Banking and Beyond: The Evolution of Financing along Traditional and Alternative Avenues

© The Author(s) 2020

C. Cruciani et al. (eds.)Banking and BeyondPalgrave Macmillan Studies in Banking and Financial Institutionshttps://doi.org/10.1007/978-3-030-45752-5_1

1. Introduction by the Editors

Caterina Cruciani¹  , Gloria Gardenal¹   and Elisa Cavezzali¹  

(1)

Department of Management, Ca’ Foscari University of Venice, Venice, Italy

Caterina Cruciani (Corresponding author)

Email: [email protected]

Gloria Gardenal

Email: [email protected]

Elisa Cavezzali

Email: [email protected]

This book presents a selection of original contributions discussed at the 2019 Wolpertinger Conference held in Venice, Italy. The conference represents the annual meeting of the European Association of University Teachers in Banking and Finance and aims at fostering discussions on key topics and areas in the current debate within this field of applied research. The 2019 edition of the conference centred around the future of credit for small and medium enterprises (SMEs) and socially sustainable investing, touching upon the role and the evolution of the banking sector and the financing tools it fosters, while at the same time addressing the impact of new regulations and the ensuing opportunities for financial institutions, firms and individuals.

The book includes two parts. The first part takes on a more marked macroeconomic approach, addressing the impact of policy changes affecting banks and financial institutions. In particular, it deals with the consequences of recent changes in European policy looking both at how policy has been and is communicated and to how it shapes new incentives and challenges for the banking sector and institutional and individual investors. This part touches upon the debate on the bail-in versus bail-out options and reviews the new opportunities for investors on the covered and subordinated bond markets in Europe, building upon the new regulatory structure provided for by the European authorities. The second part expands the scope of the analysis and explores the role of some of the new financing tools besides the traditional banking sector available to firms and individuals. Specifically, it explores financing options for firms and individuals and describes, for example, which role alternative capital-market tools like mini bonds and crowdfunding are playing in the landscape of SMEs financing, touching upon how financing decisions can affect the survival of start-ups.

Chapter 2 by Marika Carboni, Vincenzo Farina and Daniele A. Previati analyses for the first time central banks’ communication strategies, given the increasing role they have been playing in the last decades. In particular, they investigate the differences between the topics contained in European Central Bank (ECB) and Federal Reserve (FED) Governors’ speeches over the time span 2007–2019. This contribution finds that both ECB and FED speeches strongly focus on monetary policy issues. However, the United States give emphasis also to two other important issues—financial stability and consumer protection—more than what their European counterpart does.

Chapter 3 by Ewa Miklaszewska and Jan Pys focuses on another relevant issue at the macroeconomic level—the effectiveness of the Single Resolution Mechanism (SRM) and the Bank Recovery and Resolution Directive (BRRD) in Europe—in limiting the use of public spending for the stabilization and restructuring of systemically important banks. Public intervention during the crisis played a fundamental role in stabilizing the banking sector. However, it also produced negative effects such as changes in the market structure, incentives to take risks, variations in the cost of capital and of the competitive conditions. This chapter analyses the implementation of the resolution mechanism for large banks (bail-ins), developed in the post-crisis period, and compares it with bank restructuring programmes based on bail-outs, using the case of two large banks: Deutsche Bank in Germany and ING Group in the Netherlands. The empirical analysis shows how tighter regulation can help shift the perspective towards the longer term and set in motion changes that ultimately lead to improved profitability and cost efficiency.

Chapters 4 and 5 expand the analysis of the impact of policy changes to the ever-evolving bond market. Chapter 4 by Giusy Chesini and Elisa Giaretta focuses on the evolution in the regulation of covered bonds, traditionally left in the hands of Member States. The lack of a harmonized regulation resulted in several national approaches for what concerns key technical issues and posed a challenge to the further development of this financial tool. The European Commission has recently harmonized national rules in the issuance of these securities by providing common definitions, characteristics and regulations with the aim of introducing a European trademark through the Capital Markets Union Action Plan. In March 2018 the European Commission issued a proposal for a Directive on covered bonds (CBs), laying down the conditions for such bonds to be recognized under EU law and representing an important step forward to strengthen capital markets and investments in the EU. This proposal invigorates investor protection by imposing specific supervisory duties. In this chapter, the authors intend to explore the new European characteristics of these financial instruments and the possibility for banks and investors to take advantage of the new regulation.

