Category: Research Projects

Lurking in the Shadows: Testing For Shadow Price Differences with Applications in Economic Regulation

This project (in collaboration with Timo Kuousmanen(School of Business, Aalto University,Helsinki, Finland) and Ronan Gallagher(Business School, The University of Edinburgh, United Kingdom))  introduces a novel approach for statistically testing group differences in shadow price estimates produced by non parametric efficiency models.  The test can be applied across groups being assessed using a common efficient frontier or across groups assessed using different efficient frontiers. We demonstrate empirical use cases of each by analysing the impact of regulatory imposition in European banking. Preliminary results suggests significant unintended consequences of supranational regulation in terms of bank credit risk.

Fiscal Policy Change and Corporate Strategy: Evidence from Northern Ireland

On the 18th November 2016, the devolved assembly at Stormont brokered a ‘Fresh Start’ agreement, with a resolution to the well-publicised welfare reform issue in Northern Ireland (NI).  The published document[1] also paved the way for the devolution of corporation tax power, with the legislation[2]  allow NI to set its own corporation tax levels. From April 2018, the rate will drop to 12.5%.

Academic literature suggests reduction in corporation tax has direct and indirect effects.  Directly, a cut in corporation tax would reduce tax receipts.  Indirectly there are three main effects.  Firstly, there is the cost of profit shifting by GB companies to NI.  Secondly, corporation tax receipts would be boosted by companies relocating their profits to NI. Thirdly, NI based sole traders and partnership could now choose to incorporate and pay lower taxes.  A recent HMRC consultation paper has considered all of these effects and several second-round tax effects due to higher tax earning from greater investment.[3]

Reduction in corporation tax is a competitive strategy to attract inward investment. This means the magnitude of the impact of corporation tax reduction in NI should be considered relative to the rates of GB and ROI.  Recently, to reduce the impact of closure to tax loopholes for international firms, ROI has announced a rate of 6.25% for profits associated with R&D.  Furthermore, the conservative government have aggressive perused a corporation tax reduction policy in GB and has announced a fall to 17% by 2020.  Competition is thus a key part to the impact of corporation tax reduction.

This research project seeks to understand these effects and their strategic implications for NI business community. Using a before and after survey analysis of the business attitudes to the corporation tax reduction, the project seeks to provide new corporate governance and strategy insights to fiscal policy reform.

[1] Northern Ireland Assembly 2015, “A Fresh Start: the Stormont Agreement and Implementation Plan”-

[2] Corporation Tax (Northern Ireland) Act 2015 ( 15/corporationtaxnorthernireland.html)

[3] HM Treasury, Rebalancing the Northern Ireland Economy.( ng_the_northern_ireland_economy_consultation.pdf)

Unintended Systemic Risk Implication of Regulatory Compliance

The recent financial crisis painfully demonstrated the risk large interconnected banks with complex activities pose to the financial system.  Pre-crisis, microprudential regulation was the norm, where a ‘bottom-up’ approach aimed to protect the consumer from exogenous risk. What is clear now is that a financial system as a whole behaves very differently from its individual component institutions and financial instability stems from endogeneous (within the systemic) risks.  This has meant policymaker’s in developed economies have initiated a myriad of international macroprudential regulatory programs which aim to monitoring and ultimately preventing systemic risk.

The finance literature provides us with some explanations as to why we observe bank herding behaviour which may have systemic risk implications.This literature assesses the incentives through which banks can be correlated with each other.  Specifically, through investment choices (Acharya & Yorulmazer 2007), diversification (Nijskens & Wagner, 2011;Allen et al., 2012), interbank insurance (Kahn & Santos, 2010), or through herding on the liabilities side (Segura & Suarez, 2011; Stein, 2012;Farhi & Tirole, 2012; Horvath & Wagner, 2017).

