THE EFFECT OF G-SIB CLASSIFICATION, GOVERNMENT OWNERSHIP, OWNERSHIP CONCENTRATION AND FUNDING STRUCTURE ON RISK
DISCLOSURE QUALITY OF EUROPEAN BANKS IN 2017
Name Brent van der Veer
Student number S2754967
E-mail b.van.der.veer.1@student.rug.nl
Telephone +31624137842
University Rijksuniversiteit Groningen Faculty Economics and Business
Master Accountancy
Supervisor #1 Dhr. J. G. Huttenhuis MSc Supervisor #2 Prof. Dr. R. L. ter Hoeven RA
Date 25th June 2018
Location Heerenveen
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Abstract
This research examines the effects of G-SIB classification, government ownership, ownership concentration and funding structure on risk disclosure quality of European banks in 2017. Data is used from 74 annual reports published by European banks across 24 countries and from the database Orbis bank focus. Risk disclosure quality is measured via a disclosure index. Results show that G-SIB classification, ownership concentration and funding structure affect risk disclosure quality. I find evidence that G-SIBs have risk disclosures of higher quality. Large percentage of shares held by blockholders negatively affect risk disclosure quality. Retail dominated funding structured banks are associated with higher quality risk disclosures.
Majority share ownership by governments has no impact on risk disclosure quality. Lastly, I find that larger banks have risk disclosures of higher quality.
Keywords: Risk disclosures, Disclosure quality, G-SIB classification, Government ownership,
Ownership concentration, Funding structure, European Banks, Basel III.
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TABLE OF CONTENTS
1 INTRODUCTION ... 5
2 ACADEMIC CONTRIBUTION AND PRACTICAL RELEVANCE ... 6
2.1 Academic contribution ... 6
2.2 Practical and social relevance ... 7
3 THEORETIC FRAMEWORK ... 8
3.1 Introduction ... 8
3.2 Legislation and regulations ... 8
3.2.1 Introduction ... 8
3.2.2 Basel III ... 9
3.2.3 CRD IV – CRR ... 9
3.2.4 IFRS ... 9
3.3 Explanatory theories for disclosures ... 10
3.3.1 Introduction ... 10
3.3.2 Agency theory ... 10
3.3.3 Stakeholder theory ... 11
3.3.4 Legitimacy theory ... 11
3.3.5 Voluntary disclosure theory ... 12
3.3.6 Quality of risk disclosures ... 13
4 HYPOTHESIS DEVELOPMENT ... 14
4.1 G-SIB classification ... 14
4.2 Government ownership ... 15
4.3 Ownership concentration ... 16
4.4 Funding structure ... 16
4.5 Conceptual model ... 18
5 RESEARCH METHODS ... 18
5.1 Method and population ... 18
5.2. Dependent variable ... 19
5.3 Independent variables ... 20
5.3.1 G-SIB classification ... 20
5.3.2 Government ownership ... 20
5.3.3 Ownership concentration ... 20
5.3.4 Funding structure (Retail/wholesale) ... 21
5.4 Control variables ... 21
5.5 Statistical model ... 22
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6 RESULTS ... 23
6.1 Descriptive statistics ... 23
6.2 General statistics ... 25
6.3 Validity ... 26
6.4 Correlation analysis ... 26
6.5 Regression analysis ... 27
6.5.1 Hypothesis 1 – G-SIB ... 28
6.5.2 Hypothesis 2 – Government ownership ... 28
6.5.3 Hypothesis 3 – Ownership concentration ... 28
6.5.4 Hypothesis 4 – Funding structure ... 28
7 SUMMARY AND DISCUSSION ... 31
7.1 Discussion and conclusion ... 31
7.2 Limitations and recommendations ... 32
8. REFERENCES ... 34
9. APPENDICES ... 38
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1 INTRODUCTION
The Dutch professional body of Accountants (NBA) observed that in the last decade the function and image of banks has changed within society and the financial market (NBA, 2014).
Before banks were considered to be a financial institution of stability only providing an utility service like savings and transactions of money. But new expectations offset a change in business processes and culture to be more profit orientated. Stock listed banks were expected
‘to show high returns’ (NBA, 2014). ‘But there ain’t no such thing as a free lunch’. General economic theory tells us that ‘to get one thing we like, we usually have to give up things we like’. Or in order to achieve high returns one has to sacrifice stability and safety and take high risks (Mankiw, 2014). Before 2008 the capitalization requirements for banks were low, credit rating agencies were in hindsight optimistic in their evaluations of new complex financial products and supervision authorities lacked the adequateness to measure the financial risks of banks their financial asset structures (NBA, 2014; European Commission, 2009).
To meet the aforementioned expectations of high returns, banks in the United States (US) started giving out subprime mortgages, bundled them together as a Collateral Debt Obligation (CDO) to sell as an investment product. Multiple banks around the world followed. In 2007 economic downturn in the US and Europe lead to rising interest rates resulting in people not able to afford their mortgage costs, making the CDO’s worthless and banks started to take heavy losses. The globalization of financial markets lead to the contamination of balance sheets by valueless financial products all over the world. Eventually setting off a downward spiral in asset prices and bank losses. Resulting in a global economic and banking crisis (NBA, 2014;
European Commission, 2009).
The financial crisis damaged the reputation of the banking sector. While a good reputation is essential for the banking sector. In general, creditors will not deposit money in banks whose integrity and soundness they do not trust (ECB, 2015). Banks need creditors deposits to do business (i.e. provide loans etc.). Investors’ faith in the banking sector and their business model has yet to be restored in the aftermath of the global economic crisis. Society called for transparency, reliability and stability in the banking industry and demanded information regarding their risks (EDTF, 2012). This call by society has been heard by the European Union and has led to the introduction of new regulations regarding the risks within the banking industry (European commission, 2014).
The Basel Committee on Banking Supervision (BCBS) and its members have issued Basel III,
a new framework on bank capital adequacy, stress testing and market liquidity risk. In response
to the deficiencies in financial regulation revealed by the crisis of 2008 (BCBS, 2013). Part of
this framework is dedicated to effective risk reporting (BCBS, 2013). The Enhanced Disclosure
Task force (EDTF) has been established to improve the quality, comparability and transparency
of risk disclosures (EDTF, 2012). Besides the BCBS and EDTF other regulatory and
supervisory authorities, both national and European, in example the International Accounting
Standards Board (IASB), European Banking Authority (EBA), European Security and Markets
Authority (ESMA) and Autoriteit financiële markten (AFM) state that additional risk reporting
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is necessary for both the improvement of transparency and the ability to determine the financial state of a bank (EDTF, 2012; NBA, 2014). It has been proposed that the risk reports are included in the annual report and therefore are subjected to the framework International Financial reporting standards (IFRS) and IFRS 7; Financial Instruments: Disclosures (NBA, 2014).
