Are all banks created equal?

In the wake of the last financial and banking crises, banks have been forced to reexamine business models and long-term choices. This has motivated Carlos F. Alves, in three articles written with Bernardo Marques (UCP and ORGMAN), to ‘distinguish among the different banking business models and assess the consequences of those choices, not only for the bank itself, but also for the financial system.’

In a first article, the authors seek to identify prevalent business models in the European banking sector. To do this, they employ several clustering methods on variables measuring balance sheet structure, diversification, size, and leverage. They identify four models: retail focused (e.g., Crédito Agrícola), retail diversified funding (e.g., Millennium, BCP), retail diversified assets (e.g., Volksbank Wien AG), and large diversified (e.g., Banco Santander).

In a second article, they investigate how each model impacts the profitability and resilience of individual banks. In Carlos’ words, ‘better performing banks tend to exhibit a traditional funding structure, a small size and a high level of capital, as well as a tendency to focus on relationship banking.’ Moreover, ‘banks following a retail-focused model record, on average, a higher profitability and distance to distress.’

In a third contribution, the authors study whether the diversity of business models has a systemic impact on the resilience of the banking sector. They find that diversity fosters resilience in market-based financial systems, such as that of the U.S. As Carlos puts it, ‘a financial system that has different types of banks is more resilient, and better prepared to deal with a crisis.’

Currently, Carlos is researching how the increased cooperation and harmonization in banking supervision in Europe, in the wake of the Single Supervisory Mechanism, impacts the profitability, resilience and communication of individual banks.

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Carlos Alves is Associate Professor with Habilitation at FEP, where he is the Director of the Ph.D. in Business and Management Studies. He is also Chairman of the Academic Council at Porto Business School. His main research interests include Banking, Corporate Governance, Asset Pricing, and Mutual Funds Behaviour.

He may be reached at calves@fep.up.pt.