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This paper examines wealth effects and changes in the systematic risk associated with the return structure of the “three‐pillar” functional system in Greece, resulting from the introduction of the eight major European Union Banking Directives over the period 1990‐94. The findings indicate that the systematic risk for the insurance and investment firms dramatically increased, while the systematic risk for commercial banks slightly increased through the passage of the Free Capital Movement Directive. Evidence was also found to show that the Free Capital Movement Directive created significant wealth effects for the investment firms, but insignificant wealth effects for banks. In addition, a marginal wealth effect was created for the insurance firms. Conversely, the results suggest that the Solvency Ratios and Own Funds Banking Directives produced no wealth effects for the banks, significant wealth effects for the insurance firms, and insignificant wealth effects for the investment firms. The wealth effects of the rest of the EU Banking Directives on the functional “three‐pillar” Greek financial system were neutral.

The paper seeks to examine whether or not wealth effects and changes in the systematic risk associated with the return structure of the Greek commercial chartered banks, investment firms and insurance companies resulted from the passage of the European Union Banking Directives over the period 1988‐1997.

Using monthly stock returns from the DataStream database for the period January 1988 to December 1997, the separate effects of each of the EU Banking Directives on Greek commercial chartered banks, investment firms and insurance companies are tested. The “seemingly unrelated regression” methodology is utilized to test three portfolios consisting of an equally weighted banking, investment and insurance index made up of major Greek banks, investment firms and insurance companies respectively. The Greek Market Index serves as a proxy for the market portfolio. All the aforementioned indices were converted to returns using the log difference method.

Empirical results indicate that the systematic risk dramatically increased for Greek insurance and investment firms and moderately increased for Greek commercial chartered banks through the tabling of the Free Capital Movement Directive in the Greek Parliament. After controlling for systematic risk, the results suggest that the passage of the Free Capital Movement Directive did not create wealth effects for the shareholders of commercial chartered banks, investment firms and insurance companies. Conversely, the results demonstrate that the Second Banking, Investment Services and Capital Adequacy Directives produced no wealth effects for the investment firms and insurance companies, but not for commercial chartered banks' shareholders. The whole wealth effect on the Greek financial sector was neutral.

This article will be of value to academics, bankers, bank regulators, practitioners, and economic policy makers who are interested in the regulatory evolution of the EU banking industry.

The purpose of this paper is to analyse the importance of interbank connections and shocks on banks’ capital ratios to financial stability by looking at a network comprising a large number of European and UK banks.

The authors model interbank contagion using insights from the Susceptible Infected Recovered model. The authors construct scale-free networks with preferential attachment and growth, applying simulated interbank data to capture the size and scale of connections in the network. The authors proceed to shock these networks per country and perform Monte Carlo simulations to calculate mean total losses and duration of infection. Finally, the authors examine the effects of contagion in terms of Core Tier 1 Capital Ratios for the affected banking systems.

The authors find that shocks in smaller banking systems may cause smaller overall losses but tend to persist longer, leading to important policy implications for crisis containment.

The authors infer the interbank domestic and cross-border exposures of banks employing an iterative proportional fitting procedure, called the RAS algorithm. The authors use an extend sample of 169 European banks, that also captures effects on the UK as well as the Eurozone interbank markets. Finally, the authors provide evidence of the contagion effect on each bank by allowing heterogeneity. The authors compare the bank’s relative financial strength with the contagion effect which is modelled by the number and the volume of bilateral connections.