Follow the money. What does the literature on banking tell prudential supervisors about bank business models?
| Published date | 09 November 2012 |
| DOI | https://doi.org/10.1108/13581981211279354 |
| Pages | 402-416 |
| Date | 09 November 2012 |
| Author | Paul Cavelaars,Joost Passenier |
| Subject Matter | Accounting & finance |
Follow the money
What does the literature on banking
tell prudential supervisors about bank
business models?
Paul Cavelaars and Joost Passenier
Supervisory Strategy Department, De Nederlandsche Bank,
Amsterdam, The Netherlands
Abstract
Purpose – The financial crisis that started in 2007 has led to a re-thinking of financial regulation and
supervision. One major lesson of the crisis is that supervisors should be “asking the big questions”
(FSA). These are typically questions that are difficult to address, as they require a deep understanding
of bank business models. The purpose of this paper is to provide the recent shift in prudential
supervision towards the analysis of bank business models with a sound economic basis.
Design/methodology/approach – The paper reviews the economic literature on banking in order
to answer what the authors deem to be the three central questions when analysing business models.
Findings – The bottom-line for supervisors, in the authors’ view, is that it is essential to understand
where the profit comes from and what risks the bank or the banking sector is exposed to in generating
those profits.
Practical implications – Analysing bank business models goes beyond the traditional approach to
prudential supervision, which mainly focuses on the adequacy of bank capital, liquidity and
risk management. The analysis of business models implies a different approach to risk,
starting from understanding a bank’s activities, customer groups, distribution channels and sources
of profits.
Originality/value – This paper contributes to bridging the gap between the economic literature on
banking and the needs of bank supervisors. To the authors’ best knowledge, this paper is the first
addressing this particular issue. By giving an overview of the recent literature on banking that is
relevant for understanding bank business models it helps to provide supervisors with a sound
economic basis for assessing banks’ business models.
Keywords Banking, Businessmodel, Supervision, Regulation
Paper type Literature review
1. Introduction
The financial crisis has led to a re-thinking of financial regulation and supervi sion. Bank
capital and liquidity requirements are strengthened as a result of the so-called Basel-III
agreement, government authorities obtain greater powers in the area of crisis
management, international coordination among national supervisors is enhanced (w ith
the creation of the European Banking Authority for instance) and financial supervisors
and others are critic ally reviewing the ap proach to supervisio n (Vinals and
Fiechter, 2010).
One major lesson of the crisis is that supervisors should be “asking the big questions”
(FSA, 2009). This refers to questions in the area of business models, corporate strategies
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1358-1988.htm
JEL classification – G21, G28
JFRC
20,4
402
Journal of Financial Regulation and
Compliance
Vol. 20 No. 4, 2012
pp. 402-416
qEmerald Group Publishing Limited
1358-1988
DOI 10.1108/13581981211279354
To continue reading
Request your trial