Table Of ContentPALGRAVE MACMILLAN
STUDIES IN BANKING AND
FINANCIAL INSTITUTIONS
Series Editor: Philip Molyneux
BANK FUNDING
STRATEGIES
The Use of
Bonds and the
Bail-in Effect
Fabrizio Crespi
Danilo V. Mascia
Palgrave Macmillan Studies in Banking
and Financial Institutions
Series Editor
Philip Molyneux
University of Sharjah
Sharjah, UAE
“This book offers an overview of the funding strategies adopted over the last
decade by European banks, with a focus on Italian banks. The empirical inves-
tigation of the funding carried out via bank bond issuances reveals an increase
in the cost of funding faced by banks upon the introduction of the Bank
Recovery and Resolution Directive (BRRD). Crespi and Mascia provide an
important contribution to the current debate and enrich the literature on the
interplay between regulation and bank management.”
—Elena Beccalli, Università Cattolica del Sacro Cuore, Italy
The Palgrave Macmillan Studies in Banking and Financial Institutions
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Fabrizio Crespi · Danilo V. Mascia
Bank Funding
Strategies
The Use of Bonds
and the Bail-in Effect
Fabrizio Crespi Danilo V. Mascia
Department of Economics and Business Department of Economics and Business
University of Cagliari University of Cagliari
Cagliari, Italy Cagliari, Italy
Palgrave Macmillan Studies in Banking and Financial Institutions
ISBN 978-3-319-69412-2 ISBN 978-3-319-69413-9 (eBook)
https://doi.org/10.1007/978-3-319-69413-9
Library of Congress Control Number: 2017956909
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The pizza delivery man comes to Yogi Berra after the game and says:
“Yogi, how do you want this pizza cut, into quarters or eighths?”
And Yogi says:
“Cut it in eight pieces. I’m feeling hungry tonight.”
Merton Miller
(describing the MM propositions in an interview)
Preface
The liability management represents a crucial activity for banks. Due to
the intrinsic maturity mismatch that characterizes their balance sheets,
banks need to carefully consider different options regarding the amount
and composition of the funding (e.g. more equity or more debt), the
target depositor (retail or wholesale), the ideal instruments to be used
(deposits, bonds, equity instruments). Moreover, the funding strategies
have to be in line with the asset side profile (risk and maturity) and the
legislative provisions imposed to financial intermediaries.
Yet, notwithstanding its importance, not too much literature appears
to have covered the topic, at least until the blast of the financial cri-
sis. In particular, only few academic studies have investigated, so far, the
role of bonds in the funding mix of European banks; while some aggre-
gate analyses have been proposed by the ECB and the IFM.
In this monograph, we aim to illustrate the general evolution of
European banks’ funding strategies during the last 10 years and to give
a special focus on the importance of bonds as a funding choice for the
Italian banking sector (especially after the introduction of the Bank
Recovery and Resolution Directive, BRRD). Such a choice was driven
by two major reasoning.
vii
viii Preface
On the one hand, last decade has been a period characterized by an
unprecedented recession that followed the global financial crisis and
the Euro area sovereign debt crisis, as well as by the implementation
of important regulatory reforms for banks (in particular, the Basel III
framework and the BRRD). As demonstrated by the ECB, economic
and financial conditions after the crisis have strongly influenced the
behaviour of European banks with regards to funding.
The focus on the Italian bank bonds market, on the other hand,
lies in the fact that, historically, Italian banks (much more than their
European peers) have placed to retail investors huge amounts of bonds
(as if they were a sort of surrogate for deposits), and have strongly used
this funding instrument at least until 2012. Moreover, given the struc-
ture of the financial system (traditionally bank-oriented) and the trans-
formation occurred in the last few years (including more than one case
of bail-out), it is not inappropriate to say that the examination of Italian
banks’ funding strategies represents an interesting case study.
Furthermore, our spotlight on the Italian market is motivated by the
interest to observe whether the recent implementation of the BRRD
has somehow affected the issuances of new bonds by Italian banks and
the related cost of funding. Notably, we believe that Italy represents a
good laboratory for our analysis, provided that the Italian Resolution
Authority credibly implemented a so-called burden-sharing operation
for four banks just some weeks before the full implementation of the
BRRD. The monograph, therefore, is structured as follows.
In Chap. 1, we provide a deep review of the literature regarding
banks’ funding strategies and, in particular, we investigate how the
funding strategies carried out in Europe have changed over the last ten
years. The analysis is accompanied by the presentation of some aggre-
gated statistics—drawn from the European Central Bank statistical
database—regarding the funding mix of credit institutions operating in
the major Euro zone countries.
Chapter 2, instead, offers a focus about the funding strategies of
Italian banks with a particular emphasis on bonds and their importance
on Italian households’ financial wealth. Here again, we support our
analysis through the use of some aggregated statistics—drawn from the
Bank of Italy statistical database—regarding the Italian banking sector.
Preface ix
In Chap. 3, we analyse the characteristics of the main bonds’ catego-
ries issued by Italian banks. Using a sample of data extrapolated by a
specialized platform (‘eXact 4 Suite’ by Analysis) we can appreciate the
number of issuing institutions, the amount of bonds issued, and other
key aspects of the outstanding bonds in the Italian market.
Finally, Chap. 4 concludes this book by providing an analysis of the
effects that the implementation of the BRRD has generated on the
yields (at issuance) offered by bank bonds and, consequently, on the
cost of funding borne by banks. We carry out this analysis by employ-
ing a unique set of hand-collected data. Furthermore, we illustrate a few
very recent case studies highlighting the impact of the BRRD on some
problematic banks in Italy (eventually ending up either with resolution,
liquidation or precautionary recapitalization) and the severe effects that
these phenomena have generated on retail bondholders.
Cagliari, Italy Fabrizio Crespi
Danilo V. Mascia
Acknowledgements
We would like to thank two anonymous reviewers for their helpful
comments. Furthermore, we are thankful to Philip Molyneux, series
editor for Studies in Banking and Financial Institutions, for the oppor-
tunity to publish this volume, and to the staff at Palgrave Macmillan,
especially Aimee Dibbens and Tula Weis, for helpful guidance.
Cagliari, Italy Fabrizio Crespi
August 2017 Danilo V. Mascia
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