that, also must be followed. Options to reduce these risks suppose
more simple requirements for pledges, which have also implemented the U.S.A.
clearing centers.
In general, financial regulation and supervision in the most sensitive sector
of global economy – shadow banking - moves in the direction of risk limitation
by prudential and economic strengthening towards market operators. Innovation
in the form of engineering of financial products has thus reduced the efficiency
of capital intermediation, the central social purpose of the financial markets.
References
[1] Arora, S., Barak, B., Brunnermeier, M., Ge, R. (2009). Computational Complexity
and Information Asymmetry in Financial Products, October 19. Retrieved from
http://scholar.princeton.edu/markus/publications/term/39
[2] Financial Stability Board (2012). The Three “Financial Structure” Paradigms оf
Modern Finance. Global Shadow Banking Monitoring Report, 18 November.
Retrieved
from
http://www.financialstabilityboard.org/wpcontent/uploads/r_121118c.pdf?page_moved=1
[3] Merton, R. and Bodie, Z. (2004). Design of Financial Systems: Towards a Synthesis
of Function and Structure. Harvard Business School Working Paper No2-074,
revised July 2.
[4] Schumpeter, J.A. (1939). Business Cycles: a Theoretical, Historical and Statistical
Analysis of the Capitalist Process.
[5] Volcker, P. (2009). Think More Boldly. Wall Street Journal, December 14.
Retrieved from http://www.wsj.com/articles/
[6] ***Dodd-Frank Wall Street Reform and Consumer Protection Act. July 2010.
296
VALUE AT RISK BASED ON INTRA-DAY DATA FROM
BUCHAREST STOCK EXCHANGE
RAMONA RADU
Bucharest University of Economic Studies - Faculty of Finance, Assurance,
Banking and Stock Exchange
Bucharest, Romania
[email protected]
COSMIN-OCTAVIAN CEPOI
Bucharest, Romania
[email protected]
ALEXANDRU TOMA STĂNILĂ
Bucharest, Romania
[email protected]
Abstract
Volatility is a key indicator that underlies the decision-making process and which is the
base for modern financial theories. Current dynamics of financial markets are sudden
and dramatic changes in intraday volatility observed on developed markets, presents a
very strong argument for the need for accurate measures and realistic forecasts of
volatility. Until now, in the finance literature, we find numerous studies that modelled
assets volatility using ARCH and GARCH family models, but recent researches argues
that these approaches are not so efficient for intraday volatility. Using intraday data
from Bucharest Stock Exchange we compute value at risk measures for two equities,
BRD and SNP. Our findings suggest that for a stock with higher liquidity the risk is
much smaller.
Keywords: Intraday volatility, Realized Variance, GARCH models, Value at Risk
JEL Classification: C55, D47
297
1. INTRODUCTION
As we all know, the volatility is a measure of the dispersion of returns for a
given asset. Due to his implication in evaluation of assets and derivative pricing
theories, we need robust econometrics models which can forecast intraday asset
volatility.
Another issue we should discuss are the current dynamics of financial
markets. Nowadays, the main concern of practitioners and researcher is to
analyse, as accurate as possible, the high frequency data sets available due to the
presence of tick by tick stock prices and the growth of traded volumes.
Another discussion starts from the fact that the traders need real information
about market risk. The variation of risk factors is important for the pricing
process, and return volatility is a key input for portfolio allocation problems.
Cyclicality is a feature of financial markets. This feature and the trading activity
at the intraday level induce the intensity of price movements.
Considering earlier and recent studies, and also the activity of practitioners,
value at risk measure is the most widely used approach for estimating the
implicit volatility and market risk.
In our paper we investigate using different volatility measures for intraday
data the differences between two representative equities from Bucharest Stock
Exchange, BRD and SNP. The differences between these two consist in number
of transactions of a daily basis and the average time between trades. We
investigate the evolution of value at risk measure during six months and
investigate the main differences among those evolutions.
In the first section we review the most representative empirical studies in
this area that used intra-day measures of risk to compute value at risk. The next
section presents the models that we are going to use. Section 4 presents data and
results and section 5 concludes.
There is an extensive literature on this subject. Authors like, Bollerslev
(1986), Giot (2005), Engle and Gallo (2006) developed the ARCH-GARCH
models, in order to obtain an efficient framework for intraday volatility.
Christoffersen, Hahn and Inoue (2001) pointed that risk managers are often
left to choose from various risk models. In their paper, the authors establish
which from value at risk measures is proper for their activity. Using an
application to daily returns on S&P500 Index, the methodology proposed in this
study can test whether a value at measure satisfies the efficient value at risk
condition and make a comparison among different measure of maximum loss for
an asset. In this study, the authors assumed away estimation errors and that the
volatility measures are stationary. Their approach was able to rank more models
if they change the investment horizon from one to ten trading days.
298
Dionne, Duchesne and Pacurar (2009) proposed and intraday value at risk
measure at different horizons using an intraday Monte Carlo simulation. The
authors extended the framework of Engle (2000), and applied their methodology
on data sets from Royal Bank and Placer Dome stocks traded on the Toronto
Stock Exchange. Results were statistically meaningful for traders who are active
on the market. Also, the UHF-GARCH model is efficient for almost all time
horizons and confidence levels considered, even when normality is assumed for
the distribution of error terms.
Engle and Gallo (2006) started their study from a multiplicative error model
developed by Engle (2002), choosing a convenient GARCH-type structure to
model persistence. They estimates the model on S&P500 Index and the results
obtained shows that the daily range and returns have explanatory power for
realized volatility. They also produced a 22-steps-ahead volatility forecasts,
using the indicators in a regression framework to detect their explanatory power
in tracking the value of a market based volatility measure for VIX index. The
obtained estimator is efficient when the choice of error distribution is within the
class of Gamma distribution.
A new way of modelling and estimating intraday volatility is proposed by
Engle and Sokalska (2012). Their model was applied to a data set consisting
returns aggregated at ten minutes interval for more than 2500 US equities. The
authors decomposed the volatility into components that may be easily estimated
and expressed the conditional variance as a product of daily, diurnal and
stochastic intraday volatility components. The results show that the pooled cross
section seems to outperform the corresponding forecast from company-bycompany estimation.
So and Xu (2013) forecasted value at risk and volatility using investment
horizons of less than one day. Modified GARCH models were applied to test
market risk. They observed that volatility has a significant intraday seasonality
feature. The forecasting performance of the models is one-period-ahead
volatility and they were applied to 30 constituent stocks. To capture more
information on the volatile market, the authors used realized variance and timevarying degrees of freedom in GARCH models. The estimation results sustained
the fact that models with seasonal features outperformed those without this
feature.
3. THE MODEL
In order to compute different measure for Value at Risk bases on tick by
tick data from Bucharest Stock Exchange we need to have a measure for
volatility of the asset. We are going to make a comparison between daily risk
computed using a GARCH model and Realized Volatility.
299
3.1. Realized Volatility
First of all, we assume that the logarithmic price of a financial asset is
generated by the following diffusion process:
t
pt =
∫ µ ( s)ds + p
t
t
0
+ ∫ σ ( s ) dW ( s )
(1)
0
where the mean process μ is continuous and with finite variation, σ(t) > 0
denotes the instantaneous volatility and W is a standard Brownian motion. The
integrated variance is the amount of variation accumulated over a past time
interval Δ and is given by:
t
IVt =
∫σ
2
( s ) ds
(2)
t −∆
We are interested to estimate the integrated variance given by equation (2)
using a discrete representation. In order to do that we assume that we have m
intra-day returns and the i th return is given by:
ri( m ) = pi / m − pi −1 / m , i = 1,..., m
(3)
The sum of squared intra-day returns:
RV ( m ) = ∑ ri
( m )2
(4)
provides a natural estimator for integrated variance. Andersen, Bollerslev
Deibold and Labys (2003), using the theory of quadratic variation, show that
p
RV ( m ) 
→
IV , m 
→ ∞.
Barndorf-Nielsen and Shepard (2002a) show the consistency of this estimator
and that its asymptotic distribution is normal:
(
m RV ( m ) − IV
2 IQ
) → Ν(0, 1) (5)
L
where IQ represents the integrated quarticity.
3.2. GARCH Models
Autoregressive Conditional Heteroskedasticity (ARCH) models were
developed by R. Engle (1982). In order to build an ARCH model we must
consider first two distinct equations: the first one for conditional mean and the
second one for conditional variance. The ARCH model was extended by
300
Bollerslev (1986) who proposed the GARCH type of models. In the case of a
GARCH (p,q) model specification, we must fit the price series using a ARMA
model and based on this result we model the variance. GARCH models for a
time series of returns can be summarized by the following system of equation:
m
m

j
i
rt = β 0 + ∑ β 1,i L rt + ∑ β 2,i L ε t , ε t ≈ N (0, ht )

j =1
i =1
(6)

q
p

ht2 = α 0 + ∑ α 1,i Li ht + ∑ α 2,i L j ε t

j =1
i =1

where the first equation in the system is ARMA representation of returns and the
second one is the representation of volatility.
4. DATA AND RESULTS
Based on Bucharest Stock Exchange tick-by-tick data we make a
comparison among Value at Risk measures between two equities namely BRD
and SNP during almost six months (September 2012- May 2013). Our purpose is
to show that less liquid equities, with a small number of transactions per day
have a higher risk comparing to a more liquid one which is the case of SNP. We
are going to compute daily measures of risk based on two methods: realized
volatility method and ARMA-GARCH method. After that we plot the evolution
of Value at Risk measure during six month using variance-covariance method.
Table 1. PP Test of returns
NULL HYPOTHESIS
P-VALUES
R_BRD
SERIES HAS A UNIT ROOT
<1%
R_SNP
SERIES HAS A UNIT ROOT
<1%
In Table 1, we test the existence of a unit root in return series, in order to
establish the ARMA structure of returns in GARCH analysis. We use PhillipsPerron test with null hypothesis the existence of a unit root in price series. The
results reject the null hypothesis at 1% level, so our series of returns are
stationary.
In Table 2 estimation results for ARMA-GARCH model are presented. All
estimates are statistically significant at five percent level. Based on this
estimates we extract the fitted values and compare them with realized volatility.
301
Table 2. ARMA(1,1)-GARCH(1,1) Estimation Results
CONSTANT1
AR(1)
GARCH_BRD
2.1e-05*
-0.98*
GARCH_SNP
-5.8e-05*
0.07*
MA(1)
CONSTANT2
ALPHA(1)
BETA(1)
0.97*
0.020*
0.38*
0.30*
-0.13*
0.015*
0.40*
0.19*
*Statisticaly significant at 5% level
In Figure 1 and Figure 2 the annualized risk measures are present for BRD.
As we can see the realized volatility is much higher in than volatility resulted
from GARCH model. In this case, if an economic agent evaluate his risk using a
GARCH model, is very possible to under evaluate the volatility. We can also
notice from these two figures that realized volatility reveal much better the
intraday evolution of risk, since it is computed day by day, than GARCH
volatility which depends on result that were computed in previous days.
Figure 1. BRD Realized Volatility
Figure 2. BRD GARCH Volatility
80.00%
60.00%
40.00%
20.00%
0.00%
30.00%
20.00%
10.00%
0.00%
In Figure 3 and Figure 4 the annualized risk measures are present for SNP.
The same patterns that were observed in the case of BRD can be seen and here.
However, the differences between these results are much obvious in SNP’s case,
one explanation being the fact that liquidity is much higher compared with
BRD’s market. If a trader chose to invest in SNP’s equities for a longer horizon,
the best options for him to evaluate the risk is the GARCH model. However, if
he is looking for a short term profit, the results reported by realized volatility are
more reliable.
302
Figure 3. SNP Realized Volatility
Figure 4. SNP GARCH Volatility
40.00%
30.00%
20.00%
10.00%
0.00%
8.00%
6.00%
4.00%
2.00%
0.00%
In Table 3 we can see the average maximum loss for one day horizon. We
can see that value at risk is smaller for equities with a higher degree of liquidity,
which is the case of SNP, compared to BRD.
Table 3. Average VaR comparison
99% VAR
99%VAR
RV
GARCH
BRD
-2.237%
-0.89%
SNP
-1.920%
-0.54%
Figure 5. VaR comparison RV
Figure 6. VaR comparison GARCH
0.00%
-0.50%
-1.00%
-1.50%
-2.00%
-2.50%
-3.00%
-3.50%
-4.00%
0.000%
-4.000%
-6.000%
-8.000%
-10.000%
BRD
VaR
99%
SNP
VaR
99%
BRD
VaR
99%
19-Oct-12
-2.000%
19-Oct-12
303
25-Jan-13
AVERAGE
VAR
SNP
VaR
99%
In Figure 5 and Figure 6 one day value at risk day by day is presented. In
the case of GARCH model the differences are much visible than RV case. Even
if in average the differences are closed, we cans see that on a daily basis that
BRD has a higher risk compared with SNP.
5. CONCLUSIONS
Our paper presents, using different volatility measures for intraday data the
differences between two representative equities from Bucharest Stock Exchange,
BRD and SNP. Using tick by tick data from Bucharest Stock Exchange we
estimate daily volatility measures for 132 days during October 2012 to May
2013. One important issue is that GARCH model tends to under evaluate the risk
in comparison with realized variance estimator. Our findings suggest that for a
stock with higher liquidity, which is the case of SNP we have a smaller volatility
in comparison with a less liquid one which is the case of BRD.
References
[1] Andersen, T. G., Bollerslev, T., Diebold, F.X., Labys, P. (2003). Modeling and
forecasting realized volatility, Econometrica, vol. 71, 579-625.
[2] Barndorff-Nielsen, O. E., Shephard, N. (2002a). Econometric analysis of realized
volatility and its use in estimating stochastic volatility models. Journal of the Royal
Statistical Society, Series B, vol. 64, 253-280.
[3] Bollerslev, T. (1986). Generalized Autoregresive Conditional Heteroskedasticity,
Journal of Econometrics, vol. 31, 307-327.
[4] Christoffersen, P., Hahn, J., Inoue, A. (2001). Testing and Comparing Value-at-Risk
Measures. Journal of Empirical Finance, vol. 8, 325-342.
[5] Dionne, G., Duchesne, P., Pacurar, M. (2009). Intraday Value at Risk (IVaR) using
tick-by-tick data with application to the Toronto stock exchange. Journal of
Empirical Finance, vol. 16, 777-792.
[6] Engle, R.F. (2000). The Econometrics of Ultra-High Frequency Data.
Econometrica, vol.68, 1-22.
[7] Engle, R.F. (1982). Autoregressive conditional heteroskedasticity with estimates of
the variance of U.K. inflation, Econometrica, vol.50, 987-1008.
[8] Engle, R.F., Gallo, G.M. (2006). A multiple indicators model for volatility using
intra-daily data. Journal of Econometrics, vol. 131(1-2), 3-27.
[9] Engle, R.F., Lange, J. (2002). Measuring, Forecasting and Explaining Time Varying
Liquidity in the Stock Market. Journal of Financial Markets, vol. 4(2), 113-142.
[10] Engle, R.F., Sokalska, M.E. (2012). Forecasting intraday volatility in the US equity
market. Multiplicative component GARCH. Journal of Financial Econometrics,
vol. 10(1), 54-83.
[11] Giot, P. (2005). Market risk models for intraday data. The European Journal of
Finance, vol. 11(4), 309-324.
[12] So, M.P., Xu, R. (2013). Forecasting Intraday Volatility and Value-at-Risk with
High-Frequency Data. Asia-Pacific Financial Markets, vol. 20(1), 83-111.
304
ROMANIA – THE WAY TOWARDS THE EURO AREA
ANDREI RĂDULESCU
Romanian Academy of Sciences
Bucharest, Romania
[email protected]
Abstract
Recently, the Romanian policymakers intensified the debate regarding the entry in the
Euro Area. On the one hand, the Government presented the Convergence Programme
2015-2018, keeping the target for the entry in the Euro Area: 1 January 2019. On the
other hand, the Central Bank launched several messages regarding the importance of
real economic convergence. In this paper I analyse the recent dynamics of the Romanian
economy. At the same time, I estimate the potential GDP in Romania and in the Euro
Area by using the Hodrick-Prescott methodology. According to the results the real
economic convergence of Romania towards the Euro has entered an upward trend since
2012 and I expect it to continue in the mid-run.
Keywords: real economic convergence, Romania and the Euro Area, potential GDP,
GDP/capital
JEL Classification: E32, E62, H30, H60
1. INTRODUCTION
Recently the policymakers launched several messages regarding the entry
of Romania in the Euro Area. For instance, the Romanian Government presented
the 2015-2018 Convergence Programme, in which it kept the target data for the
entry in the Euro Area: 1 January 2019. According to this Convergence
Programme the Romanian economy would increase by over 3% YoY during
2015-2017, but the growth pace may be higher than 4% starting 2016 in the
scenario of tax cuts.
On the other hand, the Central Bank of Romania (NBR) pointed to the
importance of the real economic convergence of Romania towards the Euro
Area. In this context the Governor of the NBR underlined that Romania needs a
Roadmap for the process of monetary integration in the Euro Area.
The rest of the paper has the following structure: section 2 presents the
recent dynamics of the Romanian economy; section 3 shortly describes the
305
methodology (the Hodrick-Prescott filter); section 4 presents the analysis of the
main results; the conclusions are presented in the last chapter.
2. RECENT DYNAMICS OF THE ROMANIAN ECONOMY
The recent evolutions of the macroeconomic and financial indicators in
Romania express the fact that the economy seems to be at the beginning of a
new economic cycle, after the prolonged and severe adjustment determined by
the waves of the Great Recession.
Figure 1. Romanian real GDP (index)
(Source: Based on Eurostat)
In 2014 the real GDP rose by 2.8% YoY (according to the Statistics Office),
returning to the 2008 record high level, as can be noticed in figure 1. In nominal
terms the Romanian GDP rose to EUR 150bn in 2014, a record high level.
Compared to the previous years, in 2014 the domestic demand was the
engine of Romanian economy, as the private consumption accelerated to 4.5%
YoY, while the public consumption rose by 5.3% YoY. However, the gross
fixed capital formation continued to contract, by 3.5% YoY according to the
Statistics Office. The net foreign demand had a benign contribution to the GDP
dynamics in 2014.
At the same time, the Romanian economy presents an equilibrated shape, as
reflected by the dynamics of the Investments and Savings (fig. 2). On the one
hand, the public finance had a deficit of only 1.5% of GDP in 2014, according to
Eurostat Database (the lowest level of the past 9 years). On the other hand, the
306
current account presented a deficit of only 0.5% of GDP in 2014, a record low
level for the past 25 years.
In the financial side of the economy there can be noticed the decline of
inflation to record low levels (1.1% YoY in 2014, 0.4% YoY in January and
February 2015). In this context, the NBR cut the reference interest rate over the
past quarters, to 1.75% in May 2015 (a record low level).
Figure 2. Investments vs. Savings (% GDP) in Romania
(Source: Based on IMF World Economic Outlook Database, April 2015)
At the same time, the central bank started in 2014 to normalise the levels of
the minimum reserve requirements ratios, either for the RON (at present at 8%)
or for the EUR (at present at 14%).
In the banking sector the ratio loans/deposits decreased to around 90% at
the end of 2014, a record low level for the past years, an evolution that confirms
the stabilisation after several years of adjustment.
Figure 3. Foreign banks’ exposure on Romanian economy (EUR, bn)
(Source: Bank for International Settlements)
307
The high level of macro-financial stability attained over the past quarters
was confirmed by the S&P Agency (in May 2014 it upgraded Romania rating to
investment grade), but also by the stabilisation of the foreign banks’ exposure to
the economy, after severely declining during December 2008-June 2014 (by
over EUR 19bn, as can be noticed in figure 3).
3. THE METHODOLOGY
In this paper I apply the Hodrick-Prescott methodology on GDP YoY
dynamics of Romania and Euro Area (from Eurostat Database, period 19962014) in order to estimate the evolution of the potential output.
The Hodrick-Prescott filter represents one of the main methods used by
macroeconomist researchers in order to decompose the cyclical component and
the trend component (which represents a reference for the potential output) (Yt =
Yt* + Ytc). It is considered by the macro-econometric literature a transparent
method and it can be mathematically described by the following relation:
T
Min
∑ (Y
t =1
t
2
− Yt )
T −1
*
+λ
∑ ((Y
t =2
t +1
*
− Yt ) − (Yt − Yt −1 ))
*
*
*
2
(3.1)
where:
Yt – the GDP;
Yt* - the potential GDP;
λ - a parameter of smoothness (the lower its value, the closer potential output
to the output).
I used a value of 100 for this parameter, as employed by Hodrick-Prescott
(1997).
4. THE ANALYSIS OF THE MAIN RESULTS
The main results of the estimates are presented in Figure 4.
According to the results the YoY dynamics of the potential GDP in
Romania decelerated from around 4.42% in 2005 to just 2.6% in 2011 (the
lowest level since the beginning of the 2000s). This evolution was determined by
the incidence of the Great Recession, which determined important capital
outflows, resulting in a forced, severe and prolonged adjustment.
However, there can be noticed the stabilization of the YoY dynamics of the
Romanian potential GDP in 2012 and an inflexion in 2013. In 2014, the potential
GDP in Romania rose by around 2.9% YoY, the highest level of the past 5 years,
according to my estimates.
308
Figure 4. Potential GDP (Romania vs. Euro Area) (%, YoY)
5
4
3
2
1
0
96
98
00
02
04
06
POTENTIALGDPEUROAREA
08
10
12
14
POTENTIALGDPROMANIA
(Source: own estimates based on the method described in the previous chapter)
This evolution primarily reflects the strong dynamics of the exports, but
also the performance of the agriculture output, in a context of a positive
evolution of the labour supply (also influenced by the labor market reforms). At
the same time, since 2014 this evolution also reflects the inflexion of the fixed
capital formation (up by 1.4% YoY during 4Q 2014, according to the Statistics
Office).
In the Euro Area the YoY potential GDP was on a downward since 1999
(the year the EUR was launched), as the economic divergence among the
member countries intensified after the creation of the European Monetary Union.
The severe adjustment process in the context of the waves of the Great
Recession determined the stabilization of the YoY potential GDP in 2011-2012
(at around 0.6%). Since 2013 it gradually increased, to 0.8% YoY in 2014,
according to my estimates.
Consequently, the difference dynamics (Romania-Euro Area) in terms of
YoY potential output rose to 2.1 percentage points in 2014, the highest level of
the past 4 years, reflecting the gradual convergence of our economy towards the
Euro Area. However, I underline here that this differential has space to climb
towards the pre-crisis level (an annual average of 2.8 percentage points for the
period 2005-2008).
309
5. CONCLUSIONS
According to the current analysis Romanian economy seems to have restarted the real economic convergence process towards the Euro Area. This is
also reflected by the dynamics of the GDP/Capita in Romania (as a weight of the
Euro Area level, at over 52% in 2014), as can be noticed in the figure 5.
However, I point out that this process of convergence should accelerate in
the mid-run in order to contribute to a positive performance of Romania in the
Euro Area. For this to happen I mention the importance of the sustainable relaunch of the gross fixed investments, especially in the fields with important
potential in Romania: IT&C, infrastructure (road, railways, health, education,
etc).
At the same time, I underline that Romania needs a sustainable convergence
in the mid and long-run. In other words, the economy should avoid accumulating
other important deficits in the future development phase.
Figure 5. GDP/capita in Romania (% Euro Area)
(Source: own estimates, based on Eurostat Database)
Concluding, is seems that in order to join the Euro Area in 2019 Romania
has to accelerate the development and convergence in the following quarters. In
this context, the signals issued recently by NBR are in the right direction:
Romania needs a Roadmap and further structural reforms.
In my view, now is the right period for accelerating the convergence
towards the Euro Area in a sustainable way, also by promoting in the public and
private sector the spirit of the real economic convergence.
310
References
[1] Eurostat Database.
[2] Hodrick, R., Prescott, E. (1997). Postwar U.S. Business Cycles: An Empirical
Investigation. Journal of Money, Credit and Banking, vol. 29, issue 1, 1-16.
[3] IMF Database.
[4] Isarescu, M. (2015). Opening Speech at the 2015 COFACE Conference. Retrieved
from http://www.bnro.ro/Opening-speech-delivered-at-the-2015-COFACE-CountryRisk-Conference-12253.aspx
[5] Romanian Government (2015). Convergence Programme 2015-2018. Retrieved
from
http://discutii.mfinante.ro/static/10/Mfp/pdc/programconvergenta20152018.pdf
[6] Statistics Office Database.
311
THE RECENT CRISIS OF SWISS FRANC LOANS IN THE
EUROPEAN COUNTRIES
IRINA SAV
Tomis University of Constanta
Constanta – Romania
[email protected]
Abstract
In which manner has the Switzerland decision surprised the world and why did it affect
the European countries?
The Swiss National Bank´s decision adopted in January this year to remove the Swiss
franc´s cap against the euro has sent shockwaves through global economy.
The unexpected decision to scrap its minimum exchange rate is threatening to stimulate
a rise in bad debt as the move raises the cost of paying off loans in francs, including
mortgages.
This financial move has had, and will continue to have, an impact both on the Swiss and
the euro area economies: the system that has been in place is described briefly below as
well as the consequences of the Swiss National Bank’s decision.
Swiss franc loans, including mortgages were hugely popular in emerging Europe in the
run-up to the financial crisis and several countries still have large retail exposures in the
currency. In Poland and Croatia, household debt in Swiss francs amounts up to 8% and
7.2% respectively of the Gross Domestic Product, while in Romania it stands at 4.3% of
total lending.
Keywords: Foreign currency loans, CHF-denominated loans, exchange rates, credit
risk
JEL Classification: E5
1. THE SYSTEMIC RISK IN EUROPEAN COUNTRIES RESULTING
FROM FOREIGN CURRENCY LOANS
The recent global crisis has shown that a shock that originates in one
country or asset class can quickly propagate to other markets and across borders.
Foreign currency loans are remarkably prevalent in Europe. The European
household sector, especially, is borrowing in foreign currencies.
The foreign currency loans are normally marketed to middle or low-income
earners in small or transition economies, recently been liberalized, with unstable
currency or where the currency lacks credibility – and/or where interest rates are
312
high. The banks issuing the loans are often, but not always, foreign banks,
operating in a weak legal environment with weak or no customer protection.
While borrowing in a foreign currency offers some immediate benefits—
such as lower interest rates and longer maturities—for the non-banking sector,
these loans also carry a significant exchange rate risk.
Before the onset of the financial crisis, European households and nonfinancial firms were borrowing heavily in lower-yielding foreign currencies to
finance their home mortgages or business investments, even though they did not
necessarily have a steady income in the currency concerned. While doing so,
they expect the domestic currency to continue to appreciate itself as it did in the
past, a recurring violation of the uncovered interest parity condition.
Five years after the financial crisis, banks still hold a substantial amount of
foreign currency loans to unhedged borrowers on their balance sheets. This
column quantifies the systemic risk that these foreign currency loans pose to the
European banking sector (Yeşin, 2013).
The European Systemic Risk Board (ESRB), as an independent European
Union institution monitoring financial stability within the European Union,
recognized the systemic risk that foreign currency loans possess to European
banking sectors and made an official suggestion on lending in foreign currency,
especially by Swiss Franc (CHF- ISO currency code for the Swiss franc) loans,
on November 22, 2011.
The European Systemic Risk Board settled the following:
A. Foreign currency lending to unhedged borrowers has increased in a
number of European Union Member States.
B. Excessive foreign currency lending may produce significant systemic
risks for European Member States and may create conditions for negative crossborder spillover effects.
It is very difficult to separate and identify the aggregate systemic risk
arising from all foreign currency loans and the particular systemic risk resulting
from CHF loans in Europe.
The Figure 1 shows by institutional sectors the breakdown of Swiss Franc
Loans to the Non-Banking Sector (2011, Q3).
The approach between euro-area countries and non-euro area is obvious,
although we encounter exceptions in both areas.
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While policymakers in Europe repeatedly showed their disquiet concern
regarding the systemic risk created by foreign currency loans, there is a lack of
studies regarding the precise measurement of this systemic risk. The previous
studies cannot answer questions such as the following:
• What is the magnitude of the systemic risk for European banking sectors
arising from foreign currency loans to the non-banking sector?
• To what extent would the banking sectors’ balance sheets be affected if
the unhedged non-banking sector could no longer service its foreign currency
debt because of a sudden exchange rate movement?
• As perceived by policymakers and the general public, is the CHFdenominated loan the main driver of a systemic risk in certain countries?
The following figures highlight the evolution of foreign currency loans, as a
percentage of total loans in Europe between 2011 - 2013:
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The compiled data suggest that the prevalence of CHF lending varies
powerfully both among proximate and emerging countries in Eastern Europe.
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Systemic events typically involve a combination of self-reinforcing asset
and funding shocks which then spill-over to banks in other countries.
Subsequently, the inevitable occurred.
The public dissension on Swiss franc - denominated loans started on 15
January 2015, when the Swiss National Bank removed the 1.2 EUR/CHF floor,
which led to the immediate and significant appreciation of the Swiss franc
against the euro, the US dollar and other currencies.
The decision adopted by the monetary authority of Switzerland took into
account the fact that the floor – implemented in September 2011, when the
Swiss franc was substantially overvalued against the euro – had become
increasingly difficult to keep in place given the quantitative easing initiated by
the European Central Bank and the significant capital inflows into Switzerland.
Due to the small size of the local financial market, against the background
of foreign capital inflows, the Swiss franc tends to strengthen significantly
versus other currencies in times of turmoil on international markets (Isărescu,
2015).
2. THE SYSTEM PRECEDING THE DECISION OF SWISS NATIONAL
BANK
Exchange rates play a vital role in a country’s level of trade, which is
critical to most every free market economy in the world. For this reason,
exchange rates are among the most watched analyzed and governmentally
manipulated economic measures.
Because a currency fluctuation can have impact on real economy, a
country’s central bank might decide to impose a cap on how much its currency
can appreciate and/or depreciate and – whenever the cap risks being breached –
commit to buying or selling foreign currency to push the value of its currency in
the opposite direction.
Switzerland has had the lowest interest rates in Europe for a long time due
to the strength of the Swiss franc. Therefore, borrowing in Swiss currency
seemed advantageous.
Professional and monitored short-term borrowing in a limited way was
risky but it could be paid.
However, local and international banks introduced a widespread practice of
suggesting that private individuals should have mortgages in Swiss francs,
especially in Central European countries such as Hungary, Austria, Croatia,
Poland, Romania and others. The low interest rates appeared attractive and the
risk of a rising Swiss Franc was considered marginal.
Hungary’s embrace of the franc was the most extreme in the region—at its
peak in 2009, borrowing in foreign currencies summed up to more than 70% of
household debt. But others also indulged. In Poland, the region’s largest
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economy, regulators began limiting loans in foreign currencies before the crisis;
by 2009 they made up 38% of household borrowing. They have been dropping
steadily ever since, as banks stopped offering foreign-currency mortgages,
borrowers who became much more aware of the risk and existing loans were
slowly paid down. Foreign-currency loans now come to 30% of household debt,
helped by low interest rates which make local-currency borrowing more
attractive. The trend is the same across central Europe. “Within four or five
years, the problem will largely go away,” says Krzysztof Pietraszkiewicz, head
of the Polish banking association.
The Austrian and Italian banks that had been the most eager dispensers of
foreign-currency loans across central Europe passed the European Banking
Authority’s the stress tests, as did the largest Hungarian and Polish banks. But
Marek Belka, governor of the National Bank of Poland, points out that the stakes
for the banks are high. The Polish banking supervisor has estimated that a forced
conversion of franc loans to zloty at an artificially low rate could cost them as
much as $13 billion. The franc-denominated mortgages are also among their
most solid assets: less than 3% of them are in arrears - in Hungary, the
proportion is closer to a quarter (The Economist, 2014).
Other EU countries’ steps to resolve the issue of CHF-denominated loans
show that the adopted solutions differed based on the specifics of these loans in
each and every state.
First time, Switzerland’s Central Bank decided to impose such a cap on the
franc in 2011: during the global financial crisis many investors perceived the
Swiss franc as safe and purchased large amounts to protect themselves from the
market turmoil in the United States and the European Union. The increasing
demand for Swiss francs led to its appreciation: from CHF 1.67 to the euro in
2007, the franc reached 1.02 in 2011. This made Swiss goods and services more
expensive and less competitive than those of other countries.
In the summer of 2011, franc was worth more than today. To protect its
currency from being overestimated, and, in addition, to protect Swiss export
industry, tourism, and other major industries, the Swiss National Bank decided
to peg its franc to euro at the level of at CHF 1 for EUR 1.2, and to redeem the
excess which would have occurred on the market. During 2011 to
2014, Switzerland “spent” EUR 450 billion to defend its franc.
Although this move increased investors’ confidence and protected Swiss
exporters from the loss of competitiveness resulting from further appreciation, it
came at a price.
The Swiss National Bank began a foreign currency purchase programme in
September 2011 to avoid further strengthening of the Swiss franc. The problem
of outstanding credits in Swiss francs in Central Europe was ‘forgotten’ but new
lending continued.
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The Swiss National Bank maintained the cap by printing francs and buying
euros in the market, and the result was that its balance sheet expanded
significantly, with currency reserves rising up to 80% of GDP in 2014. As can
be seen in figure 1, maintaining the ceiling has enabled the franc-euro exchange
rate to be held steady for more than three years, whereas the effect of
abandoning it has been immediate and significant (Delivorias, 2015).
But when the Swiss National Bank announced the end of its purchasing
programme on January 15, 2015, the Swiss franc rose dramatically against the
euro and against other Central European currencies. The problem was back and
even bigger.
The question being raised is: why this precise moment to adopt such an
impactful decision?
