Bank Business Models Research Articles

Post-Crisis Changes in Global Bank Business Models

The Global Financial Crisis unleashed changes in the operating and regulatory environments for large international banks. This paper proposes a novel taxonomy to identify and track business model evolution for the 30 Global Systemically Important Banks (G-SIBs). Drawing from banks’ reporting, it identifies strategies along four dimensions –consolidated lines of business and geographic orientation, and the funding models and legal entity structures of international operations. G-SIBs have adjusted their business models, especially by reducing market intensity. While G-SIBs have maintained international orientation, pressures on funding models and entity structures could affect the efficiency of capital flows through the bank channel.

The Business Model of Social Banks

SUMMARYBased on an extensive literature review, this paper proposes to define social banks (SBs) as social enterprises that run banking activities with the social mission of supplying credit to other social enterprises, which are typically less profitable than for‐profit businesses. This definition marks our starting point for developing a theoretical framework to explain how SBs survive without subsidies in the banking market. We build on a two‐pillar business model of value‐based financial intermediation, which comprises an ownership structure that limits residual ownership claims and preferential credit conditions associated with financial sacrifices from motivated depositors. We also clarify the link between SBs and stakeholder banks and weigh up the importance of market interest rates for facilitating the business of SBs. An empirical analysis based on panel regressions on 5,400 European banks over the 1998‐2013 period attests to the relevance of our theoretical framework. It also confirms that a low interest rate environment raises concerns about the sustainability of the SB business model.

Do short sellers exploit risky business models of banks? Evidence from two banking crises

We find that changes in short interest predict banks’ stock returns during two recent banking crises. Furthermore, before the 2007–2008 crisis, short interest increased more for banks with worse performance during the Long-Term Capital Management crisis of 1998. We also find that changes in short interest predicted banks’ loan quality and default risk during the 2007–2008 crisis. The results are stronger for banks with higher levels of risk-taking. Overall, our findings indicate that short sellers were informed about the persistent risky business models of banks and shorted those banks before the 2007–2008 crisis.

Banking business models and risk: Findings from the ECB's comprehensive assessment

AbstractWe use the results of the ECB's comprehensive assessment to evaluate the importance of the bank business model on risk assessment and the persuasive effectiveness of different supervisory styles on banks’ recapitalization. Our analysis reveals inconsistencies in the information content provided by the various regulatory measures used for assessing bank stability. Moreover, opposite to CET1 ratio, the leverage ratio provides assessments on business models more consistent with a market‐based measure of bank risk exposure and Z‐SCORE. Accounting for several control variables both at the bank and country level, we also find evidence that the effectiveness of the supervisory action depends on the specific type of supervisory model. In particular, countries adopting the hybrid model seem more effective in persuading banks to recapitalize preventively. Differently, countries adopting the integrated and the sectorial model seem less effective in their requests.

Islamic banking in the United Arab Emirates: Is embeddedness a contextual antecedent of performance and corporate governance outcomes?

Research issue and theoretical foundation<br/> Embeddedness refers to the financial, operational and structural mooring of an organisation in a particular social system or community. It presents itself as a central tenet of Williamson's (1975) classic theory of Transaction Cost Economics (TCE) and as such is a concept long overdue attention. In this paper, this concept is problematised as a macro- or organisation-level construct, and the paper also explores some of its consequents.<br/> Findings of the study<br/> Using a thick description approach, case study evidence is built for the Islamic Banking (IB) business model. It is shown how this indigenous business model (i.e., IB) has leveraged the power of social networks to build a profitable portfolio of investments over time, in the specific context of the UAE (United Arab Emirates) and its unique socio-political and cultural aspects. Dimensions of the embeddedness construct are proposed. Further, causal linkages are theorised with two distinct but inter-related consequents of embeddedness: corporate governance and performance outcomes of the organisation. It is envisaged that both linkages are mediated by the construct of board interlocks.<br/> Implications<br/> Proximally, this study has the potential to extend scholarship in the domains of business relations, trust and indigenous business models. As a distal possibility, researchers might use it to build on the organisational ecosystem paradigm.<br/> Scope and contributions<br/> The main contribution is to develop the concept of embeddedness. Additionally, this study uses the concept to build contextualised theory pertaining to the network characteristics of an indigenous business model.

