This paper analyses structural and cyclical determinants of banking profitability in 16 Western European countries. We find that financial structure matters, particularly through the beneficial effect of the capital market orientation in the respective national financial system. Furthermore, higher diversification regarding banks' income sources shows a positive effect. The industry concentration of national banking systems, though, does not significantly affect aggregate profitability. Business cycle effects, in particular lagged GDP growth, display a substantial procyclical impact on bank profits. These results are obtained in a single equation panel framework using the Hausman-Taylor instrument variable estimator. The data set comprises aggregate annual country data and banking group data (commercial banks, cooperative banks and savings banks) over the period 1979-2003. JEL classification: E 32, G21, L11Keywords: bank profits, financial structure, business cycle Non technical summaryThis study analyses structural and cyclical determinants of banking systems' aggregate return on assets (ROA). Applying a macroeconomic panel approach with annual data, we examine 16 Western European countries over the period . The principal research question is to what extent key structural characteristics of national financial systems contribute to the profitability of national banking systems. Among the explanatory variables, we nevertheless place strong emphasis on a broad coverage of the macroeconomic environment, e.g. GDP growth and interest rate effects. With respect to financial structure, the focus is on those characteristics that are considered to be essential in distinguishing European financial systems.First, this is the industry structure of national banking systems. It is proxied by the concentration ratio CR5, i.e. the aggregated market share of the five biggest banks. Second, financial structure represents the extent to which a financial system is bank-based or market-based.Regarding the empirical set-up, the issue is to deal with time-invariant variables in a model that in other respects is frequently estimated by using a fixed effects panel model. In our case, yet, the latter is inappropriate since the fixed effects would remove the (time-invariant) variables of interest. We tackle this problem primarily by applying an instrument variable estimator proposed by Hausman and Taylor (1981). The specifications of the ROA model differ with respect to the inclusion of financial structure variables. Furthermore, a differentiation is made between estimation at the country level and at the level of banking groups within countries.The latter enables us to control for banking group effects (commercial banks, savings banks and cooperative banks) and also to include banking group specific variables, e.g. the capital ratio.We find that financial structure matters to some extent while business cycle effects display a Second, a stronger diversification with respect to the sources of banks' income is associated with higher...
Our study analyses the extent of integration of the EU market for life and non-life insurance. The main integration indicator used is the market share (premium based) of foreign companies in domestic markets. For the calculation of this indicator, three different kinds of foreign presence are taken into account: foreign presence through merger and acquisitions, through branches and agencies and direct cross-border sales without physical presence. Whereas the static view reveals a high degree of national fragmentation the dynamic view indicates advancing integration. The results also show that integration is even less advanced for life than for non-life insurance and that mergers and acquisitions are the dominant strategy to access a foreign market. Besides summarising the liberalisation history of the European insurance sector and discussing consumer benefits from further integration, the study contributes to a better understanding of obstacles to insurance market integration.
The integration process in the European banking sector considerably differs with regard to product types. Deep integration can be observed in the money market as well as the market for wholesale products. In contrast to that, a strong segmentation of national markets still exists in the field of retail products. In this context, the paper analyses market access strategies of European banks. The analysis is based both on aggregate sectoral data and on four company case studies (BSCH, Nordea Group, BNP Paribas and HSBC). It is explored to which extent different market access strategies contribute to the integration of the European retail markets. A clear result is that mergers and acquisition as well as cooperations and strategic alliances form the most important market access strategies. Direct cross-border sales and the establishment of branches and subsidiaries are of minor importance. All strategies are complicated by considerable natural and politically induced barriers to market access. In particular, such politically induced barriers are different national supervision of banks, different tax legislation, as well as national accounting and takeover principles. Here, further harmonizations are suited to accelerate the integration of European retail markets and thus to increase consumer benefits by lower prices and a higher product variety for financial services.
This paper analyses some long-run macroeconomic effects of European financial integration. In particular we focus on the further reduction and abolition of crossborder barriers impeding the entry into the markets of banking and insurance products. We follow a theoretical as well as an empirical approach to make predictions about how deeper integration will affect growth and unemployment rates. In our growth model we show that enhanced foreign financial market penetration should increase the overall growth rate unambiguously. The empirical analysis includes a wide set of indicators, each of them capturing different aspects of financial development and financial market integration. On the basis of the estimations a weak growth impact of foreign market penetration can be identified. Hence, deeper financial integration generates a growth bonus. But the long-run growth effect is conditional on differences in institutional characteristics captured by country-specific effects. The analysis is supplemented by an analysis of the potential employment benefits of deeper financial integration. We show that the growth bonus can be transformed into an employment bonus, but also not without considering substantial country-specific differences. JEL-Classification: F36, G15, G21, O42
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