Abstract
The changing economic environment did affect the nature of banking in a profound way. Both easy monetary policy causing low interest rates as well as increasing globalization exerting competitive pressure on lending margin significantly reduced net interest margins in traditional lending. In particular, after the high interest rate period of the late 1980s long-term lending and house-bank relations did suffer severely. As a reaction the banking sector at large increasingly focused on short-term trading and investment banking. This process was accompanied by regulatory incentives and internal governance structures. In particular, the increasing focus on short term compensation based on return on equity, together with the Basle process of capital regulation opened ways of reducing loss absorbing capital and thus undermining banks’ stability as well as the resiliency of the banking sector at large. Both, the reactions of business models to a changing competitive environment as well as reactions to monetary as well as regulatory policy significantly contributed to systemic risk in Europe and the US.
I am grateful for comments from participants of the CASiM Conference on “Change Management” at HHL, Leipzig as well as the Distinguished Lecture Series of the Law Faculty at the University of Vienna.
This is a preview of subscription content, log in via an institution to check access.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Similar content being viewed by others
Notes
- 1.
More precisely, in this context “drying out” is meant to imply proper pricing of counterparty risk, which apparently and paradoxically did not happen prior to August 2007. Relatedly see Afonso et al. [3] on stressed fed fund markets after the Lehman insolvency.
- 2.
This essay borrows from Gehrig [10], which concentrates on the evolution of the Basle regulatory process and its unintended consequences. In contrast, this essay focusses on the private sector and the banks’ strategies plus their business models.
- 3.
The financial crisis of 2007/2008 re-introduced heterogeneity in European sovereign bonds.
- 4.
See Goodhart [11] for a description of the early stages of the Basle Committee.
- 5.
There are further weaknesses such as inducing myopia due to the focus on short-term periodical revenues. Alternative performance measures such as returns on assets are less critical.
- 6.
It should be noted though that quite a large number of banks with conservative business models had not changed their strategies dramatically such as large numbers of savings and cooperative banks. Nevertheless, they were also affected by the systemic feedback of the actions of a significant number or large banks.
- 7.
Similarly, Libertucci and Piersante [14] find that capital is particularly important to improve the resilience of start-up banks in Italy.
- 8.
This argument could actually be used in order to support subsidizing bank capital because of its positive externality in periods of crisis. Rather than subsidizing risk taking, the tax payer should have an interest in subsidizing solidity and resiliency. Of course, such considerations would require nothing less than a "little revolution" in the think tanks of the treasuries. In the interest of tax payers an effects-based policy might be worth considering.
- 9.
This is similar to liquidity reserves [7].
- 10.
The vicious public rhetoric against stricter rules in Basel III regulation is vivid evidence of systemically important banks trying to shy away from accepting social responsibility and providing positive externalities [1].
References
Admati, A., & Hellwig, M. (2013). The bankers’ new clothes: What’s wrong with banking and what to do about it? Princeton: Princeton University Press.
Admati, A., De Marzo, P., Hellwig, M., & Pfleiderer, P. (2010). Fallacies, irrelevant facts and myths in the discussion on capital regulation: Why bank equity is not expensive, The Rock Centre for Corporate Governance, Stanford University, Working Paper Series No. 2063.
Afonso, G., Kovner, A., & Schoar, A. (2011). Stressed, not frozen: The federal funds market in the financial crisis. The Journal of Finance, 66(4), 1109–1135.
Berger, A. (1995). The Relationship between capital and earnings in banking. Journal of Money, Credit and Banking, 27, 432–456.
Berger, A., & Bouwman, C. (2011). How does capital affect bank performance during financial crises? University of South Carolina, Working Paper.
Bester, H., Gehrig, T., & Stenbacka, R. (2012). Loan sales and screening incentives, CEPR-DP 9084.
Bhattacharya, S., & Gale, D. (1987). Preference shocks, liquidity, and central bank policy. In W. Barnett, & K. Singleton (Hrsg.) New approaches to monetary economics. Cambridge: Cambridge University Press. (69.88.)
Boot, A., & Ratnovski, L. (2013). Banking and Trading, Working Paper, IMF. Financial Crisis Inquiry Commission (FCIC 2011). Report on the Causes of the Financial Crisis. U.S. Government Printing Office.
Gehrig, T. (1998). Screening, cross-border banking, and the allocation of credit. Research in Economics, 52, 387–407.
Gehrig, T. (2013). Capital, confiance et compétitivité dans le secteur bancaire. Revue d`Economie Financière, 112(Les systèmes bancaires européens (2)), 175–193.
Goodhart, C. (2011). The Basel committee on banking supervision: A history of the early years 1974–1997. Cambridge: Cambridge University Press.
Hayek, F. Av (1974). Pretence of knowledge: Nobel memorial lecture. American Economic Review, 35(9), 3–7.
Kotz, H.-H. (2009). Deutsche Bundesbank financial stability review. BIS Review, 164/2009.
Libertucci, M., & Piersante, F. (2012). Start-up banks’ default and the role of capital. Bank of Italy, Temi de Discussione 890.
Liikanen, et al. (2012). Report of the European Commission’s high-level expert group on bank structural reform, EU.
Shin, H. S. (2009). Reflections on Northern Rock: The bank run that heralded the global financial crisis. Journal of Economic Perspectives, 23, 101–119.
Terberger, E., & Wettberg, S. (2005). Der Aktienrückkauf und die Aktienkrise von 1935, Discussion Paper, Heidelberg.
Wheelock, D., & Wilson, P. (1994). Can deposit insurance increase the risk of bank failure? Some historical evidence, Federal Reserve Bank of St. Louis.
Author information
Authors and Affiliations
Corresponding author
Editor information
Editors and Affiliations
Rights and permissions
Copyright information
© 2015 Springer Fachmedien Wiesbaden
About this chapter
Cite this chapter
Gehrig, T. (2015). Changing Business Models in Banking and Systemic Risk. In: Albach, H., Meffert, H., Pinkwart, A., Reichwald, R. (eds) Management of Permanent Change. Springer Gabler, Wiesbaden. https://doi.org/10.1007/978-3-658-05014-6_8
Download citation
DOI: https://doi.org/10.1007/978-3-658-05014-6_8
Published:
Publisher Name: Springer Gabler, Wiesbaden
Print ISBN: 978-3-658-05013-9
Online ISBN: 978-3-658-05014-6
eBook Packages: Business and EconomicsBusiness and Management (R0)