<abstract xmlns="http://www.w3.org/1999/xhtml"><p>Current research, especially after the financial crisis, highlights different key determinants of high risk bank profiles. The main aim of this paper is to test, through an empirical model, the impact of various determinants of bank business models on the bank risk with the purpose of enabling early identification of signals of risk and timely application of prudential measures. There are two basic business models for banks: market-oriented wholesale bank business model and client-oriented bank business model. In the wholesale model, a significant share of the assets is comprised of securities in the trade portfolio, the bank is strongly involved in the international financial markets, while on the income side of the bank profile, a large part is related to non-interest income. In the client related business model, classical banking is dominant, which is visible in the high share of loan-related assets, a larger share of self-financing and a larger share of income from interest-operational income in the total income structure of the bank. In the panel analysis of the empirical data, as an indicator of the bank risk profile, the stock market price to stock market price volatility ratio was used with the presumption that the market price and its volatility, with sufficiently liquid shares listed on public stock exchanges, is representative of bank risk. The analysis is conducted on a homogenous example of 20 European banks in the period 2002-2017. Following the econometric analysis, the conclusion is that banks in which business model wholesale characteristics are dominant are more exposed to business risk in periods of market shocks and, as such, represent a danger for the long-term stability of the financial sector.</p></abstract>

Current research, especially after the financial crisis, highlights different key determinants of high risk bank profiles. The main aim of this paper is to test, through an empirical model, the impact of various determinants of bank business models on the bank risk with the purpose of enabling early identification of signals of risk and timely application of prudential measures. There are two basic business models for banks: market-oriented wholesale bank business model and client-oriented bank business model. In the wholesale model, a significant share of the assets is comprised of securities in the trade portfolio, the bank is strongly involved in the international financial markets, while on the income side of the bank profile, a large part is related to non-interest income. In the client related business model, classical banking is dominant, which is visible in the high share of loan-related assets, a larger share of self-financing and a larger share of income from interest-operational income in the total income structure of the bank. In the panel analysis of the empirical data, as an indicator of the bank risk profile, the stock market price to stock market price volatility ratio was used with the presumption that the market price and its volatility, with sufficiently liquid shares listed on public stock exchanges, is representative of bank risk. The analysis is conducted on a homogenous example of 20 European banks in the period 2002-2017. Following the econometric analysis, the conclusion is that banks in which business model wholesale characteristics are dominant are more exposed to business risk in periods of market shocks and, as such, represent a danger for the long-term stability of the financial sector.

Bank Risk Profiles and Business Model Characteristics

University of Split and University of Rijeka

Journal of Central Banking Theory and Practice

This work is licensed under the Creative Commons Attribution 4.0 International License.

{"article-title":"Bank Risk Profiles and Business Model Characteristics"}

Current research, especially after the financial crisis, highlights different key determinants of high risk bank profiles. The main aim of this paper is to...

Bank Risk Profiles and Business Model Characteristics

Published Online: Sep 18, 2020

Page range: 107 - 121

Received: Mar 22, 2019

Accepted: Jun 27, 2019

DOI: https://doi.org/10.2478/jcbtp-2020-0039

Keywords
bank risk, business model, bank assets structure

© 2020 Roberto Ercegovac et al., published by Sciendo

This work is licensed under the Creative Commons Attribution 4.0 International License.

Bank Risk Profiles and Business Model Characteristics

Published Online: Sep 18, 2020

Page range: 107 - 121

Received: Mar 22, 2019

Accepted: Jun 27, 2019

DOI: https://doi.org/10.2478/jcbtp-2020-0039

Keywordsbank risk, business model, bank assets structure

© 2020 Roberto Ercegovac et al., published by Sciendo

This work is licensed under the Creative Commons Attribution 4.0 International License.

Keywords
bank risk, business model, bank assets structure