Now it has been established that since 2008 investors and society are asking for information about risks faced by banks. Additionally supervisory- and regulatory authorities have dedicated their focus on risk disclosure. Therefore the subject of this research is risk disclosures, specifically the quality of disclosures of European banks. I will be researching determinants that explain the quality of risk disclosures and add to the existing knowledge regarding banks and risk disclosures. In this paper there will be four determinants examined. In the first place, during the financial crisis multiple European banks have been nationalized by governments to save them from bankruptcy (Volkskrant, 2008). Therefore it is of interest to examine the effect of government ownership. Secondly the BCBS introduced a special classification for global systemically important banks (G-SIB). The collapse of these banks would cause a financial crisis and are therefore deemed ‘too big to fail’ (BIS, 2013). These banks are required to meet extra financial safety requirements and higher supervisory expectations for risk management functions, risk data aggregation capabilities, risk governance and internal controls. Therefore it is of interest to examine the effect of G-SIB status. Thirdly, former research states that based on agency theory concentrated ownership is associated with lower quality and quantity of disclosures. Because major shareholders take an active role in monitoring the company, making disclosures redundant (Garcia-Mesa & Sanchez-Ballesta, 2008; Morck, Shleifer and Vishny, 1988). It is of interest to examine this in European banks. Lastly the Basel Committee for Banking Supervision (BCBS) states a link between the banking crisis and a banks funding structure (2013). Banking crisis or a bankruptcy of a bank are often caused by liability on a few specific funding sources.. The moment a financial crisis impairs the funding structure, a bank would have liquidity- and solvability issues. Eventually this could lead to a banking crisis (BCBS, 2013). Therefore it is of interest to investigate the effects of funding structures of banks on the quality of their risk reporting.
This research will try to answer the following research question:
What are the effects of G-SIB classification, government ownership, ownership concentration and funding structure, on the risk disclosure quality of European banks?
2 ACADEMIC CONTRIBUTION AND PRACTICAL RELEVANCE
2.1 Academic contribution
Partially because of corporate scandals in recent times investors, regulators and scholars have
shown an increased interest in risk reporting (Miihkinen, 2012; Solomon et al., 2000; Dobler
et al, 2011; Khlif et al, 2016). Research into risk reporting is becoming more important because
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of new laws and regulations (Deumes and Knechel, 2008). Former research regarding the advancement of understanding of risk reporting has been dedicated to a variety of determinants of risk reporting. For example research into corporate size, leverage and profitability (Hill and Short 2009; Linsley and Shrives 2006; Abraham and Cox 2007; Miihkinen, 2012). Additionally Barakat and Hussainey (2013) investigated more governance related determinants, like bank governance and supervision, and their effects on risk reporting. However, despite former research into determinants of risk disclosures both Miihkinen (2012) and Oliveira et al, (2011) claim there is an absence of research into quality of risk disclosures. Additionally Beretta en Bozzolan (2004) state that mainstream literature on quality of risk disclosure has emphasized that quantity can be used as an appropriate proxy for quality. They contest this by suggesting that attention has to be paid to ‘what’ is disclosed and ‘how’ it is disclosed as well. This research adds to the current literature in multiple ways. Firstly, as specified above, former research has investigated multiple determinants like corporate size, leverage and profitability. In this paper the impact of new determinants on risk disclosure quality will be investigated, for example G- SIB classification and funding structure of banks, additionally information regarding former studied determinants like ownership concentration and governmental ownership will be strengthened be new information and a different setting. This research is focused on the European banking sector, while previous research went into Asian businesses or into varied industries (Khlif et al, 2016; Lan, Wang and Zhang, 2013; Wang, Sewon and Clairborne, 2008;
Abraham and Cox, 2007; Hill and short, 2009). Secondly, this research investigates the quality of risk disclosures, in contrast to earlier research mostly going into the quantity of risk disclosures. This is done by thoroughly reviewing the content of risk disclosures of the subjects.
Thirdly, this research enriches the current literature on risk reporting of European banks by researching the reports in a Basel III era. Former research has been done in a pre-Basel III era.
This might consecutively give insight in the potential beneficial effects of the new regulations formulated by BCBS on disclosure quality as a whole.
2.2 Practical and social relevance
In addition to the academic contribution this research has practical relevance. Firstly, the determinants of qualitative risk disclosures are of interest to supervisory and regulatory authorities, like the Basel committee of banks supervision (BCBS) and European Banking Authority (EBA). Especially where there is a strong need for regulations regarding the European banking industry on the subject of risk disclosures (EDTF, 2012; European commission, 2014).
This research can help these authorities in developing and implementing new regulations in order to meet the demand of transparency reliability and stability. Secondly, Investors use annual reports for their investment decisions on the capital market. Deumes (2008) states corporate risk communication and reporting is essential for a well-functioning capital market.
According to Healy and Palepu (2001) for disclosure to be of high quality they have to be reliable, complete, relevant and transparent. This research investigates the quality of risk disclosures of European banks and determinants that can explain the quality of disclosures.
Therefore the research can be useful for investors, because this research clarifies determinants
of quality disclosures. The higher quality the risk disclosures, the more useful the information
is for investors (Goltz and Schroder, 2010). Thirdly this study can be of relevance for
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governments. During the financial crisis multiple banks have received financial support to prevent them from collapsing. A form of support is the complete or partly nationalization of a bank. Examples in the Netherlands are ABN-AMRO and SNS-Reaal. This research investigates the effects of the increased governmental interests in European banks on the quality of risk disclosures of European banks. Whereas former research of the effects of governmental ownership on quality of risk disclosure has mainly been done in Asia (Lan, Wang and Zhang, 2013; Wang, Sewon and Clairborne, 2008; Huafang and Jianguo, 2007). This study will provide information based on European data that governments, banks and regulatory authorities can use in policy-making.
3 THEORETIC FRAMEWORK
3.1 Introduction
This chapter explains why banks disclose risk information. It starts with the explanation of current legislation and regulation relevant for risk disclosure of European banks. Furthermore, relevant scientific theories that might explain the risk disclosure of European Banks. Lastly the theory and meaning of quality of risk disclosures will be discussed.
