TAILIEUCHUNG - Bank regulation: One size does not fit all

Bank business models show diverse risk characteristics, but these differences are not sufficiently considered in Pillar 1 of the regulatory framework. Even if the business model is analyzed within the European SREP, global Pillar 2 approaches differ and could lead to competitive disadvantages. Using the framework of Miles et al. [1], we examine a dataset of 115 European banks, which is split into retail, wholesale, and trading banks. We show that shifts in funding structure affect business models differently. Consequently, a “one size” approach in Pillar 1 for the regulation of banks does not fit all. | Journal of Applied Finance Banking vol. 7 no. 5 2017 1-27 ISSN 1792-6580 print version 1792-6599 online Scienpress Ltd 2017 Bank Regulation One Size Does Not Fit All David Grossmann1 and Peter Scholz2 Abstract Bank business models show diverse risk characteristics but these differences are not sufficiently considered in Pillar 1 of the regulatory framework. Even if the business model is analyzed within the European SREP global Pillar 2 approaches differ and could lead to competitive disadvantages. Using the framework of Miles et al. 1 we examine a dataset of 115 European banks which is split into retail wholesale and trading banks. We show that shifts in funding structure affect business models differently. Consequently a one size approach in Pillar 1 for the regulation of banks does not fit all. JEL classification numbers G21 G28 G32 Keywords Bank Business Models Bank Capital Requirements Cost of Capital Leverage Ratio Regulation SREP 1 Introduction The Basel Committee on Banking Supervision BCBS establishes global standards for the regulation of all banks but neglects the individual attributes of business models for Pillar 1 requirements. The chosen business model however reflects the risk appetite of a bank and can be viewed as an additional indicator of emerging risks. So far the risks of business models are only incorporated in Pillar 2 of the regulatory framework. Since 2015 the European supervisory review and evaluation process SREP evaluates the business model to cover risks that are not fully considered by Pillar 1 2 . However the Pillar 2 implementations vary internationally and the substantial analysis of business models is fairly new in Europe. Especially since the results of the SREP may lead to additional capital requirements for different business models. In addition the SREP of the EBA 2 does not consider the future non-risk sensitive leverage ratio and only affects European banks. The 1PhD Student Andrássy University Budapest Hungary and HSBA .

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