ANALYSIS of BANKING BUSINESS and ITS IMPACT on FINANCIAL STABILITY of ECONOMIES in EURO AREA - Polish Journal of Management Studies

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ANALYSIS of BANKING BUSINESS and ITS IMPACT on FINANCIAL STABILITY of ECONOMIES in EURO AREA

Abstracts > Vol 8

Analysis of banking business and its impact on financial stability of economies in Euro area
Kiseľáková D., Kiseľák A.

Abstract: The main objective of this article is to investigate banking business and analyze factors affecting financial stability of economies and changes in these factors over time using regression model with selected statistical indicators in macroeconomic environment with a focus on Slovakia as member of the Euro area. The method of empirical sector and trend analysis, regression analysis and economic modelling are used. The relationships between the dependence of the banking business profitability and macroeconomic growth have been surveyed and quantified using regression model spanning a period of ten years (2001-2010). Multiple regression model (Mod 1) accurately reflected the real development of the banking business sector in Slovakia. Since these sector variables are not dependent on the Slovak historical context, the model can be readily applied to other central European economies to improve the profitability and stability of financial enterprises against crises.
There are found selected market factors affecting banking business that informed the analysis, such as effective liquidity management, quality of balance sheets assets, efficient management of interest policy, and increasing of profitability rate from long-term aspect.

Key words:
banking business, macroeconomic environment, regression model, financial stability

Introduction

The development and dynamic growth of banking business and commercial banks as specific entrepreneurial companies in Slovakia are conditioned by the stability and macroeconomic development of Slovakia within the EU, Euro area and development on global financial markets. Potential problems of instability and liquidity of banking business can have a negative impact on the development of whole economy evidenced by the global crisis, which arose in the banking, financial sector of the U.S., and the global changes on financial markets.  In response to the global crisis and tightening of banking business regulation, new, tighter global regulation rules of capital adequacy have been approved in September 2010 under the name Basel III with effects from 2013-2019.
What is main problem of banking business and impacts on financial stability on economies and which factors determine it most of all? The paper also investigates and points out selected factors of increasing of competitiveness of banking business in relation to the trends of profitability of commercial banks and to the changes in development of stability and rate of return of banking sector in global environment with the impacts on economy.
In assessment and measurement of quality of banking business, it is appropriate to create and apply an assessment system in such a way, so as it includes the assessing criteria in three basic dimensions: interbank assessment of internal processes and financial results, market assessment
the assessment of bank performance rate and stability in relation to the actual and future conditions of competition at the bank market, the assessment of the satisfaction rate and loyalty of bank clients [10]. For financial sphere, to which this article is focused, there are the criteria having the nature of global financial indicators of rate of returns such as profit rate, rate of return on equity (ROE), rate of return on banking assets (ROA), net interest margin and others[14]. From long-term aspect, the financial criteria would be selected by a banks strategy type. For a growth strategy, the turnover (volume) growth rate in the defined target segments and bank products is one of the important indicators. Within the basic strategy, for expected and quantified growth, it is possible to determine the ROA growth, hence the turnover (volume) growth in the client segments, which is based on the bank balance structure. The indicators of bank rate of return are oriented to the analysis of achieved profit/loss in connection with searching for an optimum relation between profit maximization on one hand and the necessity to account for the riskiness of banking activities and observe the bank liquidity on the other hand[2]. In relation to the stability, growth and competitiveness strategy in the longer term, it is necessary to pay continuous special attention to efficient and quality management of bank profitability [3].
Earlier empirical studies (e.g.[6],[7],[8]) deal with these problems and the analysis and investigation of relations between selected macroeconomic indicators from the point of view of economic and financial stability of economies, competitiveness, efficiency and profitability of banks. Additional empirical studies investigate the relations between profit rate, market concentration and competitiveness of banks. The macroeconomic framework, sphere of monetary policy and credit availability at a credit market in relation to the amount and allocation of capital and bank stability and  liquidity is surveyed and analyzed in the further studies [11],[15]. A price and market interest rate has the considerable influence on the volume of loans provided and lending rates and this mutual relation of development of interest rates and credit market in the context of global changes is analyzed by Degryse, Havrylchyk, Jurzyk, Kozak [5] and Jorge [9]. He concluded that credit markets response to the changes of interest rate (especially to a decrease) with considerable delay, what can be influenced especially by the amount of equity of the commercial banks. Differences in the quantitative impact of macroeconomic factors among banking business sector and loan categories were evident in his study. The important presumption of the stability, rate of return and competitiveness of commercial banks is the efficient management of assets-and-liabilities structure [4] and especially the management of prices of credit transactions within the framework of that management and competitiveness [12]. The important instrument of banks in management of bank credit transactions is economic modelling [13]. A model, in an simplified way, means that mutual relation of items within bank assets and between them, as well as factors that influence the most suitable way of solution of return of credit transactions, are specified by mathematical relations and statistical methods with the aim to make a profitable credit transaction and to have profitable bank as a whole. From the point of view of a bank, the moment of completion of a credit transaction is the selection of optimum option and implementation of as highest earnings as possible while observing the appropriate, acceptable risk. Banking models are undergoing continuous development and assume the view on bank as a multidimensional unit with broad variability of options. The quality of commercial bank can be measured, inter alia, by the share of earning assets in total amount of assets those points out in [10].  
The main risks for financial stability of the commercial banks in relation with business activities include credit risk. It is possible to state that the credit risk of banks is one of the main specific problems in banking sector at the management of banking credit transactions for the existence of the risk of banking credit portfolio, highlight [5]. The result can be a worsened quality of the credit portfolio, which will become evident in the period of a recession by the increase of the share of non-performing, failed loans, what is emphasized by Marcucci and Quagliariello [11]. The management of credit risk of credit portfolios is therefore one the most important tasks for the financial liquidity and stability of banking sector in connection with increased sensitivity of banks to the credit risks and changes in the development of prices of financial instruments at the time of financial crises.