The economic literature provides an interesting strand on the rationale for the unintended consequences of regulation (Averch & Johnson, 1962; Merton, 1936; Stigler, 1971). These unintended consequences can stem from many sources: human error; the inability to model complex interactions amongst regulated actors; the ‘imperious immediacy’ of a single regulatory interest to the detriment of all others. Our initial findings lend weight to Merton’s (1936) imperious immediacy conjecture.

This project extends recent studies on bank performance, regulations and bank’s business models 1 2 by moving from performance to financial system stability and consider the systemic effects of the regulatory compliance and business model diversity.  We will consider financial stability using a myriad of systemic risk measures 3 which capture a financial institution’s contribution to systemic risk and its exposure to systemic distress.  This will then be used to answer the following questions:

  • Is regulatory compliance providing stability in financial systems?
  • Are supervisors actions engendering financial stability?
  • Are what supervisors are asking banks to do having unintended consequences for financial stability?
  • How sensitive is systemic risk to different forms of financial regulation?
  • Does diversity in banking business models matter for financial stability?
  1. Ayadi, R. et al., 2016. Does Basel compliance matter for bank performance? Journal of Financial Stability, 23, pp.15–32.
  2. Ayadi, R. & Pieter De Groen, W., 2016. Banking Business Models Monitor 2015 EUROPE, Centre for European Policy Studies. Available at:
  3. We will use a number of the cross-sectional systemic risk measures described  in Bisias, D. et al., 2012. A survey of systemic risk analytics, Office of Financial Research, US Treasury Department.

Me, HEC and Research 2B


One of the many good things about working as a Finance lecturer at Queen’s Management School is the opportunity to research overseas.  As a senior research associate of the International Research Centre for Cooperative Finance (IRCCF) at HEC Montreal,  I have the pleasure of visiting this eclectic bilingual city each year. Over the academic year I have two visits as part of my sabbatical leave.  The visits are centred around three exciting projects:

  1. Banking Business Model (BBM) diversity and financial sustainability.
  2. Cooperative Traits of Mergers.
  3. Systemic Risk and Basel Regulatory Compliance (in collaboration with the IMF and Cass Business School)

This research hopes to provide evidence that enlightens the following research puzzles:

  1. What business model features have engendered resilience in the Canadian financial system ?
  2. Do credit union mergers enshrine membership benefits?
  3. How does compliance with core supervisory standards set by the Basel Banking Supervision Committee  affect systemic risk in developed economies?

Projects 1 and 2 are Canada focused while project 3 takes a global approach.  Each of these projects pose very different quantitative challenges which I relish as an card-carrying empiricist.

In project 1 we are using a data clustering approach to identify distinct business models based on an institution’s funding and activities.  This model-free approach reveals the BBM diversity in the Canadian sector over the period 2010-2015.  Following the seminal work on BBM global monitors by my co-author Professor Rym Ayadi  (Director of the IRCCF) in Ayadi et al (2011 2014, 2015 and 2016)1 this exercise will illustrate the unique architecture of the Canadian financial services industry and shed light on factors that promote resilience to globally systemic banking problems.

Project 2 uses a proprietary data set from Deposit Insurance Corporation of Ontario (DICO) to investigate 20 years of consolidation in this region’s credit unions. The analysis will use a flexible model which captures the uniquely cooperative objective of membership benefit maximisation. The project will empirically expose the cooperative traits of mergers/amalgamations in credit unions and hopes to reveal the nature of the membership value of such activity.

Finally, project 3 is a global exercise which uses a number of quantitative measures to capture systemic risk of a financial institution and identify to what extend regulatory compliance can mitigate this risk.  This is a follow on piece of work from Ayadi et al (2016) 2. We have used a large slice of data science to compile a unique sample representing global banking and its regulatory infrastructure.  Our key variable measures the compliance of a financial system with the principles of regulatory best practice proposed by the Basel Committee for Banking supervision.

In short I have my work cut out!  Watch this space for some interesting preliminary results from these projects.

  1. Ayadi, R., Arbak, E. & Pieter De Groen, W., 2011. Business Models in European Banking: A Pre-and Post-Crisis Screening. Centre for European Policy Studies.

