Scale, Scope and Complexity: Assessing Banking Business Models

39 Pages Posted: 1 Dec 2017

See all articles by Ronald W. Anderson

Ronald W. Anderson

London School of Economics & Political Science - Department of Finance; Centre for Economic Policy Research (CEPR); Sun Yat-sen University (SYSU) - Xinhua College

Karin Jõeveer

Tallinn University of Technology (TUT)

Date Written: 2014

Abstract

In this paper we study how the complexity of a bank’s business model is related to its returns. Our approach allows for the possibility that bank returns may be retained in part by mobile and powerful bankers and that the amount of rent extraction may vary across different lines of business. Using data on U.S. bank holding companies over the years 2003–12, we find strong evidence that the scope of a bank’s business is an important determinant of bank returns and that, all else equal, wide scope favors bank shareholders relative to bankers. Establishing a presence across a wide range of wholesale banking activities requires a complex organization that would be difficult to replicate elsewhere and in this way serves to moderate bankers’ compensation demands. We use our statistical results to shed light on the evolution of the business models of some of the largest U.S. banks over the last 10 years.

Suggested Citation

Anderson, Ronald W. and Jõeveer, Karin, Scale, Scope and Complexity: Assessing Banking Business Models (2014). Journal of Financial Perspectives, Vol. 2, No. 3, 2014, Available at SSRN: https://ssrn.com/abstract=3079610

Ronald W. Anderson (Contact Author)

London School of Economics & Political Science - Department of Finance ( email )

Houghton Street
London WC2A 2AE
United Kingdom
+44 20 7955 6204 (Phone)
+44 20 7955 7420 (Fax)

HOME PAGE: http://personal.lse.ac.uk/ANDERSOR/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Sun Yat-sen University (SYSU) - Xinhua College ( email )

China

Karin Jõeveer

Tallinn University of Technology (TUT) ( email )

Ehitajate tee 5
Tallinn, 12618
Estonia

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