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Analysis of banking business and its impact on financial stability of economies in Euro Area upon the example of ING banking group

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Diploma Analysis of banking business and its impact on financial stability of economies in Euro Area upon the example of ING banking group

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Summary. 3

Introduction. 4

Chapter 1. Determinants of Banking Business. 9

1.1 Factors that affect the value of Banking Business. 9

1.2 Determinants of the bank performance. 14

Chapter 2. Financial stability in Euro Area. 19

2.1. Macro-financial and credit environment 19

2.2. Financial markets. 30

2.3. Euro area financial institutions. 36

Chapter 3. Analysis of ING banking group. 44

Conclusions. 49

References. 51


The degree project - Analysis of banking business and its impact on financial stability of economies in Euro Area upon the example of ING banking group.

The degree project contains 16 charts.

The degree project contains the characteristic of banking business, determinants and factors of bank performance, macro-financial and credit environment, financial markets, financial institutions in euro area, analysis of ING banking group.

Evaluation results show that the profitability of European banks affected not only the factors associated with their management decisions, but also to changes in the external macroeconomic environment. The results are in contrast to studies that examined the relationship of structure and quality of European banking systems and find a positive effect of concentration and / or market share variables on bank profitability.

Keywords: bank, banking business, financial stability, financial markets, financial institutions, ING banking group, euro area, determinants, bank performance.


Topicality. The rate of return earned financial institutions depends on a number of factors. These factors include the internal elements for each financial institution and a number of important external factors that determine productivity earnings. Product explanation will determine the possible political implications and should be taken seriously.

The euro area banking system continues to struggle with low profitability, while euro area insurers also face challenges in a low-return environment. Despite some increases observed in recent quarters, many banks’ return on equity continues to hover below their corresponding cost of equity despite some recent narrowing of this gap. The profitability of the banking sector is being hampered by a number of challenges, two of which predominate. First, the low nominal growth and low interest rate environment makes traditional banking activities such as retail lending using maturity transformation less profitable. Likewise, insurers in some countries face challenges, in a low-return environment, especially in the life insurance business where there are pressures to ensure that returns are sufficient to maintain guaranteed returns to policyholders. A second challenge specific to banks relates to the large stock of legacy problem assets, particularly in the countries that were most affected by the financial crisis. These problem assets remain an important obstacle for banks to provide new credit to the real economy. In some countries, improvements have been made in the legal framework for resolving non-performing loans.

The financial system is weathering the euro zone problems on several fronts in the second half of the year. In particular, higher political risks appeared early summer surrounding negotiations on the New Greek program of financial assistance for some time in late summer, global and euro area stock markets affected by the overflow correction in the Chinese stock prices. The impact on the euro area financial system of these events was relatively contained, with standard bank rates, tax and financial stress remains at low levels.

Euro area banks have limited direct exposure to emerging market economies outside Europe. This should temper spillovers across financial institutions stemming from deteriorating macro-financial conditions in these economies. At the same time, the rapidly growing euro area investment fund industry has been gradually broadening its exposure to emerging markets, while at the same time developments in China and other large emerging market economies have become important drivers of global confidence. Partly as a result of increased vulnerabilities stemming from emerging markets, the risk of an abrupt reversal of global risk premia is increasing.

In this environment, there are four key sources of risk for euro area financial stability over the next two years. These risks, while tied to distinct scenarios of prospective financial stability stress, are clearly intertwined and would, if they were to materialize, have the potential to be mutually reinforcing. Indeed, all risks could be aggravated by a materialization of downside risks to nominal economic growth.

The aim of this work is to analyze banking business and its impact on financial stability of economies in Euro Area upon the example of ING banking group.

The Objectives:

  • To determine the factors that affect the value of Banking Business;
  • To describe the determinants of the bank performance;
  • To analyze macro-financial and credit environment in euro area;
  • To characterize the financial markets in euro area;
  • To describe euro area financial institutions;
  • To analyze ING banking group.

The object of the research work is banking business.

The subject of the research work is its impact on financial stability of economies in Euro Area.

The theoretical significance of the research work lies in the fact that term bank structure is often used when it comes to the characteristics of individual institutions. Individual bank characteristics such as composition of the portfolio, and the scope and volume of transactions can affect the cost at which banks carry out financial services. The structure of the market, measured by the relative size and number of firms can influence the degree of local competition, and, accordingly, quality, quantity and price of financial services ultimately available to clients.

Factors determining the profitability of banks can be divided between those that are internal and those that are external. Internal determinants of bank profitability can be defined as those factors that are influenced by management decisions and policy objectives of the bank. Effects Management is the result of differences in the objectives of bank management, policies, decisions and actions, reflected in differences in the performance of the bank, including profitability.

Theoretical and methodological basis of the thesis were a number of studies have concluded that expense control is the primary determinant of bank profitability. Cost management and offers a consistent opportunity to improve profitability. With large size and large differences in wages and salaries, effective use of labor is a key factor in determining relative profitability.

