Business Models And Their Impact On Bank Performance: A Long-Term Perspective

This paper examines the effects of bank business models on performance and risk for a sample of more than 500 banks from 30 European countries over the period from 1998 to 2013. Since we analyze strategic or business model choices, our methodology is designed to identify the long-run effects and separates these from short-run time effects. Our findings confirm that business model characteristics are important deter- minants of performance, but that no specific bank type outperforms in all dimensions. We find that deposit funding, high asset quality, income diversification and capital adequacy positively affect performance, while size and the asset composition have a more ambiguous impact. We also report substantial variation of business model effects over different bank types. Our results lend support to the new capital and funding rules proposed in the Basel III framework, but we also argue that business model con- siderations should be more fundamentally integrated in the post-crisis regulatory and supervisory practice.