Journal of Banking & Finance 37 (2013) 5160–5162

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Journal of Banking & Finance

journal homepage: www.elsevier .com/locate / jbf

Editorial

Rethinking banking and finance: Money, markets and models

1. Introduction

The papers included in this special issue have been selectedfrom the papers presented at the 2012 International Finance andBanking Society (IFABS) conference that was held in Valencia on18–20 June, 2012, in collaboration with the University of Leicester,United Kingdom, University of Valencia and University of Jaume I,Spain.

The conference theme on ‘‘Rethinking Banking and Finance:Money, Markets and Models’’ was highly relevant since the effectsof the financial crisis of 2008 have caused many, but by no meansall economists and finance specialists to ‘‘rethink’’ their models offinancial markets. As models have become progressively more rar-ified and disconnected from the practices and structures of actualfinancial markets then they have become less useful for generatinginsight and understanding of the complexities of modern econo-mies. These models provide highly general results for economiesthat are stripped of institutional detail. Empirical models also esti-mate very general relationships and ignore the underlying pro-cesses and mechanisms that generate the results.

All these challenges, reshaping the financial economics researchagenda in a way that leads us to ‘‘rethink’’ the banking and financeresearch that delves below the surface appearances of economicand financial relationships. The papers in this special issue covera wide range of contemporary issues in banking and finance re-search and aim to improve our understanding of the global finan-cial crisis and shed more light on the challenges ahead. We groupthe contributions in three areas: financial intermediation, riskanalysis, and other research issues in finance.

2. Financial intermediation

Among the financial institutions that were most strongly af-fected by the recent crisis, banks were probably those on whichthe impact was particularly severe. Despite the fact that in severalWestern economies the financial storm is less intense now, firms’access to credit is still hampered and far from their pre-crisis lev-els. The papers focusing on financial intermediation in this specialissue deal with several issues in banking, all of them relevant,including bank branch-level efficiency (Eskelinen and Kuosmanen),financial innovation and competition (Duygun, Sena and Shaban),earnings-smoothing behavior (Balboa, López-Espinosa and Rubia),initial public offerings (IPOs) and subsequent lending (Chen, Hoand Weng) and corporate control and takeover issues (Ghosh andPetrova).

Eskelinen and Kuosmanen consider a Finnish bank branch net-work to analyze the efficiency and performance of sales teamsfrom a dynamic point of view (2007–2010), for which they usemonthly data. In their analysis, in which several conditioning fac-

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tors such as changing demand, operational conditions and randomdisturbances are also taken into account, a state-of-the-art axiom-atic, semi-nonparametric StoNED method (stochastic semi-non-parametric envelopment of data), which combines some of thevirtues of Data Envelopment Analysis (DEA) and Stochastic Fron-tier Analysis (SFA) models in efficiency analysis. Their results indi-cate that this model is appropriate for modeling service provisionwhen operational conditions are changing and demand fluctuatesrandomly. From a practitioners’ point of view this is also an impor-tant result, since the branch managers of Helsinki OP Bank con-firmed they found the results credible, easy to understand, anduseful.

The paper by Duygun, Sena and Shaban is similar to that byEskelinen and Kuosmanen, since they also deal partially withefficiency and productivity issues in banking, although with amuch tighter focus on competition issues. Specifically, Duygun,Sena and Shaban, using a sample of banks from the United King-dom, investigate how competition through the launch of newproducts, or new varieties of products, affect bank efficiency.They examine the impact on both cost and profit efficiency, acomprehensive approach which is not usually considered in bankefficiency studies. They analyze the relevant 2001–2012 period,which covers both the surging as well as the crisis years, findingan intricate link, since (lagged) trademark intensity in the com-mercial banking sector affects negatively their mean cost andprofit efficiency but, as trademark intensity increases, commer-cial banks react, and their efficiency scores (both cost and profit)improve.

The accounting information needed for conducting the researchstudies by Eskelinen and Kuosmanen as well as Duygun, Sena andShaban is the focus of the paper by Balboa, López-Espinosa and Ru-bia, which analyze the links between discretionary accruals andearnings-smoothing behaviors in the banking industry for a largesample of 15,268 US banks, covering a relatively long time span(1996–2011). Although this link has been examined in several pa-pers, in their innovative proposal the authors argue that the linksmay be rather intricate, since both the incentives to manipulate in-come and the way to do it in practice depends partially on the rel-ative size of the earnings and, therefore, a nonlinear setting is moreappropriate. Their results, which are consistent with compensationtheory, actually point out that this is the case, whereas the earn-ings-smoothing hypothesis cannot explain this evidence.

Chen, Ho and Weng focus on the impact of initial public offering(IPO) underwriting on subsequent lending. In particular, they con-tribute to this relevant literature by answering the question ofwhether the underwriting relationship between a bank and anIPO issuer affects the likelihood that the bank will secure futurelending business, and if the IPO underwriting relationship affectsthe costs of subsequent loans to IPO issuers. Their results confirm

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that, in general, the IPO underwriting relationship significantly af-fects subsequent lending. This finding complements the early stud-ies on the issue, suggesting jointly that a firm’s IPO underwritingand lending relationship have ‘‘roundtrip’’ effects on its subsequentborrowing and security offerings.

