Conference Ana Lozano

14 July, 2017
10:00 ama12:00 pm

Title: Achieving a sustainable cost efficient business model in banking: The case of European banks

Speaker: Ana Lozano‐Vivas University of Malaga, Spain

Date: 14/07/2017, 10:00h

Location: Sala de Seminarios (Edificio Torretamarit), Universidad Miguel Hernández (Campus de Elche) 

Abstract: Although the business model (BM) is the most fundamental task of the bank’s management to ensure sustained operation and profitability of a bank, it has become a subject of supervisor’s scrutiny due to the recent financial crisis when failing banks were rescued with public funds and supervisors were criticized around the world. Since one of the reasonsfor the financial crisis wasthatsome banks had (and still have) unsustainable BMs, sustainable BMs are, for example, on the top of the ECB’s agenda. Given its relevance, it is important to understand implication that BM characteristics have for bank performance in general and for cost efficiency in particular. Optimizing operating efficiency has become a necessity for the survival of bank. This is one of the top priorities for a bank, especially during times when revenue‐generating opportunities are sub‐optimal. This paper usesthe Herfindahl index to measure how concentrate the bank isin items of the asset, funding or income portfolio. We analyze efficiency of bank BM along three business dimensions, viz., assets, funding and income, for the European Banking Industry. We apply recently developed four component heteroskedastic cost model to investigate effects of three business dimensions to time‐ varying bank cost inefficiency while controlling for bank effects and persistent cost inefficiency. In the proposed model we assume bank‐specific effects and persistent cost inefficiency random and distributed independently and identically across banks but time‐varying cost inefficiency and noise terms are made heteroscedastic in terms of assets, funding and income diversification for each bank. Note that we are interpreting heteroscedasticity of the noise term as risk thereby meaning whether different forms of diversifications are risk enhancing or risk reducing. More formally, our model is 0 0 log ( , ; ) it it it i i it it c h     y w v u vu  where 0 0 i u  and 0 it u  represent persistent and time‐varying  nefficiency, respectively, while 0i v captures latent bank heterogeneity and it v is the classical random noise. We assume variances of both it u and it v to be functions of assets, funding and income diversification. That is, we treat assets, funding and income diversification as determinants of time‐varying inefficiency and production risk