The Effect of Demographic Change on Financial Stability

This study investigates the effect of fertility on financial stability and its determinant particularly therelevance of demographic changes. This is motivated by the huge impact of demographic changes(increasing ageing population and low fertility level). Population ageing and low fertility tend to lowerboth labour- force participation and saving rates (change bank business model), thereby raising concernson a future slowing economic growth and financial instability. The system GMM results show that thefertility level somehow acts as a buffer and reflects to the degree of stability to the financial system. Anincrease in fertility and old-age population will contribute to lowering the financial stability. As a matterof policy implication, the nations, financial sectors, and economies should take pro-active active stepsand enhance policies in handling the inter-related issue of the ageing population, decreasing fertility, andfinancial stability especially in developed countries, but not necessarily to overlook the impact of theissues in developing countries.
 Keywords: Demographic change, old-age population, fertility, financial stability

Strategic scope and bank performance

One of the most dramatic trends in banking since the 1980s has been the secular movement away from core banking and interest generating activities towards enhanced reliance on non-interest-generating activities that focus largely on fees and trading profits. In this paper, we draw on a dataset covering nearly a million quarterly observations on more than 12,000 US banks and find no evidence that this shift in the bank business model harms bank profitability. To the contrary, a higher share of non-traditional bank income is associated with a higher profitability. The increase in profitability does not seem to come at the cost of substantially larger bank-level risk taking, at least not for large banks, which are the banks mostly involved in non-traditional bank business. There is also no conclusive evidence that a larger share of non-traditional income is associated with a larger contribution to systemic risk. The net benefits of non-traditional income increased in the 2000s, when both interest rates and bank margins started to decline. Estimation techniques that mitigate endogeneity concerns resulting from unobserved heterogeneity also show larger net benefits associated with greater bank reliance on generating non-traditional income.

Bank business modeling and levels of non-performing loans:Perspectives of international risk factors in Ukraine

This article identifies five different banking business models using the k-means method and demonstrates how banks carried out the migration between defined clusters during the banking crisis. The article identifies and links the banks with the business model they are most exposed to in terms of risk of insolvency. The factors that influence the rate of non-performing loans are defined. Developed econometric models will allow banks with certain business models to improve their activity with non-performing loans. The article also analyzes how the amount of loans to related parties can be injected into the amount of non-performing loans.

How diverse are national banking systems? An analysis on banking business models, profitability, and riskiness

AbstractIn this paper, we apply an algorithm developed by Martin Weitzman to quantify the extent of diversity among the business models of financial intermediaries at an international level. In particular, we investigate the relationship between the diversity of the business models of EU national banking systems and their profitability and riskiness. We show how Weitzman's approach can be generally applied to the issue at hand; as a by‐product, the analysis allows us to assess whether the diversity among banking systems was affected by the imported systemic financial crises of 2007/8 as well as its domestic sequel centered on the sovereign debt crisis that occurred in 2010–12. The motivation for this paper is twofold. First, we provide an operational measure of the diversity of business models among banking sectors. Second, we enrich the economic literature relating to banking business models by providing a macro‐founded analysis. To this end, we highlight the range of diversity of national banking business models correlated with high performances in terms of profitability and riskiness.