3.2 Legislation and regulations
3.2.1 Introduction
Banks played a major role in causing the financial crisis starting in 2007. Their solvability- and liquidity problems spread to the complete financial sector, resulting in a global financial crisis.
In 2004 the BCBS implemented the Basel II framework to ensure bank capital and liquidity adequacy to prevent a possible financial crisis. However the recent financial- and credit crisis has painfully proven that the capital requirements in Basel II framework were not sufficient enough to ensure an healthy and stable banking industry. The lack of sufficient capital requirements and stress testing in the banking sector led to major liquidity- and credit problems.
These problems expanded from the banks to the complete financial sector (BCBS, 2010). In
response to the pre-crisis regulatory shortcoming the BCBS introduced the new Basel III
framework in 2010. The goal of Basel III is to provide a foundation for a resilient banking
system and ensure sufficient capital- and liquidity buffers to avoid systematic vulnerabilities
(BCBS, 2015). This is done by strengthen the requirements from the Basel II standard on bank's
minimum capital ratios. In addition, it introduces requirements on liquid asset holdings and
funding stability, thereby seeking to mitigate the risk of a run on the bank
.The Basel III
regulations are mandatory in the European Union via the Capital Requirements Regulation
(CRR) and Capital Requirement Directive (CRD IV) legislation. Therefore in the coming
paragraph will both Basel III and the CRR and CRV IV be explained. Furthermore IFRS 7 is
important for the risk disclosures, therefore IFRS 7 will be explained as well.
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3.2.2 Basel III
The Basel III framework (BCBS, 2011) is, like Basel II, structured via three pillars. The pillars are as follows: Pillar 1 covers capital requirements for the three major risk components: Credit, market and operational risks. The pillar consists of the minimum capital requirements. Basel III prescribes enhancing the capital buffers by raising the minimum common equity and introducing liquidity requirements. Pillar 2 addresses the governance and risk management of the bank and covers the following: the risk of off-balance sheet exposures and securitization activities, sound compensation practices, valuation practices, stress testing, corporate governance and supervisory colleges. Pillar 3 aims to complement the minimum capital requirements and supervisory review process by developing a set of disclosure requirements which will aid the market discipline and allow the market participants to gauge the capital adequacy of an institution (BCBS, 2014). Market discipline refers to the market-based incentive scheme in which investors in bank liabilities ‘punish’ banks for greater risk-taking by demanding higher yields on those liabilities (Nier and Baumann, 2006). With the new disclosure guidelines the BCBS intents to improve the market discipline by requiring consistency and comparability within disclosures. The BCBS adds further that disclosures should provide useful information to its users (BCBS, 2014). These new requirements would lower the amount of information asymmetry, improve the market discipline and allow for comparison of risk profile across different banks and jurisdictions. Lastly, in Basel III the BCBS identifies globally systemically important banks. In addition to the new capital and liquidity requirements, G-SIBs must have higher loss absorbency capacity to reflect the greater risks that they pose to the financial system.
3.2.3 CRD IV – CRR
In order to improve the harmonization of legislation within the European Union, the Capital requirements directive IV (CRD IV) has been introduced in 2013. The directive consists of new capital requirement guidelines with mandatory compliance for the European Union states and can be considered a one-on-one implementation of Basel III. The CRD IV is incorporated in the new Capital requirement regulations (CRR). These regulations are legislation that compels all banks in the European Union to follow the new Basel III capital requirements (BCBS, 2014).
This way banks in the European Union are required the new regulations in the Basel III framework.
3.2.4 IFRS
Banks have the opportunity to include Basel III based disclosures voluntarily in their annual
reports. Since 2005 all listed companies are subjected to IFRS and therefore have to report
along these standards. The International Financial Reporting Standards intends to bring
reporting guidelines where there is a lack of strict rules. It aims to supply transparency,
accountability and efficiency to financial markets and help current and potential investors in
making investment decisions. IFRS 7 requires disclosure of information about the significance
of financial instruments to an entity, and the nature and the extent of risks arising from those
financial instruments, both in quantitative and qualitative terms (IFRS 7). The following
paragraphs are of specific relevance to the risk reporting of banks and its users. Paragraph
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33/34 cover the guidelines for quantitative and qualitative reporting on the extent and nature of risks arising from financial instruments. Paragraph 36-42 cover reporting specifics of credit, market and liquidity risks. These risks are included in the Pillars of Basel III and are therefore especially relevant for voluntary risk reporting of banks (IFRS 7). Including Pillar 3 disclosures in the annual report is beneficial for the bank and its users for the following reasons. Firstly, by including the Pillar 3 disclosures they are subjected to IFRS, the transparency, consistency and comparability would be greatly improved for the use of both supervisors and investors.
The comparability and informativeness of information is increased because there could be differences in Pillar 3 disclosures and IFRS disclosures, due to differences in accounting standards and disclosure requirements. Lastly, the EDTF encourages banks to include Pillar 3 disclosures in their annual reports (EDTF, 2012). The voluntary inclusion would increase their transparency regarding their risk profile, which would be a step towards rebuilding credibility.
3.3 Explanatory theories for disclosures
3.3.1 Introduction
This research will be based on four institutional theories; agency theory, stakeholder theory, legitimacy theory and voluntary disclosure theory. Barakat and Hussainey (2013) based their research into explaining European bank risk reporting on a framework consisting of agency theory, stakeholder theory and legitimacy theory. I will make use of a similar framework expanded by voluntary disclosure theory.
3.3.2 Agency theory
One of the most used theories to explain (risk) disclosures is agency theory (Barakat et al., 2013; Khlif et al., 2016). The agency theory concerns the separation of ownership (Principal) and control (Agent) of a company and the information asymmetry between them. The information asymmetry gives managers the opportunity and incentive to act in their own interests, instead of the owners’ interest, in order to maximize value for themselves. Acting on different interest gives rise to agency costs: owners have to make expenditures to monitor managers’ actions, implement stimuli for managers to act on owners interests or pay managers directly to make certain decisions (Jensen and Meckling, 1976; Fama, 1980). Information disclosures are a way for information asymmetry and consecutively the agency problems and the costs of managing those problems to be reduced (Jensen and Meckling, 1976). Furthermore Healy and Palepu (2001) offer a variety of solutions to the agency problem and its costs. One of the solutions is a contract between the owners and management requiring management to disclose relevant information. This information gives the owners the opportunity to monitor the managers’ actions and whether they act on their interests. Disclosures and transparency lower the amount of information asymmetry and therefore lower the amount of agency costs (Healy and Palepu, 2001). This claim of importance of information disclosure and its ability to lower information asymmetry is validated by the BCBS (2014). The commission states that disclosure of risk information to share- and stakeholders is vital for a healthy banking system.
