Meeting report
Launch of the Banking Business Models Monitor 2015: Europe

Launch of the Banking Business Models Monitor 2015: Europe

Time: 14 January 2016 – 10h30 to 13h00
Place: EPRS Library, European Parliament, Brussels

In the wake of the implementation of the Single Resolution Mechanism (SRM), the Banking Business Models Monitor (BBMM) 2015 for Europe was launched in Brussels. The Monitor is the first annual regional edition of the global comprehensive monitoring initiative of the business models of banks and credit unions undertaken by the International Research Centre on Financial Cooperatives (IRCCF) at HEC Montréal. The 2015 BBMM for Europe, which builds on the previous 2014 joint initiative between the IRCCF and the Financial Institutions and Prudential Policy Unit of CEPS, offers extensive insights into 2,550 banks in the European Economic Area, which account for almost all of the total banking assets in the region. For the 2015 analysis (using data from 2005 to 2014), more than 13,000 bank-year observations were clustered into five broad categories, i.e. focused retail banks, diversified retail (Type I and Type II), wholesale and investment. The analysis was based on a clustering strategy that used activity and funding indicators. For the different clusters, as well as ownership structures, performance, contribution to the economy, resilience and robustness were each assessed.

Opening remarks

Philippe Lamberts at the launch of the Banking Business Models Monitor 2015: Europe

Philippe Lamberts,
Member of the European Parliament (MEP), Greens/EFA

Legislators may have to revisit the regulatory measures put into place in the wake of the crisis of 2007-2009 if they want banks to continue contributing to the real economy and to be encouraged by legislation to do so. A lingering concern is  wheter it is appropriate to use risk-weighted assets (RWA) as a measure of risk. The study of the BBM Monitor is most welcome because it provides strong evidence of the difference between banks in the terms of their types of activities, ownership structures and contribution to the real economy. The Monitor of 2015 has one additional cluster to the previous edition. This raises the question of what new insights the increased granularity in the analysis has brought, regarding performance and financial stability.

Presentation of the Banking Business Models Monitor 2015: Europe

Rym Ayadi,
Professor of International Banking and Financial Systems, and Director of the International Research Centre on Cooperative Finance (IRCCF) at HEC Montréal

Willem Pieter de Groen,
Research Fellow, Centre for European Policy Studies and Associate Researcher at HEC Montréal

The Monitor develops a new thinking about sustainable finance at a global level. It attempts to understand what the fundations are for a sustainable financial system that genuinely serves the real economy.

The study uses a unique framework to analyse the banking sector. It assesses banking activities based on clustering, using activities and funding indicators (i.e. bank loans, customer loans, trading assets, debt liabilities and derivative exposures). Five business models are identified; retail focused, diversified retail (type 1), diversified retail (type 2), wholesale, and investment. The study also analyses the ownership structures of banks, which can be split into two broad categories; shareholder value banks (i.e. owned by shareholders) and stakeholder value banks (i.e. owned by stakeholders such as cooperative, public and savings banks). The different business models and ownership structures are assessed across seven dimensions: migration, internationalisation, financial performance, contribution to the real economy, risk, resilience and robustness.

Rym Ayadi

“A diversified banking system is apparently more resilient than a system that consists of, or is converging towards, a single business model.” – Rym Ayadi

The business models of banks have changed over time. More than 80% of banks retain their business model in a given year. The remainder shifts from one business model to another. During the period from 2005 to 2014, most banks migrated to the diversified retail (type 1) model, which combines typical retail activities (i.e. customer loans and deposits) with a percentage of trading assets.

Profits have declined across all business models during the period 2005-2014. Although the economic crisis hit the profitability of retail-oriented banks much more than the financial crisis, it is notable that focused retail and diversified retail (type 1) banks continued to lend to the real economy throughout the crises. Across ownership structures, stakeholder value banks continued to lend to the real economy, albeit at a lower level than previously.

In terms of risk profile, the financial crisis has mainly affected wholesale and investment banks, while the economic crisis has mainly affected retail banks. Banks across business models have decreased their average risk-weights, except for investment banks. Moreover, these banks have deleveraged but their leverage is still relatively high, which is likely to reflect in a higher bail-in contribution under the new resolution regime. Across ownership structures, public banks are likely to need to contribute most in case of resolution, before resolution funds can be tapped.

Willem Pieter De Groen

“Wholesale and investment banks will need to absorb more of the losses in bail-in than the retail banks.”
– Willem Pieter De Groen

In short, while performing financially, investment banks and wholesale banks tend to accelerate the accumulation of risk at the system level and are less resilient to extreme stress conditions. Countries that have a predominance of investment and wholesale banks need to be carefully watched, such as France, the UK and others.

