The rise and fall of universal banking: ups and downs of a sample of large and complex financial institutions since the late ‘90s

We document the development of the major international banks since the late nineties, analysing balance sheet data for 27 large and complex financial institutions. We argue that balance sheet expansion and business line diversification paved the way to the rise of the universal banking model. This model, apparently sound and efficient in the run-up to the crisis, showed all its shortcomings when the crisis erupted. European banks highlighted greater fragilities in their business models. Moreover the changed financial and regulatory landscape that followed has challenged this model further. Many proposed remedies to the global financial crisis appear to push for a return of a narrower model for banking activity. The first evidence we detected through a set of panel regressions shows that the proposed remedies are likely to change the profitability and riskiness profile of the banking industry, pushing towards a safer, although less profitable, business model. Moreover, the contemporaneous effort by banks to move in this direction is likely to strengthen this shift.