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About this book

This book is a result of several years of research to provide readers with a novel and comprehensive analysis on business models in banking, essential to understanding bank businesses pre- and post- financial crisis and how they evolve in the financial system. This book will provide depositors, creditors, credit rating agencies, investors, regulators, supervisors, and other market participants with a comprehensive analytical framework and analysis to better understand the nature of risk attached to the bank business models and its contribution to systemic risk throughout the economic cycle. The book will also guide post-graduate students and researchers delving into this topic.

Table of Contents

Frontmatter

Chapter 1. Introduction

Abstract
This book reviews the reasons and the process, describes the datasets for Europe, US and Canada, and details the methodology, computations and analysis used to develop the bank business models (BBM) analysis framework. It explains the relevance of this new framework for financial stability assessment and for the future of banking regulation and resolution.
First, it provides an overview on the evolving role of banks in the financial system—with a focus on why banks changed their business models over the past decades and how the economics and the policy literatures explained it. Second, it proposes a definition after reviewing the literature on business models and banking and describes the datasets collected and the methodology used to identify business models in banks. Third, it explains how the business models analysis can be a tool for financial stability assessment and therefore can serve as a pillar for the future of regulation and resolution. Fourth, it provides the BBM assessment framework, including links between business models with ownership and organisational structures and size, the migration of business models, the assessment of performance and risks, and how different business models respond to the exiting one-size-fits-all regulation and resolution using comprehensive datasets of banks in Europe, US and Canada prior and after the Great Financial Crisis (GFC).
Rym Ayadi

Chapter 2. Changing Role of Banks in the Financial System

Abstract
Several decades prior to the Great Financial Crisis (GFC), the structural features of banking and finance evolved, producing major changes on how banks and other financial institutions operate in the financial system domestically and worldwide. The traditional role of banks in the economy evolved from the traditional intermediation approach to a one-stop shop approach, in which banks offer a wide range of financial services, enhanced by a widespread wave of financial innovations. Banks and financial markets became more closely linked and integrated. More recently, financial technology (the so-called Fintech) has created further disruptive forces and new risks in the financial industry that are yet to be explored in the upcoming decades.
This chapter exposes the evolving traditional role of banks, which embraced the “financialisation” trend, leading to a fundamental transformation of their original business models. Is also provides a literature review on the explanatory factors of this process of transformation, in particular the reasons why banks chose to diversify their activities and funding strategies.
Rym Ayadi

Chapter 3. Defining a Business Model in Banks

Abstract
The business model is multi-faceted and a complex concept. It is a relatively new concept and is ill defined in banks but is widely used by scholars and policy analysts when assessing these institutions. This chapter proposes a definition of a bank business model: the A/F—Activity/Funding definition.
First, it provides an overview on the business model concept and a bank in the literature. Second, it exposes the definition proposed by the author of what a business model is in banks and other similar institutions.
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Chapter 4. Identification of Business Models

Abstract
The bank business models (BBM) analysis relies on sufficiently granular, good quality and comparable data collected from the savings n loans (SNL) database. For several years, the author led the research that developed several databases to test and analyse the concept of business models in banks and other financial institutions (e.g. credit unions) in Europe, US and Canada applying the Activity/Funding (A/F) definition proposed in the previous chapter. Earlier attempts of the BBM analysis were initiated to analyse how diverse is the banking sector in Europe and the ongoing research is applying this approach to other countries. This chapter describes the datasets and the methodology and shows the findings of bank business models (and credit unions) for Europe, US and Canada.
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Chapter 5. Bank Business Models and Financial Stability Assessment

Abstract
After defining and identifying business models in banks in Europe, US and Canada, this chapter examines the relevance of the business models analysis in banking for financial stability assessment. First, it reviews the dimensions of financial stability and assessment framework broadly. Second, it explains how business models analysis in banks can serve to complete the financial stability assessment framework. Third, it discusses the importance of the business models analysis for the future of regulation and supervision.
Rym Ayadi

Chapter 6. Business Models, Ownership, Organisational Structures and Size

Abstract
The bank business models analysis complements the traditional ownership, organisational structures and size analyses. This chapter examines the interaction between business models, ownership and organisational structures in banks in Europe on the one hand and the interaction between business models and size in banks in the US on the other hand. In Europe, there is a large diversity in ownership structures. In the US, size has been a key dimension to categorise banks.
Rym Ayadi

