Christoffer Kok, Csaba Móré, Monica Petrescu, (2016), “Recent trends in euro area banks’ business models and implications for banking sector stability”, ECB Financial Stability Review, May
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.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. 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.
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