Raising Capital or Improving Risk Management and Efficiency? : Key Issues in the Evolution of Regulation and Supervision in European Banks

This book analyses the raising of capital imposed by regulatory and supervisory constraints for the soundness and survival of banks in Europe, highlighting critical issues. Accordingly, the text examines the improvement of risk management and efficiency operated by individual banks as the main driver for reinforcing bank resilience and survival. The investigation is carried out essentially through study of risk management, efficiency, capital constraints, bank regulation and supervision in Europe, monetary policy and economic growth in Europe, capital raising in European banks, bank regulation and supervision in the USA, raising of capital or improvement of risk management and efficiency as the final issue. Raising capital by regulatory and supervisory constraints meets solvency requirements at a given time. In contrast, improving risk management and efficiency allows banks to create the best structural premises for reducing costs, increasing revenue and profits and capital level, contributing to the solvency and survival of banks. Contents 6 List of Contributors 8 List of Figures 9 List of Tables 10 Chapter 1: Introduction 11 Chapter 2: Risk Management and Banking Business in Europe 20 2.1 Introduction 20 2.2 Risk and Bank 21 2.3 Risk Management: Function and Processes 23 2.4 Risk Management: Objectives 25 2.5 Enterprise Risk Management 28 2.6 Bank Business: Evolution and Shifts 29 2.7 Bank Business: Range of Risks 32 2.7.1 Liquidity Risk 32 2.7.2 Solvency Risk 34 2.7.3 Credit Risk 35 2.7.4 Interest Rate Risk 36 2.7.4.1 Measurement: Gap Management Models and Duration Model 37 2.7.4.2 Measurement: Simulation Model 38 2.7.4.3 Derivatives and Securitisation 39 2.7.5 Foreign Exchange Risk 40 2.7.6 Operational Risk 40 2.8 Bank and Financial Crises 41 2.9 Conclusions 45 References 46 Chapter 3: Credit Risk Management and Banking Business in Europe 51 3.1 Introduction 51 3.2 Bank Lending 52 3.3 Credit Risk: Measurement and Management 54 3.4 Non-performing Loans: Origins and Solutions 56 3.4.1 Bad Bank 58 3.4.2 Selling Loans 60 3.5 Conclusions 61 References 62 Chapter 4: Banking Efficiency in Europe 65 4.1 Introduction 65 4.2 X-Efficiency 66 4.2.1 Cost Efficiency 66 4.2.2 Revenue Efficiency 67 4.2.3 Profit Efficiency 68 4.2.4 Measurement Techniques 69 4.3 Scale Efficiency 71 4.3.1 Measurement Techniques 73 4.4 Scope Efficiency 74 4.4.1 Measurement Techniques 75 4.5 Efficiency and Competition 76 4.6 Conclusions 77 References 77 Chapter 5: Capital Constraints by Regulation in Europe 82 5.1 Introduction 82 5.2 Capital Rules: Nature, Origins and Aims 82 5.3 Basel I and Basel II 84 5.4 Basel III 90 5.5 Rationales for Basel IV 97 5.6 Conclusions 100 References 101 Chapter 6: Capital Constraints by Supervision in Europe 104 6.1 Introduction 104 6.2 Setting Up the Single Supervisory Mechanism 105 6.3 Additional Capital Requirements by Supervision in Europe 108 6.4 Supervisory Performance 110 6.5 Conclusions 112 References 112 Chapter 7: Banking Regulation and Supervision in Europe 114 7.1 Introduction 114 7.2 Bank Regulation in Europe 115 7.3 Bank Supervision in Europe 119 7.4 The Single Supervisory Mechanism 120 7.5 The Single Resolution Mechanism 125 7.6 Banking Crises: Bail-in or Bail-out? 127 7.7 Bail-in Worrying and Bail-out Applying 129 7.8 Conclusions 133 References 134 Chapter 8: Monetary Policy, Banking Supervisory Policy, and Economic Growth in Europe 137 8.1 Introduction 137 8.2 Monetary Policy in Europe 138 8.3 Monetary Policy and Financial Stability 144 8.4 Capital Requirements, Bank Lending, and Economic Growth 148 8.5 Conclusions 153 References 155 Chapter 9: Capital Raising in European Banks 160 9.1 Introduction 160 9.2 EBA Recommendations 160 9.3 Comprehensive Assessment: Rationales and Features 164 9.3.1 The Main Results of the Comprehensive Assessment 167 9.4 The Stress Test of 2016 168 9.5 Some Evidence from a Sample of European Banks 172 9.6 Conclusions 179 References 179 Chapter 10: Banking Regulation and Supervision in the USA 180 10.1 Introduction 180 10.2 The Federal Reserve System, Regulation, and Supervision 181 10.3 Regulation and Supervision in the Light of the Financial Crisis 184 10.4 The CAMELS Rating: Features and Goals 186 10.5 Conclusions 191 References 191 Chapter 11: Raising Capital or Improving Risk Management and Efficiency 194 11.1 Introduction 194 11.2 Raising Capital: A Measure for Solvency 195 11.3 Raising Capital: Nature and Stability 196 11.4 Raising Capital: Bank Business Evolution 199 11.5 Regulation: Critical Issues 202 11.6 Supervision: Critical Issues 207 11.7 Improving Risk Management and Efficiency 210 11.8 Conclusions 212 References 215 Index 218 Front Matter ....Pages i-xiii Introduction (Fabiano Colombini)....Pages 1-9 Risk Management and Banking Business in Europe (Fabiano Colombini)....Pages 11-41 Credit Risk Management and Banking Business in Europe (Fabiano Colombini)....Pages 43-56 Banking Efficiency in Europe (Fabiano Colombini)....Pages 57-73 Capital Constraints by Regulation in Europe (Paola Ferretti)....Pages 75-96 Capital Constraints by Supervision in Europe (Fabiano Colombini)....Pages 97-106 Banking Regulation and Supervision in Europe (Antonella Cappiello)....Pages 107-129 Monetary Policy, Banking Supervisory Policy, and Economic Growth in Europe (Antonella Cappiello)....Pages 131-153 Capital Raising in European Banks (Antonella Cappiello, Paola Ferretti)....Pages 155-174 Banking Regulation and Supervision in the USA (Paola Ferretti)....Pages 175-188 Raising Capital or Improving Risk Management and Efficiency (Fabiano Colombini)....Pages 189-212 Back Matter ....Pages 213-218