A diversified system is apparently more resilient than a system that consists of, or is converging towards, a single business model. Moreover, within the different business models, there is a certain degree of variance; the goal should be to push the worst performing banks to become better performing via targeted regulation. Finally, the quality of the BBMM is highly dependent on the quality of the data that is available. More granular data could contribute to the improvement of the current exercise. In particular, non-financial indicators to complement business model analyses (financial inclusion, contribution to community and corporate social responsibility indicators, governance structure and executive compensation) could be considered.

Panel I: BBMM implications for legislation and supervision

Ayadi Tornese Farkas Issenmann at the Launch of the Banking Business Models Monitor 2015: Europe

Emiliano Tornese,
Deputy Head of Financial System Surveillance and Crisis Management, DG FISMA, European Commission

Adam Farkas,
Executive Director, European Banking Authority (EBA)

Gregoire Issenman,
Head of Strategic Risk Analysis Section, SSM – DG Microprudential Supervision IV, European Central Bank

The business model analysis comes under the scrutiny of supervisors, who are expected to conduct a detailed business model analysis, as part of the supervisory review and evaluation process (SREP). The analysis and the understanding of the business models are, in their view, crucial and key to shaping and designing effective regulation and achieving high quality risk-based supervision of banks.

The implementation of the Bank Recovery and Resolution Directive (BRRD) indicates the need for development recovery and resolution plans, which inherently require a fundamental review of the banks’ business model. It will have an impact on capital planning. Banks have to understand how resolution can be improved. It will require many banks to enhance their absorption capacity.

“Not only regulators but also supervisors should pay attention to understanding and analysing the risk pertaining to the particular bank business model.”

The EBA is assessing the impact of regulation on business models. Indesigning delegated legislation, the supervisory authority always assesses the impact of regulation on banking business models. As an example, an upcoming report will explore the impact of various pieces of legislation, such as the capital rules and the liquidity rules on banking business models. Both regulators and supervisors should pay attention to understanding and analysing the risk pertaining to each particular business model.

The purpose of these ongoing exercises is not to dictate which business model to use or to push all banks towards the same business model. Instead, identifying business models is a tool for supervisors to better understand risk factors.

Europe still predominantly has national banking systems. The single market is currently not effective. Regulators and supervisors will have to do a lot to foster deeper integration within the Banking Union and wider EU. One of the priorities is to tackle the inconsistency of the risk-weighted asset (RWA) among European countries, as well as ensuring the recovery and resolution mechanism works.

Panel II: BBMM implications for industry, economy and society

Ayadi Bishop Ferri Guider Kujpers at the Launch of the Banking Business Models Monitor 2015: Europe

Timothy Bishop,
Deputy Head of Division, Financial Affairs Division, Organisation for Economic Co-operation and Development

Giovanni Ferri,
Professor of Economics, LUMSA University

Hervé Guider,
General Manager, European Association of Co-operative Banks (EACB)

Arnold Kuijpers,
Director European Affairs, Rabobank Nederland

The results of the Monitor are consistent with those reached by the OECD, albeit using a different methodology. They concur in terms of the type of institutions that would be expected to contribute to systemic risk.

“Trust in the banking system […] is an important prerequisite for a healthy banking system. The Eurozone has not recovered from the loss of public trust after the financial crisis of 2007-2009.”

Trust in the banking system is the ultimate objective of the authorities and policy makers. It is an important prerequisite for a healthy banking system. According to the Edelman trust barometer, the Eurozone has not recovered from the loss of public trust since the financial crisis of 2007-2009. In turn, in the US trust has recovered more swiftly than Europe, despite more stringent re-regulation in Europe. Possible explanations might be economic developments, the one-size-fits-all approach that is applied, as well as the protracted nature of the crisis in Europe. The US is not using that approach; community banks and credit unions are exempted from Basel 3. The Monitor may inspire alternative ways of tackling the issue of trust in banks in Europe. In the US, for example, behind the general pattern of trust in the US banking sector, trust in large banks is substantially lower than in community banks.

Moreover, the transparency of financial institutions Europe is still less than in the US, despite several improvements in the past few years. The transparency exercises, as well as the comprehensive exercises performed by the EBA and ECB, have generated more than 10,000 individual data points on the systemic banks. This supervisory data is very detailed but, nevertheless, not fully comprehensive (e.g. limited information on liability structure and off-balance sheet exposure and performance).

“The current activities under the Single Resolution Mechanism (SRM) are, in some cases, perceived as very intrusive, with regulators, seemingly driving changes in bank business models.”

The current predominant one-size-fits all approach is considered by some to provide a strong incentive for boosting mergers and acquisitions in the banking sector. Moreover, current activities under the Single Resolution Mechanism (SRM) are, in some cases, perceived as very intrusive, with regulators, instead of shareholders, driving change in business models.

Useful links

Study – Banking Business Models Monitor 2015 Europe
Launch Event – Banking Business Models Monitor 2015 Europe
BBM in the press