Tag Archives: banking

Artificial Intelligence in Banking

Dr. Periklis Gogas

Professor, Dr. Periklis Gogas 



Anna Agrapetidou, Ph.D. Candidate


Professor, Dr. Theophilos Papadimitriou,


                                 Department of Economics  



 The problem

The health and stability of the banking sector is crucial in modern economies. Failures of systemically important financial institutions and generalized distress in even less significant banks can propagate to the whole sector very fast. These issues of distress, if not addressed swiftly and directly by the regulators (usually the central banks to associated specialized entities) may lead to wide-spread full economic crises and even international financial crises.

The U.S. banking sector

From 2000 to 2018 the total number of banking institutions in the U.S. decreased from 9,904 to 5,406 (more than 40%). This significant decline was the result of: a) an increased number of bank failures (more than 500 banks went bankrupt), b) a lack of new financial institutions entering the U.S. banking sector and c) a consolidation process through mergers and acquisitions. The financial crisis of 2007 highlighted the systemic effects of a banking crisis propagated in national (to other sectors of the U.S. economy) and international level (to other national economies around the world). Moreover, it raised serious concerns on the appropriate regulatory policies in effect and led to significant supervisory and regulatory reforms in an international scale (the Dodd-Frank Act and Basel III). Banking institutions are supervised, and their performance is monitored and evaluated by regulatory authorities through i) periodic stress testing, ii) the imposition of minimum capital requirements (Basel III), and iii) the implementation of prompt mandatory corrective actions when their financial position deteriorates significantly.

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Greek NPL’s: Is there light at the end of the tunnel?

Dr. Periklis Gogas Associate Professor


Dimitrios Karagiozis

Ph.D. Candidate

Department of Economics Democritus University of Thrace, Greece


The year 2018 is a milestone for Greece, as it moves towards to the completion of the third economic adjustment program. That means that after the official end of the program in August 2018, Greece must take fate into its own hands, and try to borrow from the markets to meet its future debt obligations. As the country leaves behind the 8-year long memorandum era, the two main concerns for the Greek government and the banking sector are: a) a decision on the debt relief measures that should follow and b) a solution to the Non-Performing Loans (NPL’s) problem.

The International Monetary Fund openly declares what anyone with basic training in economics can see: Greece requires substantial debt relief from its European partners to restore debt sustainability. The main issue here is that the resolution of this problem mainly depends on political decisions from Greece’s EU partners that are hard to sell to their voters-tax payers. This is of outmost importance for the medium to long term stability of the Greek economy. On the other hand, the NPL’s problem is urgent and imperative.

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A Brief History of International Borrowing

Perry Gogas 15xx (2)

Dr. Periklis Gogas is a frequent contributor to The Business Thinker magazine. He is an Assistant Professor of Economic Analysis and international Economics, Department of International Economics and Development, Democritus University of Thrace, Greece

Efthimia Chrysanthidou

Ms Efthimia Chrysanthidou is a PhD candidate in economics at the Democritus University of Thrace, Greece.



Traditional Banking

In the international financial system banking institutions played a core role in raising capital. Their central position was safe and unchallenged for many decades. This happened because banks can take advantage of both the economies of scale they create and their in-house expertise in risk assessment. These can reduce significantly both the financing cost and the adverse effects of asymmetric information as compared to direct financing. Moreover, the direct and one-to-one relation between the bank and the borrower provides the flexibility to adapt the financing and repayment schedule to the specific needs of the borrower. Therefore there is a state of complete transparency between the two parties.


Over the last three decades and as a result of the process of the deregulation in the financial system and the technological progress, the disintermediation was made possible: borrowers could more easily in terms of risk, cost and transparency raise the necessary capital directly from the lenders (individuals or corporations) in the capital market. The rating agencies played the role of the assessing the credit risk and thus the intermediation of a bank was not necessary. The advantage of the disintermediation is the reduction of the borrowing cost as the banking intermediary is absent. For large corporations with high creditworthiness the risk for the lender is minimized. As a result we observed a qualitative change in the borrower lender relationship: from the one-to-one direct transaction and negotiation to a relationship where the lender is now an anonymous crowd dispersed, heterogeneous and practically unknown to the borrower. There is now no flexibility on the financing terms and the lenders assume all the credit risk.


The banking industry reacted by demanding and achieving gradually the repeal of the Glass-Steagall Act that strictly separated the lending (commercial banking) and investment (investment banking) activities of a financial institution. Universal banking, the consolidation under the same financial institution of both the commercial and investment activities has become the norm. Under this new regime, banks reacted with the practice of securitization taking advantage of the disintermediation trend in financing. The impersonal nature of the disintermediation is even worse in the case of the securitization as now not only the lender but also the borrower has become unknown and impersonal: a wide and heterogeneous lender base finances the needs of a large group of individual borrowers that are for any practical reason unknown.

