The profitability and distance to distress of European banks: do business choices matter?

Abstract

In this paper we examine which business choices are more likely to increase the profitability and distance to distress of banks, and whether changing business model pays off. Our analysis is framed under the theoretical premises of the strategic groups theory and the agency theory.We find that the profitability and distance to distress increase with the use of customer deposits and equity, and decrease with size; also, relationship banks and banks with a retail focused business model tend to outperform those with other orientations and business models, respectively. Moreover, we document the heterogeneous impact of business model choices on performance by finding 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 low relationship banking orientation significantly benefit from customer deposits. We also dedicate considerable effort to studying the effects of business model changes on profitability and find that shifts from the retail diversified funding model to either the retail focused or the large diversified model improve performance in the medium term. Finally, we find evidence that large diversified banks benefited from internal capital markets during the twin financial crisis in Europe (2008Europe ( -10, 2011) 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.

The effect of borrower country financial system and corporate governance system types on the spread of syndicated loans

“…These results are also consistent with the notion that lenders are more efficient in monitoring borrowers from countries with bank-based financial systems, which help to limit discretionary management behaviour (Ivashina, 2009). Therefore, our results do not support the hypothesis of hold-up (Rajan, 1992; Weinstein and Yafeh, 1998; Boot, 2000), neither that relationship banking differentiates the banking services and this leads to higher spreads (Marques and Alves, 2021) or that bank-based system originates monitoring and such costs are afforded by their costumers (Chakraborty and Ray, 2006).…”

“…Additionally, relationship banking is likely to produce a differentiating factor from the bank involved to other competitors (Marques and Alves, 2021). Therefore, in countries with such orientation, banks can have conditions to charge their customers with higher spreads.…”

“…However, it is also possible that, in such countries, banks use close relationships and informational advantage to charge high-interest rates later (Rajan, 1992; Weinstein and Yafeh, 1998; Boot, 2000). Moreover, relationship banking is likely to produce a differentiating factor, which can lead to higher spreads (Marques and Alves, 2021). Therefore, the impact of the type of financial system on funding costs deserves to be investigated.…”

Bank-specific capital requirements: Short and long-run determinants

“…More specifically, we find that short-run increases in ROA significantly reduce the P2R, whereas increases in the share of assets at fair value held by banks induce a P2R increase. Both aspects align with supervisors' priority for bank profitability and sustainability (Marques and Alves, 2021).…”

Travel distance and travel time using Stata: New features and major improvements in georoute

“…Weber and Péclat (2017) introduced the community-contributed command , which calculates travel distance and travel time between two points defined by their addresses or their geographical coordinates. Four years after publication, the Stata Journal article and Stata module have received over 50 citations from applications in various research fields including transportation economics (for example, Theisen [2020]), health and medicine (for example, Fischer, Royer, and White [2018], Myers, Jones, and Upadhyay [2019], and Dayal et al [2019]), education (for example, Delaney and Devereux [2020]), sustainability (for example, Makov et al [2020]), and finance (for example, Marques and Alves [2021]), thereby demonstrating the usefulness of the command for many researchers.…”