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Summary of "Bank Business Models' Migrations in Europe: Determinants and Effects"

Core Content

This document presents an analysis of business model migrations in European banks, focusing on the determinants and effects of these changes. The study, conducted by Ayadi, Bongini, Casu, and Cucinelli at the 2018 EBA Policy Research Workshop, examines the evolution of bank business models (BM) across 32 European Economic Area (EEA) countries and Switzerland, using data from 2005 to 2016.

Main Research Questions

1. What are the determinants of banks' business model migration?
2. What are the effects of such migration on bank performance (profitability, risk, and cost efficiency) in subsequent years?

Key Findings

Business Model Persistence

• Banks generally maintain a stable business model during the study period.
• The five identified business models are:
  1. Focused retail (92% persistence)
  2. Diversified retail (type 1) (91% persistence)
  3. Diversified retail (type 2) (87% persistence)
  4. Investment (88% persistence)
  5. Wholesale (84% persistence)
• "Focused retail" and "diversified retail (type 1)" banks are net acquirers, while other models experience more outflows than inflows.

Migration Patterns

• Total migrations observed: 1,936 out of 19,500 observations (approximately 10%).
• 1,402 banks changed their business model at least once during the period.

Determinants of Migration

• Lower profitability: Banks with lower pre-migration profitability are more likely to change their business model.
• Higher risk profile: Riskier banks are also more likely to migrate.
• Better capitalisation: Surprisingly, better capitalised banks are more likely to switch, possibly to diversify and invest.
• Bank size: Smaller banks are more likely to migrate.
• M&A activities: Banks involved in M&A operations are more likely to change their business model.
• State aid and nationalisation: Banks that received state aid or were nationalised are more likely to migrate.

Effects on Bank Performance

• Migrating banks perform better than non-migrating banks in the years following migration, in terms of:
  • Profitability: Positive and significant effects in the first and second years post-migration.
  • Risk: Positive effect in the second year post-migration.
  • Cost efficiency: Positive effect in the second year post-migration.
• Post-M&A migration:
  • No significant performance differences between migrating and non-migrating banks.
  • However, target banks that migrate after M&A show better performance in profitability and risk.
• Post-State Aid migration:
  • Banks that migrate after receiving ad-hoc state aid or being nationalised improve their performance, particularly in cost efficiency.

Methodology

• Cluster analysis (Ward’s method) is used to classify banks into five business models.
• Transition matrix evaluates the changes in business models over time.
• Logit regression identifies the determinants of business model migration.
• Propensity Score Matching assesses the effects of migration on performance.
• Robustness tests include alternative time windows and neighbor match techniques, confirming the stability of findings.

Data Sources

• Bank-specific data from SNL (S&P Global Market Intelligence)
• Macroeconomic data from the World Bank
• State aid information from ECB and European Commission databases
• M&A data from the Zephyr database

Conclusion

• The study highlights that business model migration is influenced by a combination of profitability, risk, capitalisation, size, and external factors such as M&A and state aid.
• Migrating banks tend to show improved performance in the years following the change, particularly in terms of profitability, risk, and cost efficiency.
• The findings provide important insights for policymakers and supervisors in understanding the dynamics of bank business model evolution and its implications for financial stability.