The International Lenders – History

International lending experienced huge growth over the last three decades. Modern technological developments completely transformed the global financial system by making the mobility of funds from one country to another easier and much simpler. But this is not a new phenomenon. The history of international borrowing has its roots far in the past, from the first civilizations developed in the Mediterranean. We might even identify the colonization of the ancient Greeks as a form of internationalization of the capital in the known world. This colonization had exactly the same characteristics as in the 19th and 20th century: the Greek cities sent abroad their productive factors, capital and labor to gain from higher returns. Later in history, the rapid growth of productivity during the Industrial Revolution in Great Britain, and its subsequent spread to Europe and to the colonies all over the world, resulted in an unprecedented accumulation of capital surpluses. Thus, at the end of the 19th century this capital could not remain inactive and people tried to find ways to make the gains of productivity even higher. As a result, Europe and specifically the Great Britain became the main world international lender of capital. A significant development in this process was the creation of a new middle class, that of craftsmen, manufacturers and traders. They started to accumulate large amounts of wealth and power and to conquer high and influential positions in the societies of that time, which they did not intend to lose. They were particularly oriented towards investment in search of new wealth opportunities and higher productivity of their capital. Later, in the early 20th century the U.S. experienced the same rapid growth when the industrialization was transferred over the Atlantic Ocean. The U.S. continued to borrow from abroad as they were achieving significant growth rates, but simultaneously they increased capital export to international markets. As a result, the U.S. soon become a net international lender and took the lead from Britain just before the Second World War.

The 1870-1913 Period

This period was signaled by a strong growth in international trade and the liberalization of the mobility of the factors of production capital and labor. It is also the period of the largest migration that the humankind ever experienced, mainly from Europe and Asian countries to the U.S., Canada, South American countries, Australia, New Zealand, etc. The international lenders in this period were mainly capitalists, traders and industrialists. Total international financing increased from $100 million in 1820, to $4 billion in 1870 and to $44 billion in 1913. This international lending was achieved almost exclusively through the capital market, i.e. with the issuance and disposal of bonds and shares to the public.  The most important international lenders and borrowers for the year 1913 are presented in the table below:


$ billion


$ billion

Great Britain










Latin America










Other countries








The 1914-1950 period

This period was very important for the international capital flows as the financing of firms and the war reparations played a dominant role. When the war began there was an objective need for funding for all European countries. This need was first satisfied mainly by individuals from the U.S. as their country seemed that would not be touched by the war. But this changed in 1916 when the U.S. entered the war. At the same time, although the U.K. remained a lender, it significantly decreased its contribution to the global financial system. The same phenomenon was observed in other European countries as well. Another significant change was that excluding U.S. the other developing countries reached a pivot point in their growth due to the war. Additionally, profit margins declined significantly and in conjunction with severe recessions, there were created severe liquidity problems leading to default. This practically eliminated international lending. Especially the funding for the colonies and for the less developed countries stopped completely. By 1939, a new form of international financing was in place. The parent companies of the developed countries invested directly on subsidiaries in developing countries which were under their control. This practice became extremely widespread in Canada and Australia. About half the capital invested in the industry belonged to foreign companies. It is estimated that in 1939 the total amount of international financing was $55 billion. The U.S. played a crucial role in international lending. Not only they finance the European economies during the war, but they also provided economic support to the restoration of Europe from the damages after that. This effort is commonly known as the Marshall Plan. The total U.S. aid to Europe amounts to $40 billion.

The Impact of International Lending to borrowers and lenders

Impact on Borrowers

During the last quarter of the 19th century and the first half of the 20th century, the international capital flows played an important role in the development process of borrowing countries. The foreign funds were available for the borrowing countries in order to initiate a process of development. These funds were used to specialized uses and activities on which each country had its comparative advantage.

The results of the borrowing were not symmetrical in all countries. During the 19th and 20th century countries like the U.S., Canada and Australia used the borrowed funds in a very productive way. They succeeded to internalize the international lending both by implementing crucial infrastructure projects and by successfully diffusing the technology and the know-how they already had to enhance the inflow of foreign capital. But there were also countries that maladministered the funding that was given to them, like the countries of Eastern Europe and Latin America. The reason for this asymmetry between the countries recipients of international lending relies on institutional issues, intense corruption, political instability and war conflicts which substantially reduced the investment returns. This situation created a global competition where the efficient and productive countries managed to dominate and gain significant improvement in their balance of payments, finally becoming in that way leaders in the global market. Instead, the maladministration of funds in most of the countries of Eastern Europe and Latin America contributed to a decline of productivity and deficits in the balance of payments.  These characteristics proved significantly persistent for both groups of countries until today.

Impact on Lenders

For lender countries, the export of domestic capital to other countries abroad had a direct negative effect: the reduction of funds available for investment and production in their own economies. This situation created an intense competition between domestic and foreign markets. The economies of scale in the new and virgin markets, the availability of resources and the abundance of labor, increased the productivity of capital providing high returns for lenders. However, the resulting increase in unemployment and poverty rates in Europe and America rendered them competitors to the developing countries. The workers in the industrialized countries of Europe and America improved their standards of living due to cheaper food from the developing world and also enjoyed the positive effects of the increased growth rates in their entire economy. Overall, the distribution of income had worsened in countries acting as international lenders. Great Britain invested about 80% of its total capital abroad during the period 1893-1913.

What Happens Nowadays?

In recent years, there have been very significant changes in international borrowing and as a result the world map of lenders and borrowers has changed both quantitatively and qualitatively. The following table shows the ten largest international lenders and borrowers in 2010, using data from the International Monetary Fund.


$ million


$ million



























Great Britain