MSc In Finance And Financial Information Systems

The rubric of the proposed research, refering the Dissertation which will be conducted by the pupil Varvara-Marina Georgaki, is the followers:

“ EU Banking Directives: Hazard and wealth effects on the fiscal sector of the PIGIS from 1987-2008 ”

This undertaking suggests analyzing if the banking directives conducted from the European Union to the commercial chartered Bankss, investing organisations and insurance houses from the PIGIS, has resulted on wealth effects and alterations in the systematic hazard associated with the return construction of the aforesaid states over the period 1987-2008. The European Union ‘s Deregulation of Financial Services Initiative announced these deregulatings in order to extinguish the obstructions, through the execution of several suggestions that divided the subdivisions of operation and ownership of the banking industry from the “ non-bank ” fiscal go-betweens. Particularly from 1988 and afterwards, this EU Initiative developed and is consisted of several Banking Directives that their chief intent was to increase the competency of the full fiscal sector of the EU member provinces ( Pantos, 2008 ) .

The Banking Directives that conducted from the EU were the followers:

[ 1 ] The Free Capital Movement Directive ( effectual day of the month 7 January 1990 )

[ 2 ] The Solvency Ratios Directive ( effectual day of the month 1 January 1991 )

[ 3 ] The Own Funds Directive ( effectual day of the month 1 January 1991 )

[ 4 ] The Second Banking Directive ( effectual day of the month 1 January 1993 )

[ 5 ] The Consolidated Supervision Directive ( effectual day of the month 1 January 1993 )

[ 6 ] The Money Laundering Directive ( effectual day of the month 1 January 1993 )

[ 7 ] The Investment Services Directive ( effectual day of the month 1 January 1994 )

[ 8 ] The Capital Adequacy Directive ( effectual day of the month 1 January 1994 ) ( Pantos, 2008, pp. 10 ) .

These Directives facilitated all fiscal establishments of the EU member provinces and they were the corner rock of the riddance of all defensive economic and regulative obstructions related to EU fiscal establishments that were efficient and well-protected from the increased competition. Banks managed to reform themselves into “ non-bank ” fiscal services. The latter was a transition to a new construction of banking within EU member provinces ‘ which mentioned with the term “ cosmopolitan banking ” ( Pantos, 2008 ) .

An academic survey conducted by Stigler ( 1971 ) , Peltzman ( 1976 ) , Tollison ( 2001 ) and Pantos and Saidi ( 2005 ) refers that any deregulatory accommodations meaning to extinguish or to a grade eradicate an efficient with a “ cosmopolitan bank ” based fiscal systemstraightly influences stockholders ‘ returns and the systematic hazard of the diversified pillars of its economic activity. This research expression for replies as to how much the systematic hazard of fiscal establishments of the PIGIS and “ how returns to stockholders of commercial hired Bankss, investing organisations and insurance houses were affected by the debut ofthese peculiar binding EU Directives ” ( Pantos, 2008 ) .

2. Theoretical Background

2.1 Theoretical Analysis

Harmonizing to the academic research of Stigler ( 1971 ) and Peltzman ( 1976 ) which comprises the background for analyzing the influence in fiscal establishments after a figure of regulative alterations are established. Stigler ( 1971 ) introduced an economic theory of ordinance in which justified that the economic benefits between different market rivals are fundamentally influenced from the regulative background and the political control that each group has. The “ main regulator ” or the “ supervisor ” of fiscal organisations is the chiefly the individual who adjust the ordinances in order to assist the political party with biggest force disregarding the impact this action occurs on others. Peltzman ( 1976 ) stated that ordinances might act upon the systematic hazard of fiscal establishments. His sentiment is wholly opposed to the riddance of economic ordinance and transportation from efficient markets to “ cosmopolitan bank ” markets could better the hazard of equity ownership. This is because of the growing in competition and “ the end point increased variableness of banking net incomes ” .

Since 1990s ‘ , tonss of research workers have focused on the deregulatory alterations created by the Glass-Steagall Act, which differentiated banking from underwriting/investment concern in the USA. Litan ( 1985 ) talked about how systematic hazard might increase when Bankss expand into non-banking endeavors due to “ the being of moral jeopardy associated with authorities sedimentation insurance ” . Joskow and MacAvoy ( 1975 ) , proposed that installing of regulative betterments and obstructions consequences to the riddance of the hazard. Brewer ( 1990 ) declared that regulative betterments doing geographical variegation could cut down systematic hazard.

Pettway et Al. ( 1988 ) and Fraser and Kannan ( 1990 ) discovered that the regulative betterments boosted the hazard of equity for Bankss. They studied Nipponese and American fiscal administrations that underwrote and dealt with Eurobond offerings and discovered that the systematic hazard rises. Aharony et Al. ( 1988 ) studied the Depository Institutions DeregulationMonetary Control Act enacted in the USA in 1980 and noticed that ordinances reduced systematic hazard for Bankss. Allen and Wilhelm ( 1988 ) , on the other manus, found no correlativity related to the Act and the hazard of the fiscal organisations. Wall ( 1987 ) and Brewer ( 1990 ) discovered that deregulating did non make bigger hazard as fiscal establishments took portion into investing houses ‘ concern. Hence, it can be obvious that disagreement exists between research workers on how the regulative betterments will act upon a fiscal organisation ‘s hazard or its stockholder value.

