Size, Risk, and Governance in European Banking

The financial crisis that erupted in 2007 has brought the issues of the size, risk, and regulation of banks to the attention of a wide audience. It is difficult to open a broadsheet newspaper or a business magazine without being confronted with some aspect of bank behaviour, be it their risk levels, bankers' excessive rewards, the intertwining of bank and sovereign risk, or how they should be regulated to avoid problems in the future. In Europe, the recent and on-going crisis has demonstrated that the European Union (EU) was institutionally ill-prepared to manage a financial crisis, especially one involving large cross-border institutions which are systemically important to a number of countries. This book aims at integrating and synthesizing the various perspectives on the size, risk, and governance of banking as applied to the European markets, providing fresh insights and new analysis of the empirical data. The book is divided into three main sections. The first provides an overview of how the size of banking firms affects stability in the European banking sector, reviewing the quantitative empirical literature and offering new insights as to whether bank size motivates risk-taking where explicit or implicit 'too-big-to fail' policies shield bank creditors from market discipline. The next section discusses the debates relating to each of the different elements of risk in European banking, including new insights from a large dataset of European bank risk in different institutional contexts. The third section focuses on regulation, board monitoring, and opacity in European banking, employing a unique and hand collected dataset on the governance of European banks, as well as data on U.S. banks as a benchmark. The final chapter critically reviews the new insights gained from the chapters above, while offering policy implications as regards the role of size, risk and governance in European banking.(I) INTRODUCTION ; 1. Introduction ; (II) SIZE IN BANKING ; 2. Bank Systemic Size and Systemic Crises ; 3. Increases in Size and Bank Default Risk: Evidence from European Bank Mergers ; (III) RISK IN EUROPEAN BANKING ; 4. The Trends and Composition of Banking Risk across Europe ; 5. The Determinants of European Bank Exposure to Systemic Shocks ; (IV) CORPORATE GOVERNANCE IN EUROPEAN BANKING ; 6. Board Monitoring, Regulation and Performance in the European Banking Industry ; 7. Executive Pay and Risk-taking in the European Banking Industry ; 8. Systemic Risk Potential and Opacity in European Banks ; (V) CONCLUSIONS ; 9. Conclusions