of the euro in 1999 since it eliminated currency risk across the euro area and

Of the euro in 1999 since it eliminated currency risk

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of the euro in 1999, since it eliminated currency risk across the euro area and made it easier to take advantage of borrowing and investment opportunities abroad. Because of these and other initiatives, the number and the market share of foreign banks has significantly increased over the past few decades. 5 However, financial integration has not only raised the level of competition at home, but has also made it easier for banks to expand abroad and to offset declining profits in their home markets through higher profits in foreign markets. The growth of financial markets has also increased competition in traditional lending and deposit markets, forcing banks to look for non-traditional sources of income to make up for the shortfall. The growth of insurance products and mutual funds, 4 There are, however, still large differences in the degree of integration across markets. While wholesale markets are already more highly integrated based on price and quantity indicators, retail markets, such as loans to households and small and medium-sized enterprises, lag behind (see various issues of the ECB Report on Financial Integration in Europe ). Due to switching costs, differences in fiscal and legal systems and greater information asymmetries, retail-banking markets are still mainly local. 5 For more information on the impact of foreign banks on the retail-banking market in Germany, see Köhler (2008). for instance, has allowed banks to earn commission income on sales of these products. A number of banks have also set up their own asset management companies in order to generate additional revenues from fund management. Some banks have also started underwriting debt and equity issues, as well as issuing derivatives, and trading securities on their own account on the secondary markets. As a result, banks nowadays offer a much larger range of products and services and are conducting a growing proportion of their activities off-balance sheet [Goddard et al. (2007)]. Consequently, while reducing their net interest income, the growth of financial markets has also allowed banks to increase their non-interest income. From a financial stability perspective these changes are positive, since they leave banks with a more diversified income structure and make them less dependent on their home market. However, they have also raised the number of business models and have made banking significantly more complex than in the past. 3. Systematizing business models in banking Decades ago, banks were mainly focused on domestic markets and commercial banking activities. Nowadays, banks are much more active abroad, and non-traditional activities have become much more important. This has spawned an array of business models. In this section, we give a brief overview of the business models that currently exist in the banking sector. In Table 1, we briefly describe banks’ business models along two main dimensions.
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