But of necessity for risk disclosure goes beyond shareholders. If a bank goes bankrupt not only
shareholders and creditors have the potential to lose their money. Households and businesses
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that have their money saved at the bank would lose (a part of) their money as well. The information asymmetry is actually between the bank. Additionally, according to financial regulators, the increasing complexity of large banking organizations makes them more difficult to monitor and control. Therefore is the quality of disclosures in the banking industry is increasingly important for society and regulators to monitor the banks (Bliss and Flannery, 2002).
3.3.3 Stakeholder theory
Stakeholder theory (Freeman, 1983) expands on agency theory, by including other stakeholders whom the organization has responsibilities to, besides shareholders. The theory often relates to the term ‘accountability’ which is defined as the responsibility of one party to another in a relationship where one party entrusts another with the performance of certain duties (Mulgan 1997). In accounting this refers to the responsibility to disclosure certain information. Freeman (1983) defines a stakeholder as ‘any group or individual who can affect or is affected by the achievement of an organization's objectives’.
For the discharge of accountability to various stakeholder there are two branches: (1) an ethical branch, this branch states that all stakeholders have certain intrinsic rights (i.e. fair treatment) that should be protected by the organization. Management should engage in activities that benefit all stakeholders (e.g. disclose information about activities that affect them). (2) a managerial branch, this branch tries to explain and predict how the organization deals with demands of various stakeholders. An organization identifies the stakeholders that are considered to be significant or powerful to continuity and success of the organization. The significance or power of a stakeholder is determined be the extent of dependence of the organization on the stakeholders (Deegan, 2000; Deegan and Samkin, 2009). According to the theory an organization has to develop and evaluate the approval of corporate strategic decisions by groups whose support is required for the organization to continue to exist.
Barakat and Hussainey (2013) state that banks come in contact with many different stakeholders, whom all have different interests that a bank has to take in consideration.
Therefore a bank has responsibilities to many different stakeholders. Disclosures of information is a way to discharge their accountabilities and meet their responsibilities or interact and communicate with stakeholders (Barakat et al., 2013). The extent of disclosure depends on the amount of stakeholders: More stakeholders mean more information request (Wood, 1991). Furthermore, following the managerial branch, as the power of a stakeholder increases the importance of meeting its demands increases. This means that the demand for disclosures by powerful stakeholders can lead to more disclosure by an organization. Therefore if for example a large shareholder or the government requests additional information regarding the risks of a bank, the bank would be inclined to comply.
3.3.4 Legitimacy theory
Similar to stakeholder theory, legitimacy theory goes into the relationship between the
organization and society in which it operates. However legitimacy theory is concerned with
society as whole and stakeholder theory only the stakeholders of the organization. (Although
the stakeholders of a bank can be considered to be the whole society, because of its profound
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impact on society). Furthermore legitimacy theory is similar to the stakeholder theory in the sense that managers are incentivized to obey the will of stakeholders in order to create legitimacy. Legitimacy theory (Suchman, 1995; Magness, 2006; Deegan and Samkin, 2009) states that an organization only has a right to exist if it fulfills the expectations and adheres to the values of society. The idea behind the theory is that an organization forms a contract with their environment and stakeholders to show adherence to values of society and meet social expectations. Compliance to the contract enables recognition of their objectives and survival in their environment and therefore the organization has the ‘Right to exist’ (Magness, 2006;
Deegan and Samkin, 2009). If not, households and businesses would withdraw their money and will not store new funds. Creditors refuse to give loans and investors hold back in buying or trading shares of the bank. The bank would not be part of the societal system anymore, because society has stripped it from its right to exist.
Because of a banks function of safeguarding money its right to exist is based reliability and dependability. The amount of trust the people have in a bank decides its legitimization (Oliveira et al., 2011). The financial crisis has made society distrust banks causing the loss of their rights to exist. This compels banks to gain back trust and its existence. This can be done by disclosures of information. The bank can seek to inform society about changes in the organization’s risks in performance and activities or change the perception of society, but not change its behaviour (Deegan, 2002). Furthermore the theory explains that in order to fulfill their social contract and earn trust of society, organizations implement and develop voluntary disclosures of information (Magness, 2006). According to legitimacy theory banks might comply with mandatory risk disclosures to fulfill the social contract of adhering to established institutional values (Institutional legitimacy). This way stakeholders can determine if a bank is meeting the expectations of society. If a bank does not meet the expectations or breaches the social contract, it could lose it legitimacy and ultimately ´Right to exist’ (Oliveira et al., 2011). For example, households would withdraw their money, damaging the banks liquidity, resulting in the banks’
default.
3.3.5 Voluntary disclosure theory
Imperfect markets require a certain degree of mandatory disclosure to protect investors and mitigate information asymmetry (Healy and Palepu, 2001; Elshandidy, Fraser and Hussainey 2013). Moreover ‘Disclosure theory assumes that, even in an efficient capital market, managers have superior information to outside investors on their firms’ expected future performance’.
(Healy and Palepu, 2001). This problem moves investors to demand companies to disclose information beyond mandatory guidelines (Elshandidy et al., 2013). The decision for managers to voluntary disclosure information comes down to a trade-off between costs (negative effects) and benefits (positive effects) (Oliveira et al., 2011).
Former research states that disclosure of risk information by banks could have negative effects
(Verrechia, 2001). The disclosure of mismanagement of risk could start a bank-run, leading to
a destabilized banking system (Morris and Shin, 2002). Verrechia (2001) claims that disclosure
of risk information could lead to problems attracting new capital. Though different research
states that voluntary disclosure can have positive effects. Disclosure of information to the
outside market reduces the amount of information asymmetry and has potentially positive
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effects. Piotroski (1999) finds that firms providing voluntary additional information have a lower cost of capital. Holder-Webb and Cohen (2007) claim that additional disclosures could lower the uncertainty of future cash flows and therefore lower the chances of bankruptcy.
Lastly European regulatory- and supervisory authorities (BCBS, EDTF) state and repeat the importance of additional risk disclosures by banks to improve the transparency of the banking system (BCBS, 2013; EDTF, 2012).
