large number of smaller retail oriented banks on the other hand will likely

Large number of smaller retail oriented banks on the

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large number of smaller, retail-oriented banks, on the other hand, will likely persist in future. 6. Conclusions In this paper, we showed how business models evolved in the E.U. banking sector and how they need to be restructured to ensure sufficient profitability. At present, it is particularly large, investment-oriented banks that are under pressure to change their business models, since many business areas that guaranteed high returns pre-crisis have become unprofitable. We showed that these banks have to refocus on the core competencies and core markets in which they have comparative advantages. While maintaining their focus on corporate and investment banking, they will also need to be more active in retail banking to better diversify their income structure and to meet regulatory requirements. This move will not be an easy one and will likely put additional pressure on the profitability of large banks in the short and medium term. Smaller, more retail-oriented banks have to rethink their business models as well, although they were much less affected by the financial crisis of 2007/2008. To become more profitable and stable, they should increase their share of non-interest income by cross-selling additional services or products to their customers. Diversifying into non-interest income is also beneficial because competition in retail banking will continue to be high for structural reasons even if interest rates start to go back up. It should be noted, however, that this does not imply that retail banks should expand into investment banking and other areas in which they have little experience or comparative advantage, since this might make them more, not less, risky. Small, retail-oriented banks and large, investment-oriented banks, therefore, differ in how they have to restructure their business models. Overall, Figure 4: Consolidation in the E.U. banking sector (2012) Source: ECB (2013). Figure shows the population per credit institution and the average bank size in the E.U.-15 banking sector in 2012. The yellow color bars represent the E.U.-15 average. U.K. Assets (€m) per credit institution France Spain Belgium Netherlands Greece E.U.-15 Denmark Sweden Luxembourg Italy Germany Portugal Ireland Finland Austria 0 10000 20000 30000 Greece Population per credit institution U.K. Spain Belgium France Italy E.U.-15 Portugal Netherlands Sweden Germany Denmark Finland Austria Ireland Luxembourg 0 100 50 150 250 200
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16 The Journal of Financial Perspectives Business models in banking – how did they evolve and how do they need to be changed in the post-crisis period? this implies that better-diversified banks are able to generate higher risk-adjusted returns and are more stable. However, while this may reduce idiosyncratic risk, it may also increase the level of systemic risk in the banking sector if banks diversify their activities in a similar way. This suggests that, from a financial stability perspective, it is necessary to have both diversified as well as specialized banks.
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