Chapter 5 shifts the focus on subordinated bonds. The recent academic literature has started focusing on the evolving role of subordinated debt within the EU resolution framework. The market monitoring function employed by its investors and its crucial role in complying with the Minimum Requirement for Own Funds and Eligible Liabilities (MREL) subordination requirement makes subordinated debt the more affected asset class under the BRRD. In this chapter, the authors (Giulio Velliscig, Josanco Floreani and Maurizio Polato) provide an overview of subordinated debt literature and its evolution within banking regulation with a focus on the BRRD. The chapter explores the different streams of literature that ground both theoretically and empirically future research on the role of subordinated debt within the EU resolution framework.

Chapter 6 provides an empirical test of monetary policy on bank profitability. Paula Cruz-García analyses the effect of monetary policy on the net interest margin and on bank profitability of a panel from 31 OECD countries over the period 2000–2017, focusing specifically on the impact of policy interest rates and the slope of the yield curve. The main results show that expansionary monetary policy measures adopted in numerous economies had a negative impact on net interest margins and, therefore, on bank profitability. The relationship found between interest rates and the slope of the yield curve with both the net interest margin and profitability is non-linear, more specifically concave. This suggests that the negative impact of low interest rates and the flat yield curve is greater the lower and flattened they are, respectively. Therefore, a potential normalization of monetary policy would have highly beneficial effects on restoring margins and profitability.

Moving to the second part of the book, in Chap. 7 Andrea Ferrarin, Josanco Floreani and Maurizio Polato investigate the asset management industry focusing on the Italian market. After the escalation of the global financial crisis and the consequent turmoil of the whole banking system, the asset management industry in EU has undergone a significant growth in the last decade, distinguishing itself as the most vibrant segment within the financial intermediation field. Using a sample of 44 Italian asset management firms from 2006 to 2016, this chapter provides an empirical investigation of the major systematic risk determinants, which have featured Italian asset managers across the financial crisis. Results show that operating efficiency represents a crucial factor for the pricing of the systematic risk exposure of asset managers, having a positive impact on market beta.

Chapters 8 and 9 address another very important element for the firm financing in the fintech era—crowdfunding as financing tool for SMEs. In particular, Chap. 8, authored by Francesca Battaglia, Francesco Busato and Maria Manganiello, focuses on the role of signalling in equity crowdfunding by examining the determinants of funding success in the Italian context. By using a unique dataset of 192 successful and unsuccessful campaigns launched between 2014 and November 2018 on the leading Italian equity crowdfunding platforms, they analyse the signalling role played towards external investors by the disclosure of financial information, by the share of equity retained by founders and by the size of their social network. Results show that the disclosure of financial information, the equity retention retained and the social capital of entrepreneurs have a positive and significant impact on funding success and can be interpreted as effective signals by external investors.

Chapter 9 focuses instead on a different issue—the strategies and business models adopted by lending-based crowdfunding (LBCF) companies, a topic currently neglected by the academic literature. The authors, Stefano Cosma, Francesco Pattarin and Daniela Pennetta, aim at the definition of a more correct classification of LBCF companies, grounded on several dimensions that characterize their business models. In particular, they find that the existing classification can be improved by simultaneously considering strategic choices concerning target customers (borrowers and lenders), the intermediation model and the additional risk management services provided by platforms. This chapter analyses an original worldwide sample of 30 LBCF companies, for which the authors collected several qualitative features. They use a clustering algorithm to group LBCF companies based on the financial and commercial fundamentals of their activity. The chapter identifies four business models denoted by their strategies, financial services, risk positions and customer target. This methodology improves on the existing classifications as it is both more sensitive and more specific, and it provides a clearer picture of LBCF companies’ strategic choices and business models.

Chapter 10 concentrates on a different financing tool for SMEs, that is, mini bonds. Mini bonds are a relatively new form of corporate debt financing available to Italian SMEs that may be described as fixed-income securities with a medium-long-term expiration date, issued by listed or non-listed SMEs aimed at supporting growth projects, future developments or refinancing operations. The authors Nicola Carta and Caterina Cruciani focus on a specific, economically relevant area in Italy—the North-East including Veneto, Trentino Alto Adige and Friuli Venezia Giulia—and look at the difference between listed and non-listed issues of mini bonds. In fact, mini bonds may or may not be listed on the ExtraMotPro, the professional segment of the ExtraMot market managed by Borsa Italiana. This chapter explores whether this choice is structurally determined and how recent normative developments may affect it and the overall demand for mini bonds by investors. Moreover, the chapter explores the literature trying to identify criteria for the determination of potential emitters and show that existing criteria likely underestimate the true potential supply and are largely ignored by firms.