3.3.6 Quality of risk disclosures
As stated previously, former research regarding quality of risk disclosures had mostly used quantity as a proxy for quality (Marston & Shrives, 1991; Zarzeski 1996). Though Berreta and Bozzolan (2004) argue that quality of disclosure is determined by two factors. Firstly the quantity of information disclosed and secondly, the richness offered by information. ‘Richness determines whether or not the information helps outside investors appreciate the expected impact of disclosed risks on the firm's capability to create value’. In later research Berreta and Bozzolan (2008) define quality or risk disclosure as the ability of information to enable and support forecasting future performances. Knoops (2001) defines quality of external disclosure as the extend stakeholders have the ability to form judgement about the firm’s financial results and financial position. The better the ability to form judgement, the higher the quality of disclosure.
Furthermore, the Basel committee on banking supervision (2015) has formulated five guiding principles for banks’ pillar 3 disclosures. The guiding principles aim to provide a foundation for achieving transparent, high-quality Pillar 3 risk disclosures that will enable users to better understand and compare bank’s business activities and its risks. The five guiding principles are as follows: (1) disclosures should be clear (i.e. understandable by key stakeholders) and communicated through an accessible medium. (2) Disclosures should be comprehensive (i.e.
disclosure should describe a bank’s main activities and all significant risks, supported by
relevant, both quantitative and qualitative data). (3) Disclosures should be meaningful to users
(i.e. Disclosures should highlight a bank’s most significant current and emerging risks and how
those risks are managed). (4) Disclosures should be consistent over time (this enables the users
to identify trends in a bank’s risk profile across all significant aspects of its business). (5)
Disclosures should be comparable across banks (i.e. The level of detail and format of
presentation should enable users to perform comparisons of business activities, risks and risk
management across different banks and jurisdictions). Meeting the requirements improves the
consistency, comparability and overall quality of risk disclosures. Banks incorporate parts of
these risk disclosures into their annual reports. When incorporated in the annual report, the
information is subjected to both IFRS and the above guidelines. This results in improving the
overall risk information quality of annual reports.
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4 HYPOTHESIS DEVELOPMENT
4.1 G-SIB classification
Some banks are significantly more important to the financial system than other banks (i.e. the overall impact on the financial and economic system). The importance is based on the size and interconnectedness of banks (BCBS, 2013). These banks are considered to be a SIFI (Systemically Important Financial Institution). This label includes both banks and other financial institutions. To address specifically banks, the FSB uses the term; SIB (Systemically Important Bank) (FSB, 2016). Systemically important banks are banks whose distress or disorderly failure, because of their size, complexity, systemic interconnectedness would cause significant disruption to the wider financial system and economic activity (FSB, 2016; BCBS, 2013). In other words, these banks are too-big-to-fail (FSB, 2016). The impact these banks have on the financial system compels them to comply to additional requirements in the Basel III accord (BCBS, 2013). More intensive supervision and planning, plus a bigger safety net has been installed to lower the chance and impact of the banks collapsing. The increased supervision leads to an increase in information requests from their stakeholders. The increase in information requests makes them publish more and better disclosures (NBA, 2014, BCBS, 2013). In methodology of determining the SIB-status is complexity one of the determinants (BCBS, 2013). Information about the complexity of a bank can help investors understand the risks and assess the likelihood of failing of the bank (Sowerbutts and Zimmerman, 2013). The research by Sowerbutts et al. (2013) finds that less complex banks disclosure less risk information and more complex banks disclosure more risk information. The researchers suggest that for these less complex banks, certain information may be less relevant to assessing their risk, and so might not be demanded by investors. Additionally, size is another element in the determination of SIB status (BCBS, 2013). The effect of company size on risk disclosure is one of the most studied relationships for explaining the quantity and quality of disclosures (Linsley et al., 2006; Abraham et al., 2007; Hill et al., 2008; Baraket et al, 2013; Khlif et al., 2016). The perspective of stakeholder theory tells us largers banks have more stakeholders, resulting in more information requests. Research has found a positive relationship between size and risk disclosures. Considering G-SIB are large banks, it is expected that these banks have a larger amount of quality risk disclosures.
The Financial Stability Board (2010) state that G-SIBs pose an increased moral hazard risk by having the opportunity to take excessive risks because of their too-big-to-fail status. If a G-SIB threatens to fail, governments have no other choice then saving the bank with public funds, because securing financial stability and preventing severe economic damage is too important.
Both the BCBS (2013) and FSB (2010) prescribe strengthening SIB supervision (including disclosures regarding risks facing the bank). The disclosures regarding these risks would increase transparency and help investors assessing the risks banks take. Lowering the information asymmetry between both parties involved (Sowerbutts et al., 2013).
Considering previous research relevant to G-SIBs and increase in information requests by the strengthened supervision. The following hypothesis is formulated.
Hypothesis 1: G-SIBs have higher quality risk disclosures than non-SIBs.
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4.2 Government ownership
As result of the financial crisis in the last decade the involvements of governments in the banking system has increased. By both introduction of new regulations/legislation and financial support and nationalization. Previous research considered a company to be government owned if a government holds at least a 5% stake. This would them to be considered block shareholders.
Previous research argues that block shareholders lead to less disclosures (Marston and Polei, 2004; Hernandez et al., 2015).
However, Eng and Mak (2003) claim that government-owned companies have an increased amount of agency costs in comparison to private companies. Although these companies are run like private enterprises, they have to look beyond creating shareholder value and take the nation's interest into account as well. Motivated by the responsibility to protect their own people, governments might be more careful in establishing and preserving the legitimacy of the banks they own. This gives governments an incentive to disclosure extra information to shareholders. Their research confirmed that government-owned companies have an increased amount of disclosure. This relationship is confirmed by Lan, Wang and Zhang (2013). Their research found that Chinese state-run companies have an increased amount of agency problems and besides have more disclosures in comparison to private companies.
Furthermore the Basel III accord prescribes via Pillar 3 an increased amount of quality risk disclosures for European banks to increase the transparency in the banking system. European governments have urged for an increase in transparency in the banking system and have shown support for the new Basel accord by accepting new Capital requirement regulations (BCBS, 2015). Banks understand the importance of risk disclosures and distill parts of the Pillar 3 disclosures in their annual reports (BCBS, 2011). According to stakeholder theory of Freeman (1983) the more powerful a stakeholder the more inclined a company is to meet its demands.
Lu and Abeysekera (2014) find that in China both shareholders and governments have the power to demand disclosures from its companies. I will make the assumption that this holds up in the European sector as well and expect European governments use their ownership rights to encourage banks to disclose high quality risk information.
