## wpiea2019295-print-pdf

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---

### I. Introduction — role and scale of G-SIBs
- Focus: 30 banks currently designated as G-SIBs (using the list identified in 2018).
- Key scale statistics:
  - The 30 G-SIBs together hold more than $50 trillion in assets.
  - They account for more than one-third of the global banking system’s total assets and loans.
  - In several product markets, they collectively comprise 75 percent or more global market shares.
- Purpose:
  - Develop a novel, granular taxonomy of bank business models leveraging banks’ own reporting (revenues by business lines, geographic revenue mixes, entity-level data) to track evolution of main business model aspects and international structures relevant to global financial stability.

### II. Business model framework — four dimensions
- Taxonomy dimensions:
  - (1) lines-of-business;
  - (2) geographic orientation;
  - (3) international funding structure; and
  - (4) entity (branches and subsidiaries) structure of foreign operations.
- Data sources by dimension:
  - Dimensions (1) and (2): consolidated (global) reporting.
  - Dimensions (3) and (4): consolidated financials, regulatory filings, and entity-level data.

### III. Lines-of-business taxonomy and thresholds
- Lines-of-business categories (revenue pools used in classification):
  - Consumer banking: predominantly PFS banking, mainly for households.
  - Wealth management: private banking, funds management and insurance.
  - Commercial banking: lending to small and medium-sized companies.
  - Corporate banking: lending to corporate customers, particularly large corporates (may include underwriting and corporate advisory).
  - Markets: brokerage revenues and related gains and losses on trading positions.
  - Transaction services: payments, cash management and settlement and clearing services.
- Business-model classification thresholds (from revenue mix):
  - Wealth manager: Wealth management >50 (Percent of consolidated revenue)
  - Transaction bank: Transaction services >50 (Percent of consolidated revenue)
  - Investment bank: Corporate and investment banking plus Markets >50 AND Markets alone >25 (Percent of consolidated revenue)
  - Consumer bank: Consumer banking plus wealth management >75 (Percent of consolidated revenue)
  - Corporate bank: Corporate banking plus commercial banking >75 (Percent of consolidated revenue)
  - Universal bank: Either, PFS banking and corporate banking Each >40 OR, more than three lines of business Each >20 (Percent of consolidated revenue)
- Partitioning result among the 30 G-SIBs:
  - Three smaller clusters of narrower strategies (investment banks, transaction banks and wealth managers).
  - Two clusters of broader strategies (4 corporate banks and 8 consumer banks).
  - A large cluster of 12 universal banks.

### IV. Geographic-orientation taxonomy and thresholds
- Geographic scope measurement:
  - Consolidated revenue by region (home market plus North America; Europe, Middle East and Africa; Latin America; and Asia-Pacific).
- Classification thresholds:
  - Local: From domestic market > 80 (Percent of consolidated revenue)
  - Global: Either, from two regions Each > 10 Or, from three regions Each > 5 (Percent of consolidated revenue)
  - Regional: From domestic market < 80 And, from home region > 50 And, Bank is not Global (Percent of consolidated revenue)
- Aggregate asset shares by line-of-business and geographic reach (Figure 7 — by line-of-business (% of G-SIB assets)):
  - Universal Bank 62.2
  - Consumer Bank 22.4
  - Corporate Bank 4.6
  - Investment Bank 6.2
  - Wealth Manager 3.5
  - Transaction Bank 1.2
- Aggregate asset shares by geographic reach (Percent of G-SIB assets):
  - Global 51.7
  - Regional 18.1
  - Local 30.2
  - Total 100.0

### V. International business-model structures (funding and entity)
- Two principal distinctions:
  - Funding structure:
    - “PFS/local funding” — depends relatively heavily on local funding, mainly local-currency deposits from host-country sources.
    - “International wholesale/centralized funding” — relies more on centralized funding and wholesale instruments (interbank, commercial paper, repo, swaps) and on intragroup funding.
  - Entity structure:
    - Foreign subsidiaries — facilitate access to local deposits; regulators commonly allow tapping insured deposits only through local subsidiaries.
    - Branches — more associated with wholesale funding and greater use of intragroup transfers.
- Mapping summary:
  - International wholesale:
    - Wholesale and market-based instruments;
    - Centrally coordinated liquidity;
    - Extensive intragroup cross-border transfers;
    - Predominantly operates through international branches;
    - Home regulator is primary supervisor of branch operations.
  - International retail:
    - Large stable deposit franchises;
    - Decentrally managed local funding;
    - Extensive use of locally incorporated subsidiaries;
    - Country subsidiaries supervised by host authority.