Business Models and Banking Regulation Are Going Forward

Purpose: The study aims to summarize the level of knowledge and to correlate published material regarding banking business models. A second aim is to answer the question if European countries have different banking business models, especially in countries that have adopted euro currency and countries that have not adopted it yet. Design/Methodology/Approach: We consider the Liikanen report (2012) and we performed a literature review ex-ante and ex-post above this report using selective criteria. In addition we have completed a study case comparing performance and efficiency indicators (ROE, ROA, and CIR) and profit sources (Net interest income, total operating income, net fee and commission to total operating income, trading income to total operating income) of the banking system from European Union countries correlating the results with the business model terminology. Findings: From the literature review, we observe that it is a consentient view that the retail banking business model, based on traditional funding, is one of the most reliable business models during a financial crisis. Moreover, the reviewed studies empirically proved that the banks that migrate to retail business model from another business model improved their efficiency and profitability. We concluded that the countries that are out of the monetary union and are in the emerging economy stage along with the countries that are in the cluster of late monetary union have retail banking models and are the most efficient. Practical Implications: An analytical appraisal of the published material completed with the practical study case regarding EU banking systems is paramount for a future quantitative research study. Originality/Value: The literature review is valuable both for future researches and for managerial perspective regarding banking business model appraisal.

Transformation of Bank's Business Model in Terms of Digital Economy

Information technology, artificial intelligence penetrate into the banking sector, making it more mobile and flexible. Needs and preferences of customers, ways of providing financial services are changing. IT-companies that offer traditional banking products in a new, present day’s format are entering the financial services market. Banks have to invest huge amounts of money in developing banking innovations in order to remain in demand. All this requires banks to change not only the ways of providing their services and communication with customers, but also the qualitative restructuring of operational processes, methods and approaches to their management, corporate culture. The article examines the changes in the main components of the banking management system under the influence of digital technologies: the customer segment, the operating processes and the business model. It pays particular attention to the need of changing the existing banking business mode. It summarizes the main financial technologies that allow to transform banking business in accordance with the requirements of the digital economy.

FinTech innovation: Revolutionary or evolutionary business model disruption?

The next wave of FinTech activity has the potential to provide revolutionary business models. Collaboration between banks and FinTechs has influenced the evolution of banking business models. But the greatest challenge to FinTechs is to maximise and sustain customer adoption. This paper takes an applied approach to analyse the impact FinTech innovation has had on the banking sector and discusses its future. It will provide details of the new operating environment, discuss the evolution of customer experience and the digital banking landscape, and will examine how these areas have disrupted business and operating models. It will also discuss the threat posed by tech giants.

A Systemic Framework for Business Model Design and Development -Part B: Practical Perspective

Profit-making requires innovation in the design of a successful business model that brings about sustainable competitive advantage for the organization. Given the increasing use of mobile phones in financial affairs, the design and development of mobile banking business model is one of the major concerns of the banking sector. Since there are a multitude of stakeholders with different viewpoints on what and how value can be added through mobile, the development of mobile banking business model has turned into a complex problem. In light of this, this study aims at developing a mobile banking business model, using a new framework based on Soft Systems Methodology (SSM). This framework consists of 18 steps, ranging from finding out the problem situation to the implementation of the model. One of the Iranian private banks was selected as the case of the current study. The results revealed that in the context of the problem, the development of mobile banking business model requires the interaction among 7 sub-systems. Which emerge out of the accommodation between three different mindsets involved in the development of mobile banking business model.

Parametric, Non-Parametric and Multivariate Analysis of Capital Structure During the Financial Crises in Jordanian Banks

