The Profitability and Distance to Distress of European Banks: Do Business Choices Matter?

The European Journal of Finance, Forthcoming.

57 Pages Posted: 6 May 2021

See all articles by Bernardo P. Marques

Bernardo P. Marques

Católica Porto Business School; University of Porto, Faculty of Economics

Carlos F. Alves

University of Porto - Faculty of Economics

Date Written: March 28, 2021

Abstract

This paper examines which business choices are more likely to increase the profitability and distance to distress of banks, and whether changing business model pays off. We find that the profitability and distance to distress increase with the use of customer deposits and equity, and decrease with size; also, the top performers tend to have a high relationship banking orientation and/or operate a retail focused business model. Furthermore, we document that income diversification only bears a positive impact on the distance to distress of banks highly focused on relationship banking, and size only bears a negative effect on the profitability of these banks as well; additionally, only banks with a low relationship banking orientation significantly benefit from customer deposits. With respect to the effects of business model changes, we find that shifts from the retail diversified funding model to either the retail focused or the large diversified models improve profitability in the medium term. Finally, we find evidence that large diversified banks benefited from internal capital markets during the twin financial crisis by tapping into low-cost funding from subsidiaries. Our results are robust to changes to our baseline model that account for endogeneity and persistency issues.

Keywords: banking; business models; bank orientation; profitability; distance to distress

JEL Classification: G20; G21; G28; G32

Suggested Citation

Marques, Bernardo P. and Alves, Carlos Francisco Ferreira, The Profitability and Distance to Distress of European Banks: Do Business Choices Matter? (March 28, 2021). The European Journal of Finance, Forthcoming., Available at SSRN: https://ssrn.com/abstract=3840399

Bernardo P. Marques (Contact Author)

Católica Porto Business School ( email )

Rua de Diogo Botelho 1327
Porto, Porto 4169-005
Portugal

University of Porto, Faculty of Economics ( email )

Rua Roberto Frias
s/n
Porto, 4200-464
Portugal

Carlos Francisco Ferreira Alves

University of Porto - Faculty of Economics ( email )

Rua Roberto Frias
s/n
Porto, 4200-464
Portugal
+351 225571242 (Phone)
+351 225505050 (Fax)

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