Dollar has begun to grow vertiginously in relation to EUR, meaning that
450 billion EUR redeemed by the Swiss in the past few years has been losing its
value in relation to the world currency number 1 – dollar, even by several per
cents on a daily basis.
At the same time, rouble has begun to fall vertiginously, and wealthy
Russians figured that buying Swiss currency was not a bad idea. Moreover, their
actions created additional pressure to the context.
On the top of this, the European Central Bank got the green light to begin
“printing” fresh EUR 500 billion, which additionally impaired EUR in relation
to the major world currencies, and above all, the american dollar.
To sum up, reviewing the facts lead us to some important features:
Switzerland was confronted to significant challenges: a strong franc may slow
down economic growth by harming exporters, diminishing the competitiveness
of Swiss products versus European products and reducing the number of tourists
visiting the country. Additionally, it will expose the Swiss National Bank to
sizeable losses on its assets, since a predominant part of them is denominated in
euros.
Given the above mentioned triggers, let’s consider the repercussions to the
region of Central and Eastern Europe.
3. REACTIONS AND CONSEQUENCES ON THE EUROPEAN UNION
FINANCIAL MARKETS
Understanding the context in which the CHF crisis occurred leads us to
considering its repercussions to the Central and Eastern Europe area.
Housing loans, among other loans in countries like Poland, Austria,
Hungary, Croatia, Romania, will become more expensive related to their
referential value.
The measures taken by other European Union Member States in order to
deal with the challenges posed by CHF-denominated loans show that the
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solutions were different according to the special features of such loans in each
country.
The considerable CHF appreciation in early January 2015 has entailed
measures tailored to the particular features of each country.
In some EU Member States however, the decision raised more concerns,
since it affected not only the private sector but also a number of households
which have contracted CHF denominated loans with the aim of benefitting from
low interest rates:
• Austria - The total CHF loans in Austria amount to EUR 29 billion of
which EUR 21 billion are CHF mortgages. The mortgage exposure is relatively
small at 7% of total loans. There has been a lot of noise regarding to the
government’s efforts to mitigate the negative impact of CHF appreciation on
borrowers. The latest plans, however, are relatively mild compared to earlier
reports (e.g. forced conversion at historical rates). There should not be a forced
conversion. The support for CHF borrowers should only consist of relatively
mild steps, such as the increase of maturity.
• Polish authorities recommended the commercial banks to come up with
solutions to cut down on debtors’ debt service. In Poland, the number of CHF
borrowers exceeds 500.000 (a more accurate estimate 580.000 households have
CHF-denominated loans). Even if, as stated by the chief economist of ING in
Poland, the appreciation should have limited impact on GDP growth (-0.1%),
some politicians have already proposed adopting a support plan for the
concerned households, if the exchange rate remains at those levels for a longer
period.
Against the background of the sharp strengthening of the Swiss franc,
Polish authorities recommended credit institutions to come up with solutions in
order to translate the decline in CHF money market rates into a reduction in
debtors’ interest costs on a fast-track procedure (National Bank of Poland,
2015);
• Croatia introduced a fixed exchange rate of the kuna (HRK) against the
Swiss franc.
The Croatian government opted for the fixing of the Swiss franc at 6.39
kuna for as long as one year. The fixed exchange rate is on a par with the one
before 15th of January 2015, when the Swiss National Bank decided to
discontinue the minimum exchange rate of CHF at 1.20 per euro.
Commercial banks had earlier proposed a similar solution, i.e. a threemonth freeze on the CHF/HRK exchange rate at the level recorded before 15
January 2015.
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• The Hungarian authorities took over much of the effort of managing the
consequences of the developments in the CHF/HUF rate, as CHF-denominated
loans account for approximately 50% of local government borrowings (Isărescu,
2015).
Until recently, Hungary had been the most exposed country in Europe.
Hungary has solved the majority of its problems. A populist measure, retroactive
exchange rate return to 2008 period has enabled the Hungarians to be discharged
with almost 30 per cent discount. However, at the same time, such measure has
decimated Hungarian banks, gross national income has vertiginously fallen, and
unemployment has reached its historical maximum value.
In January 2015, The Hungarian government was not going to interfere
with the management of the impact of CHF appreciation on borrowers in this
currency. The authorities considered that the problem should be dealt with by
debtors and credit institutions, and the government should merely act as a
mediator in these negotiations. Such an approach differs a great deal from the
solutions implemented in the past, when the authorities made broad-based,
hands-on interventions.
On June 27, 2013, The European Commission launched an infringement
procedure against Hungary for this limitation on eligibility for foreign-currencydenominated mortgages on the grounds that it violated the European Union
principle of the free movement of capital (Lambert, 2015).
• In Greece, around 65 000 households have contracted loans in CHF with
losses estimated at 800 million euros. Even though the number is small (those
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loans represented only 5% of total house loans in 2013), the potential inability of
households to service them as a result of the poorer exchange rates will increase
Greek banks' non-performing loans and worsen their already fragile state;
• In Serbia the numbers are around EUR 1 billion of mostly housing loans
and around 100.000 affected people. A great majority of borrowers in Swiss
francs have had difficulties in the payment of their monthly liabilities. After
franc strengthening, the majority de facto, and in accordance with the NBS
regulations, become insolvent. Their loans have additionally grown in relation to
euro, their salaries have mostly remained the same or decreased, and the value of
purchased real estate has, in most cases, fallen.
All the affected countries are looking for ways to ease the burden on a
relatively small number of affected households, which are facing hefty
additional costs since the appreciation of the Swiss franc. As deep as the shock
may be, the situation today is manageable and no longer possess a systemic risk
in any of the countries where The European Bank for Reconstruction and
Development (EBRD) invests (Mohácsi , 2015).
Today the main danger is the amplified political cost of this issue, which –
as the past few days has illustrated – has mainly symbolic significance and thus
can still generate panic reactions and make headlines. Due to this amplified
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political cost it may be the time for solutions to be found, in coordination with
the banking industry, in order to settle the situation once and for all.
4. THE CASE OF ROMANIA
In recent years, the Swiss franc (CHF) has increasingly been used as the
currency of denomination for private sector lending in several European
countries, including Romania.
During the 2000s, foreign denominated loans, mostly in euros and Swiss
francs were very popular in Romania.
Since 2005, foreign currency loans in Romania became more attractive than
the local currency.
Swiss francs loans was an apparently cheap alternative for long-term
funding, with banks charging an annual interest rate of around 4%, whilst annual
euro
interest
rates
rarely
fall
below
6%.
The nominal interests on loans in Swiss francs varied from 3.9% a year to 6% a
year. In comparison, interest rates on euro loans started from 5.7% and can
climb up to 9% a year (Chiru, 2007).
The main competitors on the Romanian loan market in CHF currency were:
OTP Bank, Raiffeisen Bank, Volksbank, Credit Europe Bank, Piraeus, OTP
Bank, Banca Romaneasca and Bancpost, in addition to Porsche Bank, which is
specialised in auto funding. The interest rate difference was apparently in the
value of the installment, allowing the customers to receive higher value loans.
If the same sum was borrowed in both currencies (euros and CHF) the total
amount a client had to repay was considerably lower in Swiss francs than in
euros. Whereas a mortgage taken out in euros over a twenty-year period came
with an interest rate that ultimately equals the value of the initial loan, the
amount in Swiss francs is lower.
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Unlike other countries in Central and Eastern Europe, the Swiss franc loans
situation is less severe in Romania, where roughly 4.3 percent of household
loans are denominated in Swiss francs. However, the financial authorities are
also studying ways to deal with this concern that affects some 75.000 borrowers.
Romanian officials held several meetings with commercial banks and the central
bank, as well as a special parliamentary session.
Unfortunately, the expected results are being delayed to produce, in total
disadvantage to the high number of borrowers. The franc's growth against RON
comes as a result of international market movements, with major investors
seeking the safety of Swiss assets. Thus, the franc stands at all-time highs
against the euro and this indirectly translates into the exchange rate to
RON. Some clients are now mulling over changing the borrowing currency, but
they are in for surprises.
The magnitude of the problem for the whole banking system is not large,
the central bank has said. However, the concentration of most of the CHF loans
on six of Romania's 42 commercial banks indicates that these particular financial
institutions - among which OTP and Volksbank probably hold the highest share
of CHF loans - might represent a problem.
“The measures the National Bank of Romania can take in order to influence
the exchange rate of the domestic currency against the Swiss franc are limited.
The CHF/RON exchange rate is set indirectly. The euro is Romania’s reference
currency on the FX market, given the intensity of the country’s trade with euro
area states, the EU membership and Romania’s intention to adopt the euro in the
future. The EUR/RON exchange rate is the result of the foreign currency
demand and supply generated by trade and financial flows, while the CHF/RON
exchange rate is determined indirectly depending on the EUR/RON and
EUR/CHF exchange rates. The developments in the EUR/CHF exchange rate
depend on the foreign currency demand and supply between the euro area and
Switzerland, Romania having no influence on its quotation. The EUR/RON
exchange rate is relatively stable and it reflects the favorable performance of
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fundamentals. The recent depreciation of the RON against the CHF is therefore
entirely attributable to the appreciation of the CHF versus the EUR, USD and
other currencies, as a result of the Swiss National Bank removing the 1.2 floor,
following the European Central Bank’s quantitative easing decision.
The NBR’s intervention to bring the CHF/RON exchange rate back to the
14 January 2015 level is not possible, as the international arbitrage does not
allow that only the CHF/RON exchange rate be influenced, while keeping
unchanged the exchange rates of the RON versus the other currencies” (Isărescu,
2015).
The options currently under consideration include rescheduling loans,
converting loans to the rate when the contract was signed, widening tax credit
for borrowers and introducing a new personal bankruptcy law that could better
protect borrowers. Some Romanian banks have also taken precautionary
measures such as temporarily freezing the exchange rate for loans in Swiss
francs and applying cuts to their franc interest rates.
The worry of borrowers increases, even if the central bank governor states
that:
“The situation generated by the CHF appreciation should be approached
rationally, rather than emotionally.
CHF-denominated loans were almost exclusively taken by individual
borrowers. These loans account for around 10% of total loans to households, and
the number of individuals with CHF-denominated loans (75,412) account for
2.1% of the total number of individual borrowers. In comparison, in Poland, the
number of CHF borrowers exceeds 500.000.”
Credit risk associated with CHF-denominated loans is relatively higher
compared with other currencies. In November 2014, the NPL ratio on household
loans in CHF stood at around 12% versus 9.4% for all foreign currencydenominated loans to households, yet the dynamics were similar to those of
foreign currency-denominated loans overall.
The removal of non-performing loans from the balance sheets has led to
negative profitability of the banking system, with credit institutions incurring net
losses worth around EUR 1 billion in 2014.
Therefore, Romanian financial authorities must identify solutions that
would fit the own situation. NBR took several measures regarding the foreign
currency lending.
The NBR has implemented at an early stage a mix of measures to deter the
unsustainable increase in foreign currency lending. The measures envisaged: 1/
the monetary policy, 2/ the prudential regulation, 3/ the prudential supervision,
4/ public warnings, and 5/ implementing the recommendations of the European
Systemic Risk Board (ESRB) on lending in foreign currencies.
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The main representatives of the banking system believe that two types of
solutions may be considered:
1/ Unrealistic solutions, such as:
a) Conversion of CHF-denominated loans into RON at different exchange
rates than the market exchange rate applicable on the conversion date, thru
assuming a credit conversion at the historical rate in the month of extending the
credit. The commercial banks would incur losses calculated as the difference
between the exchange rate on 23rd of January 2015, (i.e. 4.58, and the historical
CHF/RON rate estimated at lei 5.66 billion or credit conversion at the historical
rate + 20%), worth around RON 4.5 billion for the entire banking sector;
b) Conversion of CHF-and EUR-denominated loans into RON at exchange
rates other than the market exchange rate applicable on the conversion date.
2/ Realistic solutions such as:
The implementation of customized solutions, negotiated between the
directly involved parties in the credit agreement (i.e. the credit institution and the
borrower).
The National Bank of Romania also recommends:
a) Converting CHF-denominated loans into RON at the market exchange
rate and/or granting a discount on the debt service amount – which may be
tantamount to a conversion at an exchange rate below the market rate;
b) Temporary cut in the interest rate on CHF - denominated loans in order
to offset the impact of the stronger CHF. This may actually be a valid option,
given that both the benchmark rate of the Swiss National Bank and the CHF
market rate have reached negative values;
c) Implementing a debt rescheduling scheme, with the award of
compensation by the State.
Today, the CHF loans for many borrowers remain an unsolved problem.
The following months are decisive for people who have borrowed in CHF.
Transilvania Bank adopted valid solutions on loans in CHF for the clients
of Volksbank Romania (Transilvania Bank has purchased Volksbank Romania
and its clients portfolio) : “ to stop calculating the risk fee with respect to the
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clients currently included in the portfolio of Volksbank Romania, who signed
agreements stipulating such a fee; refunding the amounts already charged on
account of such fee, in stages, by diminishing the outstanding principal;
reductions for clients who choose to convert their CHF loans in RON or EUR
and the extension by one month (until May 17, 2015) of the decision regarding
the freeze of the CHF exchange rate at the level valid on 31.12.2014. Starting
from 4.05.2015, a reduction of 22.5% will be available in the units of Volksbank
Romania for all the clients who intend to convert their CHF loans in RON or
EUR. The risk fee will also be added to this reduction percentage, on a case by
case basis. Thus, a number of 18,300 clients of Volksbank Romania may benefit
from the solution provided by Transilvania Bank” (Ciorcila et al., 2015).
In addition, OTP Bank Romania reduced by 1.5pp the interest rate on CHF
loans, effective for next three months for its CHF debtors but this aid is given
temporarily and unpromising.
The CHF Romanian borrowers perseveringly continue their protests,
demonstrating excellent organization and announcing that they are going to
diversify their actions against banks.
5. CONCLUSIONS
1/ Foreign Currency lending is not a bad option– it can fill a gap caused by
less affordable domestic alternative or constrained access to domestic long term
funds, but one needs to consider when it could be appropriate:
- The availability of liquid currency (access to liquidity lines, long term
funds);
- A real risk sharing mechanism;
- A stable exchange rate – no “exotics”;
- Not used for speculative purposes;
- The avoidance of risk layering.
2/ Both Central and Commercial banks need to clarify before granting loans
in foreign currencies: what is the role of foreign currency loans in the financial
market? How they could develop a domestic currency alternative and above all,
which is the best option for optimizing the protection of foreign currency
lending consumers?
3/ Recent studies also identify heightened risks and correspondingly high
costs associated with CHF loans to unhedged borrowers at an international level,
particularly in non-euro area countries.
4/ Another concern that should occupy the agendas of the financial
authorities relate to Individuals ‘ substantial foreign currency indebtedness rate
and the adverse movements in the future exchange rates of several currencies. It
is mainly about the strong appreciation of the CHF and the US dollar, as well as
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the uncertainties surrounding the euro exchange rate. That makes it even more
difficult for a number of borrowers to repay their debt.
5/Commercial Banks that have issued loans denominated in Swiss francs
must find solutions together with their customers. The solutions will probably be
different from one case to another.
And still, the problem remains and persists.
References
[1] Chiru, L. (2007). Ziarul Financiar 25 iulie 2007;
[2] Ciorcila, H.,Chairman of BT’s Board of Directors and Ömer Tetik, BT’s CEO,
Press release (2015), The message from Banca Transilvania regarding the
acquisition
of
Volksbank
Romania,
Retrieved
from:
https://www.bancatransilvania.ro/en/bt-social-media-newsroom.
[3] Delivorias, A., Members’ Research Service, European Parliamentary Research
Service Swiss decision to discontinue its exchange rate ceiling, Retrieved from:
http://www.europarl.europa.eu/EPRS/EPRS-21 January 2015;
[4] Isărescu, M. (2015). Issue of CHF-denominated loans, Presentation by Mr. Mugur
Isărescu, Governor of the National Bank of Romania, in front of the Budget and
Finance Parliamentary Commission, Bucharest;
[5] Isărescu, M., Analysis on CHF-denominated loans, press conference held on 30
January 2015?
[6] Isărescu, M. (2015). Issue of CHF-denominated loans, Presentation by Mr. Mugur
Isărescu, Governor of the National Bank of Romania, in front of the Budget and
Finance Parliamentary Commission;
[7] Lambert, S., The Orange Files, Orbán Administration Measures to Reduce
Household Foreign-Currency Debt, Retrieved from: http://theorangefiles.hu, 31
January 2015;
[8] Mohácsi Nagy, P. (2015), The European Bank for Reconstruction and
Development, The Swiss franc and eastern Europe;
[9] Official Journal of the European Union (2011). Recommendation of the European
Systemic Risk Board of 21 September 2011 on lending in foreign currencies
(ESRB/2011/1), Retrieved from: http://eur-lex.europa.eu;
[10] The Economist (2014) –Hungary’s government gives struggling borrowers a
break, Retrieved from: http://www.economist.com/news/finance-and-economics;
[11] Yeşin, P., Senior Economist, Swiss National Bank (2013). “Foreign-currency loans
and systemic risk in Europe”,VOX CEPR's Policy Portal, Web page. Retrieved
from:
http://www.voxeu.org/article/foreign-currency-loans-and-systemic-riskeurope.
327
THE MAJOR RISKS IN IMPLEMENTING NEW BANKING
PRODUCTS
MARIUS GEORGE TASCA
BRD Groupe Societe Generale
Iasi, Romania
[email protected]
Abstract
Risk management is so important in helping the bank to grow while keeping an eye on if
something goes wrong.
The perception of risk management changed within today’s institutions. It is used as a
critical input into the question if the incomes will be in plus for the additional risks we
are taking into consideration.
Risk management function in banks has evolved significantly in current times: from an
independent unit assessing risk to a credit culture that needs to be taking into
consideration by all.
The notion of risk has moved beyond the traditional measures like credit, market, and
operational to corporate governance risk, fraud risk, reputation risk, etc.
New banking products developed on the Internet platforms provides benefits to the
consumer in terms of convenience, and to the banking in terms of cost reduction.
The Internet itself however is not such a secure place, and this problem of risks
concerned all the banking industry from regulators and supervisors of banks up to
financial institutions it selves.
Keywords: Risks, banking products, on-line transactions
1. INTRODUCTION
Risk management is a very important part of helping the bank to grow
while keeping very close to the business if something goes wrong in the
industry. This could be various factors such as a great recession, a stock market
crash or internal factors such as fraud, no IT solutions to new products, etc.
Risk management assumes importance considering the economic crisis
which hit the banks and more importantly the clients.
The core business of a bank is to manage risk and provide a return to the
shareholders in line with the accepted risk profile.
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We don’t know all the risks that are around us, and we can’t manage them if
they hit us. This makes risk management an integral and necessary part of all
banks that are exposed to domestic and cross-border risks. Even risks from
unstable political and dynamic regulatory environment have become
unpredictable, as they brought the importance of internal controls and risk
management.
Banking institutions can be tempted to take bigger risks to generate
maximum profits on the short term, especially during the upturn of the economic
cycle.
The identification of risks is very important for the bank’s market, credit,
operations, reputation etc - it is particularly critical in managing credit risks. The
ability of banks to be able to provide the right solution is largely dependent on
the correct prognosis. Banks need to approach with their clients in cases of after
risk problems.
The regulatory environment is pushing banks to migrate to advanced
approaches under Basel III and progressively adhere to Basel IV requirements.
This necessitates adequate training of existing personnel to develop skills in the
risk domain.
2. THE RISKS ASSOCIATED TO IMPLEMENTATION OF NEW
BANKING PRODUCTS
As the crisis passes by, banks changed from just using internet networks to
a new area of delivering a wide range of new products and services.
With the popularity of internet, mobiles and new telecomunications
systems, pople easy access Internet, and they are expecting a new range of
banking products or the actual products but available on line (Calisir et al.,
2008). This form of banking is generally referred to as Internet Banking.
Banking on the Internet provides benefits to the consumer in terms of
convenience, and to the provider in terms of cost reduction.
The rapid changes in information technology, there is no finality either in
the types of risks or their control measures and risk management strategies
(Edelman et al., 2007).
The main risks of implementing these new banking products can be
classified into many categories such as: security risks, legal risks, reputational
risks, operational risks, money laundering risk, etc.
The Internet is a public network of computers which facilitates flow of data
/ information and to which there is unrestricted access and banks are using this
medium for financial transactions. Security risk arises on unauthorized access to
the bank’s information system.
329
From such an action, it may result a loss of data, disabling of a significant
portion of bank’s internal computer system thus denying service, cost of
repairing these etc.
Attackers could be hackers, employees or other persons. Also, in a
networked environment the security is limited to its weakest link.
In an external attack, banks are exposed to a security risk from internal
sources. They can manage to acquire the authentication data in order to access
the customer accounts causing losses to the bank. Unless specifically protected,
all data / information transfer over the Internet can be monitored or read by
unauthorized persons.
The risk of data alteration is real in a networked environment, both when
data is being transmitted or stored.
There are also legal risks that arises from violation of data, or
nonconformance with laws, rules, regulations, or prescribed practices, or when
the legal rights and obligations of parties to a transaction are not well
established.
A customer inadequately informed about his rights and obligations, may not
take proper precautions in using Internet banking products or services, leading to
disputed transactions, unwanted suits against the bank or other regulatory
sanctions. In the enthusiasm of enhancing customer service, bank may link their
Internet site to other sites also. An non-authorised person may use the linked site
to fraud a bank customer. A digital certificate is intended to ensure that a given
signature is, in fact, generated by a given signer.
Reputational risk is getting significant negative public opinion, which may
result in a critical loss of funding or customers. Such risks arise from actions
which cause major loss of the public confidence in the banks' ability to perform
critical functions or impair bank-customer relationship. The main reasons for
this risk may be system or product not working to the expectations of the
customers, significant system deficiencies, significant security breach both due
to internal and external attack (Durkina et al., 2008). Directly affected customers
may leave the bank and others may follow if the problem is publicized.
The operational risk, also referred to transactional risk is the most common
form of risk associated with internet banking products.
It is the form of inaccurate processing of transactions, non enforceability of
contracts, compromises in data integrity, data privacy and confidentiality,
unauthorized access / intrusion to bank’s systems and transactions etc. Such
risks can arise out of weaknesses in design, implementation and monitoring of
banks’ information system.
Banks manage massive amounts of data, which makes their technology
requirements quite complex and makes them a target-rich environment for fraud
or cyberattacks. Many large banks grew through acquisitions and as a result have
330
pieced-together legacy systems, which require significant investment to
integrate, update, and protect.
As Internet banking transactions are conducted remotely (the client is not
presented in person at the bank office), banks may find it difficult to apply
traditional method for detecting and preventing undesirable criminal activities.
Application of money laundering rules may also be inappropriate for some forms
of electronic payments. Thus banks expose themselves to the money laundering
risk. This may result in legal sanctions for non-compliance with “KYC-know
your customer” laws.
Internet banking is based on technology that, by its very nature, is designed
to extend the geographic reach of banks and customers (Aladwani, Adel M.,
2009). Such market expansion can extend beyond national borders. This causes
various risks. It includes legal and regulatory risks, as there may be uncertainty
about legal requirements in some countries and jurisdiction ambiguities with
respect to the responsibilities of different national authorities. Such
considerations may expose banks to legal risks associated with noncompliance
of different national laws and regulations, including consumer protection laws,
record-keeping and reporting requirements, privacy rules and money laundering
laws. If a bank uses a service provider located in another country, it will be more
difficult to monitor it thus, causing operational risk.
Traditional banking risks such as credit risk, interest rate risk or market risk
are also present in Internet banking. These risks get intensified due to the very
nature of Internet banking on account of use of electronic channels. However,
their practical consequences may be of a different magnitude for banks and
supervisors than operational, reputational and legal risks.
Presently, banks generally deal with more familiar customer base (Agarwal
et al., 2009). Facility of electronic bill payment in Internet banking may cause
credit risk if a third party intermediary fails to carry out its obligations with
respect to payment. Proper evaluation of the creditworthiness of a customer and
audit of lending process are a must to avoid such risk.
Internet banking is going to intensify the competition among various banks.
The open nature of Internet may induce a few banks to use unfair practices to
take advantage over rivals. Any leaks at network connection or operating system
etc., may allow them to interfere in a rival bank’s system.
Internal controls over Internet banking systems should be commensurate
with an institution’s level of risk. As in any other banking area, management has
the ultimate responsibility for developing and implementing a sound system of
internal controls over the bank’s Internet banking technology and products.
The different levels of complexity associated with certain areas involving
security, operations, planning, and monitoring have caused many national banks
to outsource all or parts of their Internet banking operations. Banks should
331
periodically reassess their sources of technology support to determine whether a
given solution continues to fit their business plan and is flexible enough to meet
anticipated future needs.
3. CONCLUSIONS
The past few years have been characterized by rapid changes in technology
and the introduction of corporate and retail banking services through the Internet
channels. The speed of new technologies, the global nature of electronic
networks, the integration of e-banking platforms with legacy systems and the
increasing dependence of banks on third party information service providers are
amplifying the magnitude of risks to which banks are exposed.
Many banks have assumed that Internet banking primarily increases
information security risks and have not sufficiently focused on the effect on
other banking-specific risks.
Most Internet banking customers will continue to use other bank delivery
channels. National banks will need to make certain that their disclosures on
Internet banking channels, including Web sites, remain synchronized with other
delivery channels to ensure the delivery of a consistent and accurate message to
customers.
Along with the benefits, Internet banking carries various risks for bank
itself as well as banking system as a whole. The rapid pace of technological
innovation is likely to keep changing the nature and scope of risks banks face.
These risks must be balanced against the benefits. Supervisory and regulatory
authorities are required to develop methods for identifying new risks, assessing
risks, managing risks and controlling risk exposure.
Now as before the crisis, banks need to earn an attractive risk-adjusted
return for their shareholders, but this is yet more difficult given new regulations,
and the state of the global economy. As a result, they are exploring new lines of
business, new products and markets, which bring with them new sources of
strategic and operational risk.
References
[1] Agarwal, R., Sanjay, R., Ankit, M. (2009). Customers perspectives regarding ebanking in an emerging economy. Journal of Retailing and Consumer Services,
vol. 16, issue 5, 340-351.
[2] Aladwani, Adel M. (2001). Online banking: a field study of drivers, development,
challenges, and expectations. International Journal of Information Management,
vol. 21, issue 3, 213-225.
[3] Calisir, F., Cigdem, A.G. (2008). Internet banking versus other banking channels:
Young consumers’ view. International Journal of Information Management, vol.
28, issue 3, 215-221.
332
[4] Durkina, M., Deirdre, J., Gwyneth, Mulholland, Stephen Worthington, (2008). Key
influencers and inhibitors on adoption of the Internet for banking. Journal of
Retailing and Consumer Services, USA.
[5] Edelman, A., Longcope, D., Miller, J., Obbink, K., Oudshoom, J. & Wolff, R.
(2007). MSU Information Technology Strategic Plan. Montana State University.
333
PRESENT ACTIONS TO IDENTIFY THE OPTIMAL EU
BANKING REGULATION
MIHAELA TOFAN
University Alexandru Ioan Cuza, Faculty of Economics and Business
Administration
Iasi, Romania
[email protected]
Abstract
The need for common rules of law for banking activity and credit institutions is fully
justified in the present time. Without specific regulation on full banking union, the banks
act in their operation accordingly to national rule of law, widening the differences
among internal banking systems. The papers presents the conclusions of the Green
Paper on shadow banking from 2012, which determined the EP resolution on the need to
ensure greater transparency and stronger supervision. Also, the Commission position is
analyzed, considering the highlighted issues in its communication in 2013 on
strengthening transparency of securities financing transactions. The papers presents the
measures to enhance financial stability within the Union, better integrate financial
markets, facilitate the orderly resolution and recovery of the group, enhance the crossborder provision of services and the establishment in other Member States, reduce
distortions of competition and prevent regulatory arbitrage. The Regulation proposal
launched in autumn 2014 refers to the adoption of measures for the approximation of
national provisions aiming at the uniform rules on banks’ structures.
Keywords: regulation, banking activity, EU, banking union
JEL Classification: K22, K39, K40
1. INTRODUCTION
In respond to the global financial crisis effects, states executive and legal
authorities have proposed and/or adopted reforming measures for national
banking systems. National legislation pursues domestic policy goals, which
often are different from the policy goals in other countries. At EU level, this
situation reflects in a negative way on free movement market and first of all on
capital movements and investment decisions. Lacking harmonized regulation for
full banking union, the banks develop their activities and operation accordingly
to national rule of law, widening the differences among internal banking
systems.
334
The global crisis asked for reforming banking regulation and the differences
in reform process for national legal framework postpones the implementation of
the effective banking union. The system of institutions to sustain banking union
is also jeopardized. In this context, the need for common rules of law for
banking activity and credit institutions is fully justified.
2. RECENT EU ACTIONS TO DEVELOP BANKING REGULATION
The Green Paper on shadow banking presented by the Commission on 19
March 2012 recognizes that any reinforced banking regulation could drive a
substantial part of banking activities beyond the boundaries of traditional
banking and towards “shadow banking” defined as "the system of credit
intermediation that involves entities and activities outside the regular banking
system". On 20 November 2012, the EP adopted a resolution on shadow banking
where it underlined the need to ensure greater transparency in the structure and
activities of financial institutions as well as the need for supervisors to have
knowledge of the level of shadow banking activities like repurchase agreements
and securities lending. On 4 September 2013, the Commission highlighted in its
communication on shadow banking that strengthening transparency of securities
financing transactions, such as repurchase agreements and securities lending,
other equivalent transactions and re-hypothecation will be essential to monitor
the risks associated with interconnectedness, excessive leverage and pro-cyclical
behaviours.
The EU efforts for identifying the optimal banking regulation reform
priorities continued with the Inter-service Steering Group ("ISG") on bank
structural reform, established in March 2013 with representatives from the
Directorate Generals COMP, ECFIN, EMPL, ENTR, JUST, MARKT, SG, SJ,
TAXUD and the JRC. This ISG met in March, April and September 2013 and
supported the work on the regulation proposal. The draft was submitted to the
Commission on 19 September 2013 a proposal for a regulation of the European
Parliament and of the Council on structural measures improving the resilience of
EU credit institution has been presented in autumn 2014.
The legal basis for adopting this Regulation is article 114(1) of the Treaty
of the Functioning of the European Union (the "TFEU"), which allows the
adoption of measures for the approximation of national provisions aiming at the
establishment and good functioning of the internal market.
According to the official motivation of the proposal, the uniform rules on
banks’ structures will enhance financial stability within the Union, better
integrate financial markets, facilitate the orderly resolution and recovery of the
group, enhance the cross-border provision of services and the establishment in
other Member States, reduce distortions of competition and prevent regulatory
arbitrage (Andries et al., 2014).
335
Assuming that the final text is adopted by June 2015, the proposal is
estimated to come into force accordingly to the following calendar:
• the Commission adopts the required delegated acts for
implementation of key provisions by 1 January 2016;
• the list of covered and derogated banks is published each
year, starting with mid 2016;
• the prohibition on proprietary trading becomes effective on
1 January 2017;
• the provisions on separation of trading activities from credit
institutions will become effective on July 1, 2018.
The proposal takes into consideration the evolution of financial markets and
financial innovation, on one hand, and the evolution of the Union regulatory and
supervisory frameworks, on the other. In order to ensure the effective and
consistent supervision and the development of the single rule book in banking,
this proposal strengtheners the influence of the European Banking Authority
("EBA"), awarding to this institution wider competences.
In this respect, EBA must draw reports to the Commission and is to be
consulted for adopting particular decisions, for preparation of new regulatory
and technical standards.
3. EBA PRIORITIES FOR 2015
EBA priorities 2015, as presented in EBA report for 2014, are divided in
three priority categories.
Most of the ongoing tasks are included in the third priority group and are in
accordance with the basic objectives of the EBA activities. For instance, the
following of the implementation of Regulation No 575/2013 is ongoing, EBA
supervising that By 31 December 2013, Member States have adopted and
published the laws, regulations and administrative provisions necessary to
comply with it. Member States apply those provisions from 1 January 2014.
Member States must communicate to the Commission and to EBA the text
of the main provisions of national law, which they adopt in the field covered by
this regulation. Where the documents accompanying notification of transposition
measures provided by Member States are not sufficient to assess fully the
compliance of the transposing provisions with certain provisions, the
Commission may, upon EBA' s request with a view to carrying out its tasks
under Regulation (EU) No 1093/2010, or on its own initiative, require Member
States to provide more detailed information regarding the transposition and
implementation of those provisions
The second priority task include the action by 30 June 2016, when the
Commission shall, in close cooperation with EBA, submit a report to the
European Parliament and to the Council, together with a legislative proposal if
336
appropriate, on the provisions on remuneration, following a review thereof,
taking into account international developments and with particular regard to:
(a) their efficiency, implementation and enforcement, including the
identification of any lacunae arising from the application of the principle of
proportionality to those provisions;
(b) the impact of compliance with the principle in Article 94(1)(g) in
respect of:
(i) competitiveness and financial stability; and
(ii) any staff working effectively and physically in subsidiaries
established outside the EEA of parent institutions established
within the EEA.
Also, considering prudential consolidation issues, EBA shall develop draft
regulatory technical standards to specify conditions according to which
consolidation shall be carried out. EBA shall submit those draft regulatory
technical standards to the Commission by 31 December 2016.
Among the first priority task EBA includes the Commission task to submit
a report to the European Parliament, by 31 December 2015, and to the Council
on the basis of international developments and EBA opinion on the possibility of
extending the framework to additional types of systemically important
institutions within the Union, accompanied by a legislative proposal where
appropriate. For these purposes, EBA shall issue guidelines specifying the
following concepts:
(a) activities that are a direct extension of banking;
(b) activities ancillary to banking;
(c) similar activities.
