27 December 2019

IMF: Working paper: Post-crisis changes in global bank business models: A new taxonomy

This paper proposes a novel taxonomy to identify and track business model evolution for the 30 Global Systemically Important Banks (G-SIBs). Drawing from banks’ reporting, it identifies strategies along four dimensions –consolidated lines of business and geographic orientation, and the funding models and legal entity structures of international operations.

In the aftermath of the GFC, the global financial system—underpinned by global banks (GSIBs)—underwent watershed changes in regulation and dramatic shifts in the market, economic, and financial environment. In order to better understand how these changes might impact the provision of financial services (the role of global banks in supporting growth) while protecting financial stability, an important aspect is to understand how banks themselves are adapting their business models and adjusting lines of business to the new market realities.

This paper offers a novel taxonomy of bank business models through which banks, policy makers, and market analysts may gain insights into the evolving architecture of the global financial system. The approach aligns our taxonomy with those used by banks themselves, allowing us to measure shifts in bank strategies and business models consistent with those of banks in the sample, as well as changes in the way banks conduct business within business lines and their geographic footprint. This bottom-up approach also allows for a direct mapping of changes at the bank level with the architecture of the global financial system as a whole and offers the following observations.

Banks have made substantial adjustments in bank business models in the wake of the GFC. Profitability across all categories of business models are lower than pre-crisis with the largest decline in returns found in investment bank and corporate bank models, which were hardest hit in the crisis and faced the most significant regulatory tightening. In response, eight G-SIBs (over one quarter) have altered their business mix sufficient to migrate to a different business model. Some banks have shifted business models shift from market-based services toward personal financial services. The dominant shift has been from corporate banking and markets towards consumer banking and wealth management. At the same time, consumer banks are increasingly focusing on their more profitable consumer business lines by reducing corporate banking and markets business lines. More generally, as banks have sought to diversify revenue sources, a number of banks have moved toward a more universal approach in providing financial services.

These changes in bank business models and in the provision of services along the various lines of business have broadly been in line with the thrust of strengthened regulation aimed at reducing systemic risk. This is particularly evident in the provision of capital market services. At the consolidated group level, there has been a broad shrinkage in balance sheet use for warehousing risk related to capital market activities. Using measures developed in this paper, market risk intensity for G-SIBs has declined by roughly half between its peak in 2008.

An important pillar of a well-functioning global financial system is the flow and activity of cross border lending and credit of which G-SIBs play a key role. Overall, G-SIBs as a group have mostly maintained their international presence and activities, as captured by our measures of internationalization, although there has been a good deal of substitution among banks. This provides some evidence that unintended consequences of diminished international activity in credit and lending have been avoided, despite higher regulatory burdens on GSIBs and a more difficult market environment, including competition from nonbanks, and low interest rates.

Adjustment in bank business models are ongoing and there are new challenges to entity structures and funding of models for organizing international activities of global banks, due in part to increasing regulatory focus on liquidity and resolution requirements. The international wholesale model may be most vulnerable given its reliance on the flexible cross-border flow of wholesale funding among international branches. Subsidiarized models appear less vulnerable, as they already rely almost entirely within nationally segregated structures for funding. However, the paper finds that G-SIBs’ international subsidiaries are less profitable than domestic incumbents in many host countries, particularly in emerging economies. In the absence of a clear competitive advantage, declining PFS banking margins in these markets—a frequent by-product of financial deepening in emerging banking systems—poses an increasing challenge to international PFS banking models. These structural trends will need to be closely monitored for how they may impact the liquidity of global markets, the fungibility of local liquidity pools, and the resilience of the global financial system to shocks.

Full working paper on IMF

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