Additionally, during the financial crisis from the last decade banks have been nationalized to be saved from bankruptcy (i.e ABN AMRO and SNS reaal, in the Netherlands). Over the last few years economic times have improved. This has led to the Dutch government selling a portion of their stake in ABN AMRO (Telegraaf, 2017). Makhija and Patton (2004) found that government-owned companies have an increased amount of voluntary disclosure. They suggested that one of the reasons governments prefer increased disclosure is to maximize share- value, in case the stake in the company is planned to be sold.
Considering former research into the relationship between governments ownership and (voluntary) disclosures, I will formulate the following hypothesis:
Hypothesis 2: There is a positive association between government ownership and quality of
risk disclosures
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4.3 Ownership concentration
Like most listed companies, among which banks, ownership is separated among different shareholders. When a company has many different shareholder owning a small share in company, the ownership would be considered dispersed ownership. When ownership is less concentrated, companies tend to have one or more block shareholders. A shareholder is considered a Blockholder if it has at least a 5% share in the company (Thomsen and Pedersen, 2000).
There has been done extensive research into the effects of blockholdership on disclosure or the relationship between ownership concentration and disclosure (Eng and Mak, 2003; Chau and gray, 2002; Hannifa and Cooke, 2002; Makhija and Patton, 2004; Barako, Hancock and Izan, 2006; Garcia and Meca, 2010; Juhmani, 2013) Most previous research has found a positive relationship between dispersed ownership and voluntary reporting (Eng and Mak, 2003; Chau and gray, 2002; Hannifa and Cooke, 2002; Garcia and Meca, 2010). A possible explanation for this relationship can be found in the agency theory. Fama and Jensen (1983) argue that dispersion of ownership gives rise to more agency costs and consequently the degree of information asymmetry between the organization and shareholders may lead to an adverse investor reaction. The researchers suggest that a dispersed ownership structure would give the organization the incentive to provide disclosures of relevant information for its shareholders.
This will lower the agency problems and its costs. Furthermore previous research has found a negative relationship between Blockholder ownership and amount of voluntary disclosure (Chau and Gray, 2002; Hannifa and cooke, 2002; Eng and Mak, 2003). Former research explains that for a small shareholder it is more difficult to monitor the firm’s activities.
Therefore shareholders in a dispersed ownership have a greater demand for quality disclosures, among them risk disclosures. Because the information from disclosures helps the shareholders monitor the firm.
In contrast to dispersed ownership, blockholder ownership lowers the amount of disclosures.
Marston and Polei (2004) state that blockholders get their information from internal sources.
Additionally Hernandez et al. (2015) state that companies with blockholder ownership share more information in a private setting. This makes disclosures to external environment redundant.
Considering the former research, where a positive relationship has been established between ownership concentration and disclosures and a negative relationship between blockholdership and disclosures. Therefore the following Hypothesis is formulated:
Hypothesis 3: There is a positive association between ownership concentration and quality of risk disclosures.
4.4 Funding structure
Banks fund themselves through a wide range of financial instruments, from both retail and
wholesale sources. The former consists for the most part of customer deposits, mostly from
households. The latter consists broadly of funding from private markets (i.e. institutional
parties, bonds and securities), used to supplement customer deposits in financing bank
activities (BCBS, 2013). Both the BCBS and other financial regulatory authorities (i.e. EBA
17
and ECB) state that the dependency on wholesale funding in the banking system contributed greatly to the cause of the 2007-2009 financial crisis (BCBS, 2013).
Disclosing information about funding risk (i.e. the possibility the bank may not be able to raise new funding or repay its existing creditors) is important and would increase transparency (Sowerbutts et al., 2013; BCBS, 2013). More disclosures by banks would lower the information asymmetry between banks and investors. Banks have good information about their financial resilience. Investors provide funding for banks, have less information. As debt investors become more aware of the risks banks are taking, they are less likely to provide funding to banks that are not providing attractive trade-off between risks and returns. This can affect the risk-taking decisions of bank managers. This mechanisms of market discipline gives investors the power to ensure that managers are acting upon the interests of investors and reduces the likelihood that a bank takes risks that its investors are not aware of (Sowerbutts et. al, 2013).
Studies on the 2007-2009 banking- and financial crisis suggest that banks funded by deposits fared better during the crisis than those depended on wholesale characterized sources. (BCBS, 2013). Generally Wholesale banks either do not have deposit insurance or have low deposit insurance ceilings. This makes uninsured investors react more heavily to market-wide liquidity shocks. The moment banks start having liquidity problems, wholesale banks will be hit harder in their funding than retail banks. This is because retail banks have a more stable source of funding, which makes them more resistant to liquidity shocks. (Jung and Kim, 2015, BCBS, 2013). The Basel Committee on Banking Supervision considers funding to be more stable if it consists of retail deposits, long term funding (i.e. debt with an effective duration of 1+ year) and most importantly equity (BCBS, 2013).
The increased amount of risk wholesale banks have would suggest that they disclosure more risk information. Firstly, because investors may demand disclosures to lower the information asymmetry between them and the organization to have the opportunity assess the trade-off between risk and return. Secondly, previous studies suggest that along the agency theory managers will be inclined themselves to lower the information asymmetry between insiders and outsiders (Khlif et al., 2016; Deumes, 2008; Miihkinen, 2011). Lastly, especially banks may have the incentive to communicate risk information to a wide range of stakeholders to promote their image of transparency and trustworthy in the market. This would increase the legitimacy of the bank in the market (Khlif et al., 2016; Hassan, 2009). However Volunatry disclosure theory tells us that banks facing high risks could face problems attracting new capital, if it disclosed its risk information (Verrechia, 2001). The research regarding the risk disclosures and risk factor is inconclusive. Where some studies found a positive relationship (Khlif et al., 2016; Deumes, 2008; Miihkinen, 2011; Hassan, 2009). Other studies found no significant relationship (Linsley et al., 2006; Dobler, Lajili, and Zéghal, 2011). Furthermore providers of short-term wholesale funding might have little incentive to thoroughly monitor banks via risk disclosures and instead may simply withdraw their funds at the first negative market signal regarding the client bank’s financial health (Bologna, 2011; BCBS, 2013).
Considering the previous research the following hypothesis is formulated:
Hypothesis 4: There is an association between funding structure and quality of risk disclosures
of European Banks.
18
+
4.5 Conceptual model
In figure 1 below are the expected relationships presented. In addition is indicated whether the expected relationships are positive or negative. The relationship between funding structure and risk disclosure quality does not have a positive nor negative value attached, because there has not been made a certain prediction about the direction of the relationship. The control variables are depicted in a dashed line.