The Commission may adopt, by way of implementing acts, a decision as to
whether a third country applies prudential supervisory and regulatory
requirements at least equivalent to those applied in the Union. In the absence of
such a decision, until 1 January 2015, institutions may continue to treat
exposures to such entities as exposures to institutions provided that the relevant
competent authorities had approved the third country as eligible for that
treatment.
From 2014, EBA shall, in cooperation with EIOPA and ESMA, publish a
biannual report analysing the extent to which Member States' law refers to
external credit ratings for regulatory purposes and the steps taken by Member
States to reduce such references. Those reports shall outline how the competent
authorities meet their obligations and shall also outline the degree of supervisory
convergence in that regard. By 31 December 2014, the Commission reviewed,
reported and submitted that report to the European Parliament and to the Council
together with a legislative proposal, where appropriate.
337
By 31 December 2015, the Commission shall consult the ESRB, EBA,
EIOPA, ESMA, and other relevant parties on the effectiveness of informationsharing arrangements under this regulation, both in normal times and during
times of stress. Also during that period, EBA shall review and submit a report to
the Commission on the application of this Directive and of Regulation (EU) No
575/2013 on the cooperation of the Union and Member States with third
countries. That report shall identify any areas, which require further
development as regards cooperation and information sharing. EBA shall publish
the report on its website, in order to insure public consultation among all the
parties interested and influenced by the proposed regulation.
Still as a first priority task, EBA shall develop draft regulatory technical
standards to specify the assessment methodology competent authorities shall
follow in assessing the compliance of an institution with the requirements to use
the IRB Approach and to assess the integrity of the assignment process and the
regular and independent assessment of risks.
EBA shall develop draft implementing technical standards to determine, for
all ECAIs, which of the credit quality steps are associated with the relevant
credit assessments of an ECAI (Group30, 2013). Those determinations shall be
objective and consistent, and carried out in accordance with the following
principles:
(a) EBA shall differentiate between the relative degrees of risk
expressed by each assessment;
(b) EBA shall consider quantitative factors, such as default and/or loss
rates and the historical performance of credit assessments of each
ECAI across different asset classes;
(c) EBA shall consider qualitative factors such as the range of
transactions assessed by the ECAI, its methodology and the
meaning of its credit assessments, in particular whether based on
expected loss or first Euro loss, and to timely payment of interest or
to ultimate payment of interest;
(d) EBA shall seek to ensure that securitisation positions to which the
same risk weight is applied on the basis of the credit assessments of
ECAIs are subject to equivalent degrees of credit risk. EBA shall
consider amending its determination as to the credit quality step
with which a particular credit assessment shall be associated, as
appropriate.
EBA shall submit those draft implementing technical standards to the
Commission by 1 July 2014 and shall develop draft regulatory technical
standards to specify the following:
• the assessment methodology under which competent authorities
permit institutions to use internal models;
338
•
the conditions under which the share of positions covered by the
internal model
4. DIRECTIONS TO FOLLOW IN EU BANKING REGULATION
The president Mario Draghi spoke about the ECB mission toward inflation,
which is, ironically, the need to produce inflation. Inflation – targeting is
transformed in inflation – creating targeting (Daianu, 2015).
As stated by G30 supervision and regulation are different and high quality
supervision matters to financial stability (Roman, Bilan, 2012).
Recently, banking regulations were adopted for strengthening the ability of
financial institution to face the global crises and not for “softer” issues (i.e. the
supervisor - board relations or the culture of firms).
There are four mandatory actions to improve the regulation on supervision,
in order to insure financial stability:
1. The regulation should enhance the boards and supervisors
relationships, based on clear and mutual liabilities to inform and to consult each
other, accordingly to business vulnerabilities and governance effectiveness. The
mandatory two-way communication will generate effectiveness.
2. The prerogatives and the liabilities for the chairs of the management
structures should be clearly stated by the framework in force, as a guarantee for
effectiveness and productive supervisory activities.
3. The competence of supervisors and the objectives of management
should be clearer separated by rule setting, their complementary activities being
fundamental.
4. National governments must guarantee that supervision in banking
sector means more than verifying the compliances with regulation, including
adequate means for providing sufficient financial and human resources.
If the bank demonstrates to the satisfaction of the competent authority that
these activities do not endanger the Union financial stability, taking into account
the objectives of the proposed Regulation, the competent authority may decide
not to require separation.
Article 10(2) form the proposal states that a competent authority can require
separation of a particular trading activity if it considers that the activity in
question threatens the financial stability of the bank or of the Union, taking into
account any of the objectives of the proposed Regulation.
The competent authority should consult the EBA prior to taking decisions
referred to in Article 10 and should notify the EBA of its final decision.
339
5. CONCLUSIONS
The Regulation proposal launched in autumn 2014 refers to the adoption of
measures for the approximation of national provisions aiming at the uniform
rules on banks’ structures.
The EU 2014 proposal regulation in banking sector focuses on the
possibility of the competent authorities to require separation if the trading
activities of banks and the related risks are found to exceed certain thresholds
and meet certain conditions linked to the metrics. Trading activities refers
mainly to, but they are not limited by, market making, investing in and
sponsoring risky securitisation and trading in certain derivatives.
The present tasks of EU regulation in banking sector is to identify the the
rules of law that could drive a substantial part of banking activities beyond the
boundaries of traditional banking and towards a unique banking legal
framework.
References
[1] Andries, A.M., Mutu S., Ursu S.G. (2014). Impact of institutions, financial reform
and economic governance on bank performance. Transformations in Business &
Economics, vol. 13, issue 33C, 410-429.
[2] Daianu, D. (2015). Marele impas in Europa. Ce poate face Romania?. Iasi: Editura
Polirom.
[3] EBA releases work plans for 2015 (October 2014). Retrieved from
http://www.eba.europa.eu/-/eba-releases-work-plans-for-2015
[4] Roman, A., Bilan, I. (2012). The Euro area sovereign debt crisis and the role of
ECB’s monetary policy. Procedia Economics and Finance, Emerging Markets
Queries in Finance and Business, vol. 3, 763-768.
[5] The Group of Thirty (2013). A New Paradigm. Financial Institution Boards and
Supervisors.
Washington
D.C.
Retrieved
from
http://www.group30.org/images/PDF/Banking_Supervision_CG.pdf
340
THE SINGLE RESOLUTION FUND AND ITS UPLOADING
JÓZSEF TÓTH
Zsigmond Király Főiskola
Budapest, Hungary
[email protected]
Abstract
Implementation of unified banking system is recently one of the most important issues in
the European Union. The Single Supervisory Mechanism, the unified guarantee schemes
and the Single Resolution Mechanism are the main pillars of the common banking
system.
According to Shoenmaker financial stability, financial integration and national financial
policies are not compatible. Any two of the three can be combined but not all three. It is
the so called financial trilemma. Since decisions, processes and financing are given over
to a centralised European level the new pillars could break the trilemma.
The Single Resolution Fund which is part of the resolution mechanism will be a mutual
fund that ensures the effectiveness of bank resolution within the euro zone. In other
words, the fund is common. If any of the banks in the euro zone is close to the
bankruptcy, this fund can be used for resolution.
The fund must be uploaded by the banks operating in a euro zone member state based on
the level of the covered deposits.
In its publication the European Commission stated that the target level of the Single
Resolution Fund is EUR 55 billion which must be reached by end of 2024. Using
regression calculation we can prove that the stated amount is underestimated.
Keywords: Banking, Single Resolution Fund, Banking Union
JEL Classification: E53, E58, G20, G21, G28, G38
1. INTRODUCTION
In the last years three pillars of the Banking Union has been defined. In
2013 the European Parliament approved the proposals of the European
Commission concerning European Single Supervisory Mechanism. After
regulating the banking supervision, two new pillars were created to strengthen
the Banking Union. One of them was the deposit guarantee scheme and the
second one was the unified banking resolution. The directives give framework
for issues concerning bank deposit guarantee as well as banking resolution and
define the rules based on which the financial background of the systems could be
341
created. The Parliament and the Council also issued a regulation (2014c)
defining the rules of the resolution of credit institutions and certain investment
firms in the euro zone.
Ensuring the financial stability of the Union is the main goal of the Banking
Union. Nevertheless, stability cannot be achieved by separated national efforts.
Schoenmaker (2011) proves that maintaining the financial stability,
strengthening the financial integration and enforcing national financial policies
are incompatible. Any two of the three could be combined but they make the
third impossible. It is the so called financial trilemma which is observable in the
practice: the risk of cross-border banking and investment service cannot be
managed by national policies either the financial stability or the financial
integration hurts. By implementing the pillars this trilemma could be broken.
2. RESOLUTION MECHANISM
2.1. General rules
The directive (2014b) as well as regulation (2014c) of the European
Parliament and Council causes significant changings in the process of resolution
of the credit institutions being in critical financial situation. According to the
new rules, applying the bail-in method the owners and the creditors (except for
the owners of the covered deposits) become the payers of the resolution. It is the
main result of the new directive and regulation.
2.2 Initiation of the resolution
The resolution directive defines the circumstances when resolution must be
initiated. If in the supervisory authority opinion the credit institution is close to
the bankruptcy, neither further supervisory measures, nor additional investor
financial support could help, the resolution must be initiated.
When initiating the resolution, the management body and senior
management of the institution under resolution must be replaced. It must be
examined whether natural and legal persons are responsible for failure of the
bank or not.
The following four tools can be applied by the resolution authority during
the resolution: sale of business tool, bridge institution tool, asset separation tool
and bail-in tool.
2.3. The sale of business tool
When using the sale of business tool, the resolution authority has right to
sell the shares, assets, rights and liabilities of the institution under resolution
procedure. The purchaser must be dealt as successor.
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2.4. Bridge institution tool
The resolution authority has opportunity to use the bridge institution tool in
the resolution process. The authority has right to transfer the assets, rights,
liabilities and shares possessed or issued by the institution under resolution to a
bridge institution without consent of the shareholders. The main purposes of
funding bridge institution are to maintain the critical functions of the institution
and to sell this bridge institution under the possibly best condition.
When taking over the assets and liabilities, the value of the assets has to be
higher than the liabilities.
2.5. Asset separation tool
The resolution authority is also allowed to hand over the assets, rights and
liabilities of the credit institution under resolution procedure or a bridge
institution to an asset management vehicle.
The asset management vehicle shall be a legal person that wholly or
partially owned by a public authority and is controlled by the resolution
authority. While holding the critical function is the main purpose of the bridge
institution, the price maximizing through sale or orderly wind down is the goal
of applying asset separation tool.
2.6. The bail-in tool
By virtue of the new directive and regulation, the owners and the creditors
of the credit institution are the primer payers of the cost of resolution of the
credit institutions. This mechanism is fulfilled by deleting or dilution of the
shares, by reducing the principal amount of claims or debt instruments or by
converting claims to share.
The mentioned measures can be applied in case of any liability except for
covered deposits, secured liabilities, liabilities with a remaining maturity of less
than seven days and salary liabilities.
In order to the bail-in tool might be applied, the credit institution should
meet the minimum criteria of the own fund and eligible liabilities. That is, the
following has to be fulfilled:
OF + EL
> IM
OF + EL + OL
(1)
where
OF
own fund
EL
eligible liability, this liability might be taken into account when applying
the bail-in tool
OL
other liability, this liability is not taken into account when applying the
bail-in tool
343
IM
institute-specific minimal requirement
Therefore,
EL + OL = L
(2)
where
L
total liabilities
The value of the IM is specified by the resolution authority and depends on
numerous criteria. There is no a predefined value, it is different in case of
different institutions.
When applying the bail-in tool the following order must be kept when
writing down instruments:
1. common equity Tier 1 items,
2. additional Tier 1 items,
3. Tier 2 instruments,
4. subordinated debts,
5. rest of eligible liabilities.
An instrument could be reduced if the liabilities being on higher rank in the
abovementioned hierarchy have already been reduced to zero. Therefore, the
cost of the resolution is primarily paid by the owners and such creditors who
have receivables related to eligible liabilities of the bank under resolution.
3. FINANCIAL BACKGROUND OF THE RESOLUTION MECHANISM
The money of the resolution funds can be used by the resolution authorities
for warranty or loan granting, for the institution under resolution, for buying the
assets of these institutions, for supporting the activity of the bridge institutions,
asset management vehicle, for lending to other financing arrangements or for
combination of the previously mentioned. However, the fund cannot be applied
for capitalizing institutions.
The target level of the fund is 1% of the covered deposits that must be
fulfilled by the member states by the end of 2024.
Each member state has to ensure that the institutions pay contribution in
order to upload the target level. The contribution is proportional which could be
expressed in the following form:
REC =
where REC
L
CD
L − CD
TL − TCD
(3)
ratio of the contribution
liabilities of the credit institution
the covered deposits from the liabilities
344
TL
TCD
total liability of the credit institution in the member state
the total covered deposits from the total liabilities in the member
state.
It means that the contribution of an institution has to be paid based on the
amount of the uncovered deposits in the bank compared with the uncovered
deposit portfolio in the member state in question.
4. THE FORECASTED LEVEL OF THE RESOLUTION FUND
While in case of non-euro zone member states common fund is not to be
implemented, in case of euro zone member states the so called Single Resolution
Fund must be used which is the financial background of the mutual resolution
measures.
The European Commission declared in its statement the target level of the
Single Resolution Mechanism which is EUR 55 billion. However, we prove this
level is underestimated. Our calculation is partly based on survey made by the
European Commission in 2013. The survey was made in 2007 at first but was
repeated in 2009 and 2013. Data were provided by bank deposit guarantee
schemes of the member states. Since the survey is related to covered deposits
and contribution to the resolution fund depends on their level (1%) we can
forecast the level of funds (in case of euro zone member states it is the Single
Resolution Fund and in case of non-euro zone member states they are the
national resolution funds)
The portfolio of covered deposits is changing. This changing could depend
on numerous factors. The size of the population, the level of the national GDP,
the unemployment rate, the abroad activity of the credit institutions, etc. could
have effect on the level of covered deposits belonging to one member state. In
order to simplify our calculation, compare the GDP of home country with the
covered deposits reported in the Committee’s survey as for 2012. In the figure 1
indicates the non-euro zone member states. In order to demonstrate the covered
deposits we used curve but the values can be interpreted only at the member
states.
345
Figure 1. The GDP and the covered deposits of the member states as of
31/12/2012
(Source: European Commission and Eurostat)
There is tight connection between national GDP and the level of the
coverage deposits.
Taking the continuous changing in the covered deposits into account we use
linear regression to determine the level of covered deposits after 2024 where the
level of covered deposits is dependent of the national GDP. In that case the
equilibrium of the linear regression line is the following:
yˆ = −12681,7 + 0,5424 x
(4)
The value of the coefficient of determination (R2) is definitely high (0.95).
The high level coefficient of determination indicates that our model is
applicable. The equilibrium expresses that when the GDP increases by 1 EUR
the covered deposit portfolio increases by 0.5424 EUR.
If we calculate the forecasted value of the GDPs of the member states, we
could determine the value of covered deposits, thus the level of contributions to
be paid by the credit institutions. We accept the forecast of the European
Commission (2014) regarding expected GDPs in period 2015-2016. As for
period 2017-2024 we make 4 scenarios in case of each member states. We
suppose the GDP growth will be 0%, 1%, 2% and 3%.
346
The following table shows 1% of the forecasted covered deposits (the target
level of the resolution funds is 1% of the covered deposits.) as of 12/31/2024 in
case of different scenarios.
Table 1. 1% of the forecasted covered deposits as of 31/12/2024 (EUR
million)
Single
resolution
Fund
National
resolution
funds
Scenario 1 (0%
average GDP
growth)
Scenario 2 (1%
average GDP
growth)
Scenario 3 (2%
average GDP
growth)
Scenario 4 (3%
average GDP
growth)
54 529
59 158
64 120
69 434
18 694
20 416
22 261
(Source: European Commission, own calculation)
24 237
5. CONCLUSIONS
Since the target level of the resolution funds is determined as 1% of the
covered deposits in the resolution regulation and directive, data given in the
above table show practically the forecasted level of the Single Resolution Fund
and the forecasted cumulative assets of the national resolution funds.
It is visible that the level expected by the Committee (EUR 55 billion) will
be fulfilled even if there is no GDP growth after 2017 (in case of euro zone
member states). However, its value will likely be significantly higher. In other
words, the 1% proportion of the covered deposits defined in the abovementioned
regulations ensures significantly higher level of the Single Resolution Fund
comparing with the expected EUR 55 billion.
References
[1] European Commission (2013). Updated estimates of EU eligible and covered
deposits, Retrieved from https://ec.europa.eu/jrc/en/publication/eur-scientific-andtechnical-research-reports/updated-estimates-eu-eligible-and-covereddeposits?search,
[2] European Commission (2014). European Economic Forecast, Autumn 2014,
European
Economy
7/2014,
Retrieved
from
http://ec.europa.eu/economy_finance/publications/european_economy/2014/pdf/ee7_
en.pdf
347
[3] European Parliament and Council (2014a). Directive on deposit guarantee schemes.
Retrieved
from
http://eur-lex.europa.eu/legalcontent/EN/TXT/PDF/?uri=CELEX:32014L0049&from=EN
[4] European Parliament and Council (2014b). Establishing a framework for the
recovery and resolution of credit institutions and investment firms and amending
Council Directive 82/891/EEC, and Directives 2001/24/EC, 2002/47/EC,
2004/25/EC, 2005/56/EC, 2007/36/EC, 2011/35/EU, 2012/30/EU and 2013/36/EU,
and Regulations (EU) No 1093/2010 and (EU) No 648/2012. Retrieved from
http://eur-lex.europa.eu/legalcontent/EN/TXT/PDF/?uri=CELEX:32014L0059&from=EN
[5] European Parliament and Council (2014c). Establishing uniform rules and a uniform
procedure for the resolution of credit institutions and certain investment firms in the
framework of a Single Resolution Mechanism and a Single Resolution Fund and
amending Regulation (EU) No 1093/2010. Retrieved from http://eurlex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32014R0806&rid=3
[6] Schoenmaker, D. (2011). The financial Trilemma, Duisenberg school of finance Tinbergen Institute Discussion Paper, TI 11-019/DSF 7
348
THE DEPENDENCE OF THE EXCHANGE RATE ON THE
COST OF ENERGY RESOURCES
GALINA ULIAN
Moldova State University
[email protected]
LUCIA CASTRAVEŢ
[email protected]
SILVESTRU MAXIMILIAN
[email protected]
Abstract
In the present study was carried out an interpretation of the impact of exchange rate
fluctuations of Moldavian leu (MDL) on economic variables. The period under
consideration is related to November-December 2014 and the beginning of the 2015
year. During this period the exchange rate of the national currency against major
reference currencies began a path of sharp devaluations. This trend, however, fit into
similar situations in the region, which also led to its gradual depreciation. Since
currency depreciation is a phenomenon with complex effects and multilateral once held
in a country "X" it, in order to improve the situation, it is necessary, first, to increase
their presence on other markets, more stable and with better opportunities.
Keywords: exchange rate, transactions, purchase and sale, exchange market, barrel,
depreciation
JEL Classification: F3, F4
1. INTRODUCTION
According to the newsletters of January 2015, the volume of transactions in
currency exchange offices in Moldova was increasing. The total turnover of
purchase and sale transactions of the main foreign currencies against MDL in
349
cash on the exchange market in December 2014 amounted to 334.5 million
dollars, increasing by 12.4% compared to November 2014 (Stepanov, 2015).
According to the National Bank of Moldova (NBM), the purchases of
foreign currency against MDL in December 2014 increased by 7.1% and totaled
USD 208.5 million (equivalent) and sales volume increased by 22.3 % - up to
126 million dollars (http://bnm.md/md/valute_market_publication/2014).
The total turnover of transactions of purchase and sale against MDL of the
main currencies in the cash exchange market in December 2014 the transactions
accounted 182.9 million euro. The USD (54.7% of total turnover), was 17% up
from the previous month. The purchase volume of euro rose by 14.3% and
totaled 109.4 million dollars, while sales volume increased by 21.3% - up to 73.5
million dollars.
USD transactions increased by 17.4% and amounted to 103 million dollars
or 30.8% of the total. USD purchase volume increased by 9% and amounted to
58.3 million dollars, while sales volume increased by 30.7% reaching 44.7
million dollars.
The volume of transactions with Russian ruble was 43.6 million dollars or
13% of the total, 10.1% less than in November 2014. The purchase volume of
ruble fell by 10% and amounted USD 38.5 million, and sales volume decreased
by 10.5% - to 5.1 million dollars (Stepanov, 2015).
The volume of transactions with Romanian leu was 3.8 million dollars,
1.1% of the total, 2, 7 % more than in November 2014. Romanian leu purchase
volume decreased by 10.5% and amounted to 1 7 million dollars, while sales
volume increased by 16.7% - to 2.1 million dollars.
Ukrainian hryvnia transactions volume totaled USD 1.2 million, or 0.4% of
the total, 14.3% less than in November 2014. The volume of purchase and sale
of hryvnia fell by 14.2% and amounted 0,6 mln. USD in both cases.
Comparative to December 2014, the share of transactions with USD at the
exchange rate offices increased by 1.3 percentage points, the share of current
transactions increased by 2.2 percentage points. The share of transactions with
Russian ruble fell by 3.3 percentage points, while the share of transactions with
Romanian leu and Ukrainian hryvnia fell by 0.1 percentage points each.
(Stepanov, 2015) These data could be shown in the figures below.
2.
DATA ANALYSIS
Thus, according to fig.1, in November 2014 the turnover of transactions
against MDL of the main currencies on the internal cash exchange market, was a
+ b = 277.7 (million dollars); in December 2014 this indicator was already 334.5
mln USD. The selling of major currencies against MDL on the cash exchange
market in November 2014 was like a = 103.03 (million USD); in December
2014 this figure was 126 million dollars, an increase of 22.3%. Of major
350
currencies sales turnover increased by 20.4%, purchases - with (208.5- 194.68 /
194.68 * 100%) = 7.1%. In November 2014 the purchases of the main currencies
exceeded the sales by 91.65 million dollars; in December 2014 by 82.5 million
dollars. The "hunting" by the MDL of the Euro and USD currencies in
December 2014 continued and was to remain at the beginning of 2015.
Figure 1. The total turnover of transactions against MDL of the main
currencies (million USD)
(Source: developed by authors)
A look at the turnover shows the European currency purchases and sales in
the months November-December 2014 (Fig. 2): the turnover in November 2014,
the sale and purchase of euro against MDL, was a + b = 156.3 (million dollars);
the purchase and sale balance (ab) = (-) 35.1 – purchases of euro in November
2014 exceeded sales by 35.1 million. In December 2014 lei sales against the
euro increased by 21.3% or 12.9 million Euros, the purchases increased by
351
13.7%. The Euro on internal market in Moldova is hunted by Moldovan lei. The
balance of the purchase and sale remains negative in November 2014 and
December 2014, it even increased by 2.1%, or 0.8 million Euros. The turnover,
the balance of purchase and sale of euro against MDL in dynamics (NovemberDecember 2014) are no longer determined by economic factors, the volume of
remittances, exports, imports, the level of involvement in the internal exchange
market of National Bank of Moldova by "supports" of euro funds, but distrust,
uncertainty of the clients in changing the negative trend towards the positive.
The USD against MDL turnover development, purchase and sale balance, on the
internal cash exchange market doesn’t have very different path (fig. 3).
Figure 2. The turnover of transactions against MDL of the euro (million
euro)
The transactions turnover in the balance of purchase and sale in USD in
November, December 2014 was as follows: a + b = 187.7; (A, b) = (-) 19.8
(million dollars); 1,09b = 1,307 + 44.7 + 58.3 = 103 (million dollars); 1,307352
1,09b = 44.7 to 58.3 = (-) 13.6 (million dollars). The balance of the purchase and
sale transactions in December 2014 comparative to November 2014 slightly
decreased only by 5, 7%. US dollar in November, December 2014 continued to
be bought against lei. Distrust or otherwise – customer’s confidence in further
depreciation of the currency MDL on the internal cash market created a "panic"
in Moldova. Changing the negative trend into the positive by dollar currency
sales by NBM is increasingly problematic and unrealistic. The cause of a
substantial number of buyers of dollars can be explained by the sale of dollars by
buyers from Moldova in Russia, in Ukraine. This statement is confirmed by the
data in figures 4 and 5.
Figure 3. The turnover of transactions against MDL of the USD (million
dollars)
The Romanian leu on the internal cash exchange market had a negative
impact. The purchase and sale turnover, purchase and sale balance in November,
December 2014 amounted respectively + b = 3.7; (A, b) = (-) 1 (mln USD);
1,167 + 0,895b = 3.8 (million dollars); 1,167-0,895b = 0.4 (million dollars). The
balance of the purchase and sale transactions in November 2014 was negative ((353
) 0.1 million dollars); in December 2014 - positive - (0.4 million dollars). The
purchases of USD against Romanian leu on the exchange market in December
2014 compared to November 2014 decreased by 0.2 mln USD, by 10.5%. In
other words, USD have not been purchased in Moldova and subsequently sold in
Romania. So the exchange rate "storm" in Moldova was generated and amplified
by problems ruble-dollar, dollar-ruble exchange rate; (Figure 4).
A more appropriate political situation had the NBM by sales pricing,
buying USD against the Ukrainian hryvnia (Fig.5). In November-December
2014 the turnover, the balance of USD sale constituted a + b = 1,348; a-b = 0;
0.8586 + 0.8586 = 1.2; .8586-.8586 = 0.
Buying and selling of the dollar against the Ukrainian hryvnia on the
exchange market in December 2014 to November 2014 decreased by 14.2%.
The NBM policy in this case was adequate to the uncertain situation on the
currency market of Moldova and Ukraine.
Figure 4. The transactions turnover of the US dollar against the Romanian
leu (million USD)
354
The MDL devaluation trend has resulted in increased prices, including
industrial production, by 4% in 2014 compared to 2013. In mining industry
prices increased by 4.4%.
Therefore, it appears that in the last months of 2014, the MDL depreciated
significantly. Only the first 23 days of 2015 the leu depreciated by 10% against
the USD and by over 3% against the EUR. And this trend was maintained.
Among the causes of devaluation of leu can be listed: the geopolitical situation
in the region; high demand of the US dollar; reduced oil prices; decreased
remittances to Moldova from Russia; uncertainty of the holders and users of lei
during the increasing distrust in rubles, UAH; lack of training analytical
explanations of currency: the euro-dollar, ruble-dollar, hrivnya-dollar, leu-dollar;
the lack of government mechanisms to maintain the "authority" of the leu.
In principle, any national currency depreciation favors exporters and
importers are disadvantaged, but this statement loses its contents when the
"devaluation exceeds a certain level." Boosting exports, increased taxation of
imports (at least of luxury goods) could help to maintain the value of national
currencies.
Figure 5. The transactions turnover of the US dollar against the Ukrainian
hryvnia (million USD)
355
The activities of commercial banks are also important in each nation. They
(banks) do not always contribute to the volume of US dollars or euros on the
national markets by buying shares from some economic subjects; do not aim
attracting national currencies and loans in local currency. Each individual
commercial bank, based on its interests, resolve their problems, not participating
in the settlement of the currency flows at the macro level. Also are important the
activities of national central banks, which are not always appropriate to financial
statements of national markets. In some cases, the attitude of Central Banks,
multiply uncertainty, population mistrust in the national currency. Moldova
apparently has nothing to do with the ruble, hryvnia devaluation, but the
negative consequences are increasingly apparent. Sometimes the strategies of
Central Banks are rigid and fail to conform to economic financial, political,
military, social, ecological crisis of the countries. An elementary calculation: the
speculator buys dollars in the country "X" and sells it in the country "Y" or
country "Z". Dollars in the country "X" "filled" the pockets of speculators,
impoverished the National Bank of the country "X" of foreign reserves. This is
not the only aspect that would require Central Banks to "improve" their strategy,
ie rules, actions, methods, ways of handling everyday financial problems. The
National Bank strategies must be linked to the government of these countries.
Unadjusted increase in the volume of currency in circulation, naturally it will
contribute to their development. The lack of the necessary mechanisms to
quantify currency, ways of extracting it from circulation through bank loans is
another aspect to be included in strategies of the National Banks and
Governments of countries.
If we return to Moldova, the leu-dollar exchange rate is important, but
cannot serve as a mechanism for solving the economic problems of the country.
The exchange rate can help "destructively" and very little constructively,
depending on flows and refluxes of dollars to and from Moldova. But they
(flows) are generated not by the "exchange" rate, but by the economic potential
of the structure of export, import, international economic relations policies of
RM. Devaluation against the dollar may be seasonal. But such a devaluation
should be 2-3% compared with the previous period. To make an interpretation of
the evolution of the exchange rate, we assume the following:
at
the average exchange rate of the euro against the US dollar at time
t;
bt
at
price of a barrel of oil in US dollar at time t;
*
bt
= at*bt
price of a barrel of oil in euro at the time t;
356
At the time (t+1) oil price decrease, for example, by ∆bt+1
,
i.e. at a
= βt+1. Euro exchange rate against the US dollar at the time
rate equal to
(t+1) will be:
at+1
=
=
So, the average exchange rate of the euro against the US dollar (at
) is
the inverse dependence of a barrel of oil price in US dollars at time t. The
reduction of oil prices with ßt+1 percent, the euro against the dollar US will
decrease by:
∆
=
: (1 - βt+1)-at = at (
-1) =
(
Otherwise read: reducing oil prices generates a "surplus" of euro "not
covered" with USD, so the dollar has more euros, the dollar is more expensive, it
decreases euro. The trend can be changed only by the "appearance" of a
"surplus" of dollars that would "cover" the euro surplus. In this context the euro
area initiated certain actions.
At the beginning of year 2015, the leadership of the European Central Bank
on 01.03.2015 proposed quantitative easing measures (QE) worth 50 billion
Euros (58 billion US dollars) per month until the end of 2016. In the months
01.03.2015-31.12.2016 in this case could be injected 1, 1 trln euros
(50*22=1100 billion euros =1, 1 trln euros) that would expand the institution's
balance sheet, would prevent deflation, boost the recovery of Euro zone. The
annual inflation rate in the Euro zone continued to decrease in December 2014
due to the reduction of energy prices, reaching minus 0, 2% from 0.3% level
recorded in November 2014. This was the first inflation reduction in the euro
area after October 2009. If this trend is maintained, the euro area will enter a
period of deflation. (http://bookshop.europa.eu/ro/protej-m-viitorul-prinpromovarea-cre-terii-economice, 2015)
The quantitative easing can be achieved through purchases of sovereign
bonds and corporate bonds involving national central banks of the euro area. At
any increase of oil prices above relationships will form:
at+1
=
=
(
357
)
The growth (potential) of the oil price, expressed in the
with βt+1
percent, the euro against the US dollar will increase by:
∆at+1= at -
=
(
)
The exchange rate, based on the report: national currency to USD, being
substituted by the product of the national currency / USD and oil price USD /
barrel, is identical to eliminate USD as unit and substituted as their currency /
barrel. In other words, a measure of exchange rate (US dollar) was replaced by
another unit (barrel). The price per barrel, under the impact of a number of
factors, turned into a decreasing function over time. Reducing oil prices assumes
in any national economy "lower costs", thus reducing the national GDP. It
(GDP) has to "recover" losses while improving economically from reduced oil
prices. Improvement may occur with a certain delay after the national GDP will
increase, so will increase the exports and the exchange rate will recover.
However, the positive impact of GDP growth from cheaper oil, comes with big
"delay" and therefore the national exchange rate is reduced.
3.
FINAL REMARKS
Therefore, the problem of maintaining relatively stable exchange rate could
be solved by "placing" the economic cycle of a volume of US dollars, which
would alleviate the "gap" created by the reduction in oil prices. In this respect,
the ECB's decision to circulate monthly by 50 billion euros in the period March
2015-December 2016 is justified and necessary. Entering the economic circuit of
the supplementary amounts can be achieved by the purchase of shares by all
commercial banks in the EU. According to IMF estimates, the global economy
in 2015, 2016 will increase by 3.5% and 3.7%; US economic growth will exceed
3.6%; China's economy will continue the GDP lagging growth by 6.8% and
6.3%. Gold is more expensive, reaching $ 1,280 quotation / ounce (at the
beginning of year 2015). SPDR Gold Trust, the largest gold-funded fund,
increased its assets to about 740 tons (SPDR_Gold_Trust_Prospectus, 2015).
It means that oil prices, economically unjustified in recent years (over 115
USD / barrel), have served to increase financial bubbles that have "inflated"
prices for all products of countries exporting oil resources. Reducing oil prices
involves the "breaking" of financial bubbles (Bushuev, Isaev, 2014).
Overall, the global economy following the reduction in energy prices, will
benefit economically, environmentally, socially. Reduction in energy prices
could make some changes of geopolitical character, the interest in oil resources
in some regions of the Earth could be reduced.
358
References
[1] Bushuev, V., Isaev, N. (2014). Nefti: tovar ili finansovii activ, IES, M.
[2] Stepanov, Gh. (2015), Volumul tranzacțiilor cu valută la casele de schimb valutar
din Moldova, în creștere. Retrieved from www.noi.md
[3] http://www.noi.md/md/news_id/54605
[4] http://bnm.md/md/valute_market_publication/2014
[5] http://bookshop.europa.eu/ro/protej-m-viitorul-prin-promovarea-cre-teriieconomicepbNA0113763/;pgid=Iq1Ekni0.1lSR0OOK4MycO9B0000Wf4ayTFc;sid=p9UuDnimrhU3Wzyc_XKH1vHt_xKypshhs8=?CatalogCategoryID=ZjsKABstHnI
AAAEjH5EY4e5L
[6] http://www.spdrgoldshares.com/media/GLD/file/SPDR_Gold_Trust_Prospectus_0
3_20_2015.pdf
359
THE EVOLUTION AND COLLAPSE OF THE
MARMOROSCH-BLANK BANK
ION VOROVENCI
The Bucharest University of Economic Studies
Bucharest, Romania
[email protected]
Abstract
The modern age of Romanian economy begins with the opening of the Black Sea trade
that creates favorable conditions for mass migration of foreign populations especially
Hebrew, persecuted in the Ukraine and Poland to Moldavia and Wallachia. They will
help harness Romanian products on the deployment of feudal relations and the
development of industry and banking institutions.
