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Which banks are more risky? The impact of business models on bank stability

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  • Köhler, Matthias
Abstract
In this paper, we analyze the impact of business models on bank stability in 15 EU countries between 2002 and 2011. We represent banks’ business models by the share of non-interest income in total operating income and the share of non-deposit funding in total liabilities. In contrast to the literature, we include in our sample a large number of unlisted banks, which represent the majority of banks in the EU. We believe this to be important, since many unlisted banks typically have a more retail-oriented business model. We show that banks will be significantly more stable and profitable if they increase their share of non-interest income, indicating that substantial benefits are to be gained from income diversification. Such benefits are particularly large for savings and cooperative banks. Investment banks, in contrast, become significantly more risky. Diversifying into non-deposit funding has a different impact as well. While retail-oriented banks will be significantly less stable if they increase their share of non-deposit funding, investment banks will be significantly more stable. These findings indicate that it is important to enlarge the sample of banks and to include different types of banks with different business models in order to arrive at general conclusions about the effect of non-interest income and non-deposit funding on bank stability.

Suggested Citation

  • Köhler, Matthias, 2015. "Which banks are more risky? The impact of business models on bank stability," Journal of Financial Stability, Elsevier, vol. 16(C), pages 195-212.
    • Handle: RePEc:eee:finsta:v:16:y:2015:i:c:p:195-212
    DOI: 10.1016/j.jfs.2014.02.005
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    3. Pak, Olga, 2019. "The impact of state ownership and business models on bank stability: Empirical evidence from the Eurasian Economic Union," The Quarterly Review of Economics and Finance, Elsevier, vol. 71(C), pages 161-175.
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    More about this item

    Keywords

    Banks; Risk-taking; Business model; Non-interest income; Non-deposit funding;
    All these keywords.

    JEL classification:

    • G - Financial Economics
    • G - Financial Economics
    • G - Financial Economics

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