Banks under X-rays: business model choices and trading

Abstract

Purpose – The purpose of this paper is to do an empirical analysis assessing whether banks highly involved into trading activities show specific business model choices. Key factors in the analysis are a proper measure for trading activities and a consistent classification of banks in terms of business choices. Design/methodology/approach – We investigate three measures for trading activities proposed by regulators in the context of bank structural reform in Europe. Through robust statistics we identify the key trading players and classify banks into a limited number of business model clusters, relying on a set of balance sheet and income statement indicators. Findings – Using a sample of 100 European banks in 2007-2012, results show that the measures identify similar, but not identical, sets of banks highly involved into trading. The measure proposed by the European Commission selects fewer banks and is more consistent over time. The business model analysis identifies six rather stable clusters, from small-medium retail-focused banks to very large investment groups. The measures coherently identify as key trading players the largest investment groups and select very few retailed focused banks. Differences among measures arise for very large retail-diversified and medium/large wholesale banks. Originality/value – These results could feed the debate on which measures for trading regulators could consider depending on the target of the reform they would implement. For instance we show that the measure proposed by the European Commission selects less well capitalized retail-diversified banks compared to the others.