By mid-century could not question the establishment of banks, the conditions are
unfavorable, but this is what has enabled the handler of money to loan sharks to get rich.
They are not only Hebrew, some of them are coming from south of the Danube
Macedonia.
Marmorosch-Blank Bank was born under these conditions, making it one of the most
important Romanian banks that contributed to the development and modernization of
Romania for more than half a century. Great economic crisis that marked the world
economy had an impact on the global banking system including one in Romania, leading
to the collapse and bankruptcy of Marmorosch-Blank.
Keywords: merchant, usurer, banker, bankruptcy
JEL Classification: N2
1. INTRODUCTION
Most of us are tempted to believe that for several centuries before the
nineteenth century, the Romanian economy in general and especially in capital
accumulation almost nothing. happened For some historians the nineteenth
century as a separate period of economic development begins in 1774, after the
peace of Kuciuk Kainargi; to others the landmark in Romanian economy,
perhaps the most important, is the 1829 with the opening of the Black Sea
international trade following the Peace of Adrianople, the result of the defeat of
the Ottoman Empire in the Russo-Turkish War of 1828. It is certain that the
360
interest in the region north of the Danube increased both in Western Europe and
Russia which in 1812 incorporated Bessarabia.
In 1821 report, an English expert W. Wilkinson noted: "natural wealth and
resources of Wallachia and Moldavia are great for so that these countries could
enjoy the things of a regular government [...] if export would be opened if ties
trade nations would establish a conveniently [...] they would soon become the
most populated provinces and thriving in Europe” (Rosen, 1995).
The modern age of Romanian economy begins with the opening of the
Black Sea trade. This created favorable conditions for mass migration of foreign
populations, especially Hebrew, persecuted in the Ukraine and Poland to
Moldavia and Wallachia. They will help harness Romanian products, dislocate
feudal relations and help the development of industry and banking institutions.
By mid-century we could not have in view the establishment of banks, the
conditions are unfavorable, but this is what had enabled the money changer and
usurers to loan sharks to get rich. They are not only Jews, some of them are
coming from the south of the Danube from Macedonia. Their number was
particularly high, but their trade relations with East and the countries of Central
and Western Europe, will lead the organization in true commercial companies.
Many of them were sent to follow these studies in Venice and Vienna, where did
trade practice (Iorga, 1925, p. 102). The company led by Michael Ţumburu,
based in Brasov had his father John as members, Boghici and Hagi Stan Jianu
Mayor of Craiova Theity of this company is run from Venice, Trieste, Vienna,
Bucharest, Constantinople, Thessaloniki, Larisa Tricia and employing numerous
correspondents and commissioners. We remember also brothers Stephen and
George Meitani, merchants enriched by trade with Aite Habsburg states,
elevated to barons of Emperor Francis I, or Hagi Moscu the richest moneylender
in Bucharest. Most of them adapt to new economic realities created by the
opening of international trade in Romanian countries, and will go bankrupt in
1835 or 1828.
In this period they were circulating on the Romanian territory about 70
types of coins, which meant a free field of action for moneyhandlers and rapid
enrichment of some of them. Due to the growing needs of the Treasury, royal
courts of Moldavia and Wallachia large sums of money from moneylenders
(Negrea, 1990, pp. 192-130).
In 1836 Prince Al.Ghica turn to support Hillel Manoah support from the
state get 80% of the loan with an interest rate high enough. Later this whole
fortune was donated usurer banker University of Bucharest. The same thing will
do Jaques Elias, who donated his fortune Romanian Academy. Some Hebrew
will be appreciated at the royal court, and Israel Daniel Daniel who gets back
during Nicholas Vogoride, after Mihail Sturza elevates to the rank of Boyar
(Negrea, 1990, pp. 192-130).
361
2. CONTRIBUTION MARMOROSCH-BLANK BANK TO THE
ECONOMIC DEVELOPMENT OF ROMANIAN
The new conditions created by Romanian trade opening to Europe, the
Danube and the sea, have resulted in a rather slow pace due to specific historical
conditions not enough funds in the economy, the establishment of the first
banks. And the new bank becomes a necessary tool for the economic
development, while the Romanian society is mature and part of the population
wants the model of the Western institutional modernization. Romanian
population, overwhelmingly composed of peasants, noblemen class lacking the
necessary experience being involved in economic activities, and less numerous
urban population will leave this spot open to foreign populations in less
developed areas where industry, commerce, and banking was missing.
In the data of the first census carried out in Romania in 1859, we find that
the Hebrew population of Bucharest were 5,934, and four decades later their
number increased to almost eight times while the city's population had doubled
in the. Moldovan towns the number was much higher compared to the Romanian
population. Bucharest's population in 1930 was 639,040 people, of which 69 885
Hebrew (11.9%) meant that in the Capital 9.6% of the Jewish population living
in Romania. Our country ranks third in Europe and fourth in the world in terms
of the number of Jews.
In Bucharest most Jews worked in trade (16.5%), industry (14%),
occupying one third of credit institutions (5.4%), which meant that in relation to
the Romanian population the number was quite high (Rosen, 1995, p. 21).
Non-recognition of Romanian citizenship to this population, under the
historical conditions of the time, should not lead to a misinterpretation of the
capital held, considering it being foreign. This accumulation was made
especially in Romania and as such it belonged to the country's economy. As an
expression of that situation, the representatives of this community had fought for
decades to receive recognition for Romanian citizenship.
The first bank was established in 1848 in the most important point of
Bucharest, at the intersection Blănari and Grocery streets, with a capital of
30,000 lei.That was a family bank, Jacob Marmorosch began his work as a
merchant and moneylender advised by his brother Jacob Lobel,who became
later, in 1865, the Bucharest branch manager of the Ottoman Empire Bank. It
will advocate for the creation of a national insurance companies. After a decade
and a half Marmorosch associated with Maurice Blank, one of the first
Romanian diplomats in commercial and financial sciences. in 1874, when the
Bank became a partnership society and will bear the names of both owners the
capital was increased by the sum of 172,000 lei. Maurice Blank, who was born
in Pitesti on July 8, 1848, identifies himself with the entire business of the bank,
362
given that his associate James Marmorosch left Romania in 1870 and settled in
Vienna.
The activity of the banks was particularly diverse in Romania because
"everything was done" and investments brought significant profits. The need for
credit increases, especially after the land reform in 1864. Marmorosch Blank &
Co., Bank initially, financed the agricultural export and the import of other
goods, participated in the state loans to finance the construction of bridges,
railways, public works, industry etc.
The most profitable bank activities were Romanian and Russian armies
supplies in 1877, the construction of important railway lines, Buzau-Marasesti
(1879), Dorohoi Iasi (1894), Ramnicu Valcea-Câineni (1895), which facilitated
the cost of transport, connecting them with railways in Transylvania, developing
trade in Central and Western Europe.
In 1882, together with the French company Societe Marseilleise des
Ciments du Midi participated to the sewers of Bucharest. For the first time a
bank participating in the financing of national industries was especially
important with the establishment of 50,000 lei Letea Paper Factory (1879) and
100,000 lei Scăieni Paper Factory (1887).
Together with three foreign banks (Deutsche Bank, Darmstadter Bank şi
Berliner Handels Gesellschaft), in 1895 Marmorosch-Blank Bank subscribes to
a public loan. It was the first loan with an interest rate of 4.5% of Bucharest,
compared to 5% interest on previous loans used to modernize the city and its
endowment with schools, halls, markets.
The bank created its subsidiaries or participated in setting up other financial
institutions: Bank of Commerce in Craiova (1898) – which was transformed
after a year into a cooperative limited company, the initial capital of 200,000 lei
reaching in 1913 -10000000 lei in 1920 up to 60,000,000 lei to 54,970,157 lei a
reserve fund.
After 1904 the Bank converted into a joint stock company, the activity
intensified. In 1910 it participated with 400,000 lei (40% of the capital) to create
Bank of Moldova, established by M.Wachtel. The development of the oil
industry in Ploiesti determined Maurice Blank to contribute to the establishment
of the Central Bank of Ploiesti led by Max I. Schapira, participating with 50% of
the capital (50,000 lei).
In 1922 the bank's reserves have reached 3,000,000, while deposits
amounted to 94,686,204 lei. There is a huge difference between the bank's
capital and deposits of the public, this is understandable given that the dividend
was quite high reaching 15%.
Other banks established with the participation of the Marmorosch Blank
Bank are: Bank of Commerce and Warehouses in Bucharest and Thessaloniki
(1906), Our House for Bank, Commerce and Industry, the Marmorosch Blank
363
Bank's representative in Bucharest Blank, Technical Loan Transylvanian S. A
Buchares (1919), Bank of Timisoara and Joint stock Commercial Bank SA,
Lugoj, Caransebes Keeping Case First, Free Peasants Bank SA Chisinau and
Industrial Bank S.A. Bucharest (Banca Marmorosch Blank et Co, Limited
Company 1848-1923).
Other areas of activity of the bank are: cement industry (in 1889
participating to the establishment of the cement plant at Braila with IG
Cantacuzino), wood industry, food industry, oil etc.
After the war the bank activity is developing upward. In the first period
1920-1929 in Romania there have been several tariff changes (1921, 1924, 1926,
1927, 1929) protectionism imposing a regime, which will decrease
manufacturing imports by 40%, is mainly importing raw materials, semi
manufactured goods and machines.
Some banks established during this period the Romanian distinct links with
US financial market, in 1919 the Bank opened Marmorosch-Blank agency and
an agency in New York, followed by Bank Chrisovelloni. Blank Marmoroschoperative Bank specializing in shipping operations to the US Romanian
emigrants money (Stanciu, 1996, p. 50).
In the coming years the economic nationalism prevails under the Romanian
National Liberal Party. Here's how it was seen by Vintilă Brătianu, PNL leader:
"Foreign capital must be attracted to what we like, particularly for installations
of new businesses. payments to finance large jobs, debt consolidation and to
equipment under a lighter conditions to Romania." (National Archives of
Romania, 1930, p. 58).
Another representative of the Liberal Party, Al, Topîlceanu said that
Romania "is not so rich that we can afford to sacrifice the goods we possess to
foreigners only to put an end to a difficult situation." (Topîlceanu, 1927, p. 89).
The international situation in the late '30s had become unfavorable for the
economic development of Romania. In 1930 Marmorosch-Blank Bank, which
had become a colossus with ramifications throughout the economy of the
country, for a long time due to its state subsidies to operate. At the same time it
had equities to 12 banks and 57 companies, had an insurance company and
concluded its balance sheet with a benefit of 90 million.. In reality, the survival
of the bank during the interwar period was the result of central bank support by
increasing the rescount from 274 million lei (1924) to 1.85 billion (1930).
Shortly before the opening of the bankruptcy proceedings, when the
question of state property concessions to the failure of financial support to
overcome difficulties arising due to the global economic crisis, Aristide Blank
believed that the inauguration of the policy of concessions and monopolies
would be the only solution "to household balance public and to relieve the
oppressive taxes during this time (Pintea and Ruscanu, 1995, p. 138) together
364
with some important new shareholders of the bank, he had taken precautions,
withdrawing part of bank funds and sending them abroad.
In 1930 Marmorosch-Blank Bank lost 378 million lei and recorded on
balance sheet a benefit of 60 million lei, by exaggerated evaluation of the land in
the area of Bordei (300 million), the overvaluation of bank shares that participate
to Discom (108 million lei) and evaluating publishing house into liquidation
(National Culture) worth 32 million (Pintea and Ruscanu, 1995, p. 138).
Here is how Mihail Manoilescu, governor of BNR depicts the forgeries :
“... Documents for the years 1926-1930 show that [...] all bank salaries were
falsified leading to fictitious benefits of 1 billion 415 million lei. For each year
losses totaled 1 billion 8 million.
Several procedures have been used:
The first improvement process was arbitrary lifting Hut building, consisting
of a large place on the northern edge of the capital to the value of which
increased in 1927 by 7 million and in 1930 (in the midst of a terrible crisis, when
all land was catastrophically depreciated) 298 million.
The second process of "improvement” was even more critical. It created
fictitious benefits of hundreds of millions of lei annually winding out a polling
Blank Bank, Industrial Bank which had been bankrupt even before 1926.
Balance in 1929 recorded a loss of 338 million lei, after a first correction was
reduced to 223 million after a second correction to the figure of 278 is converted
to the benefit of 55 million lei. This document provides tremendous value to be
signed Aristide Blank himself (Manoilescu, 1993, pp. 289-290).
Since 1924 especially, Blank Bank granted a series of loans to officials or
members of his entourage that would not ever be repaid. King Carol wiould
obtain pecuniary benefits and also some of the members of his clique. On
hearing the news that the bank is bankrupt, some of the press comes to his
support while King strives to save the bank. The Universe of 14 November in its
critical position " the clique know He can not defy an entire country. King
seeked to touch and feel the pulse of the country about the situation".
Mihail Manoilescu faces the press that came to support Aristide Blank, the
bank refuses to grant financial support, falling out of favor with King Charles II.
3. CONCLUSIONS
Looking closely to the economic realities of Romania before World War I,
Blank Bank evolution noted that its financial situation experienced a remarkable
development before the war and the depreciation of the leu at its end. Both
capital and reserve funds experiencing a decline in value terms after 1920. If one
takes into account that the leu depreciated by about 30 times, note that 1913 is
the safest year to the bank in terms of stability. In 1920 the bank's capital was no
longer included in the balance sheet which means that investments were only in
365
depositors' money. It should not be forgotten the fact that with the economic
crisis some foreign capital had left Romania thus it could not support this bank.
Thus in a bank that served the economic interests of Romania disappeared.
References
[1] Iorga, N. (1995). Points de vue sur histoire du commerce de dʼOrient a lʼ epoque
moderne. Paris.
[2] Manoilescu, M. (1993). Memoirs. Bucharest: Editura Enciclopedică.
[3] National Archives of Romania (1930). Economic nationalism and the doctrine of
political parties in Romania. Bucharest.
[4] Negrea, R. (1990). Money and power. Bucharest: Editura Humanitas.
[5] Pintea, A., Ruscanu, Gh. (1995). Banks in the Romanian economy. Bucharest:
Economic Publishing House.
[6] Rosen, A. (1995). The participation of Jews in Bucharest's industrial development
from the second half of the nineteenth century until 1938. Bucharest: Editura
Hasefer.
[7] Topîlceanu, Al. (1927). Romania wealth and foreign capital. State Archives, D
.XV, 7-8.
[8] ***Banca Marmorosch Blank et Co, limited company 1848-1923.
366
IMPLICATIONS OF M&AS FOR BANKING INDUSTRY.
FROM CULTURAL FIT TO CULTURAL CLASHES
IULIAN WARTER
“Alexandru Ioan Cuza” University
Iaşi, Romania
[email protected]
LIVIU WARTER
Iaşi, Romania
[email protected]
Abstract
Despite continued global uncertainty, mergers and acquisitions (M&As) in banking
industry remain essential instruments for growth initiatives in the coming years.
Traditional pre-merger planning and analysis usually focus on legal and financial
aspects. Nevertheless, numerous merging banks fail to anticipate intercultural aspects
that could affect the real value of such transactions. However, banks also need to
understand that cultural factors can critically affect the achievability of all planned
targets. Incorporating cultural due diligence into the pre-merger phase of M&As is key
to success.
The biggest challenge in cross-border banking M&As is to know how far to pursue
integration and how far to maintain cultural diversity as a synergy driver. In some cases,
clashes of cultures within the merged entity appear to have been the reason for bank
M&A failure, but few studies have analyzed these specific aspects.
Our paper analyses the intercultural issues impact on the outcomes of international
banking M&As in order to avoid the M&As disasters.
Key words: mergers and acquisitions (M&As), intercultural, cultural differences,
banking industry
JEL Classification: F23, G34, G21, M14
1.
INTRODUCTION
Not many industries have encountered as much tactical turbulence in the
latest years as has the banking sector. In response to the change of the legal and
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regulatory framework, the structure of the banking industry has been profoundly
displaced. The globalization is changing the dynamics of M&As in the banking
sector, linking borrowers and lenders, issuers and investors, managers and
consultants around the world.
Culture has become an integral part of the general discussion on mergers,
and thus a core element of the social construction of the phenomenon (Gertsen et
al., 2004).
Increasingly, banks are more interested in cross-border M&A deals, looking
to expand to new markets and access new customers. Whatever the goals driving
a M&A, a successful deal by no means guarantees a successful integration in the
post-merger stage. Merging two different banks in different countries means
merging two different bank cultures. The bank culture defines its relationship
and mode of communication with stakeholders and customers, a set of
behaviors, beliefs and values, how banks operate and predict the risks.
Gesteland (2012) defines business culture as a unique set of expectations
and assumptions about how to do business.
Mergers, acquisitions, joint ventures, and alliances across national borders
have become frequent, but they remain a regular source of cross cultural clashes
(Hofstede et al., 2010).
The bank culture can drive value in a transaction and help meet the specific
transaction objectives but, also, cultural mismatches can threaten the success of
any M&A. Rather than regard it as an incidental consequence of a M&A,
acquirers need to see it as a decisive issue, able to attenuate risk and drive
synergies.
For instance, the story of the rise and fall of ABN Amro Bank, one of
Netherland’s prides of the last century is about cultural mismatches. ABN Amro
was formed through the merger between past rivals ABN Bank and Amro Bank.
The substantial cultural gap between the two banks appeared to be addressed
properly during pre- and post- merger stages, but the difference between ABN
and Amro remained present until the fall of the myth.
It is generally believed that culture plays a determinant role in investments.
Zait et al. (2014) remark that in such operations, meeting among businessmen,
managers and other professionals in the field is, first of all, meeting in specific
circumstances, among more or less different cultures.
For example, when an European bank makes a cross-border acquisition in
an emerging market such as South America, we are dealing with a much more
complex situation and the cultural differences are more difficult to reconcile
against M&A objectives. The differences in norms, language, and thinking
patterns can create more uncertainty and greater potential for misunderstanding
and conflict.
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An interesting view (Desai et al., n.d.) shows that research suggests that up
to 65% of failed mergers and acquisitions are due to 'people issues', i.e.
intercultural differences causing communication breakdowns that result in poor
productivity.
2. CULTURAL FIT VS. CULTURAL CLASHES
Corporate culture has definitely become one of the most actively debated
issues distinguishing successful from uninspired performers in the banking
sector. Culture is something every bank has, even if it is weaker or stronger. It is
central to the bank environment in which people have to work.
Berkman (2013) contends that in the context of a merger of two businesses,
one of the intangible issues directly affecting the success of the transaction down
the road is whether the business cultures mesh well.
Today’s M&A success rate hovers around 30 to 40 percent, with clashing
cultures cited as at least a contributing factor in most cases. And yet, despite the
lessons of history, many due diligence teams glance past the topic, preferring
instead to focus on items that can be easily quantified (Recardo & Toterhi,
2014).
In a paper on the relationship between synergy potential and cultural
differences, Weber et al. (2011) reveal that only the fit between the selected
integration approach and the appropriate integration approach, taking into
account the specific level of synergy potential and problems of implementation
due to cultural differences, can minimise the problems created by culture clash
and harness the potential synergy
Shenkar (2012) reveals that the implicit assumption that differences in
cultures produce lack of “fit” and hence an obstacle to transaction is
questionable. First, not every cultural gap is critical to performance. Second,
cultural differences may be complementary and hence have a positive synergetic
effect on investment and performance.
Cultural differences are what the banks consider to be the most prominent
problems when initiating cross-border M&As. In order to have a successful
M&A, the top managers involved need to understand the objectives of the
M&A, the intercultural issues, and the management of human resources (Warter
& Warter, 2015).
The empirical evidence suggests that the culture of a bank can be strongly
influenced by one or more individuals at the top of their financial organizations,
either to push forward and improve upon a culture that already exists or to
radically change it.
Strong leadership can be particularly decisive in M&A, where easy-going
decision-making can obstruct deals and ambiguousness from the top of the bank
can impede or deflect well-defined integration strategies.
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Another scholar (Fiordelisi, 2009) claims that on the whole, integration deals
often require that the banks involved in the deal change their corporate culture:
the workforce may have to change their mindset, cultures and behaviour. In
addition, M&A deals involve transformation in the organization structure and,
consequently, power redistribution among the managers of the two banks: the
conflict of interest and loyalty may deter the success of the M&A deal.
A greater difference in management style may lead to more significant
cultural clashes and to difficulties in the integration. It is therefore important for
foreign acquiring companies to be more cautious in introducing changes in these
two management areas (He, 2009).
Culture clash in bank M&A activity is marked by negative attitudes on the
part of the acquired top managers toward the acquiring top managers. These
approaches reduce the engagement of the acquired top managers to successful
integration of the merging banks and impede their cooperation with the
acquiring top managers.
Moreover, when there is intense and frequent contact between the top
managers of banks involved in merger, cultural differences increase the
likelihood of conflict between the two top management teams involved in the
merger.
In a recent paper (Brogiato, 2012) is mentioned that the problems that can
arise in the post-M&A phase are linked with the clash between the two different
organizations.
Cultural clashes may severely damage the joint action and engagement of
the top management that may be significant in determining the success of the
post-merger integration and ultimately the merger itself.
On the basis of their studies, Stahl et al. (2013) showed that four main
unresolved issues were identified: linking pre- and post-merger processes, the
role of culture, the role of prior acquisition experience, and how to assess
performance.
Warter & Warter (2014) conclude that even in scientific research culture,
through the influence on behaviour, attitudes, and positions towards action is a
major factor of facilitating, blockage, success or failure.
When banks with different product offerings merge, the integration process
is less likely to give rise to the need for downsizing, which could result in loss of
human capital and demoralized employees (Kim & Finkelstein, 2008).
In his study on integration in M&As, Whitaker (2012) observes that culture
clashes also make most employees anxious and in many cases downright
miserable.
It is possible that the stereotypical information about how people in another
culture tend to behave might prove to be wrong in a particular setting and with a
particular individual from that culture (Lee et al, 2013).
370
Yet, the negative impact of cultural differences is thus expected to be
smaller for M&As within the same group of companies (internal acquisition)
than for external acquisitions (Arvanitis & Stucki, 2014).
Rosenbaum & Pearl (2009) believe that the financing team is tasked with
providing an objective assessment of the target’s leverage capacity. They
conduct due diligence and financial analysis separately from (but often in
parallel with) the M&A team and craft a viable financing structure that is
presented to the bank’s internal credit committee for approval.
Other scholars, such as Zander & Zander (2010), consider that it is
imperative to face the complexity of integrating international acquisitions today
while retaining sight of crucial questions such as what type of cultural
differences specifically influence knowledge transfer when opening up the grey
box.
Cultural differences give combining firms the opportunity to obtain distinct
routines and capabilities, which can lead to a richer bundle of knowledge (Reus,
2012).
3. CULTURAL DIFFERENCES: AN ASSET OR A LIABILITY?
There may be distinct beginnings of a bank’s culture, which, individually or
together, can form a strong competitive advantage. Top management and
employees identify with a “proud” history and the cultural attributes associated
with it.
A cultural audit can help the firms anticipate the effect of organizational
cultural differences and adjust the integration process accordingly (Sarala et al.,
2014).
All the difficulties in the M&A stages, especially integration phase, may be
more easily overcome with a strong historical anchor embedded in the corporate
culture. In the case of bank M&A failure, the demoralization effect on corporate
culture can far exceed the direct impact of the failure itself.
Much has been written about the financial, strategic, and integration aspects
of M&A, but the findings are contradictory and the reasons for variations in
M&A performance have remained unclear, probably because of the focus on
pre-merger variables, thereby neglecting cross-cultural conflicts between people
in the post-merger period (Weber et al., 2012).
M&A is a multilevel, multidisciplinary, and multistage process which
requires a pluralist approach, as Warter & Warter (2014) argue. M&A
researchers have focused generically separately on pre-acquisition factors and
post-acquisition influential factors. Neither scholars nor practitioners have a
comprehensive understanding of the factors involved in the M&A process and
their interrelationships.
371
It is generally believed that strong culture differences between the two
merging banks are negatively associated with merger effectiveness.
Another interesting remark is offered by Walter (2004). He argues that
whereas many of the factors determining whether an M&A transaction in the
financial services sector is accretive to shareholders have been explored
extensively in the literature, little attention has been paid to issues surrounding
corporate culture. This is a “soft” factor that arguably explains some of the
differences observed between expected and actual shareholder value gains and
losses. In some cases, clashes of cultures within the merged entity appear to have
been the reason for M&A disasters. The author concludes that corporate culture
has certainly become one of the most actively debated issues distinguishing
successful from lackluster performers in the financial services sector
Cultural differences can lead to distinctive effects in merger situations. On
the one hand, a cohesive and powerful culture can be an asset for an acquirer by
making clear what behavioral norms and values will prevail in the merged bank.
On the other hand, a strong culture on the side of the acquirer may make
integration more difficult to achieve, especially if the acquired has, also, a strong
culture.
The conclusion of the authors on these contradictory results is that in
essence, cultural differences seem to matter but it is not clear whether these can
be handled in a beneficial way, with some studies showing they can be a source
of competitive advantage and others arguing that too great a difference may
seriously impair mutual understanding and integration (Gomes et al., 2013).
Still others (Weber et al., 2012) indicate that much has been written about
the financial, strategic, and integration aspects of M&A, but the findings are
contradictory and the reasons for variations in M&A performance have remained
unclear, probably because of the focus on pre-merger variables, thereby
neglecting cross-cultural conflicts between people in the post-merger period.
A more “optimistic” approach (Stahl & Voigt, 2005) consider that cultural
differences can be a source of value creation and learning in M&A, but they can
also create obstacles to reaping projected synergies by exacerbating social
integration problems and diminishing the firms’ capacity to absorb capabilities
from the other party.
Marks et al. (2014) conclude that cultural differences are not necessarily
harbingers of doom in M&A. The authors’ experience with more than a hundred
deals over the past twenty-five years suggests that, when effectively managed,
cultural distinctions can enrich the integration process and lead to a stronger
combination of the two companies.
Although all the mergers are in the same industry (i.e. banking sector) and
the same country, there was evidence of significant cultural differences between
372
different geographic regions, particularly but not exclusively between the North
and South, which influenced the M&A process (Gomes et al., 2012).
An interesting opinion (Vaara et al., 2013) reveals that special attention
should be focused on how managers may overemphasize the role of cultural
differences and even deliberately blame cultural differences for failure. At the
same time, other causes of integration problems might pass unnoticed and be left
unaddressed.
We agree with Weber et al. (2011) when they show that a chosen integration
approach, based on its specific configurational fit that is congruent with the three
characteristics of each M&A (synergy potential, cultural differences, and
cultural dimensions) can lead the acquiring company to a superior performance.
4. CONCLUSIONS
Culture has emerged as one of the significant obstacles to effective M&A
integration.
Foregrounding the cultural differences allows the acquirer to plan coherent
integration strategies to manage the impact of a cultural mismatch and focus
resources on the main M&A objective: a stronger combination of the two banks.
The answers to the questions regarding cultural fit vs. cultural clashes at the
beginning of the integration process will define the real value that can be
extracted from the merger or acquisition and help sustain the balance between
shareholder satisfaction, synergy delivery and customer gladness.
Given that culture will casually obstruct a proposed transaction, it becomes
the responsibility of top management to prevent culture from undermining their
targets. It is vital to avoid stereotypes due to the fact that, often, banks top
managers have a positive expectation of their ability to master the human and
managerial relationships.
It is easy to make the incorrect decisions in the pre-merger stage but trying
to fix a failed integration, in the post-merger stage, is a very difficult task.
Bank management should pay as much attention to some actions during
premerger stage such as:
• Cultural due diligence to identify and mitigate immediate cultural risks
• Use of cultural differences as a clear driver of value in the transaction
• Communication rules to avoid key staff and/or customers’ loss.
The cultural differences can lead to difficulties of communication and
misunderstandings. Hence, persistent communication throughout the integration
stage is an essential part of success in bridging the cultural gap, especially when
attempting to forge a new culture for the merged/acquired bank.
Such a complex activity as a bank M&A, often does not afford the time for
an exhaustive cultural diagnosis or a long-term culture change strategy with
unclear perspectives of achieving desired aims. A more focused approach, based
373
on identifying the high-risk points in the integration process and putting the
appropriate leaders in place, can help reduce the ways in which culture amplifies
these risks.
The problematic interaction between the acquiring and the acquired bank
(due to cultural differences) or low coordination and collaboration between top
managers and staff (as a result of the culture clash following the merger) may
play a pivotal role in the bank M&A success or failure.
Leaders and managers involved in banking M&As need to identify
integration strategies, in the pre-merger phase, to combine organizational and
national cultures and motivate staff in order to enhance successful M&As.
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Companies Realize The Full Value of Acquisitions. Hoboken, New Jersey: John
Wiley & Sons.
[31] Zait, D., Warter,L. & Warter, I. (2014). Cross-Cultural Incentives for the FDI.
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[32] Zander, U. & Zander, L. (2010). Opening the grey box: Social communities,
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vol.21, 27-37.
376
CAN MERGERS AND ACQUISITIONS IMPROVE
BANKING INDUSTRY?
LIVIU WARTER
Iaşi, Romania
[email protected]
IULIAN WARTER
Iaşi, Romania
[email protected]
Abstract
The new global M&A landscape reveals the reconfiguration of the banking sector
through mergers and acquisitions (M&As). Structural changes in this industry, under
different economic and regulatory conditions, matters a great deal to the shareholders,
top managers, and employees of the banks involved. But it also matters due to the fact
that its performance affects all economic sectors and the fate of global economies.
In the last two decades, banks have expanded their business to serve global customers. It
is vital to know how banks are now reevaluating their M&A strategies based on the
current global economic situation.
The banking M&As experiences and practices that have been well proven in the
traditional economic conditions are hitting their limitations in the global world.
This paper contributes to the management literature by analyzing the underlying drivers
of the M&As process, the economic concepts and strategic precepts used to justify M&A
deals, and the synergy potential of M&As.
Key words: mergers and acquisitions (M&As), synergy, M&A performance, banking
industry
JEL Classification: G34, G21, Z19
377
1.
INTRODUCTION
Calipha et al., (2010) conclude that generally named M&A motives reflect
external motives (such as growth or globalization) as well as more internal
orientations (such as changing business models or achieving synergies).
Banking M&A activity varies across different regions, driven by
differences in economic and political conditions and industry regulations. In the
last years, the banking industry witnessed an increased number of new and
stricter regulations such as the Durbin Amendment, Volcker Rule, Basel III, and
Dodd-Frank Act with impact on global operations.
As a result of these regulations, many banks are likely to focus on the
reconfiguration of their M&A plans and the restructuring activities needed for
their targets. As they plan their M&A strategies, bank boards and top executives
should consider all the factors that may impact M&A readiness, execution, and
post-merger integration.
Regardless of their size, banks contemplating M&A transactions will need
to use different tactics and acquire additional skills. While the new global M&A
landscape has not changed the nature of core banking M&As processes (target
identification, due diligence, valuation and post-merger integration), the new
conditions are forcing the deal makers taking into account a host of additional
factors during both the pre- and post-merger stages of the deal.
The assessment period leading to the announcement of a merger or
acquisition is typically conducted in relative secrecy by a limited number of
representatives from the involved organizations, and in relative brevity to avoid
the leak of information about the intended transaction (Rottig, 2013).
It is also vital to know for practitioners and stakeholders that M&A
activities are more closely scrutinized by both public and government regulatory
bodies in order to avert the risk of losing business and reputation.
Other important factors, in banking M&As, are: economies of scale,
economies of scope, market power, conflicts of interest and managerial
complexity and their impact on market share and stock price performance for
merged banks.
The economic drivers of mergers and acquisitions in the banking sector
need to be integrated into a consistent valuation framework.
For instance, Zait et al. (2014) define an integrated system of determinants
of FDI (especially on M&A) composed of seven categories of determinants:
Economic, Social, Cultural, Institutional, Technological, Organizational and
Commercial.
Scholars and practitioners remark that an important factor for the successful
outcome of a merger is also the methodology of briefing used by the top
managers of the banks during the merger phases.
378
Regardless of team makeup, it is important that all parties be briefed at the
start of the due diligence process on the following (Recardo & Toterhi, 2014):
 Overview of target—company history, size, structure, etc.;
 Deal drivers and expected synergies;
 Nature of transaction;
 Receptiveness of management; and
 Intended level of integration/integration strategy
The banking sector has probably had far more than its share of M&As that
have failed or performed far below expectations due to mistakes in integration.
The banks involved in M&As have to focus on key managerial issues, including
the level of integration required and the integration capabilities on the part of the
acquiring firm, disturbances in human resources and bank leadership, cultural
issues, and opportunity of decision making.
These problems can easily become systemic and can provoke crises that are
hard to control and whose impact can lead to failures.
2.
THE MAIN DRIVERS FOR BANKING M&A
Global business expansion and development through mergers, acquisitions
and strategic alliances is big business. Even in the wake of the financial crisis of
2008/2009, in a climate of banking difficulties and credit restrictions, more and
more “share for share” deals are being proposed and effected (Trompenaars &
Asser, 2010).
In their study, Very et al., (2012) observe that accurate practical predictions
of M&A activity can be made at country level and that the
dependence/contagion framework appears appropriate for selecting the possible
determinants of M&A activity per country.