In their paper, Ghosh and Petrova also deal with a relevant issuefor financial intermediation, examining the likely links betweencorporate governance structures in banking and the probabilityto engage in value-reducing acquisitions, examining also the rela-tion between acquirer announcement-period abnormal stock re-turns and antitakeover indices and measures. Their analysisfocuses on a large sample of 936 acquisitions of commercial banks,with a specific interest in how the implementation of the InterstateBanking and Branching Efficiency Act of 1994 and the FinancialService Modernization Act of 1999 affected these links. Their find-ings, which can be explored from several angles, confirm the exis-tence of a relationship between the market for corporate control,firm value and antitakeover indices.

3. Risk analysis

With respect to the studies on risk analysis, five papers are in-cluded in this section (Lützenkirchen et al.; Dias; Gourieroux et al.;Maltritz and Molchanov; and Chang et al.). They examine risk fromseveral perspectives and for several asset types: capital require-ments and asset-backed securities (Lützenkirchen et al.), Value-at-Risk and stocks (Dias), pricing of credit derivatives (Gourierouxet al.), default risk and sovereign bonds (Maltritz and Molchanov),and stock misvaluation (Chang et al.).

Lützenkirchen, Rösch and Scheule propose a framework to mea-sure the exposure to systematic risk for pools of asset securitiza-tions and measure empirically whether ratings-based rules forregulatory capital of securitizations under Basel II and Basel III re-flect this exposure. Their analysis is based on US data for the timeperiod between 2000 and 2008. The authors find that the shortfallof regulatory capital during the global financial crisis is strongly re-lated to ratings. In particular, insufficient capital is allocated totranches with the highest rating. Furthermore, this paper is thefirst to calibrate risk weights which account for systematic riskand provide sufficient capital buffers to cover the exposure duringsimilar economic downturns. These policy-relevant findings maycontribute to re-establish sustainable securitization markets andto improve the stability of the financial system.

The paper by Dias studies the role of market capitalization inthe estimation of Value-at-Risk (VaR). The author tests the perfor-mance of different VaR methodologies for portfolios with differentmarket capitalization. The author performs the analysis by sepa-rately considering the financial crisis period and non-crisis period.Dias finds that VaR methods perform differently for portfolios withdifferent market capitalization. For portfolios with stocks of differ-ent sizes, better VaR estimates are obtained when taking marketcapitalization into account. Moreover, it is important to considercrisis and non-crisis periods separately when estimating VaRacross different sizes. Therefore, this study provides evidence thatmarket fundamentals are relevant for risk measurement.

Gourieroux, Heam and Monfort analyze the pricing of creditderivatives written on a single name when this name is a bank.As they note, due to the special structure of the balance sheet ofa bank and to the interconnections with other institutions of thefinancial system, the standard pricing formulas do not apply andtheir use can imply severe mispricing. A joint analysis of the risksof all banks directly or indirectly interconnected with the bank ofinterest is required. The authors suggest that the banking systemmust be treated as a whole. It is, therefore, necessary to analyzethe contagion of losses among banks, especially the equilibriumof joint defaults and recovery rates at liquidation time. The authors

show the existence and uniqueness of such equilibrium. Then thestandard pricing formulas are modified by adding a premium tocapture the contagion effects.

Maltritz and Molchanov examine the determinants of countrydefault risk in emerging markets, reflected by sovereign yieldspreads. Previous results of the literature indicate a high degreeof model uncertainty. Therefore, the authors use Bayesian ModelAveraging as the model selection method in order to find the vari-ables which are most likely to determine credit risk. They docu-ment that total debt, history of recent default, currencydepreciation, and growth rate of foreign currency reserves as wellas market sentiments are the key drivers of yield spreads.

Chang, Luo and Ren focus on misvaluation. The authors measurean individual stock’s misvaluation based on the deviation of itsprice from predicted intrinsic value. They show that both underand overvalued stocks identified by this misvaluation measure ex-hibit greater valuation uncertainty and arbitrage difficulty, and themisvaluation measure has strong return predictive power beyondthat of size, book-to-market ratio, past returns, and various returnanomalies. Based on the misvaluation measure, they form a mis-valuation factor and find that stock return covariances with thisfactor possess significant and robust return predictive power. Theauthors further show that the misvaluation factor predicts futureeconomic conditions, providing additional insight into the real ef-fect of systematic misvaluation in the stock market.

4. Other research issues in finance

The final set of papers studies a number of research issues in fi-nance, and seven papers were accepted for publication in this area(Marquez et al.; Hernandis and Torro; Milcheva; Delatte and Lo-pez; Camarero et al.; Law et al. and Kosse).

