COMPLETED - Inside Pandora’s Box
INSIDE PANDORA’S BOX: WHAT EXPLAINS DIFFERENCES IN ASIAN AND EUROPEAN BANK’S PERFORMANCES?
THE PROJECT ORIGIN
The project was initiated by the group of participants of the VII International conference "International competition in banking: theory and practice" held at the Ukrainian Academy of Banking of the National Bank of Ukraine (May 24-25th, 2012, Sumy, Ukraine) and International conference “Improving financial institutions: the proper balance between regulation and governance” held at Hanken School of Economics (April 19th, 2012, Hanken, Finland).
THE PROJECT CONTENT
Each crisis in the markets (and especially financial) brings a wave of re-adjustments and re-regulations. After analysis of the causes of the problems the regulators seek to establish new laws, which in their opinion will fix the system and make the supervision of the market and its participants more effective in order to avoid a repetition of such difficulties. The main guilt for the collapse of the financial markets was – not unduly – assigned to banks; the weakness and inadequacy of the mechanisms of corporate governance in these institutions was indicated.
THE PROJECT AIMS
This project aims to present the specificity of the corporate governance of banks in Japan, Italy and Germany, indicate the main deficiencies in the bank governance systems and show which of the corporate governance systems are more adaptable to functioning in the country with other national stereotype and in the world economy as a whole. The key goal of the project is to reveal way in which regulation of corporate governance should take place in the bank in order to generate higher performance and to describe key aspects requiring reforms: the role, constitution and accountability of board of directors, risk management function, management remuneration system, banks’ transparency, corporate social responsibility; and to present new regulations of the financial market. Also, we can use hypothesis about the necessity for adjustment of corporate governance regulation based on principal activity of the bank.
THE PROJECT’S STAGES
The second section could provide an overview of corporate governance systems. This involves a discussion of the importance of corporate governance in generating bank performance, the role of distinctive features and strengthens of corporate governance systems in Japan, Italy and Germany in prediction higher bank’s performance, and which system of corporate governance best meets the requirements of the global economy.
The third section focuses on the regulation and supervision of banks. This involves a discussion of who supervises banks, how banks are supervised, market discipline and corporate governance in banking, risk management, cross-border issues; and role of national regulation. This part could explains that banks that take a strategic approach to the challenge of complying with tough new corporate governance requirements can work with higher performance and create opportunities to strengthen their internal processes and enhance their business in the global market.
The fourth section discusses the methodology. We suggest that, going forward, the quest for global governance standards should be replaced by an effort to develop and implement two separate methodologies for assessing bank’s performance and corporate governance in country level and world economy level comparison. We also identify the key features that these separate methodologies should include, and discuss how to apply such methodologies in either country-level or world economy-level comparisons. Moreover, banks division on Country basis we can expand by dividing of banks according to their principal activity (investment banks or commercial). About our testable hypotheses, we should reflect more. Generally, we possibly will use indicators/factors as follows: good standards of balance-sheet adequacy (ALM) e.g. loans-deposits relationship, assets and liabilities maturity match, leverage scale, etc.; capital requirements (additional capital buffer) and risk management e.g. ACID TEST RATIO, regulatory capital to risk-weighted assets, nonperforming loans net of provisions to capital, nonperforming loans to total gross loans, large exposures to capital, etc.; earnings and profitability e.g. EBIDA, efficiency of interest management, efficiency of non interest management, noninterest expenses to gross income, interest margin to gross income, ROIC, ROA, ROE etc.; corporate governance parameters e.g. quality of corporate governance, CSR indexes, duality board of directors size, majority ownership, proportion of independent directors on company boards, presence of women directors on the board, proportion of non-residents on the board, total remuneration to assets ratio, level of shares and other stocks in the structure of remuneration, options granted; splitting the CEO/Chairman position, management ownership, pay-performance relation in remuneration system, proxy voting for the remuneration issues by shareholders etc.; and other indicators which will show banks activity e.g. fixed assets, labor, borrowed funds, interbank loans, commercial loans, securities etc.
From an economic point of view, a good governance system takes places to widen the feasible space of input-output vectors, and allows banks to work with higher performance and to be more competitive. Ownership concentration, duality, the size of the board of directors, institutional investors, remuneration policy, level of CSR, and other corporate governance factors can influence this space of production for each bank as well as the overall banking sector. This finding is due to the desperate concurrence between banks. Any technical evolution of any bank motivates other banks at least to follow this technology and try to develop it.
The last section contains the summary and conclusions.
THE PROJECT DEADLINES
Results of our joint research suggest presenting on the scientific conferences in France (Paris) in April 2013 and Ukraine (Academy of Banking, Sumy) in May 2013.
Deadline stages: introduction - October 2012,
theoretical investigation – end of November 2012,
model building, testing hypothesis and main findings – December 2012-February 2013,
paper key points and policy implications – March 2013.
THE PROJECT TEAM
Kozo Harimaya, Kei Tommimura (Japan); Barbara Chizzolini (Italy); Markus Stiglbauer (Germany); Alex Kostyuk, Maryna Brychko, Dmitriy Govorun, Yaroslav Mozghovyi, Yuliya Lapina (Ukraine)
CONTACT PERSONS
Alex Kostyuk
Professor, Ukrainian Academy of Banking of the National Bank of Ukraine (Sumy, Ukraine) and Hanken School of Economics (Hanken, Finland)
(e-mail: alex_kostyuk@virtusinterpress.org)
Maryna Brychko
PhD researcher, Ukrainian Academy of Banking of the National Bank of Ukraine (Sumy, Ukraine)
(e-mail: maryna.brychko@virtusinterpress.org)