Weber et al., (2012) argue that because mergers occur relatively
infrequently and unpredictably, the ability of management to accumulate the
large amounts of observations needed to capitalize on simple mechanisms is
limited.
Firms have a broad range of rationales for engaging in cross-border mergers
and other forms of foreign direct investment (FDI); while some companies are in
search of the cost advantages provided by foreign resources, other firms are
primarily interested in gaining access to new markets (Sonenshine & Reynolds,
2014).
In the last decade, mega-deals have reconfigured the banking landscape,
propelling some banks to the global top of banks in terms of market value.
UniCredit is a brilliant example driven by two landmark acquisitions
(HVB/Bank Austria and Capitalia)
On the one hand, local economic conditions could influence M&A activity;
on the other, the intense M&A activity in the U.S. could influence M&A activity
379
in foreign countries. This framework implies both dependence and contagion
with regard to national M&A activity: dependence on a country’s institutional
context, and contagion from U.S. M&A activity.
A closer glance at the essence of the deals in the banking sector reveals
three main drivers: geographic expansion into emerging markets, consolidation
in mature markets, and restructuring of the value chain.
Kim & Finkelstein (2008) show that when these banks merge, the combined
bank can utilize these resources more efficiently by channeling capital from the
lower capital cost market to the market with greater profit opportunities.
In addition to cost and efficiency effects on competitive performance, M&A
transactions in the banking sector are also driven by revenue effects.
According to Larsson & Finkelstein (1999), the success of a merger or
acquisition is gauged by the degree of synergy realization rather than more
removed and potentially ambiguous criteria such as accounting or market
returns.
Other scholar supports the previous ideas showing that the belief in
potential synergy by merger adherents has not diminished very much over the
last twenty years despite a record of extravagant promises, mixed successes and
many outright disasters (Chatterjee, 2007).
A slightly similar approach (Hofstede et al., 2010) reveals that
multinationals with a dominant home culture have a clearer set of basic values
and therefore are easier to run than international organizations that lack such a
common frame of reference.
The specific business strategies that drive banking M&A can be classified
under four categories:
• New business acquisition (the business strategy for the
acquiring bank is to venture into a new line of business)
• Small bank acquisition (the main strategy for the acquiring bank
in this second category is volume expansion)
• Full bank acquisition (all the business operations of the target
bank are acquired, achieving both volume and business line expansion)
• M&A among equals (the acquired bank is similar in size to the
acquiring bank and the business strategy is for volume and business
expansion; both banks have similar reputations in the market)
Commercial banking activities have several characteristics that make them
a particular focus for M&A transactions. These include (1) high cost distribution
and transactions infrastructures such as branch networks and IT platforms that
lend themselves to rationalization; (2) overcapacity brought on by traditions of
protection and distortion of commercial banking competition, and sometimes by
the presence of public-sector or mutual thrift institutions and commercial banks
(such overcapacity presents an opportune target for restructuring, in the process
380
eliminating redundant capital and human personnel); (3) slow-growing markets
that rarely outpace the overall rate of economic growth and usually lag it due to
encroaching financial disintermediation, exacerbating the overcapacity problem;
and (4) mature products that make innovation difficult in the production of
financial services, combined with sometimes dramatic innovation on the
distribution side, notably Internet-based commercial banking (Walter, 2004).
Konstantopoulos et al. (2009) remark that an important factor for the
successful outcome of a merger is also the methodology of briefing enacted by
the leaders of the banking branch during both the negotiation and merger
process.
According to Rosenbaum & Pearl (2009), when evaluating strategic buyers,
the banker looks first and foremost at strategic fit, including potential synergies.
Financial capacity or “ability to pay”—which is typically dependent on size,
balance sheet strength, access to financing, and risk appetite—is also closely
scrutinized. Other factors play a role in assessing potential strategic bidders,
such as cultural fit, M&A track record, existing management’s role going
forward, relative and pro forma market position (including antitrust
concerns),and effects on existing customer and supplier relationships.
Although most of the researchers point to cultural determinants of M&A,
there is not a general common opinion of the main M&A success factors (Warter
& Warter, 2014)
DePamphilis (2014) concludes that cultural differences can instill creativity
in the new company or create a contentious environment.
3. POSITIVE SYNERGY AND M&A SUCCESS
Generally, the justification of M&A operations is the intention to create
positive synergies (Li Destri et al., 2012).
DePamphilis (2012) emphasises also a different opinion: rapid integration
may result in more immediate realization of synergies, but it also contributes to
employee and customer attrition.
Some empirical studies report positive combined announcement period
returns to the acquirer and target in a merger, leading to the conclusion that
synergy is an important explanatory factor for merger activity.
According to Hitt et al. (2009), in particular, firms are better able to achieve
synergy when the institutions of the host country are more similar to the
institutions in the acquiring firm’s home country.
Post-acquisition synergies appear to be essentially rooted in the social
relations and interactions that emerge between organizational members (Mirc,
2012).
Although the synergy potential of M&A deals is widely promoted, attempts
to exploit such synergy in all stages of M&As are often unsuccessful.
381
Garzella & Fiorentino (2014) consider that synergies take longer to achieve
than expected. In addition, the time estimated for synergy to be realized is not
respected.
In a recent paper, Warter & Warter (2015) remark that turning a merger or
acquisition into a success may be difficult due to the challenges inherent in
virtually all stages of banks M&As. Dealing with differences in regulatory and
accounting systems and, cultural differences among banks operating in different
countries, requires high-level management skills and significant resources.
The conclusion reached by Fiordelisi (2009) is that the brand name
continuation is more apparent than the others, the preservation of culture,
leadership and decision making are crucial to achieve the M&A strategic aims:
for instance, a higher degree of autonomy would be appropriate if the target
bank has excellent skills (such as the workforce ability to minimize wastes
and/or customer-orientation) that are important to preserve.
In the case of cross-border bank M&A, how to weld the target into an
integrated business structure, how to deal with intercultural issues, and how to
bridge regulatory systems are among the key questions.
Warter & Warter (2014) consider that cultural diversity in organizations can
be both an asset and a liability. Whether the losses associated with cultural
diversity can be minimized and the gains be realized will depend likewise on the
managers’ ability to manage the negotiations and due diligence processes in an
effective manner.
Traditionally in a M&A, culture is the last thing that is being integrated as it
is a common belief that firstly it is important to create the synergies that lead to a
lowering of costs and then, over time, caring about culture and values (Brogiato,
2012).
Whatever the strategic goals driving a merger or acquisition, a successful
M&A by no means ensures a successful integration. Because no two mergers or
acquisitions are alike, it is required to adapt the integration approach and speed
to individual cases.
Most management researchers and practitioners point out that, particularly
in the case of international M&A, cultural differences and integration efforts
during the post-acquisition integration period are critical to performance (Gomes
et al., 2013).
According to Proft (2014), the pace of integration depends on the type of
integration. The author replaced the question “Is speed of integration beneficial
to M&A success” with “Which type of speed of integration is beneficial for
M&A success?”.
An interesting opinion (Marks & Mirvis, 2010) considers that the optimal
result is full cultural integration — the blending of both companies’ policies and
practices.
382
With a few exceptions, the strategic and finance literature has not
considered the possibility that in the management of a merger, the problematic
interaction between the buying and the target firms (due to cultural differences)
or low coordination and cooperation between managers (as a result of the culture
clash following the merger) may play a key role in the M&A success (Weber et
al., 2011).
A high degree of personnel turnover of the acquired bank tends to
negatively impact the post-merger performance of the merged bank through the
departure of key people and the demoralization of the remaining employees.
The aggressive personnel replacement in the acquired bank is a frequent
pitfall in many banking M&As due to a strong pressure to slash costs. This can
lead to severe damage to employee morale, with negative repercussions on
personnel retention, and on possible synergies.
Galpin & Herndon (2014) posit that most companies do a decent job of
traditional financial due-diligence analysis but a dismal job of nontraditional
human capital and cultural due diligence.
In sum, the presence of synergy is as an important determinant of value
creation in a merger. The development of M&A integration capabilities seemed
to have a strong positive impact on merged bank performance, but not without
costs and efforts during the post-merger integration stage.
In their comprehensive analysis, Gleich et al. (2010) posit that although we
cannot predict with certainty the outcome of an M&A, done properly, strategic
fit, organizational and cultural due diligence could, and should, be an effective
insurance policy against failures that too often accompany M&As.
Success depends on decisions in different M&A phases. To successfully
manage M&As, managers need to be aware of these complex relationships there are no simple solutions to complex problems (Bauer & Matzler, 2014).
4.
CONCLUSIONS
Banks are under more and more pressure to improve their operational
efficiency due to the changing regulatory landscape and challenging economic
conditions around the world. Banks are expected to be more cautious in their
M&A expansion strategy and to leverage the full benefits of a successful M&A.
The way to do this is to create the integration strategy, based on the cultural due
diligence, in the pre-acquisition stage of the M&A.
The acquiring bank needs to assess the potential of both banks, and can
adopt a personalized integration model. Also, the acquiring bank needs to assess
the complexity of the integration process in order to improve operational
efficiency and stakeholders’ satisfaction, helping the bank realize the full
potential of a strategic M&A.
383
In building a new bank culture, top management has to focus key personnel
on the future by adopting new values and beliefs, most of which tend to be
performance related.
M&A activity in the banking industry may be challenged by turbulences
such as an unpredicted extension of the long-drawn low interest rate
circumstance, heightened regulatory investigation of potential transactions and
prudent acquirers and sellers.
Prior studies uncovered that over 60% of mergers and acquisitions fail and
do not increase organizational and individual performance so the merged banks
have to change top management and employees with poor performance records
into new management and staff to improve outcomes of the new organization.
Bank M&A that endorses customer or geographic specialization is
presumptive to continue. Many banks are taking an extended view of their
geographic and customer markets, in order to increase, by M&A, their activities
in countries, where they are already well situated or where they see future
opportunities. At the same time, numerous banks are exiting low-performing
markets to improve capital efficiency.
The banking sector is much less consolidated than other sectors in the
global environment. Still, the global financial crisis can be expected to increase
the rate at which subsequent consolidation takes place. Subsequent value chain
restructuring will also generate more deals.
The gainers of tomorrow are presumably to be anti-cyclical acquirers of
today, as the M&A wave in the 90’s proved. But whether the next M&A wave
will create real value and positive synergies relies on how well the merging
banks perform in the merger competition. Only those that excel in the key
challenges can expect to achieve the full benefits of a successful M&A.
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386
SECTION II
EUROPEAN PUBLIC POLICIES FOR THE
BUSINESS ENVIRONMENT
AN ANALYSIS OF FINANCIAL ASSISTANCE PROVIDED
BY MULTILATERAL DEVELOPMENT BANKS TO CEE
COUNTRIES
SORIN GABRIEL ANTON
“Alexandru Ioan Cuza” University, Faculty of Economics and Business
Administration
Iasi, Romania
[email protected]
ANCA ELENA NUCU
“Alexandru Ioan Cuza” University, Faculty of Economics and Business
Administration
Iaşi, Romania
[email protected]
Abstract
Sustainable and inclusive growth in emerging markets requires long-term, reliable
capital to finance productive investment, highlighting the important role of Multilateral
Development Banks (MDBs) in long-term economic development. The recent economic
and financial crisis has constrained the traditional sources of long-term financing,
particularly for small and medium sized enterprises and for infrastructure. Financial
instability and the new architecture related to rebuilding the balance sheets has
significantly constrained the ability of the private sector to provide long-term financing
and therefore, the European banks, which have traditionally played a leading role in
structured finance, are still recovering from the crisis and adjusting to tighter regulatory
requirements. The purpose of our paper is to perform a comparative analysis of the
financial investment projects of the European Investment Bank and the European Bank
for Reconstruction and Development in Central and Eastern European countries,
members of the European Union. The results highlight the fact that one of the MDBs
aims is to support the development of micro, small and medium-sized enterprises (SMEs)
which are essential to support a private sector economy.
Keywords: Multilateral Development Banks, small and medium-sized enterprises, loans
JEL Classification: G32, F34
388
EUROPEAN PUBLIC POLICIES FOR THE BUSINESS ENVIRONMENT
1. INTRODUCTION
In the last years one of the most important consequences of the global
financial crisis for the emerging market economies (EMEs) was the difficulty to
access financial resources. In this context, MDBs increased their financial and
technical assistance to the member countries and also played an important role in
attracting capital from private sector. According to Chelsky et al. (2013), the
multilateral development banks (MDBs) can support their clients in raising
additional financing from the private sector through “a combination of a strong
financial position; preferred creditor status; technical expertise; prudent risk
management policies; credible application of well understood standards in
project design, execution, and corporate governance; a long-term perspective;
and cross-country experience”.
The purpose of our paper is to perform a comparative analysis of the
financial investment projects of the European Investment Bank (EIB) and The
European Bank for Reconstruction and Development (EBRD) in Central and
Eastern European Countries, members of the European Union.
The remainder of the paper is organized as follows. Section 2 briefly
surveys the role of the multilateral development banks in emerging market
economies. Section 3 represents a comparative analysis of financial investment
projects of EIB and EBRD per countries and activity sectors. Section 4
highlights the main conclusions.
2. THE ROLE AND THE IMPORTANCE OF THE MULTILATERAL
DEVELOPMENT BANKS IN EMERGING MARKET ECONOMIES
In academic literature as well as general public perception, the MDBs have
long been viewed as domineering organizations able to impose themselves upon
developing countries (Humphrey & Michaelowa, 2010). During the recent
international economic and financial crisis, the MDBs acted countercyclical:
they impose very little direct fiscal costs to wealthy countries, undertake the
provision of what is generally considered a global public good, development
assistance, and, arguably, further the geopolitical interests of powerful
shareholders. The development banks are better placed to provide funds for
development to countries that lack the credit ratings to access capital from the
financial markets. These banks also are more attuned to the needs of their client
countries, as they have often funded projects that relate to infrastructure - a
salient need in the time of crisis. According to Gurria & Volcker (2001), loans
provided by MDBs may have a positive effect on public investments with high
social and economic returns.
The escalation of geopolitical tensions in the region might entail a renewed
increase in risk aversion on the international financial markets (National Bank of
Romania, 2014). The EU offered its support to Ukraine, which was granted
389
financial assistance in amount of EUR 15 billion, whereas the EIB and the
EBRD announced a contribution of EUR 8 billion, and the IMF made available
USD 17 billion (approximately EUR 12.4 billion).
MDBs pay an increased attention to small and medium-sized enterprise
(SME) and they took several measures in order to enhance SMEs access to
finance during the recent economic and financial crisis (Anton, 2013a):
• MDBs increased the cooperation among them in order to enhance private
sector development;
• MDBs established relationships with financial intermediaries in order to
reach the greatest number of SMEs and magnify the presence and scale of
local/regional financial institutions.
• MDBs have increased the level of commitment to the supporting of SMEs
after the crisis.
3. A COMPARATIVE ANALYSIS OF EIB AND EBRD FINANCIAL
INVESTMENT PROJECTS IN CEE COUNTRIES, EU MEMBERS
The recent financial and economic crisis caused a contraction of foreign
direct investments, due to the risks stemming from macroeconomic
developments, highlighting structural investment gaps. Also, fiscal consolidation
efforts and the new European macroprudential framework implemented as
response to the banking financial instability undermine the ability of Member
States and the European banking sector to gather profitable investment.
The EIB provides financial and technical assistance for sound and
sustainable investment projects, helping SMEs, supporting infrastructure and
innovation, enhancing climate action and improving people’s standards.
As the European Union's bank, about 90% of EIB funding is oriented
towards promoting sustainable development and job creation in the Member
States. This includes support of regional policies such as those in the Baltic Sea
and Danube areas. Last year, EIB provided EUR 77bn as loans. Roughly 90% of
this amount was directed to projects in the EU Member States, while the
difference of 10% went to projects outside the EU, for countries that have
cooperation agreements with the EU or its Member States (EIB, 2014b).
During the period 2010-2014, Poland received the highest finance from
CEE countries, there being considerable EIB investment in energy sector as a
whole, to support the country’s ambitious renewable energy plans (table 1).
Almost half of this went towards transport and telecommunications projects,
while 18% went to SMEs and 15% to industry, services and agriculture. At the
opposite side, we find Latvia with only 379 million EUR invested by EIB.
EIB loans in Romania amounted to EUR 590 million in 2014, highlighting
an increase of 11% compared with the previous year. During the analysed
period, the Bank provided EUR 2.8 billion to support SMEs, energy, transport
390
and telecommunications infrastructure, besides industry, services and
agriculture. During the past five years (2010-2014) the EIB has invested EUR
5.6 billion in the Czech Republic. SMEs account for 41% according to the data
from the table, reflecting the Bank’s priority objectives in the EU in recent years.
Last year, the EIB offered roughly EUR 1.6 billion for the Greek economy,
supporting energy and transport infrastructure (75%), as well as SMEs which
accounted 13%. During the analysed period, the Bank has invested EUR 7.7
billion in Greece, in domain as infrastructure, SMEs and energy. During 20102014, the MDB provided EUR 6.1 billion to Hungary and the allocation was as
follows: 27% of the amount was directed towards domestic SMEs, 20% to
industry, services and agriculture, and a further 20% has consolidated projects in
transport and telecommunications.
Table 1. EIB lending by sector in CEE countries, member of EU, from 2010
to 2014 (in EUR m)
Country
Total
BG
CZ
GR
HR
LT
LU
HU
PL
RO
SI
SK
1.334
5.584
7.734
2.294
379
419
6.141
26.481
2.795
2.279
3.229
Energy
Transport,
telecommu
nications
Water,
sewerage,
solid waste,
urban
development
Industry,
services,
agriculture
Educat
ion,
health
SMEs
projects
0.2%
14%
23%
0.1%
26%
36%
10%
7%
18%
32%
13%
26%
23%
34%
9%
17%
20%
47%
22%
10%
14%
18%
5%
9%
11%
11%
7%
11%
22%
7%
16%
12%
4%
4%
20%
15%
26%
6%
15%
1%
6%
0.3%
12%
6%
4%
5%
49%
41%
16%
76%
74%
43%
27%
18%
34%
37%
31%
(Source: European Investment Bank, Statistical Report 2014)
The analysis regarding EIB financing breakdown by sector (table 1) points
out that small and medium scale projects are on top, because as a consequence of
the financial crisis, economies of Central, Eastern and South-Eastern Europe
(CESEE) faced a downward trend of loans supply to SMEs, low profitability and
an increasing level of non-performing loans (EIB, 2014b). Banks in the CESEE
countries have experienced a contraction in foreign financing from parent banks
as a result of balance sheet adjustment of European banking groups. Also, the
portfolio of loans recorded the highest credit risk levels due to the economic
downturn on corporate and household income. The credit market was affected
by factors that have been dampening both loan supply and demand. Under these
391
circumstances, banks are reticent to take additional credit risk or to extend the
maturity of corporate loans, in a context of low financing volumes on the capital
market (EIB, 2014a). If credit supply is constrained, then mechanisms such as
credit guarantees, could be useful in maintaining credit flows to the private
sector.
During the crisis the EIB has placed a particular focus on providing specific
support to countries and regions in the EU-28 that are facing limited access to
capital markets by providing increased lending capacity as a direct result of the
enlarged mandate. Lending outside the EU underpins the EIB’s support for the
EU’s external priorities via long-term investments. EIB focuses on local private
sector development, social and economic infrastructure and climate change
mitigation and supports foreign direct investment.
The EBRD has been established in 1991 with the aim to facilitate the
transition of the planned economies from Central and Eastern Europe (CEE) to
free-market economies (Anton, 2013b). There are two specific features of EBRD
compared with other MBDs (Nelson, 2013):
• the EBRD focuses on enhancing democracy-building activities;
• the EBRD does not provide concessional finance.
Also, there is a clear separation between resources provided to private sector
(60% of total lending) and public sector (40%).
Table 2. EBRD activity in CEE countries, member of EU, to date
Country
No. of
projects
Cumulative EBRD
disbursements (€
billion)
Cumulative
EBRD
investment
Bulgaria
Czech
Republic
Greece
Croatia
Latvia
Lithuania
Hungary
Poland
Romania
Slovenia
Slovakia
228
-
2.7
-
2.9
-
Private sector share
of cumulative
investment (€
billion)
88%
-
n/a
n/a
n/a
170
2.7
3.1
71
0.5
0.6
76
0.6
0.6
169
2.5
2.7
346
6.5
7.27
368
6
6.9
69
0.8
0.8
127
1.8
2.1
(Source: http://www.ebrd.com/where-we-are.html)
392
n/a
73%
64%
62%
91%
86%
74%
68%
90%
The EBRD is the largest institutional investor in Romania. Since the start of
its operations in our country, the EBRD has invested roughly € 6 billion in 368
projects (table 2), focusing on maintaining stability and expanding products in
the financial sector, sustaining infrastructure through improved efficiency and
greater private sector involvement, as well as on revamping the power sector and
increasing energy efficiency and sustainability. On the opposite site, we find
Latvia with only 71 financed projects, based on helping investments in energy
security and energy efficiency, enhancing the financial sector and improving the
competitiveness of the export domain. In Poland, EBRD is oriented towards
promoting the low carbon economy, enhancing the private sector’s role in the
economy and assisting in the development of a sustainable financial sector and
capital markets.
Table 3. EBRD current portfolio breakdown by sector in CEE countries,
member of EU (in EUR m)
Country
Current
portfolio
Energy
Financial
institutions
Industry,
commerce
and
agribusiness
Infrastructure
Of which
Bulgaria
Croatia
Latvia
Lithuania
Hungary
Poland
Romania
1,100
1,300
249
120
537
2,900
2,300
26%
7%
44%
0%
34%
32%
27%
15%
38%
40%
32%
0%
24%
15%
43%
23%
15%
32%
26%
36%
31
16%
32%
1%
36%
40%
8%
27%
Slovenia
230
43%
11%
46%
0%
Slovakia
551
14%
26%
19%
(Source: http://www.ebrd.com/where-we-are.html)
41%
In November 2012, three multilateral development banks - the EIB, the
World Bank Group, and the European Bank for Reconstruction and
Development (EBRD) launched the Joint IFI Action Plan for Growth in Central
and South Eastern Europe in order to sustain economic recovery in the countries
form this region (EIB, 2014b). By the end of July 2014, the target of EUR 30
billion financial assistance was met, delivering collectively EUR 33.6 billion.
4. CONCLUSIONS
The main purpose of the MDBs is to contribute to the economic
development and social progress of their regional member states, both
393
individually and collectively. EIB financial support focuses on developing
innovative products and partnerships that facilitate access to finance for SMEs at
all stages of their development. Together, the EIB and EIF mobilise their
financial and technical expertise to act as a catalyst for investment in this
important economic sector to enhance smart, sustainable and inclusive growth.
The mandate of the EBRD is to foster countries’ transition into developed
market-oriented economies, and its lending focuses on enhancing the
development of the private sector. The positive performance of the CEE
economies in the last period needs to be strengthened by a consistent policy mix,
in line with the economic reform path assumed under the financing arrangements
with international institutions. This would pave the way to act pro-actively with
any unfavourable developments in the event of heightened risk aversion
resurfacing on global financial markets.
ACKNOWLEDGEMENT
With the support of the Lifelong Learning Program of the European Union
through the Jean Monnet Module “Euro and the Banking Integration Process in
an Enlarged EU - 2012-2911”. This publication reflects the views only of the
authors, and the Commission cannot be held responsible for any use which may
be made of the information contained therein.
References
[1] Anton, S. G. (2013a). Multilateral Development Banks and their Role in Supporting
European SMEs during the Current Financial Crisis. Acta Universitatis Danubius.
Oeconomica, Vol 9, Issue 6, 82-88.
[2] Anton, S. G. (2013b). Instituţii financiar-bancare internaţionale. Bucureşti:
Publishing House C.H. Beck.
[3] Chelsky, J., Morel, C., Kabir, M. (2013). Investment Financing in the Wake of the
Crisis: The Role of Multilateral Development Banks, Number 121 Economic
Premise. Retrieved from http://siteresources.worldbank.org/ EXTPREMNET
/Resources/EP121.pdf
[4] European Bank for Reconstruction and Development (2015). Retrieved from
http://www.ebrd.com/where-we-are.html
[5] European Investment Bank (2014a). EIB financing in the Eastern Partnership.
Retrieved
from
http://www.eib.org/attachments/country/factsheet_eastern
_partnership_2014_en.pdf
[6] European Investment Bank (2014b). Third Report on the Joint IFI Action Plan for
Growth in Central and South Eastern Europe. Retrieved from http://www.eib.org
/attachments/efs/economic_report_jiap_III_2014_en.pdf
[7] Gurria, J.A., Volcker, P. (2001). The Role of the Multilateral Development Banks in
Emerging Market Economies. Commission on the Role of the MDBs in Emerging
Markets, Retrieved from http://carnegieen dowment.org/pdf/files/mdbreport.pdf
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[8] Humphrey, C., Michaelowa, K. (2010). The Business of Development:
Trends in Lending by Multilateral Development Banks to Latin America, 19802009.
Retrieved
from
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Conf4_Humphrey- Michaelowa-11.10.2010.pdf
[9] National Bank of Romania (2014). Financial Stability Report. Bucureşti.
[10] Nelson, R. (2013). Multilateral Development Banks: Overview and Issues for
Congress.
Congressional
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395
LOCAL FINANCIAL AUTONOMY AND LOCAL
ECONOMIC GROWTH - AN EMPIRICAL ANALYSIS FOR
ROMANIAN COUNTIES
IRINA BILAN
Iasi, Romania
[email protected]
ELENA CIGU
Iasi, Romania
[email protected]
Abstract
The economic theory of decentralization offers a number of hypotheses on the
relationship between local autonomy and local economic growth, while practical
evidence is not uniform among countries. In this paper, we firstly aim to provide a
theoretical approach on this relationship, by reviewing the most relevant studies on this
issue. Then, we develop a linear regression model for evaluating the effects of local
financial autonomy on local economic growth and apply it for the case of Romanian
counties, over the period 2006-2012, period broadly corresponding to Romania’s
membership to the European Union and covering both pre-crisis and crisis conditions.
To control for heterogeneity, we use the fixed effects estimation technique for panel data
models. The results did not confirm our hypothesis of a positive impact of a higher
degree of local financial autonomy on local economic growth but, as some other studies
on developing countries found, proved that financial autonomy had deleterious effects on
local economic growth at the level of Romanian counties. The paper can be considered a
useful viewpoint in understanding the complex relationship between local autonomy and
local economic growth, thus adding to existing literature on financial decentralization.
Keywords: local financial autonomy, economic growth, Romanian counties
JEL Classification: O4, O47, H7
1. INTRODUCTION
The establishment of democracy in Romania at the end of 1989 has
generated deep social and economic transformations, and the complexity of
396
challenges that central administration had to face and the necessity to manage
public affairs under the best conditions have determined the direct implication of
local authorities, through the decentralization process. At the same time, there is
great emphasis in Europe on using local potentialities for ensuring sustainable
local development. In this context, local autonomy satisfies the particular
requirements of each local community, ensuring its conservation and
development, which from the economic perspective will lead to higher local
economic growth. This calls for the development of theoretical and empirical
research on the relationship between local financial autonomy and local
economic growth, with particular relevance for Romania.
The goal of this paper is twofold, theoretical and empirical. Firstly, at
theoretical level, we intend to highlight the state of knowledge on the
relationship between local autonomy and local economic growth and
development. Secondly, assimilating the results of previous studies, we intend to
develop an econometric model for evaluating the effects of local financial
autonomy on local economic growth and apply it for the case of Romanian
counties, during 2006-2012. Our working hypothesis is that, as decentralization
theory stipulates, local financial autonomy may have positive effects on local
economic growth.
The paper is structured as follows: section 2 provides a theoretical analysis
of the relationship between local financial autonomy and local economic growth;
section 3 describes the model, variables, data sources and method of estimation;
section 4 summarizes the results of the empirical study conducted on Romanian
counties, over the period 2006-2012, and draws some policy recommendations.
The paper ends with conclusions and references.
2. THEORETICAL BACKGROUND
Theoretical approaches on the relationship between economic growth and
decentralization emanated in early times and from few authors (Tiebout, 1956;
Musgrave, 1959; Oates, 1972). The empirical analysis of the role of economic
growth on fiscal decentralization developed more at the end of the 1970s (Kee,
1977; Pommerehne, 1977). The studies directly examining the impact of fiscal
decentralization on economic growth multiplied at the end of the 1990s.
The scientific literature outlined a series of explanatory hypotheses for the
relationship between fiscal decentralization and economic growth. In summary,
a number of studies found a positive relationship between fiscal decentralization
and economic growth (Oates, 1993; Bird, 1993; Bird & Wallich, 1993; Yilmaz,
1999; Iimi, 2005), while others found opposite evidence, respectively of a
negative relationship between fiscal decentralization and economic growth (Xie
et al., 1999; Davoodi & Zou, 1998; Zhang & Zou, 1998; Martinez-Vazquez &
McNab, 2006). There are also studies that established no direct relationship
397
between the two (Davoodi & Zou, 1998 – only for developed countries;
Martinez-Vazquez & McNab, 2006).
According to the first hypothesis, decentralizing revenue raising and
spending decisions is seen as a way to increase economic efficiency, because
local governments are better positioned than the central/national government to
deliver public services that match local preferences and needs and, over time,
efficiency gains will lead to faster local as well as national economic growth
(Oates, 1972; Oates, 1993; Bird, 1993; Bird & Wallich, 1993). Oates (1995)
found a significant and robust positive correlation between fiscal
decentralization and growth. Some other authors (Panizza, 1999; MartinezVazquez & Timofeev, 2009) revealed that the positive effects on the GDP per
capita exist in countries with higher levels of income and with more
decentralized government.
According to the second hypothesis, there is a negative relationship
between fiscal decentralization and growth. Xie et al. (1999), using a simple
model of endogenous growth with public spending by different levels of
government applied to the U.S.A. economy, demonstrated how fiscal
decentralization affects the long-run growth rate of the economy, respectively
that further decentralization in public spending may be harmful for growth.
Zhang & Zou (1998) also found a negative effect of fiscal decentralization on
local welfare and development for the Chinese economy, characterized by a
decentralization that has been implemented too fast and has gone too far,
threatening macroeconomic control and stability. Martinez-Vazquez & McNab
(2006) demonstrated that decentralization may directly and negatively affect
economic growth in higher-income countries, but that this effect is reduced
through the indirect positive impact of decentralization on growth through
macroeconomic stability. Davoodi & Zou (1998), investigated the relationship
between fiscal decentralization and economic growth for a panel of 46 countries
over the period 1970-1989, found a negative relationship in developing
countries, but no relationship between fiscal decentralization and growth in
developed ones.
Finally, the third hypothesis highlights the idea of no direct relationship
between fiscal decentralization and economic growth. However, Davoodi & Zou
(1998) found this to be true only for developed countries.
The review of existing literature on the relationship between local
autonomy and local economic growth proves this issue is quite poorly exploited,
at least for the case of Central and Eastern European countries, Romania in
particular. From this point of view, our analysis is an original one and of
absolute novelty for Romania where, as far as we know, there is no previous
study evaluating the effects of the degree of local financial autonomy (at the
level of counties) on local economic growth.
398
3. DATA AND METHOD
Our study analyses the relationship between local financial autonomy and
local economic growth rates for a panel of 42 Romanian counties and over the
period 2006-2012, period broadly corresponding to Romania’s membership to
the European Union. Also, as the effects of the economic crisis were felt quite
late in Romania in comparison to other European countries, since late 2008, our
time framework covers both pre-crisis (2006-2008) and crisis conditions (20092012). The data for our study come from official national and international data
sources, as World Bank’s World Development Indicators database (World Bank,
2015), Tempo-online database (INSSE, 2015) and “The situation of the
execution of the revenues and expenditures of local budgets for territorialadministrative units (2000-2012)” (The Romanian Ministry of Regional
Development and Public Administration, 2015).
Our model is a standard growth regression model, augmented with some
variables to express the degree of local financial autonomy and self-financing, as
depicted in equation (1).
𝑦𝑦𝑖𝑖,𝑡𝑡 = 𝛼𝛼𝑖𝑖 + 𝛽𝛽1 𝑌𝑌𝑖𝑖,𝑡𝑡−1 + 𝛽𝛽2 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑖𝑖,𝑡𝑡 + 𝛽𝛽3 𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑖𝑖,𝑡𝑡 + 𝛽𝛽4 𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖,𝑡𝑡 +
𝛽𝛽5 exp⁡_𝑖𝑖𝑖𝑖𝑖𝑖𝑡𝑡 + 𝛽𝛽6 𝑒𝑒𝑒𝑒𝑒𝑒ℎ𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑡𝑡 + 𝛽𝛽7 𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑡𝑡 + 𝛿𝛿𝛿𝛿𝑖𝑖,𝑡𝑡 + 𝜗𝜗𝑖𝑖 + 𝜀𝜀𝑖𝑖,𝑡𝑡
(1)
where: i refers to the county (𝑖𝑖 = ��
1, 42); t refers to the year (𝑡𝑡 = ��
1,6); y is
the dependent variable; population is the local population growth rate;
expenditures is local budgetary expenditures expressed as % of local GDP;
investment is the gross investments in local units in industry, constructions, trade
and other services, expressed as % of local GDP, a proxy variable for local
private investments; exp_imp is the sum of imports and exports as % of GDP,
expressing the degree of openness of the Romanian economy in each year;
exchange is the real effective exchange rate; interest is the real interest rate; X is
the independent variable expressing the degree of financial autonomy or local
governments’ self-financing of each county; 𝛽𝛽1 , 𝛽𝛽2 , … 𝛽𝛽7 𝑎𝑎𝑎𝑎𝑎𝑎 𝛿𝛿 are the
coefficients of the explanatory variables; 𝛼𝛼 is the constant term; 𝑣𝑣𝑖𝑖 are the
county-specific intercepts and 𝜀𝜀𝑖𝑖,𝑡𝑡 are the observation-specific errors.
