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SMEs account for more than half of business sector output and employment in Europe, and depend heavily on bank credit. The credit crunch following the recent recession was more severe for banks in countries under greater stress. With banks concentrating on raising additional capital, and handicapped by impaired assets, it is important to expand the sources of long-term funding for SMEs. This chapter reviews the obstacles to a more extensive use of the main market-based debt instruments for SME financing (securitization, covered bonds, small/mid-cap bonds, private placements), from the point of view of the insurance industry, in order to develop policy recommendations that are able to remove barriers without jeopardizing the insurance companies’ overall stability. These recommendations should be considered within the Capital Markets Union initiative, the ultimate success of which will be crucial in determining the future ability of insurers to finance SMEs and, more importantly, in achieving an integrated European financial system.

This chapter focuses on the role of insurers as providers of funds for long-term investment in the real economy, with an examination of the European market. The thesis is that financial regulation, and prudential insurance regulation in particular, crucially affects insurers’ investment behaviour and therefore their contribution to financial stability and economic growth, which for many reasons will be increasing in the near future. Accordingly, careful assessment of the effects of Solvency II on the insurance industry is required, bearing in mind the regulatory reviews planned for 2018 and 2020.

This paper investigates the determinants of the pattern of banks' foreign investment. We extended previous analyses in three directions. First, we use a unique database that includes information on 260 large banks from OECD countries and all their foreign branches and subsidiaries in each one of the other OECD countries. Second, we consider explicitly the role of institutional and regulatory characteristics. Third, we considered within a unified framework a wide set of variables that are likely to influence the pattern of bank internationalization. Consistent with previous research, we find that a high degree of integration between the home and the destination countries has an effect on the location choice of multinational banks. However, we also find that the marginal effect of integration is much lower than that of other explanatory variables. Profit opportunities resulting from a high expected economic growth and the prospect of competing with relatively less efficient banks appear to be a key factor affecting the expansion abroad, especially in the case of subsidiaries. Institutional characteristics of the destination country also play a crucial role. For example, financial centers attract branches of foreign banks, but not subsidiaries, while lower regulatory restrictions on banking activities are associated with a stronger presence of foreign subsidiaries, but not of branches.

Population ageing in Italy is more pronounced than in most of the other developed countries. Given the very low employment rate for older workers, this is likely to have a negative effect on overall labour force participation in the near future. This paper describes the demographic and labour-market trends for people older than 50, making some comparisons between Italy and other EU countries. It then offers some evidence on the determinants of the individual choice of retirement by looking at some econometric studies showing that the generosity of the public pension scheme is crucial. Finally, the policy measures adopted during the last decade to raise the retirement age are reviewed: the broad pension reforms implemented over the years may have had some effect by curbing pension benefits, but none of the possible alternative measures taken in other European countries has been implemented. The Geneva Papers (2005) 30, 711–723. doi:10.1057/palgrave.gpp.2510047

The general conclusion of the empirical literature is that in-market consolidation generates adverse price changes, harming consumers. Previous studies, however, look only at the short-run pricing impact of consolidation, ignoring effects that take longer to materialize. Using a database that includes detailed information on the deposit rates of individual banks in local markets for different categories of depositors, we investigate the long-run price effects of mergers. We find strong evidence that, although consolidation does generate adverse price changes, these are temporary. In the long run, efficiency gains dominate over the market power effect, leading to more favorable prices for consumers. (JEL G21, G34, L1)

The European macro-prudential policy framework operates at two levels. First, the ESRB has a legal responsibility for macro-prudential oversight in the EU. Second, various national and EU authorities have responsibility for the implementation of macro-prudential policy. The creation of a European banking union is an important innovation within this two-level structure. In response to this innovation, this paper makes two key points. First, the ECB should be in charge of macro-prudential policies conferred by the Capital Requirements Regulation and Directive. Within the ECB, macro-prudential decisions should be taken entirely by the Governing Council, while micro-prudential decisions should be prepared by the Supervisory Board. Second, the ESRB remains the only EU-wide body in charge of macro-prudential supervision, responsible for all financial activities. The ESRB's effectiveness could be strengthened by creating a post of Managing Director, who would carry out the policy determined by the General Board and would be responsible to the General Board for the management of the ESRB.

It has often been argued during the recent credit crisis that commercial banks’ involvement in investment banking activities might have had an impact on the intensity of their underwriting standards. We turn to evidence from the period prior to the complete revocation of the Glass-Steagall Act in the United States and analyze whether investment banks or – section 20 subsidiaries of – commercial banks underwrote riskier securities. We compare actual defaults of these deals for an extensive sample of about 4,000 corporate debt securities underwritten during the period of the de facto softening of the Act’s restrictions. Securities underwritten by commercial banks’ subsidiaries have a higher probability of default than those underwritten by investment houses. This evidence is stronger in the case of ex-ante riskier and more competitive issues, and during the first years of bank securities’ subsidiaries’ entry into the market. Based on our results, it is not possible to reject that the repeal of the Glass-Steagall led to looser credit screening by broad (universal) banking companies trying to gain market share and/or to the lower initial ability of these banks to correctly evaluate default risk. JEL Classification: G21, G24, N22

To verify if a delegated monitor can certify its ability to perform its assigned tasks, we test whether syndicated loans in which a larger share of the facility is retained by the arranger have lower interest rates. For a large sample of syndicated loans in over 80 countries we find that this certification effect exists and is greater for facilities characterized by greater due diligence and monitoring efforts. Further, for listed companies the announcement effect of the new loan on the stock price is an increasing function of the portions of the loan retained by the arranger.