Motivations: This research seeks to analyze the determinants of capital structure of the banking sector in Jordan taking into consideration bank business model (Islamic versus Commercial bank). The research also sheds light on the financial crises of 2007/2008 and its impact on the financing decision in the banking sector.Novelty: Although the topic of capital structure's determinants is well studied in non-financial firms, very few studies considered the financial firms, namely banks. Since the nature of operations and capital components for banks are totally different this research comes to fill the gap in the banking literature.Methodology and Methods: The study uses multivariate regression techniques of panel data besides the parametric and non-parametric analysis. Three measurements of capital structure are considered: leverage ratio, long term debt ratio and short-term debt ratio, the explanatory variables are included in two sets, bank specific characteristics and economic characteristics.Data and Empirical Analysis: Balanced panel data set was formed for 27 Jordanian banks during the period of 2003-2015. Empirically, the findings suggest a variation of capital structure determinants based on the variable of measurement. However, the analysis confirms that bank's profitability and bank's risk are major components of the capital structure decision regardless of its measurement variable. In addition to these two variables, liquidity, growth and taxes are important variable in the short-term debt financing, and retained earnings is important to the long-term financing. Empirically proven that Jordanian banks' capital structure decision is affected by the global financial crisis 2007/2008 and by bank type. Jordanian banks might differ in size, but this doesn't affect their policies toward the capital structure. The empirical results are consistent with the pecking order theory that profitable firms prefer to use more of their internal sources of funds rather than debt financing.Policy Implications: Due to the importance of the capital structure decision for banks and non-banks firms and based on our finding, the policy makers in Jordan and may in other similar countries should pay attention to capital requirement regulations as the determinants of leverage among banks are different based on the business model whether commercial or Islamic.

The regulations–risk taking nexus under competitive pressure: What about the Islamic banking system?

Does market power condition the effect of bank regulations and supervision on bank risk taking? We focus on three regulatory tools: capital requirements, the restriction of activities, and official supervisory powers. Employing 10 years of unbalanced panel data on 123 Islamic and conventional banks operating in the Middle East and Asia, we arrive at the following conclusions. First, banking market power strengthens the negative impact of capital regulation on bank risk taking. Second, our empirical results suggest that the negative effect of activity restrictions on stability is diminished when banks have greater market power. Finally, we do not find strong evidence that the negative effect of supervisory power on banks’ risk taking is conditioned by their competitive behavior. In further analysis, we differentiate between Islamic and conventional banks regarding their competition, as well as their risk behavior. The results differ according to the banking business model. These findings could be useful for bank regulators in light of the accomplishment of Islamic banks’ regulatory framework. Indeed, the adoption of Basel III represents a significant regulatory challenge, given that it does not take into account the specificities of Islamic banks.

Clustering Heterogeneous Commercial Bank Lending Models

This research aims to uncover commercial bank business models through cluster analysis. Detailed regulatory snapshots of bank balance sheet data are used to derive a small set of bank lending features for clustering. These snapshots can be considered chronologically to better understand trends in the banking industry. For instance, the number of commercial banks has dramatically declined from 1980 to 2013 (the window of analysis). In addition, commercial bank business models have become more uniform or homogeneous with respect to lending activities. Characterizing banking business models is part of a larger research initiative focusing on agent-based modeling and simulation of the Federal funds market, as well as the detailed inter-bank lending market. Understanding banking business models is key to populating the agent ecosystem, implementing better behavior models and interpreting the simulation results. Unsupervised learning methods such as cluster analysis are a natural fit for this business model discovery challenge.

THE CORPORATE GOVERNANCE REFORMS OF THE STATE-OWNED BANKS OF UKRAINE

The main purpose of the article is to analyze the reforming process of the corporate governance of state banks in Ukraine. The research is based on the review of existing theories, statistical data and official documents. The article discloses information on financial results and provides the main activity indicators of state banks of Ukraine. It is considered the main risks of Ukrainian banking system stability, among which are the high level of the state share and the presence of poor-quality assets in the state-owned banks of Ukraine. The features of existing corporate governance of state-owned banks in Ukraine were investigated. The results of comparing the international principles of corporate governance in banks with domestic practice have made it possible to highlight the main issues of Ukrainian state banks. It has been shown that the corporate governance system in Ukrainian state banks did not correspond to the best international practices, owning to the fact that legislation determined the status, powers, composition and work principles of the board of directors locally. The consequences of the low level of corporate governance (insider lending for business of individual politicians and their associated individuals, state-owned enterprises with a low level of creditworthiness) were considered. The new approaches for corporate governance in state-owned banks, which were focus on revision of the principles and mechanism of corporate management of state-owned banks and have to change the business and operating models of state banks in order to achieve the highest efficiency of their activities, were considered. The article shows the positive aspects of reforms, as well as possible risks. The findings are useful for practitioners and researchers to gain knowledge of the implementation of corporate governance reforms in state-owned banks.