The dependent variable (y) is represented in our model by the annual real
GDP growth rate at the level of Romanian administrative-territorial units
(counties). The growth rate of local GDP was computed using GDP expressed in
the constant prices of the year 2006. As standard growth models, our model also
includes, as independent variable, the natural logarithm of the real GDP per
capita of the previous year (Y).
In order to capture the effects of local financial autonomy on local
economic growth, we have successively included into our growth model two
explanatory variables, as follows:
399
•
•
the degree of financial autonomy (autonomy_fin):
𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎_𝑓𝑓𝑓𝑓𝑓𝑓 =
𝑡𝑡ℎ𝑒𝑒 𝑜𝑜𝑜𝑜𝑜𝑜 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟 𝑜𝑜𝑜𝑜 𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙 𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏
𝑡𝑡ℎ𝑒𝑒 𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟 𝑜𝑜𝑜𝑜 𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙 𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏
∗ 100
(2)
the degree of local governments’ self-financing (self_fin):
𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠_𝑓𝑓𝑓𝑓𝑓𝑓 =
𝑡𝑡ℎ𝑒𝑒 𝑜𝑜𝑜𝑜𝑜𝑜 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟 𝑢𝑢𝑢𝑢𝑢𝑢 𝑜𝑜𝑜𝑜 𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙 𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏
𝑡𝑡ℎ𝑒𝑒 𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜 𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒 𝑜𝑜𝑜𝑜 𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙 𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏
∗ 100
(3)
In agreement with economic theory, we expect for a positive relationship
between the above mentioned variables and local economic growth rates.
However, as previous empirical studies on less developed countries with an
unstable economy (as is the case of Romania) prove, it is to be admitted that a
higher degree of financial autonomy may also have deleterious effects for local
economic growth.
Given the quite high number of cross-sectional units (42 counties) and the
issue of heterogeneity, the fixed effects estimation technique for panel data
models was selected. The results of the Hausman test confirmed that the fixed
effects estimation technique is to be preferred to random effects. As the results
of the modified Wald test for groupwise heteroskedasticity in fixed effects
regression models rejected the null hypothesis of homoscedasticity, we used
Huber/White (sandwich) estimators to control for heteroskedasticity.
4. EMPIRICAL RESULTS AND DISCUSSIONS
The results of our linear regression analysis are summarized in table 1.
Along with some other determinants of local economic growth rates at the level
of Romanian counties, model (1) includes as explanatory variable the degree of
local financial autonomy, while model (2) includes the degree of local
governments’ self-financing.
The results of both models invalidate the hypothesis of a positive
relationship between local financial autonomy and local economic growth at the
level of Romanian counties and over the period 2006-2012. The coefficients of
both variables we are interested in (autonomy_fin and self_fin) are negative and
statistically significant. However, this is not out of the common, as similar
effects have been confirmed by other empirical studies on developing countries
(Davoodi & Zou, 1998).
400
Table 1. The results of the regression analysis
L.Y
Population
autonomy_fin
self_fin
Model 1
-63.45181***
(4.169426)
2.16804
(1.866733)
-0.6022627***
(0.1825294)
-
Model 2
-64.65515***
(4.307828)
-0.2009759
(2.497041)
-
-0.8297048***
(0.1712235)
expenditures
-4.142166***
-4.74782***
(0.5962353)
(0.5954046)
Investment
0.0088344
0.0112952
(0.0089334)
(0.0099732)
exp_imp
-0.2404388***
-0.3216135***
(0.03794)
(0.0313824)
Exchange
-0.5988707***
-0.4221081***
(0.0960879)
(0.0956113)
Interest
-1.216119***
-1.069836***
(0.1271161)
(0.1291478)
_cons
759.0646***
773.3706***
(50.10096)
(49.78826)
N
252
252
R-squared
0.7968
0.8209
Notes: heteroskedasticity-robust standard errors between parentheses
*** denotes significance at 1%, ** at 5%, * at 10%
(Source: authors’ calculations using Stata 12.0)
The rational explanation could be the fact that the positive effects of local
autonomy on local economic growth may not materialize for developing
countries (such as Romania), since local autonomy is affected by a number of
legal and non-legal, direct and indirect constraints.
As direct legal constraints on local revenue autonomy, for the case of
Romania, we may consider the statutory rules on specific parameters of ownsource revenues (local taxes, user charges, fines, revenues from leasing and sale,
loans, etc.), respectively on tax base assessment, exemptions, deductions, rates,
earmarking of user charge revenues, which are so stringent that local taxation
hardly enhances revenue autonomy at all. As direct legal constraints on local
budget autonomy, there are statutory rules on deficit, borrowing and debt in
local public finance law. One of the most powerful indirect legal constraints is
the right and the practice of the national legislative to revise the laws on local
taxation and grants every year or even more frequently.
401
Non-legal direct constraints are visible through a lower productive
efficiency of own-source revenues, regarding the volume of tax collection (8090%), while non-legal indirect constraints are visible through a lower productive
efficiency of revenues feeding the grants system. Transfers represent a high
share of total fiscal revenue and expenditure, and further decentralization may
result in slower overall economic growth. Another rational explanation could be
given by the crisis, which created distortion in economies (Nuta, 2014), even in
the most developed countries, so that the negative effects are relative justified in
the case of Romanian counties.
The results of our study suggest it is imperative for policy-makers to design
more favorable policies and procedures that can help improving the
decentralization management process in Romania, thus leading to higher future
local economic growth rates. In order to promote the desired local policies,
according to the preferences of local community members, the central authority
should remove a number of constraints, at least a part of those mentioned above.
5. CONCLUSIONS
Trying to answer the research question, namely to examine what were the
effects of local financial autonomy on local economic growth in Romanian
counties over the period 2006-2012, we found a negative and statistically
significant relationship between the two variables.
These findings are understandable given the current stage of Romanian
economy, which is seen as a “glass economy”, combining characteristics of an
unstable economy with an economy in transition, where local autonomy is under
a high number of legal and non-legal, direct and indirect constraints. Also, the
context of global economic crisis created distortions in Romanian economy.
As future research direction, we intend to expand the analysis for the case
of Romanian regions of development and the time-framework of the analysis to
cover the period before the integration of Romania into the European Union. We
also intend to extend the analysis at macroeconomic level, by evaluating the
effects of local financial autonomy on the economic growth rates of different
developed and developing countries.
ACKNOWLEDGEMENTS
This work was cofinanced from the European Social Fund through Sectoral
Operational Programme Human Resources Development 2007-2013, project
number POSDRU/159/1.5/S/142115 „Performance and excellence in doctoral
and postdoctoral research in Romanian economics science domain”.
This work was cofinanced from the European Social Fund through Sectoral
Operational Programme Human Resources Development 2007-2013, project
402
number POSDRU 159/1.5/S/134197 ”Performance and excellence in doctoral
and postdoctoral research in Romanian economics science domain”.
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decentralization. National Tax Journal, vol. XLVI, issue 2, 207–227.
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Macrostability, and Growth. Hacienda Pública Española /Revista de Economia
Publica, vol. 179, 25–49.
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Rescaling. Cambridge Journal of Regions, Economy and Society, vol. 2, issue 1,
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[9] Musgrave, R.A. (1959). The Theory of Public Finance. New York: McGraw Hill.
[10] Nuta, A. C. (2014). Some comments about the impact of population ageing on fiscal
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[12] Oates, W. E. (1993). Fiscal Decentralization and Economic Development. National
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Rudolf Hommes, in M. Bruno and B. Pleskovic, eds., Annual World Bank
Conference on Development Economics, 351-353.
[14] Panizza, U. (1999). On the Determinants of Fiscal Centralization: Theory and
Evidence. Journal of Public Economics, vol. 74, issue 1, 97-139.
[15] Pommerehne, W.W. (1977). Quantitative Aspects of Federalism: A Study of Six
Countries. In W. Oates, ed., The Political Economy of Fiscal Federalism,
Lexington, Mass.
[16] The Romanian Ministry of Regional Development and Public Administration
(2015). The situation of the execution of the revenues and expenditures of local
budgets for territorial-administrative units (2000-2012). Retrieved from
http://www.dpfbl.mdrap.ro/sit_ven_si_chelt_uat.html
[17] Tiebout, C. M. (1956). A Pure Theory of Local Expenditures. The journal of
political economy, 416-424.
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[19] Xie, D., Zou, H., and Davoodi, H. (1999). Fiscal Decentralization and Economic
Growth in the United States. Journal of Urban Economics, vol. 45, issue 2, 228239.
[20] Yilmaz, S. (1999). The Impact of Fiscal Decentralization on Macroeconomic
Performance. National Tax Association, Proceedings, 251-260.
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economic growth in China. Journal of Public Economics, vol. 67, 221–240.
404
THE ENTERING OF EURO ZONE BY ROMANIA –
CONDITIONS AND CHALLENGES FOR THE ROMANIAN
ECONOMY
VALERIU DORNESCU
Iasi, Romania
[email protected]
Abstract
Entering the Euro zone successfully requires every member state to fulfill a set of real
convergence criteria, as they have been established by the Maastricht Treaty. It also
requires actually achieving some real convergence criteria, even if such a thing is not
expressly demanded. The analysis of these criteria allows the underlining of socioeconomical disparities between the respective country and the states from the euro zone,
while eliminating/diminishing such disparities prior to entering the Euro Zone provides
further reassurance in regards to the country’s economical ability to adapt to the new
situation. The most common indicators used to measure the real convergence of a
country’s economy inside the euro zone are: the level of gross domestic product/capita,
the work productivity, the structure of the economy on different activity domains and the
openness degree of the economy. In this study we will analyze the evolution of the
indicators recorded by Romania in comparison to the European average and identify the
measures that need to be taken so that the Romania economy – after entering the euro
zone – is capable of successfully dealing with new challenges.
Keywords: nominal convergence, real convergence, euro zone
JEL Classification: F15, F36, O52
1. INTRODUCTION
The joining of the euro zone is conditioned by the fulfillment of the
nominal convergence criteria established in the Maastricht treaty, criteria that
generally refer to a series of monetary and budgetary restrictions. Recent studies
(Lazea, 2015) show that Romania – from this point of view – is ready to enter
the euro zone, as it fulfils the required criteria. The respective indicators can be
analyzed as per the data presented in the table below:
405
Table 1. Nominal convergence indicators (Maastricht criteria) – Romania’s
status in 2015
Indicators
for
nominal convergence
Maastricht criteria
Inflation rate (IAPC)
(percent,
annual
average)
Rate of interest on
long term (percent,
annual average)
≤ 1,5 pp above – 0,3%
(average of the 3 top
performers in EU*)
≤ 2 pp above 3,3%
(average of the 3 top
performers in EU*
considered from the
perspective of price
stability)
± 15 %
Romania
1,2
(february
2015)
4,1
(february
2015)
Fulfillment of
criteria
Yes
Yes
Exchange rate in
+2,1 / -3,5
Yes
comparison to Euro
**
(appreciation
+,
depreciation -)
Consolidated budget under 3 %
1,8 (p)
Yes
deficit ***
(percent in GDP)
Public debt ***
under 60 %
39,8
Yes
(percent in GDP)
Note: *) Poland, Spain, Hungary; **) Calculated as the maximum deviation of the
exchange rate to Euro for the April 2013 – March 2015 interval, compared to the average
registered in march 2013, based on daily information. An ascending/descending
deviation implies the appreciation/depreciation of the national currency, similar to the
level of the exchange rate in march 2013; ***) 2014, SEC2010 methodology, (p) =
Winter Prognosis of the European Commission (February 2015).
2. EVOLUTIONS
Even if the Maastricht Treaty does not mention the real convergence criteria
between the members of the European Union, the European Commission applied
a set of measures through which to ensure a high similitude and cohesion degree
for the economical structures of its members. The cohesion policy’s purpose is
the reduction of socio-economical disparities between member states and
between the richer – poorer regions. In financial terms, the cohesion policy is a
major political area for the European Union, as the non-refundable financing
granted to candidates are a major support for the latter. The European
Commission and the Central European Bank have repeatedly provided warning
in regards to the risks that can appear after prematurely adopting the Euro
406
currency by a country whose real convergence with the west-European is
insufficient (Dăianu, 2002). The size of the GDP/capita, the workforce
productivity, the structure related to economy departments and the degree of
opening of the economy are among the most important real convergence
indicators. We will further analyze the evolution of these indicators, as recorded
in Romania during the last years.
a) The size of GDP/capita
During 2007-2013, Romania’s GDP (calculated at the parity of standard
purchase power) has seen a pronounced annual growing trend, fact that led to the
continuous rise of the GDP/capita and catching up to the euro zone, reaching by
the end of 2013 at a level of 55% from the G/DP/capita from the Euro zone (see
table 2). Although Romania has seen a faster growth of GDP than Bulgaria and
has come close to the economical growth rate seen by more advanced countries
in Central and East Europe (Czech Republic, Hungary, Poland), we can see that,
in comparison to the these countries, but also compared to the European average,
our country has a lot to recover.
In the below table we also have the situation for the 2 countries that have
joined the Euro Zone in the past years (Latvia and Lithuania in 2014 and 2015),
countries that at the moment of joining had a much higher level of this indicator,
of 64% and respectively 73%.
Table 2. Evolution of GDP/capita (calculated at the parity of purchase
power) in 2007-2013
Year
European
Union
(28 countries)
Romania
Bulgaria
Czech Republic
Hungary
Poland
Latvia (1 ian. 2014)
Lithuania
(1 ian. 2015)
Note: EU 28 = 100
2007
100
2008
100
2009
100
2010
100
2011
100
2012
100
2013
100
42 %
40 %
84 %
61 %
53 %
60 %
48 %
43 %
82 %
63 %
55 %
60 %
49 %
44 %
83 %
64 %
59 %
53 %
50 %
43 %
81 %
65 %
62 %
53 %
51 %
44 %
83 %
65 %
64 %
57 %
53 %
45 %
82 %
65 %
66 %
60 %
55 %
45 %
82 %
66 %
67 %
64 %
61 %
63 %
57 %
60 %
65 %
69 %
73 %
(Source: Eurostat)
This disparity that separates us from other countries in Central and Eastern
Europe in regards to GDP/capita comes from the fact that, unlike Romania, these
countries benefited from foreign investments from the beginning of the 90’s,
407
while Romania had a late start from this point of view. The more consistent
foreign investments only came in the last years, after a series of important
events, such as joining NATO (April 2014), the full liberalization of the capital
account (September 2006) and joining the European Union in January 2007.
Another negative aspect is the fact that there are very high disparities as to the 4
micro-regions and their contributions to forming the national GDP. For example,
in 2012, their participation was as follows: micro-region 1 (North-West +
Central) – 22,5%, micro-region 2 (North-East + South-East) – 20,8%, microregion 3 (South – Muntenia + Bucharest-Ilfov) – 38,8% and micro-region 4
(South-West Oltenia +West) – 17,7%.
b) Work productivity
Although it has seen a rise during 2007-2013, the level of the work
productivity has remained, and still is much lower than the one seen in other
east-European states. Although it showed 51,7% of the European average at the
end of the recording period, the work productivity is much lower in Romania
when compared to other east-European states. At the end of 2013 for example,
this indicator was much higher in countries such as Poland (74,4), Czech
Republic (72%) or Hungary (70,7%). Only one country (Bulgaria) was under
Romania’s level for the measured timeframe. As to the 2 countries that joined
the Euro Zone during the last 2 years (Latvia and Lithuania), at the end of 2013
they had a 67%, respectively 74,7% levels of the indicator. The evolution of the
indicator for the timeframe is presented in table 3.
Table 3. Evolution of work productivity (GDP/capita) during 2007-2013 in
comparison to the European average
Year
European
Union
(28 countries)
Romania
Bulgaria
Czech Republic
Hungary
Poland
Latvia (1 ian. 2014)
2007
100
2008
100
2009
100
2010
100
2011
100
2012
100
2013
100
43,4
37.5
76.3
66.6
62.2
54.0
49,1
39.7
74.1
70.6
62.4
55.1
49,4
39.7
75.9
72.4
65.5
57.3
49,7
40.9
74.3
71.7
70.1
60.8
50,5
43.0
74.6
72.6
72.0
63.8
51,1
44.5
73.9
71.2
73.7
66.3
51,7
43.4
72.0
70.7
74.4
67.0
Lituania (1 ian.
2015)
Note: EU 28 = 100
59.6
62.0
58.0
68.2
72.3
74.1
74.7
(Source: Eurostat)
c) Structure on economy sectors
408
During 2007-2013, the convergence of structure in regards to Romanian
economy branches has seen a positive evolution in comparison to the one of the
member states of the EU and we consider that this needs to be maintained until
the Euro currency is adopted. While agriculture has kept a steady contribution in
GDP, we can also see an increase of industry contribution to forming GDP, from
38% in 2007 to 43% in 2013, but also a decrease of services contribution to
GDP from 55% to 50%, a much lower level compared to the EU-27 average,
which was above 72% in 2013. As we can tell from the date in table 4, the
contribution of the tertiary segment to the GDP was much higher in the
comparison states, over 60%, and in some cases, over 70%.
Table 4. Contribution of main economical sectors to forming GDP during
2000-2008 (calculated as % from GDP)
Agricultur
e
Industry
Services
2007
2008
2010
2013
2007
2008
2010
2013
2007
2008
2010
2013
RO
BG
CZ
PL
HU
LV
LT
6
7
6
6
38
38
42
43
55
55
52
50
6
7
5
5
31
30
30
28
63
63
65
67
2
2
2
3
38
38
3
3
3
3
33
33
4
4
5
4
31
30
4
3
…
…
23
23
4
4
3
…
32
31
37
37
60
60
61
61
33
33
64
64
64
63
30
30
65
66
65
65
…
…
74
…
…
…
…
…
64
65
70
…
(Source: World Bank)
d) The economy’s degree of openness
One area where Romania is very different from other EU member states
(that illustrate a economical growth based rather on internal absorption) is the
relatively low degree of economical openness, indicator that is measured through
the contribution of imports and exports of goods and services in the GDP.
Although the indicator has seen a slight rise during 2007-2013 (from 72% to
85%), Romania is below other countries in the region, members of the EU
(Bulgaria, Czech Republic, Poland, Slovakia and Hungary), whose degree of
openness in 2007 was between 81% and 157% and has seen a much constant
increase. A negative aspect for Romania in this case is that this economical
409
openness is less sustained by exports then the other countries in Central and
Eastern Europe, whose export rate is much higher, and much closer to the import
rate. Alternatively, Romania’s poor orientation towards exports can be
considered an advantage during the next period of time, if we take into
consideration the contraction of the main European markets and the absorption
limits from the internal markets. The evolution of the degree of openness for the
Romania economy between 2007-2013 is presented in the table below:
Table 5. The degree of openness for the Romania Economy (import +export
of goods and services)/GDP (%)
Year
Romania
2007
72
2008
73
2010
85
2013
85
Bulgaria
Czech
Republic
Poland
Hungary
Latvia
Lithuania
125
131
128
124
132
149
137
148
81
157
104
121
81
160
99
132
90
168
...
...
90
170
...
...
(Source: World Bank)
3. CONCLUSIONS AND PROPOSALS
The economical crisis that was triggered during the last years, as well as the
problems from Greece have underlined the fact that the simple fulfillment of the
Maastricht nominal convergence criteria is not enough for a country to resist the
pressures from the Euro Zone. The existence of important discrepancies between
the actual performances of the Romanian economy and that of other countries
from Central and Eastern Europe (members of the EU) make the promotion of
macro-economical policies that would ensure the premises of rapid, healthy and
durable economical growth a necessity (Dinu, Socol, Marinaş, 2004). Doing so
will make sure that adopting the Euro currency does not become a risky and
counter-productive adventure for Romania. These policies need to make sure
that the nominal convergence criteria are met, by promoting a prudent salary
policy in the budgetary sector, by limiting budgetary deficits, increasing the
absorption rate of European funding, increasing the quality of public
expenditure, restoring credibility and stability to public finances on short and
mid term etc.
Some measures of structural adjustment will also be necessary, in order to
ensure the synchronization of the Romania business lifecycle with the one from
410
the Euro Zone. The workforce will need to become more flexible, the external
deficit will need to be adjusted to levels that are sustainable for mid term and the
internal financial markets will need to be consolidated for long term strategies.
An important condition for aligning Romania to the economical standards seen
in other countries from the Euro Area is reaching a GDP level per capita of at
least 60% of the European average. To reach this target, the annual growth rate
of the Romania economy should be 2% higher than the European average. Also,
it is necessary to promote a series of policies for eliminating disparities between
regions, because, even if Bucharest and Ilfov reach the standards for joining the
Euro Zone, the same cannot be said about Botosani or Vaslui (Isărescu, 2004).
We consider that the thesis saying that the degree of development in a country
does not affect joining the Euro Zone, is false. Larger countries that have a
larger population, such as Romania, cannot be compared to smaller countries
that have already joined the community and are more adaptive to external
shocks. A higher economical growth in Romania could be sustained, apart from
the externals investments by European funding (structural-agricultural) that are
granted for our country during 2014-2020 (around 40 bl. Euro) (Lazea et al.,
2012). According to estimations, drawing around 60% of these funds could
increase GDP with about 1.,6%, from 2% per year to about 3,5% per year.
Some measures to counteract the reduction in population are necessary,
because even if this increases the GDP/capita, it has a negative impact on the
potential long term GDP. Raising GDP/capita and work productivity can also be
sustained by other measures, including those related to increasing the Romanian
educational system. As such, continuing and accelerating economical measures,
as well as measures to adjust the macro-economical imbalances are the only
valid solution to ensuring that the real convergence criteria are met. Only in
these conditions can the Romanian economy by aligned to European standards
and can be enhances to withstand the rigors of the competition from other
European/world markets.
References
[1] Dinu, M., Socol, C., Marinaş, M. (2004). Economie Europeană. O prezentare
sinoptică. Bucureşti: Editura Economică.
[2] Dăianu, D. (2002). România şi Uniunea Europeană. Iaşi: Editura Polirom.
[3] Ghica, L. (2006). România şi Uniunea Europeană. Bucureşti: Editura Meronia.
[4] Isărescu, M. (2004). România: drumul către euro. Prezentare la Conferinţa
organizată la Colegiul Academic al Universităţii "Babeş-Bolyai", Cluj –Napoca,
2004, versiunea actualizată 2007.
[5] Lazea, V. (2015). Convergenţa nominală şi convergenţa reală – condiţii pentru
creşterea competitivităţii internaţionale a României. Conferinţa “Romania’s Path
towards
Euro”,
Bucureşti,
20
aprilie
2015.
Retrieved
from
http://ec.europa.eu/romania/images/20042015_valentin_lazea_-_bnr.pdf
411
[6] Lazea, V., Anghel, L., Biriș, G., Ivan, P. (2012). Prioritizarea politicilor UE prin
prisma avantajelor produse pentru România. CNP, București.
[7] ***statistical data: Eurostat, World Bank, Institutul Naţional de Statistică Bucuresti.
412
EVALUATION OF THE ECONOMIC EFFECTS OF
REMITTANCES: CASE STUDY REPUBLIC OF
MOLDOVA
NATALIA BRANASCO
State University “Alecu Russo” from Balti
Balti, Republic of Moldova
[email protected]
Abstract
The economic dimension of labor migration is represented by financial flows from
migrant labor, oriented on family from origin country, and are called remittances. The
role of remittances in economic development determines a growing interest in the last
time, because remittances are an important financial flow for developing countries,
becoming vital elements for existence. Also, remittances substitute successfully and even
surpass international aid, reaching the required target. Of course, main function of
remittances is to ensure minimum conditions of existence of the households that generate
real living conditions of the migrant family. It is clear that remittances have some
implications on the economic situation in the origin country of migrants. Achieving these
effects will happen in case of multiplication of aggregate demand at the macroeconomic
level, so microsocial relations, from people and economic agents have influence on
macroeconomic stability.
Keywords: remittances, international labor migration, microeconomic effects,
macroeconomic effects
JEL Classification: F24
1.
IMPORTANCE AND STATISTICS OF REMITTANCES
The role of remittances in economic development presents a growing
interest. According to International Organization for Migrants, remittances are
approached as monetary transfers made by migrants to their origin countries
(IOM and Remittances, 2007). J. van Doorn uses this term as "part of the income
earned by migrant workers sent to their origin country". C. Sander, R. Chami
define remittances as "substantial flow of financial resources, directed, mainly,
from developed countries to developing countries" (Ghencea, Gudumac, 2005).
Indeed, remittances constitute very important financial flows for developing
413
countries, being vital sources for their existence. Also, remittances successfully
replace and exceed international aids, going to the required destination.
It is evident that volume of remittances is determined by economic, social
and institutional characteristics of the destination countries and origin country of
migrants:
- The number of immigrants` work force;
- Characteristics of immigrants` work force (level of qualification,
immigrant status, family situation of migrants, level of family income, duration
of stay abroad, moral values of migrant that determines remission motivation);
- Incomes of migrants;
- Costs of migrants living in the destination country;
- Exchange rates;
- The cost of remittance transfers etc.
In the last decade has been observed a significant increase of remittances
volume at the global level. Official volume of remittances from developing
countries constitutes over 2/3 of global volume of remittances, doubled from
2006 from 228 bn. USD, reaching in 2012 at the 401 bn. USD, in the future, is
estimating to maintain recorded trend. If it is known the targets of forecasting for
long term migration flows, then referring to the remittances forecasting, there is
no studies for such a long periods. The most efficient forecast is made by World
Bank, based on trend determination. World Bank forecasts that global flows of
remittances, at the end of 2015, will reach 665 bln. USD, but in the developing
countries – 515 bln. USD. According to recent estimates of World Bank, till the
end of 2016, global remittances will reach 707 bln. USD, from this – 540 bln.
will be directed to the developing countries. For 2013, real dates are very close
to those planned, global flow of remittances being 550 bln. USD, from this
value, volume of remittances directed to developing countries reach 414 bln.
USD (Banca Mondiala, 2013). For 2013, the main countries receiving
remittances are represented in table 1. Among other important beneficiaries are
following states: Egypt, Pakistan, Bangladesh, Vietnam and Ukraine.
Table 1. Top countries by volume of remittances, 2013
Place
Country
1.
2.
3.
4.
5.
India
China
Filipina
Mexico
Nigeria
All received remittances,
Country
Remittances/GDP
USD
71 bln.
Tajikistan
48%
60 bln.
Kyrgyzstan
31%
26 bln.
Lesotho
25%
22 bln.
Nepal
25%
21 bln.
Moldova
24%
(Source: http://databank.worldbank.org, 2014)
414
The highest amounts of remittances are sent from the USA, Saudi Arabia,
Germany, Belgium, Switzerland, and Russia. The presented analysis is made for
transfers through official channels, because remittances sent by informal
channels are difficult to estimate. According to information presented by United
Nations Organization, about 40% of total global remittances are sent through
informal channels.
2.
MICROECONOMIC EFFECTS OF REMITTANCES
In this global top, among first places are situated and Republic of Moldova,
and remittance trend in our country has a positive relation with global trend of
remittances and with those directed to developing countries. It is evident that
remittances have certain implications regarding the economic situation in the
origin country of migrants, reflected in some economic effects, and their
realization takes place within multiplication of macroeconomic aggregate
demand. The micro-social relations, among people and economic agents, affect
macroeconomic stability.
It is difficult to follow the use of remittances, anyway is observed that
incomes are growing in family having members working abroad. So, remittances
becoming a vital source of existence for a big number of families from Republic
of Moldova. According to information presented by National Bureau of
Statistics (NBS), in the last decade is growing weight of households receiving
remittances. In these cases, remittances from abroad represent an increasing
weight (fig. 1).
Figure 1. The weight of remittances in available monthly average incomes
2000
1500
1000
500
116.3
178.5
227.5
198
213.9
241
220.6
1444.7 1508.8
1188.6 1166.1 1273.7
839.6 1018.7
0
2006
2007
2008
2009
2010
2011
2012
Remittances
, MDL
Incomes, M
DL
(Source: http://statbank.statistica.md)
In this sense, there are differences between remittance beneficiaries
depending on area of residence. Of course, in rural areas dependence on
remittances in higher, because of the persistence of involuntary unemployment
in Moldovan villages. From figure 2, we can observe that in period 2006-2012
415
weight of population below the absolute poverty decreased by about 8%,
inclusively due of influence from remittances. In the same time, we consider that
many households would be below the poverty level if they would not benefit
from these financial flows.
Figure 2. The implications of remittances on absolute poverty
40.00%
30.20%
25.80% 26.40% 26.30%
21.90%
20.00%
17.50% 16.60%
0.00%
2006
2007
2008
2009
2010
2011
2012
(Source: http://statbank.statistica.md)
It is evident that money coming from Moldovan migrants are like a lifeline
for their families, they contribute directly to poverty reduction. The most of this
remittances are directed towards consumption. In 2013, NEXUS program has
performed a survey according to which 48% of total remittances are oriented
towards consumption, 21% are bank deposits, 25% are investments in houses
and 5% are business investment (NEXUS-Moldova, 2013). In the same time, we
cannot mention the negative effect of remittances, represented by price increase
for goods and services, especially for houses. Therefore, such situation
emphasizes poverty in households that do not receive remittances, which serves
as an additional incentive to emigrate (Moşneaga et al., 2004, p. 70).
3.
MACROECONOMIC EFFECTS OF REMITTANCES
Like we mention, the effects of remittances from the microeconomic level
creates and important effects at the macroeconomic level. The analysis of these
implications concerns the interdependence between remittances and the
country's GDP, investment volume, state budget. In Republic of Moldova,
according to the experts of the World Bank, remittances have a positive impact
on maintaining stability of national economy, by compensation of commercial
deficit and fiscal consolidation. Because of that, the importance of remittances
can be measured by their weight in country's GDP, this indicator, in different
years, in Republic of Moldova has fluctuated between 10% and 36%, reaching a
critical point for our economy. In the same time, more than one decade,
remittances exceed other financial flows, like external financial assistance and
foreign direct investment (fig. 3). In the period 1999-2012, migrants from
416
Republic of Moldova, working abroad, transferred through the banking system
around 11 billion. USD, which exceeds 2,5 times the amount of foreign direct
investment (FDI) (http://infomoldova.net).
Figure 3. Dynamics of GDP, remittances and foreign direct investments,
bln. USD
GDP
Remittances
FDI
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
100%
90%
80%
70%
60%
50%
40%
30%
20%
1218
1660
8521096
1443
1244
1182
1609
10% 132185267419638
1494
0%
(Source: Branașco, 2014)
In figure 3 can be observed weight of remittances and foreign direct
investment in country's GDP. In 2008, both remittance flows and foreign direct
investments had the biggest absolute values till the present, although their
weight in the country's GDP was higher in 2007. The global economic crisis has
influenced and our economy, confirmed by both decreasing remittances and the
dramatic decrease of FDI, which led to the decline in GDP. In order to confirm
the intensity of relation between remittances and GDP, we determined the
correlation between these two variables (fig. 4). As result, we determine that
between total volume of remittances and Moldova's GDP exist a strong direct
correlation (r = 0,92), so, remittances contribute to the economic growth of the
country.
Research the impact of remittances on public finances can be performed by
different approaches of migrant's status both like taxpayers and the beneficiaries
of social assistance and by analyzing the effects generated by labor migration
and remittances inflows of migrants. In terms of origin country, migranttaxpayer causing a negative impact on the state budget through loss of direct
taxes, and migrant-solicitant of social assistance causing a positive impact on
state budget through saving resources. In terms of destination country, logic
417
follows a reverse way: migrant-taxpayer causing a positive impact, and migrantsolicitant of social assistance causing a negative impact on state budget.
GDP RM. bln USD
Figure 4. Correlation between the volume of remittances and GDP, years
2000 – 2012
20000
R² = 0.8437
r = 0.92
15000
10000
5000
0
0
2
4
6
8
10
12
14
Remittances, bln. USD
In this context, in the situation of Moldova, where the predominant is
circular migration that generate massive flows of remittances, we observe
positive effects on the national public budget in terms of migrant-taxpayer. This
is manifested through increasing incomes of people beneficiary of remittances,
such situation lead to increase its consumption of goods and services, both
national and imported, which induce growth of indirect taxes. Analyzing
statistics information, we find a strong correlation between remittance flows and
state budget incomes consist of taxes on consumption, like value added tax,
excise, and duty. Because of the fact that indirect taxes constitute an important
weight in the national public budget, final consumption of households contribute
significantly to its formation. Based on the idea that most remittances are
directed to final consumption, we conclude that these financial flows leading to
increase the part of incomes in the national public budget. In order to support
this affirmation, we present strong relationship between volume of remittances
and volume of tax incomes from indirect taxes by the correlation coefficient r =
0,93 (fig. 5). In the same context, we can affirm that remittances contribute to
the reduction of public national budget deficit, first of all, due of increasing tax
incomes obtained by rising of consumption from beneficiaries of remittances.
For example, in 2009, when the economic crisis has grew, were significantly
reduced both the flow of remittances and the amount of tax incomes from
indirect taxes and the budget deficit has reached a huge negative value of 3836,6 bln. lei.
418
Tax incomes from indirect
taxes. MDL
Figure 5. Correlation between volume of remittances and volume of tax
incomes from indirect taxes, years 2000 – 2012
20000
R² = 0.8694
r = 0.93
15000
10000
5000
0
0
5000
10000
15000
20000
25000
Remittances, bln. MDL
But, of course, emigration of potential contributors generates and negative
effects on public finances, especially on social insurance budget. Reducing the
number of people working in the national economy lead to problems in the
social assistance system, especially in the payment of pensions for working age.