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Summary

In this study, the factors most affecting financial stability on economies were identified in three areas: effective bank liquidity management, quality of balance sheets assets and increasing of bank profitability rate from long-term aspect in stable macroeconomic environment, measured by real GDP. It was not possible to deal with other indicators within the banking business (f.e. Capital adequacy, higher share of deposits to loans) and to cover all the changes and dependencies between them, in this study. It results from the outcomes that despite these changes, commercial banks will increasingly have to realize their potential by higher quality and prices of offered products and services with utilization of their competitive advantage such highlights in [16], [17]. The necessity to direct the banking business to more efficient, active and quality management of liquidity and rate of return, management of quality of balance sheet structure, efficient management of interest policy and net interest margin, management of credit risk in connection to expected development of interbank interest rates on financial markets are the important factors of banking business stability and growth in the market economy in the following period. From the aspect of strategic development and consolidation and integration processes, it is possible to emphasize also the processes of mergers and acquisitions in the international scale, implemented also within the economy of the Slovak Republic in the EU and Euro area.
The European common currency has come under pressure from large national debts, problem of stability of European monetary union towards euro area crisis and impacts of global crisis, ultimately requiring a rescue package close about billion Euros.  Are the EU authorities preparing for a euro breakup or for euro preservation and regulation of stability of world banking business with Basel III? The answer brings for all economies only the future.
Acknowledgments
This study was processed within research project VEGA No. 1/0142/12 „Research of development trends and key determinants of cross-border mergers and acquisitions in common European area“ researched and solved at Faculty of Management, University of Prešov in Prešov, Slovakia, with financial support of Ministry of education, Slovakia.

References

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ANALIZA BANKOWOŚCI ORAZ JEJ WPŁYWU NA STABILNOŚĆ FINANSOWĄ GOSPODAREK W STREFIE EURO

Streszczenie:

Głównym celem artykułu jest zbadanie działalności bankowej i analizy czynników wpływających na stabilność finansową gospodarek i zmiany tych czynników w czasie, przy użyciu modelu regresji z wybranych wskaźników statystycznych w otoczeniu makroekonomicznym, z naciskiem na Słowację jako członka strefy euro. Zastosowano metodę empirycznego sektora, analizę trendów, analizę regresji i modelowania ekonomicznego. Relacje między zależnością rentowności biznesu bankowego i wzrostu makroekonomicznego zostały przebadane i określone ilościowo za pomocą modelu regresji obejmującego okres dziesięciu lat (2001-2010) . Modelu regresji wielokrotnej (Mod1) dokładnie odzwierciedla rzeczywisty rozwój sektora usług bankowych na Słowacji. Ponieważ te zmienne sektora nie są zależne od kontekstu historycznego Słowacji, model można łatwo zastosować do innych gospodarek Europy Środkowej w celu poprawy rentowności i stabilności przedsiębiorstw finansowych przed kryzysami.
Znaleziono wybrane czynniki rynkowe wpływające na działalności bankową, które to informowały analizę o takich czynnikach jak efektywne zarządzanie płynnością, jakość aktywów, bilanse, skuteczne zarządzanie polityką odsetek i zwiększenie wskaźnika rentowności w aspekcie długoterminowym.

Słowa kluczowe: działalność bankowa, otoczenie makroekonomiczne, model regresji, stabilność finansowa.


銀行業務分析及其對經濟在歐元區金融穩定

摘要:本文的主要目的是調查銀行業務和分析影響經濟和變化隨著時間的推移金融穩定這些因素採用回歸模型在宏觀經濟環境選擇的統計指標,重點斯洛伐克作為歐元區成員的因素。實證部門和趨勢分析,回歸分析和經濟模型的方法被使用。的銀行業務盈利能力的依賴和宏觀經濟增長之間的關係進行了調查,並利用回歸模型跨越一個為期十年( 2001-2010年)量化。多元回歸模型( MOD1 )準確地反映在斯洛伐克的銀行業務部門的真正的發展。由於這些部門的變量是不依賴於斯洛伐克的歷史背景下,該模型可以很容易地應用到其他中歐經濟,提高對危機的金融企業的盈利能力和穩定性。
還有影響銀行業務發現選擇的市場因素通報分析,如有效的流動性管理,資產負債表的資產質量,利率政策的有效管理,以及盈利率從長遠的方面越來越多。
關鍵詞:銀行業務,宏觀經濟環境,回歸模型,金融的穩定

 
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