This paper investigates what factors might help explain the internationalization strategy of banks and insurance companies, by comparing the determinants of cross-border M&As in the two sectors in a unified framework. The empirical analysis shows that between 1990 and 2003 the internationalization of banks and insurance companies followed similar patterns. Distance and economic and cultural integration are important determinants for both the banks’ and the insurance companies’ expansion abroad. Comparative advantage also has a prominent role, the more so for banks. The evidence is less supportive of the view that cross-border M&As are more frequent between similar countries, as predicted by the new trade theory. Finally, and most interestingly, we find indirect evidence consistent with the hypothesis that implicit barriers to foreign entry are more important in explaining the behavior of banks than that of insurance companies.

In order to verify whether a delegated monitor can certify its ability to perform its assigned tasks, we test whether syndicated loans in which a larger share of the facility is retained by the arranger have lower interest rates. For a large sample of syndicated loans in over 80 countries during the nineties, we find this negative correlation between the interest rate on the facility and the share of the loan subscribed. The effect of certification is greater for facilities that are characterized by greater due diligence and monitoring efforts: smaller ones, those used for debt repayment, and those granted to smaller borrowers and to borrowers new to the syndicated loan market. Further, for listed companies the announcement effect of the new loan on the stock price is an increasing function of the portions of the loan retained by the arranger.

The general conclusion of the empirical literature is that in-market consolidation generates adverse price changes, thereby harming consumers. Previous studies, however, look only at the short-run pricing impact of consolidation, ignoring all effects that take a longer time to materialize. Using a database that includes detailed information on the deposit rate paid by individual banks in local markets to different categories of depositors, we investigate for the first time the long-run pricing effects of M&As. We find strong evidence that, although in the short run consolidation generates adverse price changes, these are only a temporary phenomenon. In the long run efficiency gains dominate over the market power effect of mergers, leading to more favorable prices for consumers.

In dynamic panel data models, which are particularly well-suited to cross-country analysis, the mean group estimator (J. Econ. 1995 68 79–113) is under certain quite strong conditions consistent, but theoretical and empirical evidence indicates that it can be biased when the number of time observations is small. Possible explanations are sample-size bias and omitted variables or measurement errors that are correlated with the regressors. I find support for both hypotheses using a Monte Carlo experiment, which analyzes cointegrated systems. A possible solution for the MG estimator bias is a bootstrap bias-correction procedure, but Analysis of Panels and Limited Dependent Variables: A Volume in Honour of G.S. Maddala 1999, Cambridge chapter 12 297–321 shows that it performs well only when the true coefficient of the lagged dependent variable is small. In this paper, I test three different bootstrap procedures and obtain an appreciable reduction in the MG estimator bias, especially when the suggestions of J. Econ. (1997) 80 297–318 are applied. Finally, I use bootstrap bias-corrected estimators to investigate the long-run properties of money demand in the euro area.

The banking industry is consolidating at an accelerating pace, yet no conclusive results have emerged on the benefits of mergers and acquisitions. We analyze the Italian market, which is similar to other main European countries. By considering both acquisitions (i.e. the purchase of the majority of voting shares) and mergers we evidence the motives and results of each type of deal. Mergers are more likely between a more and a less services-oriented bank; they seek to improve income from services, but the resulting increase is offset by higher staff costs; return on equity improves because of changes in the capital structure. Acquisitions are more targeted towards banks with a poor credit management record; they aim to restructure the loan portfolio of the acquired bank; improved lending policies result in higher profits.

TThis paper investigates which factors determine a bank's decision to expand its activities abroad and what determines its choice of the countries to invest in. The empirical analysis is conducted using firm-level data on foreign subsidiaries for a representative sample of nearly 2,500 OECD banks. The results show that the banks with cross-border shareholdings are larger and have headquarters in countries with a more developed and efficient banking market. They prefer to invest in countries where expected profits are larger, owing to higher expected economic growth and the prospect of reducing local banks' inefficiency. These factors are overall more important in banks� decisions than those related to the degree of openness of the origin country and its economic integration with the destination country.

Bank lending expanded rapidly in Italy in the second half of the 1980s and early 1990s. By contrast, in the four years 1993-96 it rose moderately, and in real terms it diminished. The paper addresses some questions in the light of these trends: Was there a structural change in firms’ demand for credit after 1993? Are there systematic differences in the parameters of the demand for loans in the different parts of Italy? If such differences do exist, how have they influenced recent developments in credit? The evidence presented delineates a rather clear picture. At national level the demand for loans was stable during the observation period. The deceleration in lending is ascribable in small part (about 3 percentage points on an annualized basis ) to the increase in the opportunity cost of loans; it was due largely (about 10 percentage points on an annualized basis) to the sizable decrease in business investment in relation to firms’ gross margins. The demand for loans displays differing characteristics in the different parts of Italy. In particular, its elasticity to interest rates was lower and its elasticity to investment higher in the North-East than in the other parts of the country. It is possible that changes occurred in the demand function in the North-West and the Centre.

The report discusses a variety of issues involving difficulties in the banking sector, with a view to ascertaining the appropriate institutional infrastructure in the context of the European Union and the euro area. Forbearance on the part of banks dealing with delinquent borrowers is problematic if it is designed as a way to game creditors and supervisors. Supervisors should not tolerate excessive forbearance; failure to intervene early tends to increase the costs of the crisis. Macro-prudential concerns should not induce the authorities to delay clean-ups of banks in difficulties. To minimise the macroeconomic fallout from banking problems and to reduce the temptation for authorities to delay and hide problems in banking, it is necessary to have a viable resolution regime that leaves room for authorities to reduce the systemic fallout from resolution. The Advisory Scientific Committee calls for the establishment of strong European bodies responsible for banking supervision and bank resolution. A European competence is necessary to ensure that cross-border concerns are given appropriate weight in supervision and resolution.