An important indicator that reveals situation about pension insurance is
coefficient of elderly maintenance. In 2010 this indicator was 2,9, but forecasts
show a descendent trend: for 2020 – 2,3, and for 2030 the coefficient is reduced
to 1.3 (Баскакова, 2007). As in the world practice is considered that critical
value of this indicator is 2,0, and medium-term forecast is close to the critical
value, in this context the problem of pension insurance becomes dramatic. In
Republic of Moldova this situation increasingly worsens because of big number
of migrants, not contributing to social insurance fund, but will seek social
protection in old age. It is evident that migrants, who will get on pensionable age
after 2030, won`t hold full stage of contribution, and others won`t receive even
the minimum pension, turning into a disadvantaged category (Cantarji,
Vladicescu, 2011).
Following on this, we consider that remittances contribute on country's
economic growth, in such way fortifying the country's economic security. In
order to confirm the obtained information, we present the results of recent
research conducted by Expert-Group. At the moment, in Moldova international
relations with Russia have generated concerns about the security of Moldavian
migrants. In November and December of 2013 about 21,500 Moldovans have
been banned from entering in Russian Federation, and according to the
Moldovan Diaspora Congress about 288,000 migrants risk to being deported
419
(http://www.ipn.md). Taking into account fact that most of Moldovan migrants
work in this country and, respectively, the biggest weight of remittances also
comes from Russia, is expecting a reduction of remittances by 35%, which
would produce negative effects on the national economy. According to experts
from Analytical Center Expert-Group Independent, in this case decrease in
macroeconomic indicators would have the following values (table 2). From this
analysis, we can conclude that the economy of Moldova is dependent on
remittances, and the negative aspect is that there is a strong dependence on
migration Russian market.
Table 2. The collective impact of migration shock on main economic
indicators
Consumption
Changes,
%
-9,4
Budgetary
expenditure
-10,5
Import
Investments
GDP
-6,4
-4
-4,3
Budgetary
incomes
-8,3
(Source: Morcotilo, Fala, p. 6)
4.
STATE PROGRAM REGARDING USING OF REMITTANCES
From the information above, we can conclude that remittances have
contradictory effects on the country's economy, and is necessary state
involvement in order to achieve sustainable character for these positive effects.
The national strategy on migration and asylum for 2011-2020 includes a
compartment for returning migrants, because often returned people have
problems with socio-economic reintegration, that's why is necessary to create a
favorable environment for adaptation of the returned migrants. So, to facilitate
returning of migrant workers and their economic and social reintegration is
objective Nr. 1 in this point. In order to realize this objective, was performed an
action plan for stimulating the return and reintegration of Moldovan migrant
workers for 2012-2014. Here we can mention Program Pare 1+1, applied by
Government in the fourth quarter of 2010, having like objective redirecting
human and financial potential of Moldovan migrants in the country's sustainable
development, by encouraging the creation and development of small and
medium enterprises by migrant workers and remittances beneficiaries. This
program operates under rule 1 + 1, so that every leu invested from remittances
will be added with a leu grant from the program. As result, in 2011-2013 about
300 beneficiaries were made total investments 193,6 bln. lei, so real ratio is
about 4 lei from remittances + 1 leu grant. Following this program were
employed about 1,500 people, of which 40% are women and 35% are young
(http://odimm.md).
420
Based on the experience of other countries, we highlight some instruments
to stimulate investment of remittances, which can be used in the future and in
Republic of Moldova. First of all, it is necessary to encourage opening of bank
deposits by migrants, which would increase lending opportunities in the country.
In Israel, in this area, deserves attention bonds issuing for diaspora. Migrants,
being motivated both economically (by interest) and moral (his contribution for
country's development), buy these bonds, being sure that these resources will be
directed towards investment programs. The program „Tres por Uno” was
implemented in Mexico in order to motivate the diaspora to invest in the
country's infrastructure by tripling its investments (every dollar invested by
migrants is substituted with three dollars come from local, federal and central
government). But it is evident that for massive attracting remittances in the
country it is necessary to create the entrepreneurial culture among population
and improving the investment climate.
5.
CONCLUSIONS
Therefore, current conditions amplifies the need to promote management
policies of flexible coherent and comprehensive migration, having like main
objective increasing the benefits of this process and protecting migrants and their
needs, but should contain and measures to adapt to crisis situations. In this case
we emphasize the need to develop a stimulating business environment,
beneficial for economic growth, in order to attract foreign direct investments,
investments of national economic agents, and investments from remittances. An
important objective is to support the small business sector through preferential
lending, to promote entrepreneurial skills among remittances beneficiaries, to
motivate investment intentions of migrants, to make instruments for the
recognition of informal learning, which will facilitate the employment of
migrants in the country's labor market, effective programs management by using
remittances. In this sense, we consider that it’s very important to motivate
diaspora regarding development of the country through remittances and
investments, technology transfer, relational development and promoting access
to the host country market, which can be done by preferential treatment in the
allocation of licenses and credits, tax breaks, reduction of import duties etc.,
which would contribute to the country's economic growth.
References
[1] Banca Mondiala (2013). Ţările in curs de dezvoltare vor primi 410 mld. de dolari în
remitente
în
2013.
Retrieved
from
http://www.uruguay.ro/index.php?module=Pagesetter&func
=viewpub&tid
=1&pid=1887.
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[2] Branașco, N. (2014). Migrația internațională a forței de muncă : tendințe și efecte
social-economice. Teză de doctor în economie. Chişinău: ASEM.
[3] Cantarji, V., Vladicescu, N. (2011). Migraţia forţei de muncă din Republica
Moldova: implicaţii asupra sistemului de asigurări sociale pe termen mediu şi lung.
În: Monitor social, nr. 11, Chişinău: IDIS Viitorul.
[4] Ghencea, B., Gudumac, I. (2005). Migraţia de muncă şi remitenţele în Republica
Moldova. Chişinău: ILO.
[5] IOM and Remittances 2007. Retrieved from http://www.iom.int/unitedstates/
Fact%20Sheets/PDFs/IOM%20and%20Remittances.pdf.
[6] Morcotilo, I., Fala, A. (2014). Aspectul migraţional în securitatea economică a
Republicii Moldova: Analiza instituţională. Chişinău: Expert Grup. Retrieved from
http://www.expert-grup.org/ro/biblioteca/item/929.
[7] Moşneaga, V., Rusnac, Gh., Ţurcan, V. ( 2004). Migraţiunea forţei de muncă în
Republica Moldova: cauze, tendinţe, efecte. In: Moldoscopie (Probleme de analiză
politică). Chişinău: USM, nr. 1 (XXV).
[8] NEXUS-Moldova-Economiile-migrantilor-ating-suma-de-16-miliarde-de-euro69438.htm, (2014). Retrieved from http://unimedia.info/stiri/ l.
[9] Баскакова, В. Н. (2007). Пенсионная система Республики Молдова.
Актуальная экспертиза. Москва: РИА «Социальное и пенсионное
страхование». Retrieved from http://www.pension.md/publications/ra/1.html.
[10] http://databank.worldbank.org.
[11] http://infomoldova.net/remitente-republica-moldova-se-afla-top10-tari-din-lumedupa-ponderea-remitentelor pib.
[12] http://www.ipn.md/ro/comunicate/3952.
[13] http://odimm.md/ro/menu-types/vizibilitate/rapoarte-pare.html.
[14] http://statbank.statistica.md.
422
THE LABOUR MOBILITY – VECTOR OF
DEVELOPMENT IN EUROPE – LEGAL FRAMEWORK
MIHAELA CATANĂ
“Titu Maiorescu” University of Bucharest
Bucharest, Romania
[email protected]
Abstract
The economic crisis at the beginning of the new millennium has brought attention to the
phenomenon of labor mobility in all its aspects and forms, even if approaches were
manifested in different ways and with pros and cons. Emerging challenges in a
globalized world, the demographic change, scarcity of skilled labor, shortage of
financial innovation and risk insurance schemes (risks that feel more prominent in social
security systems because of the factors previously exposed) are increasingly necessary to
improve the legal framework, legal framework to ensure protection and flexibility given
the objectives underlying the European construction, creating a common space, a
dynamic framework conducive to economic development, economic efficiency of
allocation and distribution of resources is particularly important. Thus in Europe,
developing policies to promote growth of labor mobility has become a prerequisite for
economic growth and occupancy to reduce unemployment, in order to avoid further
economic decline.
Keywords: mobility, migration, E.U, worker
JEL Classification: K31, K 33
1. FORMS OF LABOUR MOBILITY
The approach that literature provides to analyze forms of manifestation of
labour mobility is guided into two dimensions, namely: geographical dimension
- ie territorial space - and occupational size. Thus, labour mobility, economically
and socially manifests itself as a form of movement depending on the changes in
the labor market, social area, within the productive factors, etc. The idea is that
the phenomenon of mobility occurs when there is a change of domicile, place of
employment or the provision of the labor movement, but should envisaged and
temporal dimension.
423
1.1 Labour mobility in spatial / geographic and temporal terms
Geographical mobility is analyzed in terms of space, the distances and
geographies, individual moving to another town, another area, region or to
another country to take up employment or to perform the work. Given that this
phenomenon of mobility is accompanied by change of residence, the situation is
the phenomenon of migration.
We find that the forms of geographical mobility at short distance which is
usually a temporary mobility without changing the residence and we include
here commuting / switching, generally between rural and urban, or intra-regional
mobility, within regions or inter-regional mobility between different regions. But
players short distance mobility workers may be residents of border villages
frontier workers or frontier workers, who represent a substantial and mobile
workers whose mobility is regulated separately in the rules of European law.
Thus, in 1980, the European Council adopted the European Outline Convention
on Transfrontier Co Territorial Communities or Authorities (EC 1980), as a
result of experience gained in the integrated management of common problems,
to facilitate cooperation between local authorities under the coordination of such
states that this cooperation will take the form of agreements and arrangements
aimed at contributing to regional development, improve infrastructure and
services. Subsequently, the Additional Protocols were adopted at European
Outline Convention on Transfrontier Co Territorial Communities or Authorities
(EEC 1995, 1998, 2009, 20013) protocols signed and ratified by the Member
States (first Protocol signed by 29 countries and ratified by 23 of them, and the
third Protocol signed by 13 countries and ratified already being 5 of them).
Under European law, if you work in one EU country but live in another, the
return daily or at least once a week, are cross-border or frontier worker (EU
2015).
A form of labor mobility, which takes place over longer distances,
extensive geographic area comes as posting in the transnational provision of
services, with headquartered matter in Directive 96/71 / EC of the European
Parliament and of the Council, of 16 December 1996 concerning the posting of
workers to provide services (CE 1996), this form of mobility and interest in
terms of time, it is subject to limitations from this point of view (Article 3).
Another form of labor mobility is represented by temporary employment,
which is also subject to limitations of temporal order, depending on the duration
of a mission work. Benefits of regulations in the wording of Directive 2008/104
/ EC on temporary agency work are auspicious, thus eliminating the restrictions
or prohibitions on the use of temporary labor. In our national legislation, art. I,
paragraph 48 of Law no. 40/2011 amending and supplementing Law no. 53/2003
- Labour Code, published in the Official Gazette of Romania, Part I, no. 225 of
31 March 2011 brought changes in terms of the maximum duration can be set
424
assignments to a maximum of 36 months. With increasing these periods is
facilitated both employer on the one hand, and the employee, on the other hand.
Needing standardization and harmonization of rules of national law with EU law
and as a consequence of applying art. 4 of Directive 2008/104 / EC on temporary
agency work, that Member States must review any restrictions or prohibitions on
the use of temporary labor, a clause that prohibits or prevents the conclusion of a
temporary employment contract is void, was adopted Government Decision no.
1.256 / 2011 on operating conditions and the procedure for the authorization of
temporary employment, published in the Official Gazette of Romania, Part I, no.
5 of 4 January 2012. Any clause that prohibits or prevents the conclusion of a
temporary employment contract is void. In the context of modernizing and
standardizing the norms of law with the European Union, Romania must address
challenges in the member state of the European Union thus providing favorable
legislative framework to fulfill the objectives set by the Lisbon Agenda.
Temporary work is one of the most important drivers of higher employment
levels, particularly among the vulnerable groups, successful transitions from
education to employment but mostly to boost labor mobility.
1.2 Labour mobility in terms of occupational dimension - professional
mobility
Occupational mobility is a form of mobility in the labor market relevance
mainly domestic national. Although, if we look in depth we will find migration
phenomenon even at first glance that a very high percentage of migrant workers
working in fields other than those operating in the country of origin.
Professional mobility requires in addition to changing careers and changing
employer of doing business, branch change, transfer from one profession to
another, posting specific regulation in the sense of Law 53/2003 - Labour Code,
republished, which differ from posting in the provision based services matter in
Directive 96/71 / EC.
Work through temporary employment is one form of labor mobility, which
can take all sizes mobility, temporal, spatial or geographical and occupational.
2. LABOUR MOBILITY - VECTOR DEVELOPMENT IN THE
EUROPEAN UNION
The Conference Organised by the European Economic and Social
Commiteee under the Latvian presidency in January 2015 the main theme was
guided support rights to freedom of movement and defense. Also, the study in
2013 from the European Commission, showed that mobile citizens economically
active overall contributed positively to the economy of the host countries.
Labour mobility in the internal market has resulted in growth and despite all the
fears that there was no evidence to show that emigration was widespread, and
425
free movement was not unconditional, but both were covered by the European
Union in order to prevent abuse. Latvian president was important to ensure that
free movement of workers is of fundamental importance for the EU internal
market and construction. Latvian Presidency opened discuss ways to improve
the conditions of free movement, but the basic principles have not been in
debate. Mobility was a key component in creating a competitive Europe, a an
active Europe and an digital Europe.
Freedom of movement has been one of the main achievements of the EU
and an integral part of the European peace project. Therefore, it insists that this
right to defense should be a political priority for Member States and within the
existing legislative year in each country, should the legal regulations containing
rules that favor the development of labor mobility, protective rules, rules to
ensure a decent living, especially rules to meet the challenges arising in the labor
market.
European Commission statistics show that 10.6 million workers - people
active in the labor market of third-country live and work in the EU, representing
a rate of 4.3% of total employment in the EU. 8 million people active in the
labor market in the EU live and work in another Member State - representing
3.3% of total EU employment. Also, 20% of EU citizens are interested in
moving to another country but only 1.2% have a firm intention in this respect,
that is actually going to move in the next 12 months; frontier workers and border
represents 1, 2 million and 1.3 million workers posted other people.
Balance free movement within the European Union is positive, voluntary
mobility is essential for Europe's economic success. Mobility within the EU
contributes to more flexible labor market and recovering any mismatch of skills
and jobs. It also helps to resolve differences between the unsustainable levels of
registered unemployment in some Member States, differences that affect the
economy of all Member States.
Commission studies show that workers from other Member States are
important contributors to social protection systems in host countries. As shown
in some studies, mobile workers pay more in taxes and social security budgets of
the host countries than they receive benefits because they tend to be younger and
more economically active than the labor force, national countries host.
Healthcare spending inactive EU mobile citizens is very small compared to the
total health expenditure (0.2%) and for the economies of host countries (0.01%
of GDP) and EU citizens represent a very small proportion recipients of benefits
- contributory.
The main objective it pursues construction of the European Union is
economic and social progress of member states by creating the Common Market
as an area without borders where free movement is guaranteed of goods,
persons, services and capital. Constitutive Treaty of the European Community 426
1957 EEC as amended by the Treaty on European Union (1992) and published
in the Official Journal C 191 of 29 July 1992 guarantees in Title III of Chapter 1
of Articles 48-55 of movement of salaried workers, freedom establishing
freedom to provide individuals for self-employment, freedom to provide services
by employers and freelancers.
On 1 January 2007 Romania joined the European Union accession process
followed by complex integration with important economic, political and social.
The integration process had continued measures aimed at fulfilling the
obligations undertaken by Romania since the signing of the EU Association
Agreement on 1 February 1993 and entered into force in 1995. These measures
aim, among others, transposing Community rules into national law by
harmonizing Romanian legislation with EU provisions, and "Romanian citizens'
interests compatible with those of citizens of the Member States in all aspects of
their lives" (Ţiclea, 2011). In this respect, Romania adopted a series of laws to
harmonize national legislation with the EU acquis. In labor law, the most
important legal acts adopted on efforts to harmonize national legislation with the
acquis, Law 53/2003 - Labour Code, the development of which was envisaged
EEC Directives and Recommendations, International Labour Organisation rules
and Council of Europe which has undergone many changes and updates, as the
European reality, the most important change being achieved by Law 40/2011,
which has been reprinted. Upon accession, according to art. Protocol 52 of the
Accession Treaty, all directives, regulations, decisions and laws - European
framework intended and Romania to the extent that they are addressed to all
Member States.
The organizational, administrative and legislative measures must be
circumscribed by the principle of equal treatment enshrined in Article 12 of the
EEC Treaty that "any discrimination based on grounds of nationality/
nationality, such as free movement of workers - as one of fundamental freedoms
of citizens within the community space - fall within the provisions of art. 39-40
detailed the EEC Treaty by Regulation EEC nr.1612/1968 regarding the
movement of workers within the community and by Directive nr.2004/38 / EC
on free movement and residence within the Member States for Union citizens
and their family members thereof.
Free movement of workers requires the removal of discrimination on
grounds of nationality between citizens employed in the Member States as
regards employment, remuneration, providing general working conditions,
protection and labor safety.
Directive nr.2004/38/EC on free movement and residence within the
Member States for Union citizens and their family members was transposed into
Romanian legislation by Government Emergency Ordinance no.102/2005 on
free movement in Romania citizens of Member States of the European Union
427
and European Economic Area, approved with amendments by Law no.260 /
2005, in force since 2 January 2007. The Act regulates how those rules which
addresses citizens can exercise their right to to free movement in Romania,
temporary and permanent residence rights and limits on the exercise of these
rights for reasons of public order, national security or public health.
The rules contained in Regulation EEC nr.1612/1968 on access to
employment conditions and Directive nr.2004 / 38 / EC on free movement and
residence within the Member States for Union citizens and their family members
the principles underlying free access to employment and equal treatment, favor
the elimination of discriminatory practices and creates an environment
conducive to labor mobility.
Supply and demand in the labor market are the main factors behind labor
mobility, and economic disparity and opportunities between places of origin and
destination of workers are crucial elements which have the effect of movement
on the labor market, national and european which tried to show in the current
study.
3. CONCLUSIONS
To achieve the goals and objectives of European integration, guaranteeing
the free movement of persons and workers underpins labor mobility within the
European area, the increase mobility employs a common area with harmonized
and uniform rules so that the role of labor mobility the factor of sustainable
development of the European Union can be achieved.
Research, including studies by the European Commission showed that
economically active mobile citizens contributed positively to the economy of the
host countries globally. Labour mobility in the EU market boosted economic
growth, although free movement was not unconditional, but regulated by the EU
to prevent abuse, to reach finality in creating a competitive Europe with a digital
Europe and a Europe active.
Free movement of labor is not without costs for the countries of origin.
They may lose a significant portion of skilled labor, labor in those states which
have invested training (such as doctors and nurses, computer engineers). On the
other hand, a person may prefer to work in a other Member State, than going out
of home and when the economy revives in the home many workers will return,
backed by the skills and experience acquired in the host country, since this here
the reverse migration.
Labour mobility must be one of the pillars of the EU internal market, and
the authorities must fight against any unfair or deceptive terms, so last in the
posting of workers Directive contains rules on the enforcement of european law
so as to it can be a social dumping in the European Union.
428
ACKNOWLEDGEMENT
This
work
was
supported
by
the
strategic
grant
POSDRU/159/1.5/S/141699, Project ID 141699, co-financed by the European
Social Fund within the Sectorial Operational Program Human Resources
Development 2007-2013.
References
[1] E.C. (1980). European Outline Convention on Transfrontier Co Territorial
Communities or Authorities, Madrid, May 21, 1980. Retrieved from
http://conventions.coe.int/Treaty/EN/Treaties/PDF/Romanian/106-Romanian.pdf
[2] E.C. (1996). Directive 96/71/EC on the posting of workers to provide services,
published in the Official Journal of the European Communities (OJEC) No. L 018
of
21
January.
1997,
Retrieved
from
http://eurlex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:31996L0071:en:HT
ML)
[3] EEC (1995, 1998, 2009, 2013). Additional Protocol to the European Outline
Convention on Transfrontier Co-operation Territorial Communities or Authorities,
Strasbourg, 9 November 1995 Protocol No. 2 Additional to the European Outline
Convention on Transfrontier Co Territorial Communities or Authorities, Strasbourg,
5 mai1998; Protocol Nr. 3 supplementing the European Outline Convention on
Transfrontier Co Territorial Communities or Authorities (ECGs); Protocol Nr.
Additional to the European Outline Convention on Transfrontier Co Territorial
Communities or Authorities (ECGs), Utrecht, 16 November 2009, with APPENDIX
- The legal provisions for the implementation of the Protocol on border cooperation
Territorial Communities or Authorities, approved by the Committee of Ministers
July 10, 2013 at the 1176 Meeting of Ministers MPs him. Retrieved from
http://conventions.coe.int/Treaty/en/Treaties/Html/206.htm
[4] E.U (2015). Working abroad, cross-border workers. Retrieved from
http://europa.eu/youreurope/citizens/work/work-abroad/cross-bordercommuters/index_ro.htm
[5] Țiclea, A. (2011). Tratat de dreptul muncii, Ediția a V-a revizuită. Bucharest:
Universul Juridic.
429
THE CAUSAL RELATIONSHIP BETWEEN FISCAL
POLICY AND ECONOMIC GROWTH: EVIDENCE FROM
EMU COUNTRIES
ADINA DORNEAN
Iasi, Romania
[email protected]
DUMITRU-CRISTIAN OANEA
Bucharest, Romania
[email protected]
Abstract
Fiscal policy is an important tool in the hand of the central authorities in order to
influence the economic activity. Recently, fiscal policy become a common problem
throughout Europe, and therefore is treated by international regulation. In 2011, the
European Commission emphasized the importance of fiscal policy harmonization within
the European Union (EU).
In this context, this paper analyzed if the European Monetary Union (EMU) countries
have all premises in adopting successful fiscal policy instruments. Regarding this, we
used Granger causality test in order to identify the significant influence of fiscal policy
on economic indicators. The main results pointed out that the direct taxes and
government expenditure have a significant impact on more than 25% of EMU countries.
Keywords: fiscal policy, EMU, financial crisis
JEL Classification: E62, G01
1. INTRODUCTION
Fiscal policy is a symbol of national sovereignty (European Commission,
2000) and it is an important component of economic policy, by distribution of
income and resources allocation.
In EU, fiscal sovereignty is one fundamental sovereign rights of each
member state. However, the existence of different tax regimes affects the
internal market and economic and monetary union. In this context, in 2011, the
430
European Commission emphasized the importance of fiscal policy
harmonization within the EU.
Before defining or applying a harmonized fiscal policy in EU we have to
see if all countries have the premises for applying successful fiscal policy
measures. Regarding this, we will analyze if the fiscal policy measures during
2003-2014 affected significantly the economic indicators or not.
The paper is structured as follows: second section review the literature
regarding fiscal policy. Section three presents the methodology, while section
four presents the sample used and the main descriptive statistics of the data. The
results are presented in the fifth section, while last section will conclude the
paper.
In the current economic environment characterized by instability and
uncertainty, fiscal policy plays an important role, especially in countries which
are accelerating their fiscal consolidation. Particular attention is given to the role
of national fiscal policies for solving the problems they face, but in the same
time, to achieve the objectives of national economic policy.
Due to the global financial crisis, several EU countries announced
additional measures on fiscal policies in order to achieve fiscal consolidation,
which must be linked to growth prospects and job creation.
Fiscal policy is very important in combating financial and economic crisis
and ensuring sustainable economic growth. Some authors are considering that
"the cure for secular stagnation, as the balance of underspending is an active
fiscal policy" (Hansen, 1927, p. 67).
In the literature, there are many researchers who tried to identify the effects
of fiscal policy measures on economic situation. It seems that increase of
government purchases have higher impact on economic growth during recession
periods (Auerbach and Gorodnichenko, 2010). Despite this, it seems that there
is not a consensus in the literature on this topic (Ramey, 2011).
Moreover, there are some evidence which pointed out that fiscal stimuli
based on tax cuts are more likely to increase economic growth compared to
those based on expenditure increases. (Alesina and Ardagna, 2010).
The economic literature highlighted the fact that fiscal policy in developing
and also high income countries is pro-cyclical (Ilzetzki and Végh, 2008), and
exacerbates the business cycle.
Analyzing the causal relationship between fiscal policy and economic
growth in Jordan, Shihab (2014) highlighted the fact that economic growth
affects budget deficit, but the opposite is not true. Fiscal policy impact on
economic growth was also found by Ogbole et al. (2011), for Nigeria’s case.
431
In the EU there are 28 tax systems with significant differences between
them in terms of tax treatment applied. Differences in tax systems is a source of
inefficiency in the operation of the single market and a premise of tax
competition, which can generate conflicts.
Concerns for the removal of fiscal frontiers in the EU existed for decades,
but there is not any result on it, because initial proposals on harmonization were
often centralized, and rigid (Pelkmans, 2003, p. 86), causing a reaction of denial
from member states.
3. METHODOLOGY
In order to capture the way in which fiscal policy influences the economic
situation of each country, we will use the Granger causality test (Granger, 1969)
based on which we can identify the dependence and also the direction of this
dependence between selected indicators.
One data series x will Granger cause another data series y if the historical
value for x can explain the evolution of y values, and opposite. This will be
tested based on linear regression between the two data series, which must be
stationary.
The linear regressions will be estimated based on values of series x for a
given moment in time, t, and values of series y for historical moments t-1, t-2, ...,
t-k, where k is the lag value. In our case, k=4, because we use quarter data (Gali,
1999; Kilian, 1999; Ivanov and Kilian, 2005).
For two data series x and y, the linear regression will be written as follows:
4
4
(9) xt = α 0x + ∑ α kx ⋅ xt − k + ∑ β kxy ⋅ y t − k + ε tx
k =1
(10)
y t = α 0y +
k =1
4
4
k =1
k =1
∑ α ky ⋅ yt −k + ∑ β kyx ⋅ xt −k + ε ty
where ε ty and ε tx are uncorrelated error term, α 0x , α ky , β kxy , α 0y , α ky , β kyx
are the coefficients of linear regression, and t is the time indicator.
If β kyx is different significant by 0, then data series x Granger cause the data
series y. In the same way, if β kxy is different significant by 0, then data series y
Granger cause the data series x. In the special case, when both β kyx and β kxy are
different significant by 0, then selected variables are influencing each other.
4. DATA AND DESCRIPTIVE STATISTICS
We will analyze the impact of fiscal policy on economic activity of the
EMU countries. We selected two categories of indicators:
432
• Fiscal policy indicators: government expenditure (% of GDP),
government revenues (% of GDP), direct taxes (% of GDP), indirect taxes (% of
GDP), capital investments (% of GDP);
• Economic indicators: GDP growth rate, unemployment rate, and direct
investments (% of GDP),
We used quarter data for period 2003 – 2014 which were available on
Eurostat official web site.
From the sample of 19 countries which are in EMU, we exclude four
countries namely: Slovenia (no available data for selected period), Latvia (enter
in EMU on 2014), Lithuania (enter in EMU on 2015) and Greece (the official
data are not reliable and do not reflect the reality).
Table 1. Average values for selected indicators for period 2003 - 2014
Country
Austria
Belgium
Cyprus
Estonia
Finland
France
Germany
Ireland
Italy
Luxembourg
Malta
Netherlands
Portugal
Slovakia
Spain
GDP
Revenue Expenditure Unemployment
Direct
growth
(% of
(% of GDP)
(%)
investments
rate
GDP)
(% of
(%)
GDP)
0.90
48.62
51.32
5.01
5.08
0.99
48.88
51.06
7.93
12.17
0.80
37.36
41.19
7.46
7.37
2.11
38.19
37.63
9.42
8.23
0.81
52.77
51.99
8.01
2.35
0.64
50.32
54.53
9.04
1.91
0.58
43.57
45.31
7.76
1.03
0.68
34.61
40.98
9.07
6.42
0.57
45.29
48.67
8.65
0.95
1.42
42.98
42.18
4.86
378.72
1.31
38.42
42.21
6.65
1.15
0.68
43.09
45.42
5.34
3.78
0.48
41.66
47.60
11.05
2.56
2.27
35.93
39.83
14.03
3.97
0.85
37.81
41.97
16.18
2.55
(Source: Authors’ calculations based on Eurostat data)
In table 1, we present the average value for the main selected indicators.
Based on this, we are able to see that the highest GDP increase for period 2003 –
2014 is recorded by Slovakia (2.27%). In the same time, the highest value of
government expenditure is recorded for France (54.53%), while the smaller
value belongs to Estonia (37.63%). As we expected, the highest rate of
unemployment is recorder for Spain (16.18%).
433
Figure 1. Gross Domestic Product for selected countries (million EURO)
Sustainable
increase in GDP
Financial crisis
Recovery period
2003Q1
2003Q3
2004Q1
2004Q3
2005Q1
2005Q3
2006Q1
2006Q3
2007Q1
2007Q3
2008Q1
2008Q3
2009Q1
2009Q3
2010Q1
2010Q3
2011Q1
2011Q3
2012Q1
2012Q3
2013Q1
2013Q3
2014Q1
2014Q3
2,800,000
2,600,000
2,400,000
2,200,000
2,000,000
1,800,000
1,600,000
1,400,000
In figure 1 we are able to see the GDP evolution for selected countries
expressed in million Euro. If until 2007 the GDP had constantly increase and
maintained a positive trend, in 2008 – 2009 there is recorded a decrease in the
value of this indicators, due to financial crisis. The highest decrease in GDP
value is recorded in 2009, when the value have dropped with 3.51% compared
with 2008.
Moreover, the annual average increase in GDP for period 2003-2007 was
around 4.65%, while the annual increase in GDP for period 2010-2014 is only
1.71%, which is more than half from the value recorded before financial crisis.
This highlighted the negative impact of financial crisis on EMU countries.
5. RESULTS
The EU faced several problems in past years, many of them being caused
by financial crisis. That’s why, the EU tries to implement some fiscal policy
measures in order to stabilize the Euro area and the EU.
Of course, it is hard to predict the successful rate of these fiscal policy
measures, but we can start from the historical point of view, and to analyze if the
countries from EMU have the premises of applying successful fiscal policy
measures. Regarding this, we want to see if for period 2003-2014, the fiscal
policy measures took in those countries affected significantly the economic
situation or not. We consider that in the countries where the fiscal policy already
had a significant impact on economic situation, it will be more easily to
implement the new rules, and to expect that these measures will achieve the
goals for which were created.
In order to understand the manner in which the fiscal policy measures
adopted by EU will affect the economic situation of the EMU countries, we
applied the Granger causality for selected variables, in order to detect the
statistically significant influences. The results are presented in table 2.
434
These results highlight that the government expenditure has the biggest
influence on GDP growth rate in six countries (Belgium, Cyprus, Estonia,
Finland, France and Malta). In the same time, the government revenues, and
more specifically the direct taxes have also a significant impact on GDP growth
rate in Austria, Belgium, Finland, Ireland, and Spain, In the same time, the
indirect taxes have a lower influence on GDP, only in Austria, Estonia and
Ireland. The same can be see also for capital investments (Germany, Italy and
Malta).
If we analyze the fiscal policy influence on unemployment rate, we can see
that only in six countries from our sample, the fiscal policy has a significant
impact: Austria, Finland, Luxembourg, Malta, Netherlands and Spain. This
influence of fiscal policy is resulting especially from government revenues, and
not from government expenditure.
Going further, we can see that in nine countries the fiscal policy has a
significant influence on direct investments. Despite this, we pointed out that all
fiscal policy instruments have the same impact on the direct investments.
Table 2. Granger causality relations between selected fiscal policy variables
and economic variables, by each country
Country
GDP growth rate
Unemployment
Direct
investments
Austria
DT**, IDT*
REV*
EXP**
**
**
**
Belgium
DT , EXP , REV
Cyprus
EXP** , REV*
Estonia
IDT***, EXP*
Finland
DT***, EXP* , REV**
DT***, EXP*
REV*
France
EXP**
IDT*
*
Germany
CAP.INV
CAP.INV*
**
***
***
Ireland
DT , IDT , REV
DT*
*
Italy
CAP.INV
EXP*
*
Luxembourg
REV
CAP.INV*
**
**
*
Malta
CAP.INV , EXP
IDT
IDT**
*
Netherland
IDT
Portugal
Slovakia
Spain
DT***, REV***
DT**, REV**
DT***, REV**
Note: DT – direct taxes; INT – indirect taxes; REV – total revenues; EXP – total
expenditures; CAP.INV – capital investments.
*** ** *
, , - the null hypothesis of Granger causality test is rejected at 1%, 5%, respectively
10% significance level (the fiscal variables from cells are Granger causing the economic
variable from the main row)
435
The only countries in which we didn’t found any significant influence of
fiscal policy on economic situation is Portugal and Slovakia. Based on these
findings, we consider that the fiscal policy measures which will be adopted in
these two countries, must be implemented very carefully and with some more
specific analyses, otherwise there is the risk that these measures to not achieved
the purpose for which will be applied.
Next, we want to determine the percentage of the countries for which there
is a significant Granger causality relation between different fiscal policy
instruments and economic indicators.
