The Greek three-pillar functional system in the presence of the European Union Banking Directives

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.