Finally, Chap. 11 by Giulia Baschieri, Giorgio S. Bertinetti and Gloria Gardenal analyses the role of the initial capital structure decisions on the success and duration of entrant manufacturing start-up firms. Focusing on all the Italian manufacturing companies incorporated in the database Aida Bureau van Dijk in 2009, this chapter includes financial variables such as leverage (measured as a debt-to-asset ratio) and studies their impact on firm survival through the implementation of duration analysis as an estimation technique on the time span 2009–2016. The analysis confirms that the relationship between leverage and firm hazard is positive and significant, meaning that higher levels of initial bank debt increase the probability of default for Italian manufacturing SMEs. This suggests that start-ups should rely more on alternative financing tools at their initial stages and use debt at a later stage.

The chapters contributed to this book and presented at an internationally recognized conference confirm that the academic debate regarding financial markets and institutions is not at all out of step with the issues that businesses and firms are facing. Financial markets and instruments are continuously evolving in response to the evolution of standards, technologies and goals. This volume aims at providing an overview of this complex and rich debate, providing original solutions and responses to the main research questions in the Banking and Finance field and highlighting the interplay between all of these dimensions ranging from policy and regulation to new financing tools.

Part IFinancial Institutions and the Evolution of European Market and Policy Framework

© The Author(s) 2020

C. Cruciani et al. (eds.)Banking and BeyondPalgrave Macmillan Studies in Banking and Financial Institutionshttps://doi.org/10.1007/978-3-030-45752-5_2

2. ECB and FED Governors’ Speeches: A Topic Modeling Analysis (2007–2019)

Marika Carboni¹  , Vincenzo Farina²   and Daniele A. Previati¹  

(1)

Department of Business Studies, University of Rome III, Rome, Italy

(2)

Department of Management and Law, University of Rome Tor Vergata, Rome, Italy

Marika Carboni (Corresponding author)

Email: [email protected]

Vincenzo Farina

Email: [email protected]

Daniele A. Previati

Email: [email protected]

2.1 Introduction

Central bank communication has evolved largely in the last decades. Prior to the 1990s, monetary policymakers did not say much to the public (Blinder et al. 2008), with central banks saying little to clarify what they were doing and the reason why (Vayid 2013). That approach changed in the last years of the twentieth century, when central banks reinforced their communication strategy (Blot and Hubert 2018). Starting from those years, central banks have taken significant steps in communication, trying to strengthen transparency and accountability (Vayid 2013). Communication can represent a valuable part of the central bank’s set of resources, since it is able to make the predictability of monetary policy decisions stronger, move financial markets, and also help reach the macroeconomic goals of central banks (Blinder et al. 2008). That is why central banks communicate their monetary policy framework and objectives nowadays. Additionally, they normally publish both their analysis and projections of economic conditions (Vayid 2013).

Several types of communications have been employed in previous research, such as introductory statements of the European Central Bank (ECB) President at the monthly press conferences (Berger et al. 2006), Financial Stability Reports, and speeches by central banks (Born et al. 2011, 2013). Those papers analyze the content and/or the effects of central bank communication. For example, on the one hand, with respect to the content, Berger et al. (2006) found that, over time, the relative amount of words related to the monetary analysis decreased; on the other hand, with respect to the effects, Born et al. (2011) showed that communication by monetary authorities on financial stability issues are able to affect financial market developments.

Our research is related to the first group of papers, aiming to analyze the content of central bank communication. Specifically, we aim to investigate the content of the ECB and the Federal Reserve (FED) Governors’ speeches, with a focus on possible differences and evolution over time of central banks’ functions, for the year period spanning 2007–2019.

By employing the topic modeling approach, coding the content of texts into a set of topics containing meaningful words, we find that both ECB and FED Governors’ speeches are extensively related to monetary policy, with respect to both the achievement of stable prices and the effects on macroeconomic variables. The topic of financial stability is also relevant, especially in the United States, where, additionally, the issue of consumer protection emerges.