External determinants of bank profitability are concerned those factors that do not depend on the decisions and policies of a particular bank, but the impact of events outside the bank. Some external determinants included separately when considering performance to isolate the impact of the banking structure frames so the impact on profitability can be more clearly discerned.

Literature review. Haslem (1968, 1969) calculated the balance sheet and profit and loss coefficients for all member banks of the Federal Reserve System in a study two years. The results showed that most factors were largely linked to profitability, including capital ratios, interest paid and received, salaries and wages. He also said that the management to improve management must first emphasize cost management, fund management source and finally use controls.

Wall (1985) concludes that the management of assets and liabilities of the bank, its funding management and control of non-interest expenses all have a significant impact on profitability record.

Performance also depends on many other forces that are often described as "demand" factors. While all the factors of demand can not be identified or quantified, Kaufman (1965) believes that the level of and changes in population and income can reasonably be considered one of the most important (and Yates, 1974).

Nelly and Vylok (1997) conclude that the state per capita income in the US has a strong positive impact on the statistics of the State Bank profit while revenue growth is explained by the relatively small number of changes in banking revenues.

On the other hand, Heggestad (1977) found that per capita income has no effect on bank profits. In any case, we believe that per capita income can be a good substitute for economic shocks that affect bank earnings -for example, the oil crisis or commercial real estate failures. The sharp decline in the sector, such as real estate, may significantly affect bank earnings without having a major impact on income per capita.

Zimmerman (1996) found that regional conditions of employment is a significant factor contributing to both the banking community and the quality of assets ROA.

Haslem (1968) found that the impact on the profitability of placement is not important (these effects are important only for heads of banks and other).

Tirtiroglou and Daniels (2000) strongly suggest that regional heterogeneity of the US banking geography and its temporal dynamics are important factors that determine the activities of banks.

On the other hand, Zimmerman (1996) indicates that the location is an important factor in determining profitability.

Prasad and Harker (1997) found that in a competitive retail banking or IT capital is not IT labor investments have a significant impact on the profitability of the company. The results of this hypothesis are: the IT investment has zero or negligible impact on the profitability of banks.


After examining and analyzing the overall cost of business factors and their specificity within banking, we can make conclusions that a number of common factors that determine the cost characteristics of any business, according to banking activities acquired a different meaning.

Summing up the results of the conducted analysis the following conclusions can be made:

  • The main factors that form the business value: supply and demand, income, time, risk, control, restrictions.
  • The efficiency of the banking business as a general characteristic of the results of its proceedings, is influenced by factors both external and internal origin.
  • In the context of performance management banking as a priority task of bank management, a practical interest are the internal factors - conditions of efficiency, which proposed to consider the position of status characteristics and performance of the bank's business model.
  • The mechanism of influence of factors on the efficiency of the banking business forms the basis for further studies to verify its actions country realities.

I want to note that euro zone financial institutions still face problems related to weak economic growth prospects inherited problems due to the financial crisis and strengthening the regulatory and prudential environment. Despite the recent improvement in operating performance in the euro area banks, finding sustainable sources of profitability remains a problem at low nominal macroeconomic growth prospects and low interest rates across the maturity spectrum. Separate large stock of old distressed assets also remains a problem, especially in the country’s most affected by the financial crisis. Progress in removing non-performing loans (NRC) with the balance remains modest when measured against the supply of such loans remains an important obstacle for banks that provide new loans to the real sector of the economy.

The European Central Bank aims to carry out independent centralized monetary policy. The national central banks thus losing their autonomy and are unified statutes. They not entitled to provide financial credit institutions and national EU institutions and cash loans and overdrafts. Finally eliminated the opportunity to cover the budget deficit by issuing or loans to central banks. They are converted into branches of the ECB.

Euro area banks’ exposures to equity markets increased somewhat in the first half of 2015, on average, with the median share of SBGs’ equity holdings edging up from 0.9% at the end of 2014 to 1.1% in June 2015. Significant heterogeneity across banks of different sizes persists, with some LCBGs maintaining an exposure of between 5% and 10% of total assets. Therefore, some banks remain exposed to volatility in equity prices, such as that observed in the third quarter of the year.

ING have numerous initiatives to bring our strategy to life. They earn more primary relationships and improve their payment solutions. Innovation in products and distribution channels, particularly digital, do banking with ING easier and more accessible. These innovations are aimed at empowering customers to make more informed financial decisions. ING accelerate the transition to a more sustainable economy.

ING are prioritized issues they think are most important to its customers. ING believes that while new initiatives are important, they carefully take into account local market conditions, supply and suitability customers. Looking ahead, they are now focusing on future-proofing our business. IN intend to be flexible - fast and innovative enough to keep up with the changing expectations of their customers.


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