+
(β= -1,810, p>0,1)
Figure 1: Conceptual model
5 RESEARCH METHODS 5.1 Method and population
This research is an analysis of annual financial statements from financial year 2017 from European banks. In case a financial year does not run until 31 December, the annual report with a financial year ending in 2017 is used. The focus lies on banks specifically because only they are subjected to Basel III regulations. The basis for the population lies in the an EU-wide transparency exercise by the European Banking Authority (EBA) for the ongoing enhancement of transparency of EU Banking sector. From this exercise a population is drawn of 66 banks.
Added to this are 9 banks from the single supervision mechanism (SSM) from the European
G-SIB classificationGovernment ownership
Ownership concentration
Funding structure
Quality of risk disclosure
ECB supervisor
Profitability Corporate Size
Board size
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Central Bank (ECB). The population is constructed based a couple criteria to paint a representative picture of the banking sector. The population consists of 75 banks from 25 European countries. The selection of banks from the transparency exercise is based on the largest and most influential banks (based on total assets). The banks outside of the exercise are significantly smaller. Additionally there a difference in supervision. According to the ECB, 49 banks are considered to be significant in the banking sector and are therefore under direct supervision by the ECB. 26 banks are considered ‘less’ significant and are under supervision by their local national supervision authority. The variety in criteria make the population representative for the European banking sector. Different currencies in annual reports are converted to euros using the currency rate at the time of 31-12-2017. Banks from which the explanatory variable data could not be retrieved are left out of the sample. The information from State Street Bank Luxembourg S.A was not available and this leaves a research sample of 74 banks. Appendix 2 lists all banks included in the sample, their index score and classification of G-SIB and government ownership.
5.2. Dependent variable
Risk disclosure quality of European banks
In this research risk disclosure quality of European Banks is the dependent variable. The risk disclosure quality will be measured via a quality score derived from a risk disclosure index.
The index includes the financial statement analysis based on 30 relevant evaluation criteria.
The criteria are based on Basel III, EDTF and ESMA. The criteria cover the following subjects:
Credit risk, Solvency/financial strength, Liquidity and general/audit of information. The index score is measured via an ordinal scale, ranging from 0 to 2 points. The allocation of points is as follows: Criterion not included = 0 points, criterion included, but limited = 1 point, criterion included and extensive = 2 points. The assumption is made that the more points are scored the higher the quality of the risk disclosure (Beattie, McInnes and Fearnley, 2004).
The use of an index is partially subjective, because the comprehensiveness and extend of information will be evaluated and the index can have problems with validity and reliability.
However the application of a disclosure index is backed by previous research. Despite its subjective nature is has been proven as a reliable tool to measure disclosure quality (Eng and Mak, 2003; Huafang and Jianguo, 2007; Wang, Sewon and Clairborn, 2008). Furthermore Indices are considered to be an appropriate tool for researching annual reports (Marston and Shrives, 1991; Beattie et al., 2004). The subjectivity of this method will be reduced by a few countermeasures and the validity and reliability are checked using the following methods.
To check if the index is a valid and reliable instrument for measuring the quality of risk
disclosures, a pilot test has been performed. The pilot test gave insight in the similarity between
criteria in the index and the risk subjects in annual reports and the consistency of data collection
by the researchers. In the pilot test the index has been filled in for 5 banks; Deutsche bank,
ING, Barclays, Sociéte Generale and HSBC. The pilot test intends to increase the validity and
reliability of the index. The index is considered valid if it measures what it intends to measure
(Marston et al, 1991). By filling in the index during the pilot phase, we verified to which extend
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the criteria in the index covered the information disclosed by the banks. The pilot test concluded that the criteria covered the relevant parts of the risk disclosures and the index is therefore valid. The index is considered to be reliable if the results can be replicated by another researcher (Marston et al., 1991). In the pilot test the checklist has been filled in for the annual reports of five banks. For every annual report two researchers have filled in the checklist and every researcher has filled in the checklist for two banks. This way researchers can review one another and see if every researcher would come to the same index score. The pilot test concluded that there were no differences in interpretation of criteria or point allocation and the results are replicable. Therefore the disclosure index is considered reliable. Although the pilot test helped to resolve interpretation differences and decrease subjectivity, it cannot exclude bias completely. Therefore the subjectivity of judgements is reduced additionally by having 40 indices be reviewed by fellow researchers. Lastly the subjects within the index are free from weighting. This way every subject is of equal importance and therefore less subjective.
5.3 Independent variables
5.3.1 G-SIB classification
The Basel Committee of Banking Supervision (BCBS) defines global systemically important banks as banks that would cause a financial crisis if they collapsed (BIS, 2013). For the measurement of G-SIB classification the research will make use of the list of G-SIB-banks drafted by the Financial stability board (FSB) in consultation with the BCBS and national authorities (FSB, 2017).
5.3.2 Government ownership
Identifying state- versus private ownership is usually straightforward. Except there is a judgement call to be made (La Porta et al., 2002). Ownership by foreign governments is considered as private ownership instead of state ownership. This research will try to investigate the effects of government ownership by a government that is willing to support money-losing banks to offer their citizens a stable bank or to rescue the capital of their citizens in times of crisis and bankruptcy, which are mainly domestic state-owned banks. While foreign states primarily own banks abroad as profitable investment and are less-likely to support money- losing firms abroad (La Porta et al., 2002). Furthermore a bank is considered to be state-owned if more than 50% of shares are owned by the government (Bonin et al., 2005). The data from the database Orbit bank focus will be used for the variable.
5.3.3 Ownership concentration
Ownership concentration is defined as the structure of ownership and the concentration of
shareholders (Thomsen and Petersen, 2000; Wruck, 1989; Eng and Mak, 2003). Former
research has used different measurements for ownership concentration. For robustness will this
research use two different measurements; Ownership share of the largest shareholder in
percentage (Thomsen and Pedersen, 2000) and the cumulative percentage of ownership of all
blockholders (Eng and Mak, 2003). The higher the cumulative percentage the lower the
21
concentration of ownership. The data for this variable will be derived from the database Orbit Bank focus.
5.3.4 Funding structure (Retail/wholesale)
The funding structure of banks will be measured alongside two key ratios based on the study of banking models by Roengpitya et al. (2014). This research differentiates two ratios to classify the funding structure of a bank, based on the data from Bankscope. The ratios are:
Customer deposits/Total funding excluding derivatives and Gross loans/Customer deposits.
