This paper investigates whether investment in information technology (IT) – hardware, software and other IT services – influences the performance of banks. Using a sample of 737 European banks over the period 1995–2000 we analyse whether IT investment is reflected in improved performance (measured using both standard accounting ratios and cost and alternative profit efficiency measures). Despite banks being major investors in IT we find little relationship between total IT investment and improved bank profitability or efficiency indicating the existence of a profitability paradox. However, the impact of different types of IT investment (hardware, software and services) on banks’ performance is heterogeneous. Investment in IT services from external providers (consulting services, implementation services, training and education, support services) appears to have a positive influence on accounting profits and profit efficiency, while the acquisition of hardware and software seems to reduce banks’ performance.

This paper compares and reconciles two new methods for cross-country comparisons of the cost efficiency of UK and Italian investment firms over the period 1995–1998. It employs four different specifications of the stochastic frontier methodology, using a translog cost function in order to measure X-efficiency. The traditional common frontier reveals that Italian investment firms are nearly as efficient as UK firms. To overcome traditional limitations, two methods are used in this paper. They provide consistent results. The first method shows differences between the efficiency of the two countries by incorporating environmental variables into the cross-country common frontier. The second method shows differences in the efficiency of the domestic versus foreign investment firms in the two countries, by testing the ability to monitor and control on a cross-border basis. Finally, to identify investment firms that are both cost and profit efficient, we undertake a profitability test.

Given the importance of capital regulation in the banking industry, how and why a bank's behavior reacts to a recapitalization has profound consequences. To this end, we investigate the effects of 306 seasoned equity offerings (SEOs) conducted by listed European banks between 2002 and 2014. We use propensity score matching and find that SEOs lead to asset expansion as opposed to any deleveraging. Further, we find a decrease in lending in the short-term followed by a subsequent increase, a reduction in profitability, and an increase in systemic risk. Regulators might not have fully considered this last negative externality when they imposed the tougher Basel III capital requirements. The effects of SEOs strongly depend on the reasons behind the recapitalizations.

This paper investigates the role of off-balance sheet securitization on US bank leverage pro-cyclicality. Effective leverage (taking into account off-balance sheet securitization) is especially relevant for the US, where GAAP accounting rules for securitization allowed until 2009 a underestimation of on balance sheet items. Over 2001–2010, we document that US BHCs which are more involved in securitization have a more pro-cyclical leverage. We also show that in the pre-crisis period securitization dominates the business model in determining the leverage pro-cyclicality to the point that even commercial banks highly involved in securitization had a pro-cyclical behavior. We document that the period-long relation between securitization and capital ratios was week. The effect on leverage pro-cyclicality of the 2004 changes in regulation (the new SEC net capital rule and the exemption from the FASB directive on consolidation of SPVs) was absent for investment banks, and mixed for commercial banks highly involved in securitization. The evidence of this paper supports the view of the Basel III committee that macro-prudential regulation must include constraints on effective leverage.

In light of the policy debate on too-big-to-fail we investigate evidence of economies of scale for 103 European listed banks over 2000–2011. Using the Stochastic Frontier Approach, the results show that economies of scale are widespread across different size classes of banks and are especially large for the biggest banks. At the country level, banks operating in the smallest financial systems and the countries most affected by the financial crises realize the lowest scale economies (including diseconomies) due to the reduction in production capacity. As for the determinants of scale economies, these mainly emanate from banks oriented toward investment banking, with higher liquidity, lower Tier 1 capital, those that contributed less to systemic risk during the crises, and those with too-big-to-fail status.