Bank Business Model Migrations in Europe - Determinants and Effects

This paper investigates the determinants of bank business model migrations, and their effects on bank performance.

Since the global financial crisis, the European banking sector has undergone fundamental changes that have compelled banks to reconsider their business models. The introduction of new and more stringent capital and liquidity regulation under Basel III; the intensifying competition by emerging Fintech firms under the new European Union (EU) Payment Services Directive (PSD2); the organisational restructuring imposed by political choices (such as Brexit or state-aid interventions); and a challenging macroeconomic environment are among a few of the many challenges posed to bank performance. To remain profitable in such a fast-changing landscape, banks need to prioritise their activities as well as their funding sources.

Based on a sample of over 3,000 banks from 32 European countries during the period 2010-2017, the paper Bank Business Model Migrations in Europe: Determinants and Effects identifies banks' business models and tracks their evolution. Applying a logistic regression, it finds that banks with higher risk and lower profitability are more likely to change their business model. Employing a propensity score matching approach, the researchers look at 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.

The paper Bank Business Model Migrations in Europe: Determinants and Effects can be downloaded at City Research Online.