Bank business models, negative policy rates, and prudential regulation

Using data from Italian banks over the period 2011–2017, we study how negative interest rate policy and prudential regulation impact on bank business models. We report four key findings. First, banks shifted into retail- and market-oriented business models. Second, high- and low-deposit banks reduced loans and increased security/liquid assets; only market-oriented banks expanded lending. Third, interest rate income compression induced by negative rates has been substantial for the Italian banking system as a whole, although retail banks seem to have suffered less. Fourth, non-interest incomes played a compensatory effect. The portfolio reshuffling, as we observed for wholesale and retail banks (less lending and more securities/liquid assets), is related to the goal of reducing risk exposures and, in turn, the connected capital absorption required by prudential regulation.

Retail banking concept from a formal perspective

Expressions like “retail banking”, “retail banking products”, “retail banking services” have become very widespread in recent years in the banking environment, the media, the scientific literature, etc. In addition, such phrases are more and more often found in normative acts. However, there is no definite understanding of those terms. In literature, in order to define the phenomenon, various general and evasive features are used. At the same time, for accounting, taxation, reporting, statistics, but especially for prudential regulation, an exact delimitation of retail banking is necessary. This article is dedicated to an overview of the existing views on the notion of “retail banking” and its clarification from a formal point of view.

Review of financial liberalisation policies in developing countries from 1986 to 2016

By the late 1980s, most sub-Saharan African (SSA) countries had undertaken policy reforms to abolish financial sector controls. While studies have produced several liberalization indices, available measures are limited in scope and time coverage. The purpose of this research is to address this limitation by constructing a new set of indicators that tracks the magnitude, pace, and timing of reform aspects in 26 countries between 1986 and 2016. The paper uses questions and coding rules from a framework developed by Detragiache, Abiad, and Tressel (2008) to collect and analyse data on seven liberalization policies: credit controls, interest rate controls, entry barriers, state ownership of banks, capital account restrictions, prudential regulation and supervision, and securities market policy. Results indicate that interest rate liberalization is the most advanced dimension, followed by the abolition of entry restrictions. The least advanced dimension is bank supervision and prudential regulation. An aggregate liberalization index constructed using principal component analysis (PCA) confirms advancements in financial liberalization over time. This study is significant as it provides indicators critical for policy formulation in developing economies whose performance hinges on sufficiently developed and stable financial sectors. The study recommends implementing further reforms to update and modernise prudential regulation and supervision of banks in line with good governance.