Chapter 7. Migration of Business Models

Abstract
Changing business models, hereafter called “migration”, can provide a wealth of information to market participants, regulators, creditors and depositors about the strategy of banks and their behaviour in the markets where they are active in and about their risk profiles and their contribution to systemic risk over time.
This chapter explains the reasons why banks change their business models and describes the migration process of business models in banks in Europe, US and Canada.
Rym Ayadi

Chapter 8. Performance of Business Models

Abstract
Banks and other financial institutions must be economically and financially viable. To assess their financial and economic performance, several indicators are used. If a bank is not performing as compared to its peers, then it will not honour its financial obligations with its clients, depositors and creditors. Therefore, performance is a key indicator that must be monitored frequently as part of the financial stability assessment framework.
This chapter discusses the financial and economic performance metrics and shows the results of business models performance for banks and credit unions in Europe, US and Canada.
Rym Ayadi

Chapter 9. Risk of Business Models

Abstract
Banks and other financial institutions take and manage different types of risks in the financial system. These risks range from credit risk, market risk, operational risk to counterparty risk and reputational risk, to name a few. Depending on its business model, ownership structure and size, banks and other financial institutions can take excessive unmanaged risk; when accumulated in the system, this risk may cause disruptions that are detrimental to the stability and safety of the financial system. This chapter presents the risk indicators used and shows the results of business models risks for banks and credit unions in Europe, US and Canada.
Rym Ayadi

Chapter 10. Regulation and Business Models

Abstract
Banks (and credit unions) in Europe, US and Canada are regulated entities. The regulatory authorities adopt and adapt the Basel global standards to their financial systems to ensure that banks are sound and resilient. Banks are required to operate with a minimum capital requirement, hold sufficient liquid assets and to be resilient to extreme shock scenarios. Credit unions are also regulated using an equivalent approach but generally much less stringency applies in the conduct of business. Depending on its business model, ownership structure and size, banks and other financial institutions respond differently to regulation and regulatory metrics that are not calibrated to their business models. The differences in their response contribute to better understand the stability and safety of the financial system. This chapter presents the regulatory indicators used and shows the results of how business models of banks and credit unions in Europe, US and Canada respond to regulation.
Rym Ayadi

Chapter 11. Resolution and Business Models

Abstract
In Europe, policy responses to the GFC have emphasised the completion of Banking Union—mainly the resolution pillar enacted under the European legislative framework known as the Bank Recovery and Resolution Directive (BRRD). Depending on their business model, ownership structure and size, banks respond differently to these resolution metrics that are not calibrated to the business models. The feasibility and the credibility of their response are essential for the stability and safety of the financial system.
This chapter exposes the resolutions indicators used and shows the results of how business models of banks in Europe respond to the resolution requirements. The same exercise can be done for US and Canadian banks but the results are not illustrated in this chapter.
Rym Ayadi

Chapter 12. Conclusions

Abstract
This book reviews the reasons and the process, describes the datasets, and exposes the methodology, computations and analysis used to develop the BBM analysis framework. It explains the relevance of this new framework for financial stability assessment and future of regulation and resolution. It provides an overview on the evolving role of banks in the financial system—with a focus on why banks changed their business model over the past decades and how the literature explained it using the diversification benefits from the assets and liability sides. It proposes a novel definition of a bank business model emphasising the activities on the asset side and the funding on the liability side. This new definition provides a holistic view as to how a bank behaves in the market while transforming its funding (retail, market or mixed) into retail, market or both financing and investment opportunities. The definition allows comparability between countries and all types of banks including the credit unions. It identifies the business models banks for comprehensive large datasets of banks and credit unions (when data is available) in Europe, US and Canada using the clustering methodology that is a simple statistical technique for assigning a set of observations into distinct group. It explains how the business models analysis could form part of the financial stability assessment framework and serve as a policy tool in terms of prevention, remedy and resolution. The business model assessment framework was performed and included the following: how business models interact with the other traditional metrics such as size and ownership and organisational structure, the determinants of business models migration and contribution to systemic risk, how business models contribute to financial and economic performance, how they increase and manage risks, and how they respond to regulation and resolution.
Rym Ayadi

Correction to: Banking Business Models

Rym Ayadi

Backmatter

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