Banking Business Models and the Extent of Financial Crisis

Abstract

This study applies the k-medoids methodology and identifies various banking business models according to asset combinations and funding sources. The study determines the effects of these models on bank risk-return profiles. We use all systemically important banks listed on the V-LAB list from 2000 to 2007 in 65 countries to examine the effect of the banking business models’ characteristics on the mortgage crisis. Our results prove that the asset structure of banks was responsible for the systemic risk before the mortgage crisis, whereas the liability structure was responsible for the crisis itself. The results reveal why the banking sector’s risk was not obvious before the mortgage crisis. Finally, we show that countries whose banks rely on investment activities experienced a greater drop in GDP; however, the drop was short-lived compared to countries with a predominantly traditional banking sector.

Keywords: Bank risk, business model, bank regulation, financial crisis, banking stability, systemic risk

JEL Classification: G21, G15, E58, G32