    Ayadi, R. & DeGreon, W.P., 2014. Banking Business Models Monitor 2014 Europe. Centre for European Policy Studies.

    Ayadi, R., Arbak, M. & GreonWP, D., 2015. Regulations of European Banks and Business Models: Towards a new paradigm.Centre for European Policy Studies.

    Ayadi, R. & De Groen, W.P., 2016. Bank Business Model Monitor for Europe 2015. International Research Center for Cooperative Finance.

  2. Ayadi, R., Naceur, S. B., Casu, B. & Quinn, B. 2016, Does Basel Compliance Matter for Bank Performance?,  Journal of Financial Stability. 23, p. 15-32

Credit Unions and Financial Stability


A credit union is one of the purest forms of cooperative banking, striving to balance both economic and social goals for the benefit of its membership.

Credit unions are a prevalent part of  society and have long been seen as a stable and risk-averse form of banking. In Canada, credit unions compete directly for market share with shareholder-owned banks, and dominate in some regions. Overall this heterogeneous banking system has been perceived to be relatively stable, especially since the recent financial crisis.

This research project aims to provide key insights into the dynamic contribution financial cooperatives make to the overall stability of a banking system. Focusing on the Canadian banking system, the analysis aims to assess key credit union characteristics that influence stability in a banking sector in periods of crisis and calm. The projects’ empirical design has four paradigms; business model heterogeneity; structural performance; survival, and viability.
This research project is part of my work as a Senior research associate of the International Research Centre for Cooperative Finance in HEC Montreal.

Tiered Regulation and Irish Credit Unions

Regulatory reform in Irish credit unions is a hot topic.  A recent Irish times article 1 highlights the juxtaposition of opinions of the various stakeholders in Ireland.

In this research project we investigate the existence of a tiered structure in Irish credit unions.  We let the data speak and provide some empirical evidence to help inform this current policy debate.

So far our findings conclude that a multi-tier system in terms of business model complexity is present.  This findings is based on a novel approach which endogenously identified an optimal tiered business model strategy based on key financial viability characteristics of Irish credit unions.

For more details of this work see


  1. “Credit unions criticise ‘overzealous’ regulatory plans”-″

Opportunity cost of financial regulation in English football

In collaboration with Ronan Gallagher (University of Edinburgh) I am investigating how financial fair play regulation (henceforth FFP) affects the relative performance of top flight professional football teams in Europe.  Using panel data from on the top two Tiers of English Football, we will use multi-dimensional benchmarking techniques to capture the heterogeneous nature of professional football teams and then retrospectively assess how FFP affect their relative performance.  Our goal is to shed light on the potential opportunity cost of such financial regulation in professional sport team management.

Regulatory Compliance and Bank Efficiency

This project is in collaborating with Sami Ben Naceur (International Monetary Fund Institute), Rym Ayadi(Centre for European Policy Research) and Barbara Casu (Cass Business School).  Using an international sample of commercial banks and Basel Core Principles compliance data (henceforth BCP) supplied by the IMF a non-parametric efficiency analysis applied using modern econometric techniques investigates whether compliance with these BCPs is associated with bank operating efficiency.  This project will produce two pieces of work.  In the first instance a peer-reviewed IMF working paper will be produced by September 2014.  In the second instance a peer-review academic paper will be produced that will target a journal of international standing.

Abstract from IMF working paper

The recent crisis underscored the importance of regulation and supervision that promotes a well-functioning banking system that channels efficiently financial resources into investments,  In this paper, we contribute to the on-going policy debate by assessing whether compliance with international regulatory standard and protocols enchances bank operating efficiency.  We focus specifically on the adoption of international capital standards and the Basel Core Principles for Effective Bank Supervision (BCP). Using an international sample of publicly listed banks the relationship between bank efficiency and regulatory compliance is investigated using the (Simar and Wilson 2007) double bootstrapping approach.