Heterogeneity of business models and banking sector resilience

Bernardo P. Marques () and Carlos Alves
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Bernardo P. Marques: Católica Porto Business School, Research Centre in Management and Economics

Journal of Banking Regulation, 2024, vol. 25, issue 3, No 3, 256-271

Abstract: Abstract This paper studies the relationship between the heterogeneity of business models and the banking sector's resilience, in light of the interplay between diversification, market power, and resilience. Our goal is to tackle the open puzzle related to the effects of diversification-induced homogeneity of banks' business models on the banking sector's stability. Using a sample of 1268 banks from 33 countries (Europe, Asia, America), for the period between 2005 and 2021, we estimate a 3SLS model that accounts for the interplay between revenue diversification, heterogeneity, market power and resilience. We apply principal components and clustering analysis to identify the banks' business models and compute an ecology-based measure of heterogeneity per country. We find that revenue diversification reduces bank heterogeneity, suggesting that banks pursue uniform diversification strategies. We also uncover a positive relationship between bank heterogeneity and market power, suggesting low rivalry among different business models. Importantly, our results indicate that bank heterogeneity positively impacts resilience and is economically significant. Namely, we estimate a 4.5% increase in the Z-score due to a one (within) standard deviation increase in business model heterogeneity. We discuss several implications of our results for micro- and macro-prudential supervision and regulation, and identify potential avenues for future research.

Keywords: Banking; Business models; Heterogeneity; Resilience; Supervision and regulation (search for similar items in EconPapers)
JEL-codes: G20 G21 G28 G32 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1057/s41261-023-00227-6

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