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.

The implication of banking regulation on bank business model: evidence from the ASEAN countries

Purpose The purpose of this paper is to examine to what extent is the impact of Basel II adoption on bank business models in the emerging market of selected ASEAN member states. Design/methodology/approach To evaluate the impact of the Basel II regulation on banking business models, a difference-in-differences estimation approach is used. This study defines bank business models using diversification index of a modified Herfindahl–Hirschman Index. Findings The findings suggest that the Basel II framework only affects banks’ income diversification, while there is no evidence that it leads to funding and asset diversification. Under the Basel II accord, banks have adjusted their business models by diversifying their sources of income to avoid the obligation for keeping more capital; in contrast, a less developed financial market structure and a dependency on customer deposits are creating difficulties for banks in diversifying their funding and asset structure. Research limitations/implications The banking sample are taken only from ASEAN countries. Practical implications The findings provide important implication on the regulatory perspective, which is the implementation of Basel II framework induces higher intensity for the use of non-interest income activities. Including in these activities are trading and derivatives. Accordingly, the financial authorities should take with care the use of trading and derivatives products in the banking industry which is already embedded in current Basel framework, the Basel III Accord. Originality/value The paper provides direct evidence on the impact of Basel II on bank business models in the emerging markets of ASEAN banking sectors.

Evolution of traditional banks' business models

The article considers topical issues of how banks are developing in the new realities of the digital economy, and presents the results of research on theoretical and practical aspects of banks' business models evolution. The methodology uses such approaches as scientific abstraction, system and factor analysis, methods of grouping, detailing, and synthesis. The topic is relevant for banks first of all from the economic science point of view, since until now the conceptual apparatus of not only the types of bank business models but also the definition of bank business models and their ecosystems remain controversial. However, in practice the applying of new strategic solutions is needed to solve the triune task: to ensure profitability of banks' business while maintaining liquidity and minimizing risks. The obtained results allowed us to reveal the important role of the banks' business models innovative transformation, as well as to reveal the tendency of improving the intermediary function of banks on the modern stage of digital technologies' development. The article substantiates the need to develop new approaches to administering business processes, expanding banking activities using digital platforms, and reveals the problem that requires the speediest solutions in developing regulation standards for financial ecosystems.

THEORETIAL BASIS AND CLASSIFICATION OF BANK BUSINESS MODELS

This article devoted to the issue of banking business models. The negative impact of financial crises on the banking system leads to the search for new tools for risk assessment and risk management. Today banking supervision in Ukraine is based on the methodology of the Supervisory Review and Evaluation Process. In addition to assessing capital adequacy and liquidity and corporate governance, this methodology involves also assessing the business models of banks, which determines the relevance of the research of this term. Therefore, the purpose of the study is determination the theoretical foundations of the concept of business model of the bank, as well as analysis of approaches to their classification. The study investigates the main theoretical approaches of defying the essence of the term «business model of the enterprise» and «bank business model». The author proposed its own definition of the term «banking business model», which can be represented as a system of bank management elements, including business processes, resources, technologies, their relationships with each other and with the external environment. The study summarizes the approaches to classification of bank business models by both as foreign and domestic scientists. The classification of bank business models on the different criterions is offered by the author. Of most practical relevance is the classification of business models of banks by their activities (depending on the source of resources and areas of their placement) and provides for the following types: traditional model, universal model, corporate model, retail model and investment model. The change of existing business models occurs with the active introduction of information technology in banking. The article offered the classification of business models according to the level of digitalization. The traditional business model (does not involve the use of information technology), online banks (operate mainly through software interfaces), mixed business model (combines the two previous ones). The results of the study can be the basis for the development of indicators for the analysis of business models of banks, as well as the identification of business models of banks in Ukraine and identify the risks specific to each of them.

Bank Risk Profiles and Business Model Characteristics

Current research, especially after the financial crisis, highlights different key determinants of high risk bank profiles. The main aim of this paper is to test, through an empirical model, the impact of various determinants of bank business models on the bank risk with the purpose of enabling early identification of signals of risk and timely application of prudential measures. There are two basic business models for banks: market-oriented wholesale bank business model and client-oriented bank business model. In the wholesale model, a significant share of the assets is comprised of securities in the trade portfolio, the bank is strongly involved in the international financial markets, while on the income side of the bank profile, a large part is related to non-interest income. In the client related business model, classical banking is dominant, which is visible in the high share of loan-related assets, a larger share of self-financing and a larger share of income from interest-operational income in the total income structure of the bank. In the panel analysis of the empirical data, as an indicator of the bank risk profile, the stock market price to stock market price volatility ratio was used with the presumption that the market price and its volatility, with sufficiently liquid shares listed on public stock exchanges, is representative of bank risk. The analysis is conducted on a homogenous example of 20 European banks in the period 2002-2017. Following the econometric analysis, the conclusion is that banks in which business model wholesale characteristics are dominant are more exposed to business risk in periods of market shocks and, as such, represent a danger for the long-term stability of the financial sector.