The first ratio measures the share of deposits in total funding. A higher ratio implies retail funding. The second ratio measures the amount of deposits used for issuing loans. A high ratio implies less retail funding. Thus a higher ratio characterizes wholesale funding. The data from the database Orbit bank focus will be used for this variable.
5.4 Control variables
There is an extensive amount of previous research into explaining the effects of corporate size on the quality and amount of risk disclosure of both banks and other companies (Linsley et al., 2006; Abraham et al., 2007; Hill et al., 2008; Baraket et al, 2013) and among the researchers there is a consensus of a positive relationship between corporate size and quality of disclosure.
Large firms tend to be complex are more varied in activities. This results into higher information asymmetry. According to agency theory, risk reporting can reduce the agency problems and information asymmetry (Deumes et al., 2008; Khlif et al., 2016). Furthermore larger firms are characterized by having more public visibility and impact. According to legitimacy theory larger banks therefore have to be more aware of their reputation and legitimacy. Risk disclosures are used for controlling the reputation and legitimacy (Khlif et al., 2016). To control for this effect, corporate size will be included as a control variable. Corporate size will be measured as total assets (Linsley et al., 2006; Abraham et al., 2007).
Another effect I will control for is the profitability of the bank. Former research claims that profitability has an effect on risk disclosures (Linsley et al., 2006; Deumes et al., 2008;
Miihkinen, 2011). Hussainey (2013) argues from the Voluntary disclosure perspective that highly profitable firms communicate their good performance and ability to manage risks to their environment. While Khlif et al. (2016) suggest that bad performing firms have the incentive to disclose their risk information to ensure their environment about the future prospects of the firm. In line with previous research, profitability will be measured as Return on Assets (RoA) (Linsley et al., 2006; Deumes et al., 2008).
Additionally, I will control for the effect of the bank supervisor. Banks are either supervised by the European Central Bank or the National Supervisory Authority. Supervision on European banks has increased as reaction on the financial crisis (BCBS, 2015). Large and impactful banks have been placed under supervision by the ECB from their national authority. Because of the more rigorous supervision by the ECB, their size, and impact on the financial system it is expected that banks under ECB supervision have higher quality risk disclosures.
Lastly I will control the effect of the size of supervisory boards. According to agency theory a
higher amount of supervisory board members or non-executive members ensures that
management activities are monitored better and opportunistic management discretion is
22
prevented (Fama, 1980; Fama and Jensen, 1983). So a higher amount (non-executive) members sitting on the board would result in more effective monitoring and higher level of corporate transparency (Barakat et al., 2013). Previous research has found a positive relationship between supervisory board size and operational risk disclosure quality of European banks (Barakat et al., 2013).The board size is measured as total members on the supervisory board in a two-tier structure and total non-executive members on the board in a one-tier structure. In general larger companies have larger boards and therefore is board size corrected for the size of the bank.
This is done by dividing the amount of members by the natural logarithm of total assets of the bank.
All data for the control variables is handpicked from the annual reports from the research population.
5.5 Statistical model
For the employment of the statistical model the following adjustment have been made to the data. Three dummy variables have been created. This has been done for the variable ‘G-SIB classification’. A score of 1 is given if the bank is considered a Globally significant important bank and a score of 0 is given if not. This has been done for the variable ‘Government ownership’ as well. A score of 1 is given if government ownership is >50% and a score of 0 is given if not. And as last this has been done for ECB supervision. A score of 1 is given if the bank is under ECB supervision and a score of 0 if not. Furthermore the control variable
‘Corporate size’ is standardized by deriving the natural logarithm (LN) from the value of total assets. The size of the supervisory board or amount of non-executive members has been corrected for size of the bank by dividing the board size by the natural logarithm of total assets.
Lastly extreme values in the continuous data will be reduced by winsorizing. This way any outliers will be eliminated. All values smaller than the mean minus three times the standard deviation will be adjusted to the mean minus three times the standard deviation. All values greater than the mean plus three times the standard deviation will be adjusted to the mean plus three times the standard deviation. An overview of the variables and its measurements are given in Table 1.
An Ordinary Least Squares (OLS) regression is employed to examine the relationship between risk disclosure quality and the explanatory variables. The following model is estimated:
𝑅𝑄𝑆𝐶𝑂𝑅𝐸 = 𝛽
0+ 𝛽
1𝐺𝑆𝐼𝐵 + 𝛽
2𝐺𝑂𝑉𝑂𝑊𝑁 + 𝛽
3%𝐵𝐿𝑂𝐶𝐾 + 𝛽
4%𝐵𝐿𝑂𝐶𝐾𝑇𝑂𝑇 + 𝛽
5𝐹𝑈𝑁𝐷1
+ 𝛽
6𝐹𝑈𝑁𝐷2 + 𝛽
7𝐹𝐼𝑅𝑀𝑆𝐼𝑍𝐸 + 𝛽
8𝑅𝑂𝐴 + 𝛽
9𝐵𝑂𝐴𝑅𝐷𝑆𝐼𝑍𝐸 + 𝛽
10𝐸𝐶𝐵 + 𝜀
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6 RESULTS
6.1 Descriptive statistics
The mean risk disclosure quality score is 26,47. This means that on average banks score 26,47 points out of 60. The minimum score of 11 points is scored by Volkswagen Financial Services and the maximum score of 42 points is scored by Standard Chartered plc. The mean percentage of shares hold by the largest shareholder 38,84% with a standard deviation of 34,57. The
TABLE 1
Variable definitions and measuring methods
Variable Definition Measuring methods
Dependent variable
RQSCORE Risk disclosure quality Disclosure score derived
from disclosure checklist
Independent variables
GSIB G-SIB classification Score of 1 if bank is G-SIB,
score of 0 if not.
GOVOWN Government ownership Score of 1 if government
ownership is at least 50%, score of 0 if not
%BLOCK Ownership concentration Percentage of shares held by the largest blockholder (>5%)
%BLOCKTOT Ownership concentration Cumulative percentage of shares held by all blockholders (>5%)
FUND1 Funding structure Customer deposits divided
by total funding excluding derivatives
FUND2 Funding structure Gross loans divided by
Customer deposits
Control variables
FIRMSIZE Corporate size Natural logarithm of total
assets
ROA Profitability Net income divided by total
assets – Return on Assets (RoA)
ECB ECB supervision Score of 1 if the bank is
under supervision by ECB, score of 0 if not.
BOARDSIZE Supervisory board size Size of the supervisory board
in two-tier board or total non-
executive members in one-
tier board divided by natural
logarithm of total assets
24
