Bank Business Model Migrations in Europe: Determinants and Effects

Abstract

In response to post-crisis regulatory reforms, the European banking sector has undergone significant changes that have led banks to reconsider their strategies, structures and operations. Based on a sample of over 3,000 banks from 32 European countries during the period 2010-2017, we identify banks' business models based on cluster analysis and track their evolution. We then apply a logistic regression and find that banks with higher risk and lower profitability are more likely to change their business model. Employing a propensity score matching approach, we investigate the effect of migration on bank performance and find that changing the business model affects banks positively (i.e. migrating banks increase their profitability, stability and cost efficiency). The effect of migration differs depending on the target business model. When switches are a consequence of being acquired or motivated by regulatory compliance, the positive impact remains.

European banks’ business models as a driver of strategic planning: one size fits all

“…In literature, the most commonly used balance sheet dimensions for the banking sector are represented by: loans to customers to assess the extent of credit concessions concerning total assets; trading activities, whose percentage weight compared to the balance sheet total is more present in investment banking models; deposits as an expression of the sources of financing used by the institutions; liabilities other than deposits to give evidence of the different sources of funding activated as debt; and nonperforming loans to provide evidence on the ability of the institutions to correctly assess the riskiness of the concessions (Mergaerts and Vennet, 2016; Ayadi et al , 2019; Ayadi et al , 2021) [3].…”

Challenges for corporate governance at the national and firm levels

“…For example, stewardship codes promote economic growth and sustainability in certain extreme environments (Klettner, 2021), but in other contexts, there is a dearth of compliance (Shaw et al, 2021). In the banking sector, there have been differences across countries in regulatory reforms intended to foster stability and cost efficiency (Ayadi et al, 2021). Governance consequences vary in different political environments for environmental policies (Gaganis et al, 2021) Second, with this issue, we observe concerns about pyramidal ownership structures (Choi et al, 2022), and we see that specific regulations are effective at curtailing agency issues with ownership (Bhagat & Hubbard, 2022;Choi et al, 2022).…”

Corporate Governance in Extreme Institutional Environments

“…Third, there is much evidence that trust and social capital is a strong substitute for extreme weak regulatory institutions, including: corporate culture has an exacerbated impact on innovation (Wang, Farag and Ahmad, 2021); trust and social capital have an exacerbated role in internationalization (Puthusserry et al, 2021); and emerging technology firms over-comply with governance and ethical standards relative to firms from traditional environments (Fotaki et al, 2021). Fourth, in the presence of stronger regulatory institutions such as the European banking setting, extreme events still happen, such as the GFC; but in these contexts, public institutions matter -post-crisis regulatory reforms in banking positively influence banks to Corporate Governance in Extreme Institutional Environments 921 change business models and thereby improve stability and cost efficiency (Ayadi et al, 2021). Fifth, governance consequences can diverge in the presence of political shifts even in countries with strong regulatory institutions.…”