Narrow Results

The global financial crisis of 2008 challenges some relevant aspects of macroeconomic theory such as the neutrality of money. This paper shows that this neutrality is based on the unrealistic assumption of perfect competition. Relaxing this alone (without time lags, price rigidities, menu costs and other frictions) makes money no longer necessarily neutral and hence makes financial crises and institutions much more important. The presence of increasing returns to scale at the firm level and to specialization at the economy level due to the division of labor also makes finance much more important than suggested by traditional economics.

The crucial role of mutual banks in promoting local development is highlighted by an extensive theoretical and empirical literature. The historical success of mutual banks derives not only from their specific business model, but also from their peculiar and distinguishing corporate governance with member ownership. According to a copious literature, these features have probably allowed mutual banks to better withstand financial crisis. This work compares the cost efficiency of European mutual banks by analyzing a sample which consists of the universe of all the banks operating in Italy, Germany, France and Spain over the period 2011–2016, by employing a stochastic approach (Stochastic Frontier Analysis-SFA) to determine the effects of the recent financial crisis on the efficiency level of this particular kind of bank. The analysis aims to point out the determinants of efficiency in order to understand if the mutual model reveals to be still attractive in the modern banking system. The main contribution of the paper to previous literature consists in comparing different impacts of financial crisis on efficiency of mutual banks in main European countries. Furthermore, the results enrich the recent debate about the cooperative and mutual banking system and its raison d’être. Our results show that the European mutual banks reveal a higher degree of efficiency with respect to commercial banks. Cost efficiency appears to be significantly and negatively related to the level of regulatory capital, the level of credit risk, the level of leverage and the cost-income ratio. On the other hand, it is significantly and positively related to the profitability of the traditional lending activity, to the level of prudence in terms of provisions against credit risk and to the amount of liquidity as a buffer against unexpected troubles.

We investigate whether and how SMEs’ credit quality influences their substitution of bank credit for trade credit. Using data from the five largest European countries, we find that substitution of bank credit for trade credit decreases during the financial crisis, but it decreases significantly less for ex ante low credit quality firms. We control for pre-crisis or lagged firm characteristics including size and external finance dependence, industry effects, sample selection effects and cross-country heterogeneity. We also find that low credit quality firms increase their absolute and relative trade credit usage significantly more than high credit quality firms during the financial crisis. The effects are consistent across countries and stronger for net trade credit borrowers and financially constrained firms. The evidence highlights how credit quality influences demand-side driven substitution in SME finance.

We examine how changes in research and development expenditures (R&Ds) at the beginning of the 2008 financial crisis affected firms’ market performance immediately after the crisis. Our sample contains 2470 firms listed on NYSE and NASDAQ. We find that firms that increased their investment in R&Ds had higher risk-adjusted returns in 2009. The highest risk-adjusted returns were among firms that decreased dividends but increased their R&Ds and are associated with the firms’ managerial efforts before and during the crisis. These findings underscore the importance of investment in innovations even during severe cash constraints and document that firms benefit from preserving cash by cutting other than R&D expenses.

This study investigates how the COVID-19 pandemic affected the European banking system, focusing on lending activities and risk-taking behavior. We use a difference-in-differences (DID) approach to compare the performance of banks highly impacted by the pandemic with those operating in less affected countries. Our results indicate a negative impact on lending activities, as banks reduced their exposure to both individuals and businesses. Nonetheless, the impact on bank risk-taking was heterogeneous, as certain banks increased their risk-taking by relaxing their lending standards to support their borrowers while others tightened lending criteria. The reduction in total lending for the banking system was primarily driven by less capitalized banks — with a sharp decline in corporate loans combined with stability in mortgages and consumer loans — and those with limited access to public guarantee schemes. Different characteristics, such as size, profitability, and listing status, led to varied lending behaviors during the COVID-19 pandemic, with smaller and more profitable banks exhibiting greater resilience.

This paper explores the relationship between banks’ “reward culture” and banks’ performance and risk during the 2007–2008 financial crisis. Reward culture is defined as a result-oriented culture influenced through the incentives structure. Reward culture reflects three dimensions: (i) Chief Executive Officer incentives; (ii) Vice Presidents’ incentives; and (iii) employee incentives. A reward culture score represents the common factor in incentives across all employee levels. I find strong evidence of a nonlinear relationship between reward culture and bank returns and risk. Classifying banks into high, average, and low reward culture groups in the pre-crisis year 2006, I find that during the crisis period, banks within both the high and low reward culture groups performed worse, and were more risky than banks within the average reward culture group. The findings are consistent with the problems of adverse selection and moral hazard associated with incentive misalignment when incentives are too low or too high.

Reducing credit procyclicality represents one of the key challenges on the regulatory agenda to reform the financial system architecture. Some early experiences may provide some insights on how countercyclical regulations may be effective. The Spanish dynamic provisions scheme implemented in 2000 is one of the main reference points in this context. We analyze the effects of dynamic provisions on managerial accounting discretion and ex-ante risk-taking behavior by banks. We empirically examine a sample of Spanish banks using quarterly information from 1995Q1 to 2013Q4. Our findings suggest that the counter-cyclicality of provisions has been reduced over time, as it has also been the case of managerial discretion (income smoothing and profit signaling). However, the results suggest that banks game on dynamic provisions by taking an ex-ante riskier behavior once the dynamic provisioning scheme is adopted.

This paper investigates the potential impacts of the degree of divergence in open macroeconomic policies in the context of the trilemma hypothesis. Using an index that measures the extent of policy divergence among the three trilemma policy choices—monetary independence, exchange rate stability, and financial openness—we find that emerging market economies have adopted trilemma policy combinations with the smallest degree of policy divergence in the last 15 years. We then investigate whether and to what extent the degree of open macro policy convergence affects the probability of a crisis and find that a developing or emerging market economy with a higher degree of policy divergence is more likely to experience a currency or debt crisis. We also compare the development of trilemma policies around the crisis period for the groups of Latin American crisis countries in the 1980s and the Asian crisis countries in the 1990s. We find that Latin American crisis countries tended to close their capital accounts in the aftermath of a crisis, while that is not the case for the Asian crisis countries. The Asian crisis countries tended to reduce the degree of policy divergence in the aftermath of the crisis, which possibly meant they decided to adopt open macro policies that made their economies less prone to a crisis.