Our chapter contributes to two main strands of literature. The first one broadly relates to central bank communication to the public (see, for example, Born et al. 2011, 2013; Montes and Scarpari 2015; Ehrmann and Talmi 2017; Montes and Nicolay 2017; Blot and Hubert 2018; de Mendonça and de Moraes 2018; Gertler and Horvath 2018). The second one relates to the evolution over time of central banks’ functions and role (see, for example, Goodhart 1988, 2011; Nier 2009; Rochon and Rossi 2015; Bordo et al. 2016; Masciandaro and Romelli 2018).

The rest of the chapter is organized as follows: in Sect. 2.2, we review relevant past papers; data and methodology are provided in Sect. 2.3, and we discuss our results in Sect. 2.4. Section 2.5 concludes the chapter.

2.2 Literature Review

Our chapter is closely related to two branches of literature. The first one relates to central bank communication to the public. The second one relates to the evolution of central banks’ role and functions.

Central bank communication evolved largely in recent decades (Blinder et al. 2008; Vayid 2013). Previously, central bankers thought that monetary policymakers should provide the public with little information. This belief started to change in the last decade of the twentieth century, when economists finally understood the importance of communication; specifically, they realized that an appropriate communication strategy could make central banks able both to affect the expectations of economic agents and to improve the performance of monetary policy (Janikowski and Rzonca 2018). Policymakers started to think that communication could be employed as a tool to both anchor inflation expectations and orient financial markets. As a consequence, central banks started to disseminate their policies more strongly, as proven by the increasing number of speeches released by representatives of central banks since the end of the 1990s (Lustenberger and Rossi 2017). A large empirical evidence shows that central bank communication has finally strengthened the transmission of the monetary policy, both before and during the financial crisis (Blot and Hubert 2018), supporting the above-mentioned (more recent) belief. Additionally, central bank communications are proven to affect bank risk-taking (Montes and Scarpari 2015), financial markets (Gertler and Horvath 2018), for example, stock market returns (Born et al. 2013), stock prices (Born et al. 2011), and financial stability (de Mendonça and de Moraes 2018), which both the ECB and the FED are committed to promote.

As reported by Janikowski and Rzonca (2018), central banks usually employ the following communication tools: (i) press conferences; (ii) minutes and voting records; (iii) reports (such as annual reports, inflation reports, quarterly and/or monthly bulletins); (iv) official hearings and testimonies (e.g., in parliament); (v) interviews with individual monetary policy committee members. The authors highlight that combining tools is necessary for reaching an effective communication; for example, press conferences are useful to communicate the reasons of a specific monetary policy decision quite rapidly, and at the same time they are able to contain misunderstandings related to central banks’ communication, since they allow media to ask clarifying questions. However, press conferences are able to provide only a limited amount of information at once, suggesting that other tools to provide additional information are required.

A crucial point concerning the press releases, announcing and explaining monetary policy decisions, is related to how they are drafted. Central banks usually start from the past statement, and update the previous text at the margin. Interestingly, Ehrmann and Talmi (2017) find that similarity is connected to more stability: specifically, similar press releases are able to generate lower market volatility, whereas more textual changes, after a series of similar statements, generate much larger volatility.

Several types of communications have been employed in past papers, for example, introductory statements of the ECB President at the monthly press conferences (Berger et al. 2006), Financial Stability Reports and speeches by central banks (Born et al. 2011, 2013), ECB press conferences (Ehrmann and Fratzscher 2009). The content of such communications can reveal the evolution over time of central banks’ functions and role, which have been studied by different scholars in past papers (see, for example, Goodhart 1988, 2011), especially after the 2007 financial crisis (see, for example, Nier 2009; Rochon and Rossi 2015; Bordo et al. 2016; Masciandaro and Romelli 2018). For example, Bordo et al. (2016) focus on the strengthened central banks’ role to guarantee financial stability in the wake of the global financial crisis, while Masciandaro and Romelli (2018) highlight the increased involvement of central banks in supervision following the crisis.

