Contents of Volume 4, Number 2

Special Issue: Trends & Developments in Global Banking (Guest Editor: Prof. Phil Molyneux)

December 2008

Do we Know Why Banks Go to Emerging Countries and What is the Impact for the Home Country?: A Survey

A. García Herrero, D. Navia Simón

Abstract: This paper reviews the theoretical and empirical literature explaining financial FDI from the perspective of the investing country (home). We conclude that the existing theoretical paradigms need to be adapted to explain the recent surge in international banks’ local operations in the financial sectors of emerging countries. Macroeconomic and risk diversification theories would seem particularly well-suited to explain this reality. The empirical literature on the reasons why banks from decide to go broad has concentrated on bank-specific factors and much less so on macroeconomic determinants of the home country. Finally, the effects of financial FDI on the home country’s economy and/or financial system are virtually unknown.

Corporate Culture and Performance in European Banking  

A. Carretta, V. Farina, F. Fiordelisi, P. Schwizer

Abstract: This paper analyzes the casual relationship between corporate culture and shareholder value using a sample of large banks in the French, German, Italian and U.K. banking systems over the 2001 to 2003 period. Firstly, we measure corporate culture using language as its particular artifact and developing a cultural survey based on the application of a text-analysis model to a corpus of reference texts produced by the sample of banks. Secondly, we measure shareholder value using an Economic Value Added estimated through a procedure tailored to account for banking peculiarities. We posit six hypotheses regarding the relationship between corporate culture and bank profits and shareholder value. Our results noticeably show that bank profits and shareholder value benefit from different orientations of banking corporate culture.  

Profitability and Interest Rates Differentials in Tunisian Banking

H. Ben-Khedhiri, B. Casu, F. Sheik-Rahim

Abstract: Since the deregulation and liberalisation processes of the mid 1980s, the Tunisian financial sector has become more market oriented and bank interest margins have been experiencing a steady decline. In this context, this study explores the key determinants of bank profitability and differentials in interest margins for deposit banks during the period 1996-2003. Following both the dealership model and the firm-theoretical approach, this paper implements both parametric and non-parametric tests and panel data analysis to investigate a variety of determinants: the bank-specific component; the regulatory component and the macroeconomic component. Results seem to indicate that the more profitable banks are those with bigger size of operations, better management quality and higher leverage ratio. Furthermore, it appears that bank-specific and regulatory variables are the most relevant factors in explaining Tunisian banks’ interest differentials. Finally, macroeconomic variables do not seem to influence the bank margins.

Are European Savings Banks too Small? A Comparison of Scale Economies and Scale Efficiency

J. Williams

Abstract: Studies on the cost structures of banks tend to find that economies of scale are negligible whereas improvements in X-efficiency facilitate much larger cost reductions. The implication is that banks should reduce costs by emulating industry best practice rather than increasing size. This interpretation is questionable because it is based on comparisons of two different economic concepts - scale elasticity and X-inefficiency. As pointed out by Evanoff and Israilevich (1995), more accurate cost comparisons can be made if one compared scale efficiency with X-inefficiency but, as far as we are aware, few studies (to date) make such comparisons. This paper employs the Fourier flexible cost function and stochastic frontier methodologies to estimate scale elasticity and scale efficiencies for a large sample of European savings banks. In contrast with previous studies, we find that scale efficiency is potentially a larger source of cost reduction than improving X-efficiency for different bank sizes, but particularly so for smaller institutions. The average savings bank could reduce costs by 38% if it attained cost scale efficiency compared with 16.5% if it lay on the X-efficient cost frontier.

Financial Credit Intermediation and Economic Development: An Empirical Research for British Economy

N. Dritsakis, Ch. Michailidis

Abstract: This paper examines empirically the causal relationship among financial intermediation and economic development by using a multivariate autoregressive VAR model for the British economy for the period 1995:Ι – 2005:IV. The results of cointegration analysis suggest that there is one cointegrated vector among economic development and financial intermediation derived from credit and stock market. Granger causality tests showed that there is a causal relationship between economic development and financial intermediation.