23/05/2016 Publication - Recent trends in euro area banks’ business models and implications for banking sector stability1
This special feature reviews recent trends in business model characteristics, discusses their relationship with bank stability and performance, and looks at how this relationship has changed over time, comparing the period before the crisis with the crisis years and the current situation.
Key trends in banks’ business activities since the financial crisis
The financial crisis and new regulatory requirements have had a profound impact on banks’ activities and business models. Pre-crisis profitability levels of many banks were boosted by high leverage and/or reliance on relatively cheap wholesale funding as well as, in some cases, elevated risk-taking (such as real estate lending or securitisation exposures) in order to generate revenues. Changes in banks’ behaviour and in the regulatory framework have rendered some of the (previously) most profitable business strategies less viable which, coinciding with weak macroeconomic and financial market conditions, has led to deteriorating financial performances since the crisis. Accordingly, banks’ return to sustainable profitability and thus banking sector stability will depend on their ability to adapt their business mix to the new operating environment.2 By the same token, business model challenges and profitability risk have been identified by ECB Banking Supervision as being high-level microprudential priority risks for 2016.3
In response to these challenges, in the past few years banks have made substantial efforts to reshape their business models. Business model adjustments have been driven by at least three factors. First, the regulatory reforms implemented in the wake of the crisis have materially affected business models by requiring bank balance sheets to contain more high-quality capital, liquid assets, bailinable debt and more stable funding sources.
More specifically, regulation has made certain business lines more costly (in particular, trading activities), leading a number of banks to scale down these types of activity. Furthermore, some of the new regulations (such as the Bank Recovery and Resolution Directive and structural bank reforms) will have a direct impact on business models, by forcing banks to adapt their operating structures to new requirements. In addition, some business model changes have been triggered by conditions laid down in the restructuring plans of banks that received state aid, which often required affected banks to focus on more traditional banking activities. Second, banks have also implemented (or are still implementing) changes to their business models to respond to market pressures from investors. As an example, some banks have exited low-margin activities to boost returns. Third, business model changes may, to some extent, also reflect banks’ own initiatives on account of their altered risk-return preferences.
page source http://www.ecb.europa.eu/
