A Counterparty Approach to the Balance Sheet of Banks: A Tool for Financial Stability

Abstract

This paper proposes a split of the balance sheet of banks between core and non-core activities as a tool to broadly analyse and monitor the risks embedded in banks' business models. This split is based on the counterparts as an alternative to the contractual maturity of balance sheet items. This framework can be used to monitor the evolution of the business model of banks and to assess its implications for the ability of banks to provide lending to the real economy. This is particularly relevant in the wake of the financial crisis in Europe, where a credit crunch and an increasing financial fragmentation is jeopardising the recovery. Besides the implications for monitoring financial stability, the proposal of this paper can also be used for improving the understanding of monetary transmission and of how leverage builds up in banks’ balance sheet.