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Book and Market Values of European Banks: Country, Size, and Business Mix Effects

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Contemporary Issues in Banking

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Abstract

In the years since the outbreak of the crisis, the financial markets have persistently reduced the market value of European banks as a consequence of macroeconomic, regulatory, and structural factors. Even though these factors have affected the European banking industry as a whole, the market valuation of banks have shown differences across country, size, and business mix profiles. In line with the existing literature on bank market valuation, this study tests for the difference between the market-to-book ratios of the large European banks using a variety of indicators typically affecting bank market value. To verify our research questions, we first regress the market-to-book ratio over performance measures, risk indicators, and growth patterns. Then, in a second step, we test whether bank business or country characteristics affect bank market valuation. Our panel consists of all large publicly traded bank holding companies at the European level. Large publicly traded banks comprise all listed banks with consolidated assets exceeding € 50 billion in 2015. The results highlight the relevance of the country context for the consequences on bank performance and stability.

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Notes

  1. 1.

    A large body of recent literature supports the view that the persistence of a prolonged low interest rate environment lowers the earnings prospects of banks, hurting especially the smaller deposit-funded and less diversified banks. See Borio et al. (2015), IMF (2017), and Claessens et al. (2017).

  2. 2.

    In a recent study on the determinants of value creation within US commercial banks, Egan et al. (2017) add evidence to the existing literature that the screening and monitoring of information-intensive loans is an important source of bank value, while the ability to raise sticky short-term funding is a key source of bank synergies.

  3. 3.

    In the words of Philippon (2017), “Fintech…innovations can disrupt existing industry structures and blur industry boundaries, facilitate strategic disintermediation, revolutionize how existing firms create and deliver products and services, provide new gateways for entrepreneurship, democratize access to financial services, but also create significant privacy, regulatory and law enforcement”.

  4. 4.

    As to the relationship between bank performance and business models, see the recent literature review in Cosma et al. (2017).

  5. 5.

    The use of non-trimmed variables leads to similar results in all the analyses performed.

  6. 6.

    We tested whether Fixed Effects (FE) or Random Effects (RE) model was to be preferred for our final regression specifications using the Hausman specification test. The test suggests that a fixed effect model is more appropriate. To determine whether time fixed effects are needed when running a FE model, we use the command testparm. This is a joint test to see whether the dummies for all years are equal to 0; if they are, then no time fixed effects are needed. As the Prob > F = 0.0000, we reject the null that the coefficients for all years are jointly equal to zero; therefore, time fixed effects are needed in this case.

  7. 7.

    Tables 15.7 and 15.8 show the fraction of the intercept over the fitted value just for Model 2, as it presents the highest Adj. R-squared (Table 15.5). The application of the other models yields similar results. Data are available upon request to the authors.

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Author information

Authors and Affiliations

  1. Dipartimento di Comunicazione ed Economia and Cefin, Università degli Studi di Modena e Reggio Emilia, Modena, Italy

    Riccardo Ferretti

  2. Dipartimento di Economia “Marco Biagi” and Cefin, Università degli Studi di Modena e Reggio Emilia, Modena, Italy

    Andrea Landi & Valeria Venturelli

Authors
  1. Riccardo Ferretti
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  2. Andrea Landi
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  3. Valeria Venturelli
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Corresponding author

Correspondence to Riccardo Ferretti .

Editor information

Editors and Affiliations

  1. Facultad de Económicas, University of Cantabria, Santander, Spain

    Myriam García-Olalla

  2. Facultad de Económicas, University of Cantabria, Santander, Spain

    Judith Clifton

Appendix

Appendix

Table 15.10 Composition of the sample by country
Full size table
Table 15.11 Variable definition and sources
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Table 15.12 Correlationmatrix
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Ferretti, R., Landi, A., Venturelli, V. (2018). Book and Market Values of European Banks: Country, Size, and Business Mix Effects. In: García-Olalla, M., Clifton, J. (eds) Contemporary Issues in Banking. Palgrave Macmillan Studies in Banking and Financial Institutions. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-319-90294-4_15

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  • DOI: https://doi.org/10.1007/978-3-319-90294-4_15

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  • Publisher Name: Palgrave Macmillan, Cham

  • Print ISBN: 978-3-319-90293-7

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