The impact of Blockchain on the transaction banking business model

This paper analyses the impact of distributed ledger technology (DLT) on various areas of transaction banking (TxB), identifies the most promising use cases and discusses the impact on banks’ business models. By means of both a theoretical analysis as well as expert interviews using a variation of the Delphi approach, a number of potential use cases and their relative importance are evaluated. The most promising use cases identified were the utilisation of DLT for internal systems among disparate entities, securities settlement, cross-border payments, remittances, trade and supply chain finance and regulatory compliance. The impact on banks’ business models depends on the role that banks play in the ecosystem. If banks build or control their own private ledgers, DLT-based applications can significantly increase efficiency and reduce transaction cost and times for banks and, therefore indirectly, their customers. If other players build up exclusive private ledgers without banks, banks face a significant threat of disintermediation and high business model impact. Finally, while not likely in the near future, the possibility exists that overarching public ledgers with various participants will emerge. These would not necessarily disintermediate banks but rather provide a significant opportunity for new business models, forcing banks to adjust to these changes.

Possibilities for Financial Technology Sector Development and its Impact on Banking Sector Profitability in Lithuania

Abstract Research purpose. The development of financial technology sector (fintech) poses a challenge for traditional financial institutions. Therefore, it is important to analyze not only how financial technologies can change, but also how the fintech sector affects banks and their profitability. The aim of the paper is to analyze the possibilities for the development of financial technology sector and quantitatively evaluate its impact on the banking sector’s profitability in Lithuania. Design / Methodology / Approach. After the analysis of academic literature and statistical data, the authors used expert evaluation method in order to identify development opportunities of fintech in Lithuania and correlation-regression analysis was applied to evaluate the impact of fintech on the profitability of the Lithuanian banking sector. Findings. According to the results of expert assessment research, Lithuania possesses favorable conditions for fintech enterprises to enter the Lithuanian finance market; it is expected that this sector will continue to rapidly expand mostly in payments and banking business models. Correlation-regression analysis showed that fintech indicators has an effect on the banking sector’s profitability but the effect in not very significant. The significance of the connection is lower because banking sector adapts technologies and is influenced by fintech from inside and outside the environment. Originality / Value / Practical implications. The fintech sector in Lithuania is still new and so far very little researched. The outcomes of this research have expanded the scope of research of the Lithuanian fintech sector. The obtained results would be useful and relevant to (i) the government sector to manage risks and ensure stability in the financial sector; (ii) financial sector entities to monitor possible developments and prepare them accordingly; and (iii) banking sector to analyze the impact of technology and fintech entities on them and take strategic decisions in this regard.

Financial derivatives and bank risk: evidence from eighteen developed markets

We examine the relationship between equity risk and the use of financial derivatives with a sample of 555 banks from eighteen developed markets from 2006 to 2015. Our main findings suggest that banks’ use of financial derivatives increased their risk. This increase in risk can be driven by banks’ use of derivatives for speculative purposes, by suboptimal hedging to obtain hedge accounting status, or from accounting mismatches that generate volatility in earnings. We also show that this relationship is nonlinear. Too-Big-To-Fail banks and those that employ a traditional retail banking business model are subject to lower idiosyncratic risk. We address endogeneity concerns using instrumental variables capturing the use of derivatives with portfolio ranking. Overall, our study contributes to understanding the impact of derivatives use on bank risk and the risk consequences of a bank’s business model choice.