During the last 15 years the international financial systems of most developed countries have been characterized by conditions of severe weakness resulting by the Financial Crisis of 2007-2009. The banking sector was at the centre of the crisis as the market stress led to an acute re-concentration of on- and off-balance sheet risks in banks, putting pressure on capital buffers, liquidity and credit availability. The weaknesses in the banking sector amplified the transmission of shocks from the financial sector to the real economy. As a response, Basel Committee's programme promote a more robust supervisory and regulatory framework for the banking sector. In this perspective Basel Committee on Banking Supervision (BCBS) uses five key components: strengthening the regulatory capital framework; increasing banks' liquidity buffers; enhancing bank governance, risk management and supervision; improving market transparency; and deepening cross-border supervisory cooperation for internationally active banks. The efforts of both Supervisory and Authorities will promote a banking sector that is more resilient to future periods of economic and financial stress and help reduce systemic risk.
However, despite the progress made in finalising Basel III and IV there is a lot of market scepticism such as investor uncertainty over the sustainability of bank business models and the impact of legacy-related costs.
In this perspective the research objective are to define:
- the main strategic and operational impacts of Basel IV and the balance sheet adjustments made by bank;
- the market valuations and credit ratings for many banks;
- the strategic adjustments that banks may need to be made in order to achieve sustainable profitability.
Banking instability escalated in recent times showing an intensity which was unexpected only few years ago. The irony is that banking instability kept plaguing Europe in spite of the region's intense stiffening of regulation. According to some scholars, the almost exclusive focus on increasing capital requirements and applying a one-size-fits-all regulatory framework may have weakened the effectiveness of European regulators (e.g., Blundell-Wignall et al., 2014; Ferri & Neuberger, 2014). By this perspective, something European Authorities have at length overlooked is the possibility that focusing on a more structured approach to supervised entities should mitigate the model risk of capital adequacy framework. More in particular, the EBA in 2014 has issued the "Guidelines on common procedures and methodologies for the supervisory review and evaluation process (SREP)", where, among other facets, the necessity to overlook to 4 fundamental items, in order to proper assess the economic sustainability of a bank, is represented. More in particular, the EBA suggests to consider the Business Model (BM), the internal governance and institution-wide controls, the risks to capital and adequacy of capital to cover these risks, the risks to liquidity and adequacy of liquidity resources to cover these risks, as fundamental determinants of banks' soundness. In the actually regulatory framewok and market contest the Business model sustainability is very relevant although there is no a unique definition. In this perspective the present research want to give a contribution to this debate. This has been a key priority for European Banking Supervision, especially due to the challenges that banks in the Euro area are facing, triggering the need to review their asset and liability and balance sheet composition as consequence of Basel compliance.
There is a large literature on that decline sustainability in terms of profitability that analyses the relation beetween the first one and the resilience of banking system.
On profitability and and risks, some researchers found that higher profitability leads to higher "charter value" (i.e., long-term expected profitability) and therefore less risktaking by banks (Keeley 1990; Berger, Klapper, and Turk-Ariss 2009). Others suggest that high profitability could loosen leverage constraints and lead to more risk-taking (Natalya, Ratnovski, and Vlahu 2015). Furthermore, high profits in good times could be an indicator of systemic tail risk in bad times (Meiselman, Nagel, and Purnanandam 2018). After all there is mixed evidence on the impact of Non-Interest Income (NII) on risks (Baele, De Jonghe, and Vander Vennet 2007; Elsas, Hackethal, and Holzhauser 2010). More recently, some researchers found that the impact on financial stability depends on the type of NII (Kohler 2014; DeYoung and Torna 2013). We want to analyse:
- firstly the different menanings of sustainability of bank business model (beyond the concept of profitability);
- and, secondly, the relation beetween this different meaning and banking resilience.
In 2016 European Banking Supervision launched a thematic review in order to assess in more depth the profitability drivers and business models of the significant institutions. These challenges include, among others, low profitability and pressure on revenues from the economic environment, the low level of interest rates and high competition; elevated levels of Non-Performing Loans (NPLs) and the need to clean up balance sheets; digitalisation and new competitors (FinTech and big tech companies); tougher regulation and the need to adapt to it. Looking across the Significant Bank universe, there is no one-size-fits-all approach to profitability as even strategies among the best-performing banks have largely differed with regard to costs and income (SSM,2018). The Authority not consider in their analisys the Less significant bank; our research try to enlarge the assessement to this universe.
We want also to introduce in our analysis the market perspective in the business model sustainability. For the financial sector, sustainable development is based on the concept of achieving the main aim of banking activity, i.e., to create value for shareholders, whilst respecting the environment and social development (Korzeb, Samaniego-Medina, 2019). Obviously the market reaction to Basel III and IV strategic adjustments is a macroeconomic pespective that we want to assume with the microeconomic view. In our opinion there is no one-size-fits-all approach to profitability. In this perspective the reaserch would be very interesting for Authorities and financial intermediaries credit risk policy.