First we take a look at the relationship between direct taxes and GDP
growth, which can be seen in figure 2. If before financial crisis the direct taxes
had a significant impact on GDP growth in more than 20%-25% from selected
countries, during financial crisis, this influence remain significant only in 5%15% of them. Despite this, we can see an increase in the last period, such that the
direct taxes have a similar impact as in the period before financial crisis. This
aspect it is very important, because if direct taxes have a significant impact on a
bigger number of countries, the fiscal policy measures adopted at EU level will
have a higher rate of success.
Figure 2. Granger causality relation between direct taxes and GDP growth
40%
30%
20%
10%
0%
Direct taxes --> GDP growth
The impact of indirect taxes on selected countries is presented in figure 3.
We can observe that in the last period the indirect taxes have a significant impact
on less than 5% of EMU countries. This was not the case during financial crisis
period, when there was recorded a significant impact in more than 20%-25% of
EMU countries.
436
Figure 3. Granger causality relation between indirect taxes and GDP
growth
35%
30%
25%
20%
15%
10%
5%
0%
Indirect taxes --> GDP growth
When we analyzed the impact of government expenditure on GDP growth
rate of selected EMU countries, we found out that during the last period this
fiscal policy instrument had a significant impact in more than 20%-25% from
selected countries, even for short period of time in more than 40% of the
countries.
This higher impact of government expenditure is understandable, due to
fact that many countries during financial crisis and the period after that cut a
significant part of their expenditure, such that the economic situation of the
country to be stabilized.
437
Figure 4. Granger causality relation between government expenditure and
GDP growth
2003Q1-2007Q4
2003Q2-2008Q1
2003Q3-2008Q2
2003Q4-2008Q3
2004Q1-2008Q4
2004Q2-2009Q1
2004Q3-2009Q2
2004Q4-2009Q3
2005Q1-2009Q4
2005Q2-2010Q1
2005Q3-2010Q2
2005Q4-2010Q3
2006Q1-2010Q4
2006Q2-2011Q1
2006Q3-2011Q2
2006Q4-2011Q3
2007Q1-2011Q4
2007Q2-2012Q1
2007Q3-2012Q2
2007Q4-2012Q3
2008Q1-2012Q4
2008Q2-2013Q1
2008Q3-2013Q2
2008Q4-2013Q3
2009Q1-2013Q4
2009Q2-2014Q1
2009Q3-2014Q2
2009Q4-2014Q3
2010Q1-2014Q4
50%
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
Government expenditure --> GDP growth
GDP growth --> Government expenditure
Figure 5. Granger causality relation between capital investments and GDP
growth
35%
30%
25%
20%
15%
10%
5%
0%
Capital Investments --> GDP growth
438
One type of expense which was decreased is represented by capital
investments. If during financial crisis the capital investments was around 3.5%
from GDP for EMU countries, during financial crisis the value decreased around
2%-2.5% from GDP. That is the reason why the impact of this fiscal policy
instrument on GDP was significant in less than 5% of EMU countries during
financial crisis and recent period. Despite this, from figure 5, we can see that
before financial crisis, capital investments were a good fiscal policy instrument
for influencing GDP growth in more than 20%-25% of the EMU countries.
6. CONCLUSIONS
The aim of this paper was to analyze if the EMU countries have premises of
achieving economic stability and further economic growth based on fiscal policy
instruments. This is a very important aspect, because otherwise all fiscal policy
measures adopted recently by EU will not achieve their purposes.
Based on our analyses made on 15 countries from EMU, during the period
of 2003-2014, we were able to see that the main fiscal policy instrument which
affects GDP growth was the government revenues, especially direct taxes.
Moreover, the fiscal policy seems to have a bigger impact on GDP growth
rate than on direct investments and unemployment. Despite this, for Portugal and
Slovakia we didn’t found any significant influence from fiscal policy on
economic situation. The fiscal policy measures which will be adopted in these
two countries, must be implemented very carefully and with some more specific
analyses, otherwise there is the risk that these measures to not achieved the
purpose for which will be applied.
When we analyzed the percentage of countries in which different fiscal
policy measures have a significant impact, we found that in the recent period, the
direct taxes and expenditure have significant impact in over 20%-25% of
analyzed countries. In the same time, the indirect taxes and capital investments
have a significant impact in less than 5%-10% of analyzed countries.
The main limit of the paper is represented by the small sample of data, only
12 years of quarterly data, and 15 countries. Another limitation is the fact that
the financial crisis overlapped with the analyzed period, such that some findings
can be affected by this.
Further research can compare the EMU countries situation with non-Euro
area countries, to see if there is any significant difference between adopted fiscal
policy measures. Also, we can apply the VAR methodology in order to capture
the impulse response function for each fiscal policy instrument on economic
situation of each country.
439
ACKNOWLEDGEMENT
This work was supported by the project “Excellence academic routes in the
doctoral and postdoctoral research – READ” co-funded from the European
Social Fund through the Development of Human Resources Operational
Programme 2007-2013, contract no. POSDRU/159/1.5/S/137926.
References
[1] Alesina, A., & Ardagna, S. (2010). Large changes in fiscal policy: taxes versus
spending. Tax Policy and the Economy, The University of Chicago Press, vol. 24,
35-68.
[2] Auerbach, A. J., & Gorodnichenko, Y. (2010). Measuring the output responses to
fiscal policy. NBER Working Paper No. 16311.
[3] European Commission (2000). Tax Policy in the European Union. Retrieved from
http://ec.europa.eu/publications/booklets/move/17/txt_en.pdf;
[4] Galí, J. (1999), Technology, Employment, and the Business Cycle: Do Technology
Shocks Explain Aggregate Fluctuations?. American Economic Review, vol. 89,
issue 1, 249-271.
[5] Granger, C. W. (1969). Investigating causal relations by econometric models and
cross-spectral methods. Econometrica: Journal of the Econometric Society, vol. 37,
issue 3, 424-438.
[6] Hansen, A. (1927). Business-Cycle Theory: Its Development and Present Status.
Boston.
[7] Ilzetzki, E., & Végh, C. A. (2008). Procyclical fiscal policy in developing
countries: Truth or fiction?. NBER Working Paper No. 14191.
[8] Ivanov, V., & Kilian, L. (2005). A practitioner's guide to lag order selection for
VAR impulse response analysis. Studies in Nonlinear Dynamics & Econometrics,
vol. 9, issue 1, 1-36.
[9] Kilian, L. (1999). Exchange Rates and Monetary Fundamentals: What Do We
Learn From Long-Horizon Regressions?. Journal of Applied Econometrics, vol. 14,
issue 1, 491-510.
[10] Ogbole, O. F., Amadi, S. N., & Essi, I. D. (2011). Fiscal policy and economic
growth in Nigeria: a granger causality analysis. American Journal of Social and
Management Science, vol. 2, issue, 4, 356-359.
[11] Pelkmans, J. (2003). European Integration. Methods and economic analysis,
Second edition. Bucharest, European Institute from Romania.
[12] Ramey, V. A. (2011). Can government purchases stimulate the economy?. Journal
of Economic Literature, vol. 49, issue, 3, 673-685.
[13] Shihab, R. A. (2014). The Causal Relationship between Fiscal Policy and
Economic Growth in Jordan. International Journal of Business and Social Science,
vol. 5, issue 3, 203-208.
440
YOUTH EUROPEAN PUBLIC POLICY ON
EMPLOYMENT AND ENTREPRENEURSHIP
VERONICA GARBUZ
[email protected]
ANA-MARIA BERCU
Alexandru Ioan Cuza University
Iasi, Romania
[email protected]
Abstract
The working paper focuses on the European public policy – aiming at the labor market
integration of youth and entrepreneurship. The most important actors of those labor
market policies that directly or indirectly target youth employment, and the context of
their policy implementation are discussed. Special attention is paid to mainstreaming
policy and their effectiveness. The paper provides an overview of the varieties of
European programs addressing young people, highlights certain practices in socioeconomical context. European Youth Employment practices on the labor market can be
retrieved and applied to other countries.
Keywords: Public policy, labor market, youth employment, unemployment, European
programs
JEL Classification: E6, J2
1. INTRODUCTION
Young people represent a huge force. Because intellectual capacity and
power to mobilize quickly, they are the engine of social change, economic and
political worldwide. But to what extent it is concentrated energy of young
Europeans who live in developing countries? How state structures supporting
youth through social-economic programs? What youth policy exists in Europe
regarding employment and entrepreneurship? These and many other questions
that we try to answer in this article.
441
2. THEORETICAL HIGHLIGHTS OF THE CONCEPT "YOUTH
PUBLIC POLICY"
Policy comes from the Greek "polis" (city) and it is a business decision,
mainly related to the community. The meaning of this concept is linked to
managerial leadership, organization and control. In common sense, the term
policy is usually taken to apply to something "bigger" than individual decisions,
but "something less" than the general social movements. So policy, in terms of
level of analysis, is a concept placed in the middle. A second element, namely
the one essential, is that for most authors the term refers to a purpose of some
sort (Heclo 1972).
Romanian Government Decision no. 870/2006 defines public policy as "all
activities of the specialized central public administration in order to resolve
problems identified public policy and to ensure the necessary development in a
particular area".
Trying to summarize, we advance the following definition of public
policies: "public policy is a network of interrelated decisions on the choice of
objectives, means and resources allocated to achieve them in specific situations".
By analogy we deduce the definition of public policies for youth. This term
means that set of measures designed to facilitate the entry of young people into
working life and develop their active citizenship.
3. WHY EUROPEAN PUBLIC POLICY IN THE FIELD OF YOUTH?
About 20% of the European population are young people aged between 1830 years. They are a modern generation, living in a free Europe without borders.
They can work and learn wherever they want. The provisions of European youth
appeared in the early 90s, taking the form of programs that were intended to
support the mobility of young people, organizing youth exchanges, promoting
active citizenship and volunteering. Gradually appeared in youth policy
provisions, provisions that are found in a number of documents and initiatives
launched at European level, such as the White Paper, European Youth Pact, and
European youth strategy. In the member states of the European Union is trying,
through existing mechanisms, shaping a common approach to youth. Each
Member State remains, however, responsible for implementing its policy on
youth, under the principle of subsidiarity (National Agency for Community
Programs in Education and Vocational Training, 2010).
In April 2009, the European Commission presented a Communication "An
EU Strategy for Youth - Investing and empowering. A renewed open method of
coordination
to
address
youth
challenges
and
opportunities".
The new strategy calls on both the Member States and the European
Commission in the period 2010-2018, to cooperate in the field of youth through
the Open Method of Coordination. It proposes a sectorial approach, with short
442
and long term actions, involving all key policy areas that affect young people in
Europe. It was established eight priority areas for action (Fig. 1).
Fig. 1. Youth European Public Policy
(Source: elaborated by authors)
According to Adrian Miroiu, given that public policies are a set of
intervention measures in a particular area of concern, through their economic
and social levers act, facilitating the development of successful youth sector
(Miroiu, 2001).
4. LEGAL FRAMEWORK OF YOUTH PUBLIC POLICY
European legal framework on youth participation is continuously improved.
Some Member States have adopted legislation, others have strategic action plans
for the youth or youth consulting practice. This is illustrated in Fig. 2.
443
Fig. 2. Legal framework of youth public policy
(Source: elaborated by authors)
Many European countries have implemented actions to support
participatory structures and to promote dialogue between partners in the youth
field. Some countries have nominated individuals to deal with issues concerning
youth: Finland has appointed a mediator, the United Kingdom has appointed a
national youth correspondent, and Lithuania has opted for municipal youth
coordinators. Others develop horizontal practices like inter-ministerial meetings.
But others were created consultative structures such as (web site – European
Legal Framework Synthesis):
- National councils (most Member States);
- Youth commissions and local councils (Belgium, Luxembourg);
- Youth parliaments (Cyprus and Malta);
- Participative structures for youth (Greece, Spain);
- Structures for disadvantaged young people (Germany);
- Structures for young people living in rural areas (Poland);
- Support structures for youth projects (Austria).
5. THE YOUTH: A PROBLEM OR A RESOURCE FOR EUROPEAN
ECONOMY?
The population of the European Union has about 500 million inhabitants,
which represents 7.3% of world population. The European Union generates an
annual GDP of 17.6 trillion US dollars (more than any other country in the
world), which represents 20% of estimated GDP in terms of purchasing power
parity worldwide.
Knowing that young Europeans constitutes about 20% of the total
population, we follow that their number is about 100 millions. Unfortunately,
444
unemployment among young people has reached alarming levels, of around
24%. Since the young labor force has a job, the economy has suffered much, and
the consequences will be disastrous in the long term. Thus, according to the first
approach, young people are considered vulnerable and endangered individuals.
Youth development is threatened by many things, including their own behavior.
Non-integration into the labor market leads to a series of own expenses
(maintenance costs) and the state (unemployment benefits, income losses for
non-generation of the country's GDP). Youth unemployment in Europe at a cost
that rises to 150 billion annually, representing about 1.2% of EU GDP. We must
not forget the difficulties faced by these young people and their families.
The second approach, presented in a more luminous quality of an individual
youth aged 18-30 years. This approach is characteristic of countries that put
more emphasis on this segment of the population, issuing and applying public
policies in the youth sector. Young is regarded as a resource to be harnessed
price efficiency to help increase the country's financial results.
6. EMPLOYMENT AND ENTREPRENEURSHIP
By providing the Communication no. 933/2011, the European Commission
proposed a new initiative called the Member States 'Youth Opportunities'. The
initiative proposes to assist young unemployed who have dropped out of
education / training before obtaining a degree, to return in school or follow
vocational training courses to get necessary skills to find a job. They are also
encouraged employment opportunities it offers a premium professional
experience of university graduates who have difficulties to integrate in the labor
market.
The Commission finances these national programs and network to exchange
ideas on the best ways may be to provide young people access jobs, training
courses or internships. Finland and Austria already have such programs.
European taxpayers will have to pay for those programs about 21 billion euros,
well below the cost of unemployment benefits that would get young people
without job.
Other EU-level actions:
- Youth guarantees – a €4 million worth preparatory action to help EU
countries get young people into employment, further education or
(re)training within 4 months of leaving school.
- European quality framework on traineeships.
- Your First Futures Job – preparatory action to help 5,000 young people
find a job in another EU country (2012-13).
- Erasmus & Leonardo da Vinci – 130,000 company placements in 2012
in other EU countries for university-level and vocational students.
445
-
Erasmus for Entrepreneurs – 600 placements for young entrepreneurs in
small businesses in other EU countries.
- European Voluntary Service – 10,000 volunteering opportunities across
all EU countries.
The EU provides financial support and political partnership between the
European Commission, national authorities, social partners and civil society, EU
funds
better
targeted
to
help
young
people
get
jobs.
Romanian policies that stimulate youth employment and recent graduates are
operationalized by Law No. 76 / 16.01.2002. According to Article 80 (1),
employers who employ, for an indefinite period, graduates of educational
institutions are exempt, for a period of 12 months paid contributions to the
unemployment insurance budget, related graduates employed, and receive
monthly,
during
this
period,
for
each
of
the
graduates:
• 1 minimum gross salary guaranteed payment in force at the date of
employment for graduates of lower secondary schools or schools of arts and
crafts;
• 1.2 minimum gross basic salary guaranteed payment in force at the date of
employment for graduates of upper secondary or post-secondary education;
• 1.5 minimum gross basic salary guaranteed payment in force at the date of
employment for university graduates.
Law no. 116/2002 on preventing and combating social exclusion states in
Article 8 (1), that employers who hire young people aged between 16 and 25
years, under a contract of solidarity, will receive a monthly basic salary set on
youth employment but not more than 75% of the average net wage economy,
announced by the National Statistics Institute. Moreover, if the termination date
of solidarity employers will conclude with the young individual employment
contract of indefinite duration, they shall, for a maximum of two years, the
monthly repayment of an amount in amounting to 50% of unemployment
benefits due (Heclo, 1972).
Regarding entrepreneurship among young people, a study published by
Euro found, an EU institution, shows that only 6.5% of young people aged
between 15 and 29 years, decided to become self-employed in 2013. However,
48% of young people want to become entrepreneurs. European public policies to
support entrepreneurship in youth facilities aimed at creating economic, fiscal
and legal for young people to set up their own business. In many countries it was
simplified procedure for registering new economic entity.
7. CONCLUSIONS
The young generation is a resource weakening, it is estimated that the 20%
of the population that it is now will fall to 15% by 2050. The Lisbon Strategy
446
proposes a cross-sectorial approach, considering both short-term actions and
long-term, highlighting the importance of youth work and addresses a simplified
method, more flexible coordination between Member States in relation to youth
policy.
To promote and support youth employment in labor is required continuously
improved EU Youth Strategy, which aims at the following objectives:
- Improving young people's participation in the labor market both
quantitatively and qualitatively,
- Increase young people's ability to develop and use of their professional
potential;
- Developing young people's ability to search, find and occupy jobs
matching their professional training and skills;
- Creating the conditions for a harmonious combination of professional
and family life;
- The widest possible participation in social, cultural, civic and political
life of countries States and Europe.
Special emphasis should be placed on creating free time and opportunities
for enhancing skills development, skills and creativity. The European
entrepreneurial ecosystem development in youth, is necessary to take measures
both at public and private level. Thus, at governmental level should be
abandoned in establishing programs for new companies - the focus should be
changed on existing sustainability by improving the quality of entrepreneurship
education programs to young people. In this respect, it is important to be a link
between school and business, and curricula should be adjusted to market
conditions. In addition, the educational system should focus on creating
responsible and independent leaders who exploit entrepreneurship and
understand what it entails. Also serving the state falls and simplifying
administrative and fiscal alongside the fight against corruption. On the other
hand, the private sector can contribute significantly to the development of
entrepreneurship by implementing quality programs: training sessions, events
and competitions for entrepreneurs just starting out, mentoring programs and
support for start-ups or information sessions about existing funding
opportunities. Facilitating access to accelerated programs, incubators and coworking spaces is another very important point, along with continuous
promotion of successful models and correct reasons for being an entrepreneur.
Together, public and private sector have the potential to significantly contribute
to Europe's entrepreneurial ecosystem.
447
References
[1] Heclo, H. (1972). Policy Analysis. British Journal of Political Science, issue 2, 83 –
108.
[2] Miroiu, A. (2001). Introduction to Public Policy Analysis. Bucharest.
[3] National Agency for Community Programs in Education and Vocational Training
(2010). European Youth Policy. Retrieved from:
http://www.eurodesk.ro/buletin/brosura_politici_final_CC.pdf
[4] ***Communication 933/2011 of the European Commission "Youth Opportunities".
[5] ***European
Legal
Framework
Synthesis.
Retrieved
from
http://europa.eu/legislation_summaries/education_training_youth/youth/c11200_ro.htm
[6] ***Law no. 116 of 15 March 2002 on the prevention and combating social exclusion
published in the Official Monitor of Romania no. 193 of 21 March 2002.
[7] ***Law no. 76/16.01.2002 regarding the unemployment insurance system and
employment stimulation, published in the Official Monitor of Romania no. 103 /
6.02.2002.
448
WHY DO WE NEED A COMPETITION POLICY?
LUCIA IRINESCU
″Al. I. Cuza″ University
Iasi, Romania
[email protected]
Abstract
The Treaty on European Union competition was included among the Community principles,
Member States being required to adopt an economic policy consistent with the principles of open
market economy based on fair competition. Preventing, restricting or distorting competition will
affect the functioning of the internal market and create imbalances in intra-Community relations.
European competition rules have been upgraded over time. The reform in this area was aimed
primarily at harmonizing the applicable law. Competition policy aims at the provision of quality
goods and services at reasonable prices.
Keywords: competition, anti-competitive practices, antitrust policy
JEL Classification: K 210, L 400, L 440
1. COMPETITION: EUROPEAN UNION POLICY
Considered to be a competition between economic operators, competition
is, above all, a stimulus to economic efficiency through innovation at all levels:
implementation of new production techniques, marketing of new products and
services, diversification sale and distribution methods (Floander et al., 2007).
Competition leads, inevitably, to the elimination from the market of economic
operators who are unwilling to change and who lack innovation.
The main beneficiaries of the economic progress are the consumers. The
immediate consequence of competition is the lowering of selling prices of
products and/or services. A reasonable price can be a strategy to attract
customers and can lead to a higher volume of sales, and ultimately to an increase
in profit. All economic operators should aim to maximize the profit by
minimizing the production costs, selling prices and improved quality of
produced goods (Moşteanu et al., 1998).
The competitive mechanism is responsible for the formation of prices by
comparing supply and demand in terms of quantity and quality. The competition
is one of the important factors that result in adapting the supply on demand. In a
market that holds the share offer, competition leads to customization of
economic operators in relation to competitors. In a market dominated by
449
demand, its effect will result in a specialization of economic operators in relation
to consumers. The function of satisfying consumer demand derives from this
perspective.
The competition has a preventive function that prevents the formation of
dominant position on a given market, the abuses or discrimination of which can
reach up to monopoly. It is the means by which we can diminish the economic
power concentrated in the hands of the state and economic operators. In a market
characterized by reduced competition, concentration is often accompanied by the
establishment of a dominant position. Competition has also a coercive function.
Economic operators are forced to constantly adapt to market requirements in
order to avoid elimination from the economic network (Mihalache, 2014).
Considered to be a fundamental principle of international trade, the
commercial competition has important functions in the development of
international trade relations, namely the function of guaranteeing the conduct of
market economy; a function to facilitate the free movement of goods, capital,
services and people; a function to stimulate participants in international trade
(Mazilu, 2010).
Summarizing, we see that in a market economy, competition is essential to
the normal commercial activities.
The objectives of competition policy have not been fixed in terminis in the
Treaty of Rome in 1957. Starting from the provisions of the Treaty and the
European Court of Justice the principles of competition policy in doctrine were
drawn: the prohibition of the entente affecting trade between Member States and
distorts competition in the exclusive market; the prohibition of abuse of
dominant position; control of concentrations of organisations; State aid
monitoring.
The provisions of art. 101 of the Treaty on the Functioning of the European
Union (former art. 81 of the European Communities) prohibit and declare
incompatible all the agreements between organisations, decisions of associations
of organisations and concerted practices which may affect trade between
Member States and which have as their object or effect the prevention,
restriction or distortion of competition within the internal market.
Art. 102 of the Treaty on European Union states that it is incompatible with
the internal market and prohibited so far as trade between Member States of the
European Union is likely to have affected the behavior of one or more
businesses to use in an abused a dominant position in the market or in a
substantial part of it.
Monitoring of compliance art. 101 and 102 of the Treaty on European
Union shall be performed by the European Commission. The control procedure
is carried out under Regulation (EC) no. 1/2003 of 16 December 2002 on the
450
implementation of the rules on competition laid down in art. 81 and 82 of the
Treaty.
The Treaty on the Functioning of the European Union does not contain
provisions relating to the mergers that may distort competition. To fill this
legislative gap, the EU Council adopted the Merger Regulation.
Competition restrictions apply not only to companies but also to
governments which grant aid to economic operators. Treaty on the Functioning
of the European Union prohibits, in principle, by art. 107- art. 109, any aid
granted by a Member State or through State resources granted in any form
whatsoever which distorts or threatens to distort competition by favoring certain
organisations or the production, to the extent that it affects trade between
Member States.
The international anti-competitive policy protects freedom of trade more
effectively than the national anti-competition policies designed to defend a
certain state (Moga, 2001). Competition rules that are applicable to Member
States refers to dumping and subsidies. Art. 91 of the Treaty establishing the
European Economic Community since 1957 prohibited dumping exercised
within the common market. Art. 92 declared incompatible with the common
market aid granted by Member State or through State resources in any form
whatsoever which distort or threaten to distort competition by favoring certain
organizations or the production, to the extent that the trade between Member
States was affected.
Dumping and subsidies have the effect of distorting the competition
internationally, thus impeding free trade. The anti-dumping and anti-subsidy
measures guarantee a free trade and are at the same time, a remedy for domestic
producers against dumping disadvantages created by foreign manufacturers. As
far as unfair practices are being reduced, the effectiveness of the trade increases.
Anti-dumping and anti-subsidy policies are part of the common commercial
policy. In the European Union there have been developed over time, a number of
foreign trade instruments, from the common external price to dumping and
countervailing measures. The main objective in the long term, which states
pursue through trade policy instruments and measures is to stimulate the national
economy and protect it from foreign competition.
The European legislation is transposed into our law by Law no. 21/1996.
Rules implementing these provisions are established by regulations and
instructions issued by the Competition Council, which is secondary legislation.
2. THE ANTRITRUST POLICY
The agreements between organizations, the decisions made by associations
of organizations and concerted practices may be grouped into the concept of the
Entente. In our law, the legal regime is established by art 5 of the Competition
451
Law. 21/1996 which is similar art. 101 para. (1) TFEU. Doctrine defined the
Entente as any agreement occurred between two or more organizations,
expressed in written form regardless of title or nature of the act or clause
containing it - or implied, express or implied, whether public or occult, with the
purpose or effect the coordination of competitive behavior (Michael, 2008).
European Court of Justice ruled that the agreement may consist of a single action
in a series of actions or behavior in a way. For the understanding to fall under
art. 101 para. (1) TFEU, it is sufficient that operators should have expressed
their common intention to adopt a certain conduct on the market.
Decisions of association represents a preliminary manifestation of will by
which a trader agrees to group with other collective entities, which shall run only
if completed an agreement.
The concept of concerted practice designate a state of affairs arising from
the behavior of individual economic operators who avoid any competition facing
their cooperation.
We consider to be anticompetitive those agreements that establish, directly
or indirectly the purchase or selling prices or any other trading conditions; limit
or control production, markets, technical development, or investment; refers to
the share markets or sources of supply; relationships with trading partners apply
dissimilar conditions to equivalent transactions, thereby placing some of them at
a competitive disadvantage; the conclusion of contracts subject to acceptance by
the other parties of supplementary obligations which, by their nature or
according to commercial usage, have no connection with the subject of such
contracts (coupled).
As a general rule, Ententes are void. However, exceptionally, some Entente
are not covered by art. 101 Para. (2) TFEU when they meet the following
conditions: they contribute to improving the production or distribution of goods
or to promoting technical or economic progress, ensuring at the same time,
consumers with the resulting benefit of the parties to that agreement, decision or
practice collaboration; do not impose on the organizations concerned restrictions
which are not indispensable to the attainment of these objectives; do not offer to
organizations the possibility of eliminating competition in respect of a
substantial part of the products in question.
In the 2014 Annual Report the Competition Council showed that most of
the investigations on the possible infringement of competition completed in
2014 was the horizontal and vertical cartel. The Competition Council found
infringement of competition through anticompetitive agreements media market,
the marketing of food products and passenger taxi from Bucharest and Ilfov
County; market sharing drilling for oil and natural gas in Romania (at auctions
organized by ROMGAZ SA); through retransmission of the rights to broadcast
football matches and collusion; on Prepaid phone cards market.
452
3. THE ABUSE OF DOMINANT POSITION
The existence of a dominant position stems, usually in possession of a large
market share over a long period. To examine whether an operator is dominant,
we consider the constraints faced in relation to ability to behave independently
in the market. In the absence of evidence on which to analyze the situation of
economic operators, the dominance is automatically presumed, as long as market
share is 70% - 80% over a period of time. In our law, it is presumed that one or
more organizations are not in this situation when the cumulative quota on the
relevant market during the period under review, do not exceed 40% [art. 6 para.
(1) of Law no. 21/1996].
To prevent and combat all forms of abuse of dominant position,
Community and national legislation exemplifies just some of the behaviors that
may constitute abuse of a dominant position. The first example provided by art.
102 para. (2) (a) TFEU concerns the imposition, directly or indirectly, of unfair
prices of sale or purchase or other unfair trading conditions. Art. 6 para. (1) (a)
of Law no. 21/1996 supplements the text of art. 102 para. (2) (a) TFEU by
refusing to deal with certain providers or beneficiaries. Other forms that can take
the abuse of dominance exemplified by the legislature are limiting production,
markets or technical development to the prejudice; application in relations with
trading partners of dissimilar conditions to equivalent transactions, causing in
this way, some of them at a competitive disadvantage; the conclusion of
contracts subject to acceptance by the other parties of supplementary obligations
which, by their nature or according to commercial usage, have no connection
with the subject of such contracts; excessive pricing or predatory pricing in order
to eliminate competitors or export sale below cost, coverage differences by
imposing increased prices to the domestic consumers; the operation state of
dependence is another enterprise to such an organization or organizations which
do not have an alternative solution under equivalent conditions, and the
severance of contractual relations for the sole reason that the partner refuses to
submit to unjustified commercial conditions.
4. MERGER
According to art. 3 of Regulation (EC) no. 139/2004, the merger can be
achieved in three ways, namely through the merger of several companies; by
taking control of other organizations by one or more organizations; through the
establishment of a concentrative joint venture. The competition authority
determines whether or not the operation is compatible with a normal competitive
environment according to two criteria. The fusion is an operation whereby two
or more previously independent organizations become a single economic entity.
Acquisition and merger achieve this.
453
Absorption occurs when a trader increases its activity encompassing
another economic operator that cease such activity. The merger implies that two
or more operators are merged to form a new legal entity. Some mergers may
reduce competition in a market by creating or strengthening a dominant player.
The situation thus created can harm consumers through higher prices through a
reduced choice or less innovation. The European Commission has been notified
of two large mergers, both in the pharmaceutical sector, namely Sanofi /
Synthélabo and Pfizer / Pharmacia. The Commission found that both fusion
could distort competition by limiting the range of drugs that patients could opt
for. In both cases, the parties proposed to transfer to competitors some of their
products to restore competition.
Taking control is achieved by obtaining by an operator of an influence on
one or more economic operators or parts thereof. The takeover is done by
persons or organizations which are the holders or beneficiaries of rights
conferring control or at least have the power to exercise them. Control may be
sole or joint, as exercised by one person or by at least two associates.
The first criterion refers to the situation where two or more parent
companies retain, to a significant extent activities in the same market as the joint
venture or in a market upstream or downstream of the society jointly or in a
neighboring market closely related to this market. The second criterion concerns
the possibility of eliminating competition in respect of a substantial part of the
goods or services concerned by the creation of the joint venture.
All the mergers that exceeds the thresholds laid down in legislation must be
notified to the European Commission at Community level or national
Competition Council. Notification should be made before and after the
implementation of the agreement, the announcement of the public offering or
acquisition of control (Moşteanu, et al., 2006). Upon notification, the
Commission or competition authority may issue decisions declaring the
concentration compatible or incompatible with the common market.
If it is found that the concentration has already been implemented and has
been declared incompatible with the common market, the Commission may
require the organizations concerned to dissolve and to restore the situation
prevailing prior to the implementation of the concentration. Where concentration
by dissolving this is not possible, it may take any other appropriate action to
ensure that the organizations concerned dissolve the concentration or meet the
measures set out in the Commission's decision (Grigorescu, 2007).
5. CONCLUSIONS
Competition policy ensures fair competition between operators. What's
more, it is the main instrument, which provides improvement and business
efficiency by encouraging initiative, increasing the quality of goods and
454
services. From the consumer perspective, fair competition will ensure a wide
range of products and an attractive price-performance ratio.
ACKNOWLEDGEMENT
This
work
was
supported
by
the
strategic
grant
POSDRU/159/1.5/S/141699, Project ID 141699, co-financed by the European
Social Fund within the Sectorial Operational Program Human Resources
Development 2007-2013.
References
[1] Floander, I., Costea, M., Rapotan, A., Dumitru, C. (2007). Competition Law,
Constanta: Europolis.
[2] Grigorescu, C. (2007). Merger control, additional procedures after EU accession,
Romanian Journal of Business Law, Issue 5, 64-69.
[3] Mazilu, D. (2010). Freedom of trade and fair competition in international trade,
Commercial Law Review, Issue 6, 100-105.
[4] Michael, E. (2008). Competition law. Community law and Romanian, Timişoara:
Mirton.
[5] Mihalache, C.M. (2014). Strategies of European governmental good practices, SeaPractical Application of Science, Vol. II, Issue 4 (6), 65-71.
[6] Moga, I. (2001). Anti-competitive policies in international practice, Economic
Tribune, Issue 9, 69-71.
[7] Moşteanu, T., Alexander, F., Buckle, D. (2006). Economic competition and
European integration, Bucharest Economic Tribune.
[8] Moşteanu, T., Purcărea, Th. (1998). Competition. Guide to business performance,
Bucharest: Economic, 1998.
455
KEY PROBLEMS OF FISCAL AUTONOMY: EVIDENCE
FROM ROMANIA
GEORGE IVĂNESCU
“Alexandru Ioan Cuza” University of Iași
Iași, Romania
[email protected]
FLORIN-ALEXANDRU MACSIM
Iași, Romania
[email protected]
DUMITRU-NICUȘOR CĂRĂUȘU
Iași, Romania
[email protected]
Abstract
In the current globalized world, every country aspires to obtain the highest degree of
economic development and competitiveness. In order to achieve these common goals
each country needs to ensure that local government can level keep up with the economic
development. In this regard, an important role is being played by the local autonomy. In
this paper we presented which are key advantages and disadvantages of fiscal
autonomy, and analyze the degree of fiscal autonomy for two medium economical
developed counties from Romania. Our results indicate that the degree of local
autonomy in the analyzed timeline has never been higher than 30%, proving the need for
fiscal transfers from the central budget to the local budgets. Also, we have shown that
viewing local fiscal autonomy from the financial point of view isn’t enough, because the
other important piece of the puzzle, the local government responsibilities are hindered
by the lack of legislative autonomy. Nevertheless, we have shown that unbalanced ratios
between the sizes of the local public expenses to local revenues are one of the major
factors that hinder the economic development, in a rigid environment regarding local
autonomy.
Key words: Local Autonomy, economic development, fiscal autonomy
JEL Classification: H30; H41; H77
456
1. INTRODUCTION
From the historical standpoint the local autonomy, has been one of the
major driving factors of the European Union for long term economic and social

Here - ebip-eu - Alexandru Ioan Cuza

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