The first two papers focus on the analysis of overnight interestrates during the financial crisis period when unconventional mon-etary policy measures implemented by the Federal Reserve (Mar-quez et al.) and the European Central Bank (ECB) (Hernandis andTorro). Marquez, Morse and Schlusche examine the relationshipbetween the Federal Reserve’s balance sheet and overnight interestrates, with an empirical assessment of the Federal Open MarketCommittee (FOMC) exit principles. The results indicate that theFederal Reserve needs to decrease its asset holdings by about $1trillion in order to increase the federal funds rate to 25 basis points.The projections in the empirical part which investigates theFOMC’s exit principles suggest a normalization of overnight fund-ing markets in which the federal funds rate increases to 70 pointsby 2016. This is the first study which examines the effectiveness ofthe FOMC’s exit principles.

Hernandis and Torro examine whether the monetary policytransmission mechanism along the yield curve of the monetarypolicy stance has been restored after the financial crisis. They testthe expectations hypothesis in money market rates during andafter the period when the ECB implements monetary policy actionsto restore the monetary transmission mechanism. They find outthat the monetary policy transmission mechanism has been re-stored in Eonia swap markets, but not in unsecured interbank de-posit markets where the Euribor forward risk premiums are muchhigher than its pre-crisis values.

The third paper is by Milcheva in the area of regulation. Thisstudy utilizes a global vector autoregression (GVAR) frameworkto examine the cross-border effects of regulatory capital arbitrageon domestic and foreign asset prices and economic activity across11 OECD countries or regions. The results indicate that there is aninternational finance multiplier, and regulatory capital arbitragehas important roles, firstly, in transmitting financial spillovers toequity prices in the majority of the countries; and secondly, inaugmenting the reallocation of capital from housing markets

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towards equity markets through the U.S. securitized sector for theU.S. and other countries.

The paper by Delatte and Lopez investigates the cross-marketlinkages between equity and commodity markets using a copulaapproach. The study reports three major facts on the analysis ofcommodity and equity markets. First, they find that the depen-dence between commodity and stock markets is time-varyingand symmetrical. Second, imposing a constant relationship overtime may generate false evidence of tail dependence. Third, theyreport the co-movement between industrial metals and equitymarkets shows an increasing trend since 2003 but during 2008 glo-bal financial crisis, the co-movement becomes stronger andreaches to all commodity classes.

The papers by Camarero et al. and Law et al. are country levelstudies that relate financial and macroeconomic variables. Camare-ro et al. test for external sustainability for a group of 23 OECDcountries for the period 1970–2012 whilst Law et al. examine thegrowth effect of financial development using data from 85 coun-tries spanning from 1980 to 2008.

The size of current account imbalances in the world economyhave raised a key question of their sustainability and the natureof the adjustment process. Camarero, Carrion-i-Silvestre and Tam-arit contribute to the empirical literature with a comprehensiveassessment of the complex relationships between the stock ofnet foreign assets and the primary external balance. They use mul-ticointegration approach to test external sustainability. The resultsindicate weak sustainability in the flows analysis, however somedegree of strong sustainability is reported for six countries,namely, Austria, the Netherlands, Portugal and Spain, as well as Ja-pan and New Zealand.

A vast amount of literature exists on the relationship betweenfinancial development and economic growth. However, Law, Az-man-Saini and Ibrahim contribute to the literature with their anal-ysis on the existence of an institutions threshold in financialdevelopment and growth showing that the level of institutionalquality is effective in achieving financial development. The empir-ical results indicate that there is a significant institutions thresholdin the financial development economic growth nexus. For example,financial development does not have any significant effect ongrowth for institutions below the threshold. However, for institu-tions above the threshold level, the growth effect of financialdevelopment is positive and significant.

Finally Kosse’s study examines credit card fraud issues. Giventhe rapid increase in the amount of skimming fraud on debit cards,Kosse’s study provides new insights on consumer’s paymentbehavior in relation to safety. The study uses micro data on dailytransactions and newspaper announcements to deal with the im-pact of newspaper articles on skimming fraud on debit card usagein the Netherlands. The findings demonstrate that news on skim-ming fraud significantly affects debit card usage. Consumers havetendency to use their cards less on those days with news aboutskimming fraud in the newspapers.

As can be seen from the above papers, this special issue ad-dresses a number of questions and challenges existing methodsof modeling in banking and finance research. We expect that thearticles in this special issue will add an international perspectiveto the current debate and thus, contribute to our understandingto rethink the future of banking and finance research.

Guest co-editorsMeryem Duygun 1

President, IFABS,School of Management,

University of Leicester, Leicester LE1 7RH, United KingdomE-mail address: mdf2@le.ac.uk

Mohamed ShabanSchool of Management,University of Leicester,

United Kingdom

Pilar SorianoDepartment of Financial Economics,

University of Valencia,Spain

Emili Tortosa-AusinaDepartment of Economics,

Jaume I University and Ivie,Spain

Available online 6 September 2013

1 Tel.: +44 116 252 5328; fax: +44 116 252 5515.