2.2 Basel I

The chief grounds that forced a group of 13 member provinces ( known as G-10 ) to make the Basel Committee were, first of all, to guarantee the proper map of regulative and to guarantee the capital adequateness criterions of the fiscal establishments within the Committee ‘s members. Second undertaking was to offer sufficient capital, equal to 8 % of the risk-weighted assets, to procure Bankss against hazards like fluctuations in a province ‘s currency, alterations in involvement rates and macroeconomic downswings. Finally, it aims to guard the minimal capital demands for world-wide fiscal establishments and suggests that cardinal and independent Bankss should be based on traditional banking ordinances. The aforesaid issues constituted the Basel I which implemented in July 1988 ( Balin, 2008 ) .

2.3 Basel II

The Basel I criticized from the oppositions and as a consequence from the banking crises of the 1990s ‘ , the Committee proposed in 1999 a more elaborate construct which could supply ab initio a better attack to recognition hazard, secondly to accommodate the securitization of bank assets, screen market, operational and involvement rate hazard and thirdly to integrate market-based surveillance and ordinance without losing the “ pillar ” model of the Basel I. This agreement is known as “ A Revised Framework on International Convergence of Capital Measurement and Capital Standards ” , with other words Basel II, and released in December 2008 ( Balin, 2008 ) .

2.4 Basel III

The debut of Basel III has non been yet completed and there are many grounds to believe that Basel II ne’er acted every bit efficaciously as expected. For this ground, the Basel Committee decided to change the model in order to increase capital held for market hazard in the trading book portfolio in July2009, and the basic thought was more capital to be introduced. The papers issued in December 2009 and marks to welcome new proposals on capital growing ( OECD, 2010 ) .

3. Data Construction and Methodology

3.4 Event Study Methodology

Event survey methodological analysis is a utile attack which assesses the impact of an event on the value of a corporation. This specific methodological analysis is based on fiscal market informations and its efficiency is reflected in security monetary values for given information in the market place. Hence, the impact can be examined utilizing short-time periods for security monetary values. In economic research, the application of the methodological analysis can be implemented to assorted fiscal organisations and economic system broad events. In some instances, when regulative environment alterations, the value of the fiscal establishments can be measured utilizing event surveies ( Schwert, 1981 ) .

Before calculating the monthly stock returns for a certain period, in this instance January 1987 to December 2008, it is indispensable to place the exact clip that an event occurs and to specify the clip over which the security monetary values of the endeavors involve in the event. In other words, when information takes topographic point in the market, occurs by and large an impact on the market value of the house. Sing the information, three parts are assembled: the day of the month of the proclamation, the existent net incomes and the computation of the expected net incomes. It is besides critical to acknowledge the correlativity among the proclamation release and the alteration in equity ‘s value. Furthermore, the length of the event window and appraisal window will be identified as good ( MacKinley, 1997 ) .

After sorting the event, some standards should be introduced that involve limitations aggravated by informations adequateness. Requirement for the proper computation of the impact is the appraisal of the unnatural return. The unnatural return is defined as the tax write-off of the normal return from the existent ex station return. Afterwards, follows the design for the unnatural returns and the building of the void hypothesis. The methods for aggregating the unnatural returns should be besides verified. Last but non least, the decisions and the remarks will be included ( MacKinley, 1997 ) .

Using event survey methodological analysis and ciphering monthly stock returns for the period January 1987 to December 2008, the separate effects of each of the EU banking directives on PIGIS Bankss, investing organisations and the insurance houses are traveling to be tested. The aforesaid methodological analysis will be employed to prove three portfolios dwelling of an every bit leaden banking, investing and insurance index model of the chief PIGIS commercial Bankss, investing organisations and insurance houses severally. The PIGIS market index maps as a placeholder for the market portfolio. All the aforesaid indices were transformed to returns utilizing the log difference method ( Pantos, 2008 ) .

In this thesis will be investigated if Bankss, investing organisations and the insurance houses are affected by the systematic hazard. Furthermore, after look intoing for systematic hazard, the consequences should propose whether or non the transition of the Basel I, II and III ( proclamation ) Directives generates wealth effects for the stockholders of Bankss, investing organisations and insurance houses. Last, the consequences will unwrap if the whole wealth effects on the fiscal sector of the PIGIS are positive, negative or impersonal ( Pantos, 2008 ) .

The event survey methodological analysis is the best technique for proving a assortment of regulative event proclamations. However, it is non all of the times applicable for proving the unnatural returns when events involve a common calendar day of the month ( constellating consequence ) . The job of event day of the month bunch occurs when the companies have current event day of the months in calendar clip. Studies, like trials of the information content of regulative alterations which likely influence all event securities at the same time, are largely affected by this phenomenon. More troubles may originate when the event securities are gathered along an extra dimension like industry or size. Hence, a portfolio attack is the most appropriate in proving for unnatural returns when the event involves a common calendar day of the month ( Strong, 1992 ) .

