Follow the money: What does the literature on banking tell prudential supervisors about bank business models?
Journal of Financial Regulation and Compliance
ISSN: 1358-1988
Article publication date: 9 November 2012
Abstract
Purpose
The financial crisis that started in 2007 has led to a re‐thinking of financial regulation and supervision. One major lesson of the crisis is that supervisors should be “asking the big questions” (FSA). These are typically questions that are difficult to address, as they require a deep understanding of bank business models. The purpose of this paper is to provide the recent shift in prudential supervision towards the analysis of bank business models with a sound economic basis.
Design/methodology/approach
The paper reviews the economic literature on banking in order to answer what the authors deem to be the three central questions when analysing business models.
Findings
The bottom‐line for supervisors, in the authors' view, is that it is essential to understand where the profit comes from and what risks the bank or the banking sector is exposed to in generating those profits.
Practical implications
Analysing bank business models goes beyond the traditional approach to prudential supervision, which mainly focuses on the adequacy of bank capital, liquidity and risk management. The analysis of business models implies a different approach to risk, starting from understanding a bank's activities, customer groups, distribution channels and sources of profits.
Originality/value
This paper contributes to bridging the gap between the economic literature on banking and the needs of bank supervisors. To the authors' best knowledge, this paper is the first addressing this particular issue. By giving an overview of the recent literature on banking that is relevant for understanding bank business models it helps to provide supervisors with a sound economic basis for assessing banks' business models.
Keywords
Citation
Cavelaars, P. and Passenier, J. (2012), "Follow the money: What does the literature on banking tell prudential supervisors about bank business models?", Journal of Financial Regulation and Compliance, Vol. 20 No. 4, pp. 402-416. https://doi.org/10.1108/13581981211279354
Publisher
:Emerald Group Publishing Limited
Copyright © 2012, Emerald Group Publishing Limited