Better insight in risks of business models used by banks

The Commission helped the Bank of Slovenia to better analyse and understand business models and strategies of banks with the use of an improved tool, that provides an independent view and assessment of the sustainability of banks’ business models.

Context

In recent years, supervisors and regulators have become increasingly focused on banks’ business models, their strategies and the sustainability of their activities.

The transformation of business models is a process that has been prompted in recent years by the low interest rate environment (putting pressure on profitability and increasing the risk appetite), an increasingly demanding regulatory and institutional environment and the emergence of FinTech companies, providing all sorts of new services.

For Bank of Slovenia, being the supervisor, it is crucial that it identifies banks’ business models, analyses their strengths and weaknesses, and formulates its own strategy for the future sustainability of individual banks’ business models.

Support delivered

Currently, Bank of Slovenia is using a Bank Business Model Analysis (BBMA) tool to perform the analysis of the business model of a supervised bank within the so-called Supervisory Review and Evaluation Process (SREP). The Central Bank wanted to create a second BBMA tool alongside this existing one to estimate the banks’ and other players’ behaviour in the next three years under different assumptions. One can think of a changing economic environment, or of financial, supervisory or regulatory circumstances. This new tool has no links with the existing one.

Experts first performed the data extraction before the econometric modelling took place. Then, they developed the tool, tested it, and fixed the bugs. Finally, staff was trained to ensure that Bank of Slovenia took ownership of the BBMA tool.

Results achieved

Thanks to the tool, the Central Bank can now better forecast balance sheets, profit and loss statements and financial indicators for each bank under different scenarios. The tool enables the users in Bank of Slovenia to compare the supervised banks’ own forecast with the predictions generated by the tool, and challenge business plans accordingly in case of obvious differences.

The tool allows Bank of Slovenia to challenge banks’ business plans from supervisory perspectives, it facilitates dialogues with banks, can be used for assessing risks in case of potential mergers and acquisitions, but also to predict outcomes under different scenarios or to calibrate stress tests.