3.5 Data Collection

The country of probe will be the DataStream Database, Eurostat and ICAP and secondary informations are traveling to be utilized in order to roll up information, to pull decisions and to stop up to recommendations. Basic beginning of information will be the Stock Exchange Markets of the concerned states, which are Portugal, Italy, Greece, Ireland and Spain. The clip period is defined from January 1987 to December 2008 trusting that equal informations are traveling to be found for this 19-year period. The research will concentrate on the effects of the EU Directives on the stockholders ‘ wealth and the hazard of the “ three pillars ” of the economic system, intending the Bankss, the investing organisations and the insurance houses of the PIGIS.

3.6 The Market Model Benchmark

The theoretical account that will be utilized is the Market Model ( MM ) and is formed as followers:

Rjt= I±j + I?hRmt + ujt ( 1 )

Where ujt is a average nothing, independent perturbation term in period T.Equation ( 1 ) divides Rjt into a systematic constituent linearly related to Rmt and an unsystematic constituent, ujt, which is uncorrelated with Rmt. The consequence of firm-specific events is meant to be to the full captured in the unsystematic constituent, the premise being that the information signal and Rmt are independent. BothI±j and I?j must be estimated here, ensuing in a predicted unnatural return of:

ujt = Rjt – ( I±j + I?j Rmt ) ( 2 )

Further inducement for using the market theoretical account is that, by and large, consequences in smaller discrepancies of unnatural returns ( comparative to raw returns ) , taking to more powerful statistical trials, and that it produces smaller correlativities across security unnatural returns giving closer conformance to standard statistical trials ( Beaver, 1981 ; cited in Strong, 1992 ) .

3.7 Hypothesiss

What are traveling to be tested are the positive or negative effects that resulted from each of the eight European Directives in the Bankss, investing organisations and insurance houses in the PIGIS. These trials will demo if there is an sweetening in the systematic hazard of the aforesaid establishments or non through the transition of these eight Directives. Additionally, whether the stockholders ‘ wealth changed as a consequence of the debut of these deregulatings and whether this alteration attributed into the economic system of the “ three pillars ” .

The two hypotheses that are traveling to be tested in this research are the undermentioned:

H1. Whether or non the debut of the European Banking Directives influenced the systematic hazard of the Bankss, the investing organisations and the insurance houses.

H2. Whether or non the proclamation of each Banking Directive had an of import effect in the separate portfolios of the Bankss, the investing organisations and the insurance houses and in the stockholders ‘ wealth severally ( Pantos, 2008, pp. 12 ) .

3.8 Timetable

Time

Undertaking to be achieved

Start December

Start believing about research thoughts

Mid-February

Literature read

End-February

Aims clearly defined with mention to the Literature

Mid-april

Literature Review written. Read Methodology reappraisal affecting secondary informations and descriptive analysis

Mid-june

Collect all the stock monetary values and the fiscal statements of the declarative listed companies

End-July

Analyse the corporate informations harmonizing to the suggested techniques of Methodology and research reappraisal

Mid-August

Further composing up and analysis

End-August

Draft completed including arranging bibliography and appendices

Mid-September

Revision and rectify the Dissertation

End-September

Submission of Thesis

4. Decisions and Summary

Dr. Demetrios Kousenides has been selected as the responsible supervisor of the pupil Varvara-Marina Georgaki. The former besides proposed this academic subject for the Dissertation. After discoursing the thesis of the thesis, they concluded that the concluding rubric of the topic should be the followers:

“ EU Banking Directives: Hazard and wealth effects on the fiscal sector of the PIGIS from 1987-2008 ”

The fiscal statements, the stock monetary values and historical records of the Bankss, the investing organisations and the insurance houses of the PIGIS include a immense fluctuation of public presentation characteristics for separate portions. The approaching consequences are traveling to be demonstrated in the Dissertation, utilizing monthly stock returns and uniting them with the appropriate theoretical account of the event survey methodological analysis in order to accomplish our end.

Of class, there are some restrictions for the selected methodological analysis which are jobs that may happen. The most of import of them is the limited handiness to the databases of the Stock Exchanges. Market ordinances are rather rigorous in order to procure the answerability of the processs and forestall any sort of unjust competition.What is more ; the hazard of constellating consequence might be presented. To extinguish this job, some corrections for cross-sectional dependance will be used. Furthermore, particular attention will be taken to command in instance the sample of event securities is unrepresentative and it might be used a proper attack to command the selected portfolio. Additionally, there is ever the possibility to happen obstructions seeking to specify the precise day of the month of an proclamation. However, we will seek to be every bit accurate as we can because that is the most of import when person works with this specific methodological analysis.

In the terminal, the consequences and the decisions will be gathered in the last subdivision of the Dissertation where the results of the research will be evaluated. These results are expected to show a general image of the fiscal sector in PIGIS, comparing the consequences of each of the “ three pillars ” of the PIGIS individually. Finally, it is indispensable to procure the self-respect of the expected consequences using all possible reconsolidation measurings.