Central banks are involved in processes such as money creation and control, price and financial stability control, and payments system management, having a tremendous impact on society and citizens’ welfare (Farina et al. 2019). It is supposed that central banks should align their communication efforts to macroeconomic variables, developments, and trends, but this does not always appear in such a clear way (Farina et al. 2018). The (probably) most influential central bank in the world, the FED, basically shows the same functions of the ECB (conductingmonetary policy, maintaining financial stability, supervising financial institutions, fostering payment and settlement system safety and efficiency), even if the former also explicitly communicates to promote consumer protection and community development.¹ Conversely, the ECB and the FED differ with respect to their goals. The main goal of the ECB is to achieve price stability, while the FED’s statute states multiple goals, without providing a clear guidance on their relative importance. Specifically, the FED should promote the goals of maximum employment, stable prices, and moderate long-term interest rates. The comparative absence of clarity opens the interpretation of its mandate, posing challenges for the FED (Orphanides 2013), even though, in order to achieve these objectives, the Federal Open Market Committee (FOMC), responsible for open market operations, tries to explain its monetary policy decisions to the public as clearly as possible. As reported on the website of the FED: Clarity in policy communications facilitates well-informed decision-making by households and businesses, reduces economic and financial uncertainty, increases the effectiveness of monetary policy, and enhances transparency and accountability, which are essential in a democratic society.²

On the other side of the Ocean, the ECB makes efforts to strengthen communication; its commitment is proven, for example, by its first conference on communication organized at the end of 2017.³ From an academic point of view, clarity of central bank communication has been proven to improve the credibility of monetary policy (Montes and Nicolay 2017).

2.3 Data and Methodology

We collected publicly available data, specifically related to ECB and FED Governors’ speeches, in the period going from 2007 to 2019.⁴ Therefore, we built a unique dataset, characterized by a 13-year coverage.

To conduct our analysis, we applied a topic modeling approach, which enables analysis of large volumes of texts, and groups words according to their co-occurrences (Ferri et al. 2018). Those groups of words form specific topics, which are automatically generated and represent our focus of analysis. According to Ferri et al. (2018) and DiMaggio et al. (2013), topic modeling shows different advantages if compared to human analysis. In fact, topic modeling is (a) more effective, especially when corpora are very large; (b) more reliable, since it produces objective topics, so that other researchers may easily reproduce the analysis; (c) not requiring the imposition of a priori categories for the analysis of corpora, because topics are automatically generated following a bottom-up approach. Specifically, in this chapter we employ an unsupervised probabilistic model, called Latent Dirichlet Allocation (Blei et al. 2003), which is used to discover latent themes in a document and is the most diffused implementation of topic modeling. This technique makes two different assumptions: (1) documents are produced from a mix of topics, so that each document belongs to each of the topics to a specific degree; (2) each topic is a generative model that generates words of the vocabulary having specific probabilities (words often occurring together will have more probability than others).

As observed by DiMaggio et al. (2013), in order to capture patterns of co-occurrences, which are important in the assignment of words to topics, the LDA trades off two different goals that are at odds: (i) for each document, it allocates its observed words to few topics; (ii) for each topic, it assigns high probability to very few words from the vocabulary. On the one hand, if a document exhibits one topic it is harder to assign few words high probability, since observed words must all have probability with respect to that topic. On the other hand, in the presence of a set of topics, each of which shows very few words with high probability, it is harder to assign documents to a few topics.

To perform the LDA analysis, we used a specifically developed Python script on the basis of the NLTK and Gensim libraries. Three parameters are needed in order to run the LDA model: (1) the number of topics, which should be extracted from the corpus; (2) the number of terms composing a single topic; (3) the maximum number of iterations, which are allowed for an LDA algorithm for convergence. Therefore, even if topics are automatically produced, researchers can still decide the number of topics the model should generate (as reported by DiMaggio et al. 2013, a statistical test for the optimal number of topics is not available), whether they must contain (or not) the same number of words, and the number of iterations for convergence. In our chapter, we started to look at the 5-topic model and 10-topic model, with 10 terms composing each topic and 50 iterations allowed to the LDA algorithm, related to both ECB and FED Governors’ speeches. Each co-author looked at the models independently, trying to label the produced topics. Since we agreed that the 5-topic model generated topics that were too aggregated, we chose the 10-topic model.

In order to study the various topics communicated by the ECB and the FED and their representation during the time, we respected the following steps for our LDA analysis. The first step refers to the selection of all the text documents (corpus). The first corpus consists of 313 speeches of Governors Jean-Claude Trichet and Mario Draghi of ECB, during the period January 2007—February 2019. The second corpus consists of 193 speeches of Governors Ben Bernanke, Janet Yellen, and Jerome Powell of the FED, during the same time period.

By using the NLTK library of Python, we then performed the removal of punctuations and stop words from each corpus. Moreover, by using the same library, we normalized the corpora with lemmatized words in order to bring both inflectional forms and derivationally related forms to a common base form.

In order to obtain the conversion into a document-term matrix and to run the LDA model