In response to the Covid-19 crisis, EU leaders agreed on the creation of a €750bn recovery fund (the Next Generation EU, NGEU). We investigate the short-term impact of this landmark deal on bank stocks, sovereign credit default swaps (CDS) and bank CDS. First, we find that stock market investors firmly welcomed the agreement as we find sizeable positive abnormal returns in bank stocks as a response to the NGEU proposal by the European Commission. Spreads on sovereign and bank CDS significantly declined, with more pronounced movements for heavily indebted countries and those that strongly advocated the creation of the recovery fund and for the banks located in these economies. Second, we show that banks’ sovereign exposures towards other European countries, especially those with weaker financial conditions and limited fiscal capacity, play a key role in driving the strength of the stock market reaction. Overall, financial markets responded positively to the credibility of the NGEU policy as an extraordinary common effort to support the post-Covid-19 recovery and enhance economic growth in the region.

This article investigates risk and stability features of Islamic banking using a sample of 553 banks from 24 countries between 1999 and 2009. Small Islamic banks that are leveraged or based in countries with predominantly Muslim populations have lower credit risk than conventional banks. In terms of insolvency risk, small Islamic banks also appear more stable. Moreover, we find little evidence that Islamic banks charge rents to their customers for offering Shariá-compliant financial products. Our results also show that loan quality of Islamic banks is less responsive to domestic interest rates compared to conventional banks.

Banks must adhere to strict rules regarding the quantity of regulatory capital held but have some flexibility as to its composition. In this paper, we examine if bank insolvency (distance to default) is sensitive to capital other than common equity for a sample of listed North American and European banks. Decomposing tier 1 capital into tangible equity and non-core components reveals a series of heretofore unidentified non-linear links with insolvency risk. We assess the influence of binding capital requirements, finding that low regulatory capital buffers are associated with increased insolvency risk for banks holding greater quantities of non-core tier 1 and tier 2 capital. The links between insolvency and capital, evident when the latter is denominated relative to tangible assets or total regulatory capital, are found to be expunged when defined relative to risk-weighted assets.

This study attempts to reconcile the conflicting theoretical predictions regarding how government ownership affects bank capital behaviour. Using a unique Chinese bank dataset over 2006–2015 we find that government-owned banks have higher target capital ratios and adjust these ratios faster compared to private banks, supporting the ‘development/political’ view of the government’s role in banking. This effect is stronger for local government-owned and state enterprise-owned banks than for central government-owned banks. We also find that undercapitalized government-owned banks increase equity while undercapitalized foreign banks contract assets and liabilities as their respective main strategy to adjust their capital ratios.

This paper contributes to the bank efficiency literature through an application of recently developed random parameters models for stochastic frontier analysis. We estimate standard fixed and random effects models, and alternative specifications of random parameters models that accommodate cross-sectional parameter heterogeneity. A Monte Carlo simulations exercise is used to investigate the implications for the accuracy of the estimated inefficiency scores of estimation using either an under-parameterized, over-parameterized or correctly specified cost function. On average, the estimated mean efficiencies obtained from random parameters models tend to be higher than those obtained using fixed or random effects, because random parameters models do not confound parameter heterogeneity with inefficiency. Using a random parameters model, we analyse the evolution of the average rank cost efficiency for Latin American banks between 1985 and 2010. Cost efficiency deteriorated during the 1990s, particularly for state-owned banks, before improving during the 2000s but prior to the sub-prime crisis. The effects of the latter varied between countries and bank ownership types.

This paper examines evidence for a bank lending channel in Europe. Following the approach suggested by Kishan and Opiela (2000) we use bank balance sheet data to estimate the response of bank lending to changes in monetary policy stance between 1991 and 1999. In particular, we classify banks according to asset size and capital strength to see if these factors have a significant impact on the lending channel. Using a panel data approach we find that across the EMU systems, undercapitalised banks (of any size) tend to respond more to change in policy.

We provide both a theoretical framework and empirical results for the relationship between CO2 emissions and systemic risk in the U.S. Based on a modified structural distance-to-default model that integrates physical risk effects, a theoretical framework is developed, documenting a positive link between CO2 emissions and systemic risk. Network VAR analysis, Diebold and Yilmaz variance decomposition, and conditional Granger causality provide empirical support for this positive link. Bank assets are found to be negatively related to CO2 emissions, which indicates an adjustment of the banking sector’s assets towards a lower-carbon economy. Policy implications include government-sponsored insurance support for banks facing insured losses.

We investigate the role of CEO power and government monitoring on bank dividend policy for a sample of 109 European listed banks for the period 2005–2013. We employ three main proxies for CEO power: CEO ownership, CEO tenure, and unforced CEO turnover. We show that CEO power has a negative impact on dividend payout ratios and on performance, suggesting that entrenched CEOs do not have the incentive to increase payout ratios to discourage monitoring from minority shareholders. Stronger internal monitoring by board of directors, as proxied by larger ownership stakes of the board members, increases performance but decreases payout ratios. These findings are contrary to those from the entrenchment literature for non-financial firms. Government ownership and the presence of a government official on the board of directors of the bank, also reduces payout ratios, in line with the view that government is incentivized to favor the interest of bank creditors before the interest of minority shareholders. These results show that government regulators are mainly concerned about bank safety and this allows powerful CEOs to distribute low payouts at the expense of minority shareholders.