Browsing by Author "Alves, Carlos F."
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- Business model diversity and banking sector resiliencePublication . Marques, Bernardo P.; Alves, Carlos F.What is the impact of the diversity of business models operating in a banking sector and its resilience? Literature offers mixed predictions: while one strand of literature puts emphasis on the virtues of diversity due to lower contagion, an opposing strand suggests that nudging banks to choose diverse diversification strategies (which tend to be individually sub-optimal) may be ‘a worse remedy than the disease’. This paper provides several contributions to this discussion: (i) the development of a two-step measure of business model diversity, based on the application of clustering techniques on a set of business model variables at the bank level, followed by their aggregation at the country level, (ii) the specification of a 3SLS model that explicitly considers the interactions of business model diversity with diversification and market power in explaining banking sector resilience, (iii) the breakdown of the baseline results per type of financial system (i.e. bank vs market-based), and (iv) the analysis of the diversity and composition of optimal country-level portfolios of banking business models. In general, our results suggest that more resilient banking sectors tend to be more diverse (i.e., assets are well distributed across different bank types), less revenue diversified and exhibit more market power than less resilient ones. Additionally, a deeper dive tells us that such relationship between diversity and resilience seems to occur chiefly in market-based systems. Finally, the analysis of efficient portfolios confirms that a similar level of diversity may induce different resilience responses according to the type of financial system, which we attribute to the ‘ecosystem’ of each type of financial system. Our results are robust to changes to the original model specification, proxies for dependent and independent variables, and sample composition.
- Heterogeneity of business models and banking sector resiliencePublication . Marques, Bernardo P.; Alves, Carlos F.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.
- The profitability and distance to distress of European banks: do business choices matter?Publication . Marques, Bernardo P.; Alves, Carlos F.This paper examines which business choices are more likely to increase the profitability and distance to distress of banks, and whether changing business model pays off. We find that the profitability and distance to distress increase with the use of customer deposits and equity, and decrease with size; also, the top performers tend to have a high relationship banking orientation and/or operate a retail focused business model. Furthermore, we document that income diversification only bears a positive impact on the distance to distress of banks highly focused on relationship banking, and size only bears a negative effect on the profitability of these banks as well; additionally, only banks with a low relationship banking orientation significantly benefit from customer deposits. With respect to the effects of business model changes, we find that shifts from the retail diversified funding model to either the retail focused or the large diversified models improve profitability in the medium term. Finally, we find evidence that large diversified banks benefited from internal capital markets during the twin financial crisis by tapping into low-cost funding from subsidiaries. Our results are robust to changes to our baseline model that account for endogeneity and persistency issues.
- Transnational banking supervision and resilience: the SSM casePublication . Marques, Bernardo P.; Alves, Carlos F.; Silva, Joana C.In this letter we assess the impact of adopting a transnational supervisor on the resilience of large and complex banks, exploring the establishment of the Single Supervisory Mechanism (SSM) in 2014. Using a differences-in-differences approach, we compare the performance of SSM banks vis-à-vis other banks with a similar size and complexity. Our results suggest that the adoption of a transnational supervisor can improve the resilience of large and complex banks, particularly for those operating in countries with larger banking sectors, higher market concentration and higher supervisory discretion.
- Transnational banking supervision, distance-to-distress and credit risk: the SSM casePublication . Alves, Carlos F.; Marques, Bernardo P.; Silva, Joana C.We assess the impact of adopting a transnational supervisor on the distance-to-distress and credit risk of large and complex banks, exploring the establishment of the Single Supervisory Mechanism (SSM) in 2014 as a quasi-natural experiment. Using a differences-indifferences approach, we compare SSM banks vis-à-vis banks with a similar size and complexity operating in European countries outside the SSM. Our results suggest that adopting a transnational supervisor increases the distance-to-distress, particularly for banks operating in countries with larger banking sectors, higher market concentration and greater supervisory discretion. We also show that SSM banks reduced loan loss reserves and NPLs significantly more than non-SSM banks, but only among the most capitalized banks-which is consistent with the notion that well-capitalized banks are better able to weather haircuts induced by credit risk reduction initiatives. Interestingly, we find that SSM banks from countries with greater supervisory discretion saw their NPLs increase in the first years of the SSM, which could reflect the elimination of national idiosyncrasies in credit risk accounting. In general, the evidence presented in our paper suggests that transnational supervision bears a superior ability to increase the distance-to-distress, reduce credit risk, and harmonize supervisory practices among large and complex banks.
- Using clustering ensemble to identify banking business modelsPublication . Marques, Bernardo P.; Alves, Carlos F.The business models of banks are often seen as the result of a variety of simultaneously determined managerial choices, such as those regarding the types of activities, funding sources, level of diversification, and size. Moreover, owing to the fuzziness of data and the possibility that some banks may combine features of different business models, the use of hard clustering methods has often led to poorly identified business models. In this paper we propose a framework to deal with these challenges based on an ensemble of three unsupervised clustering methods to identify banking business models: fuzzy c‐means (which allows us to handle fuzzy clustering), self‐organizing maps (which yield intuitive visual representations of the clusters), and partitioning around medoids (which circumvents the presence of data outliers). We set up our analysis in the context of the European banking sector, which has seen its regulators increasingly focused on examining the business models of supervised entities in the aftermath of the twin financial crises. In our empirical application, we find evidence of four distinct banking business models and further distinguish between banks with a clearly defined business model (core banks) and others (non‐core banks), as well as banks with a stable business model over time (persistent banks) and others (non‐persistent banks). Our proposed framework performs well under several robustness checks related with the sample, clustering methods, and variables used.