### VI. Key findings on post-GFC model adjustments and implications
- Major observations:
  - Banks have made substantial adjustments in bank business models in the wake of the GFC.
  - According to the authors’ classifications, eight G-SIBs (over one quarter) have altered their business mix sufficient to migrate to a different business model.
  - Changes along business lines have broadly been in line with the thrust of strengthened regulation aimed at reducing systemic risk.
  - Market risk intensity has declined from pre-crisis by roughly half (measure developed in the paper).
  - As a group, G-SIBs have maintained their degree of international orientation, providing evidence that unintended consequences of diminished international activity in credit and lending have been avoided.
  - G-SIB models continue to evolve as banks address emerging challenges to entity structures and funding models in international operations.
  - The international wholesale model may be most vulnerable given its reliance on flexible cross-border flows of wholesale funding among international branches as regulation and ringfencing may inhibit cross-border liquidity flows, along with increased emphasis on subsidiarization.

### VII. Methodological notes used by the taxonomy
- Framework emphasis:
  - Use banks’ own reporting (revenues by business lines and geographic revenue mixes) and entity-level data to align classification thresholds with banks’ management descriptions.
- Data derivation:
  - Lines-of-business and geographic orientation: derived from consolidated reporting.
  - Funding and entity dimensions: use consolidated and entity-level/regulatory filings.
- Threshold application:
  - Thresholds uniformly applied across banks to allow aggregation and grouping into specific business models.
- Time-smoothing:
  - To reduce single-year distortions, revenue mixes in figures capture average revenue mix over 2017 and 2018 where noted.

### VIII. Customer focus, subsidiarization, and funding localization
- International consumer business models:
  - Tend to be more heavily subsidiarized and rely more on local funding.
- International wholesale models:
  - More branch-based and rely less on local deposits.
- Definitions preserved:
  - Localization of international funding = Foreign offices’ local liabilities in local currency as a percent of consolidated total foreign liabilities.
  - Degree of subsidiarization = Assets of material banking subsidiaries as percent of consolidated assets.
- Empirical notes:
  - Banks in Switzerland, Japan and China are excluded from certain G-SIB data due to insufficient granularity.

### IX. Funding composition and degree of subsidiarization (selected observations)
- Country labels used in source figures: US, GB, DE, JP, CA, HK, KR, TW, ZA, CL, PL, TK.
- Funding components presented in source figures include:
  - Deposits, Wholesale funding, Intra-group, Other (with ‘Other’ including non-funding items such as payables).
- Conclusion from figures:
  - International consumer business models are more subsidiarized and local-funding reliant; international wholesale models are more branch-based and less deposit reliant.

### X. How the Global Financial Crisis reshaped bank business models
- Regulatory and market changes:
  - Overhaul of regulatory framework; long-lasting changes to economic and financial environment; shifts in competitive landscape.
  - G-SIBs faced bad debt and losses on trading and investment positions; large multi-billion dollar penalties and legal charges for some US and European G-SIBs; sustained low interest rates compressing interest income; dampened market volatility suppressing trading volumes and revenues.
  - Strengthened global capital framework (Basel III) and more stringent global liquidity management regime followed the GFC.
  - New frameworks: total loss-absorbing capital (TLAC) and similar concepts (e.g., MREL).
  - Supervisory responses: vastly enhanced stress-testing processes and new resolution regimes.
  - Regulatory measures: increased risk-asset weightings for capital market activities, capital charges related to the fundamental review of the trading book, and simple leverage ratios.

### XI. Profitability dynamics and business-line impacts
- Pretax ROA and ROE findings:
  - Wealth management and consumer banking remained relatively profitable during the crisis period and aftermath.
  - Corporate and investment banking generated sub-standard profitability both before the financial crisis and more recently.
  - Corporate and investment banking profitability came under pressure across revenues, expenses and capital structure.
- Panel methods:
  - Pretax ROA by line of business uses three-year intervals to reduce episodic effects.
  - ROE comparisons by business model use 2005–07 versus 2016–18 (basis points).

### XII. Business model response and strategic adjustments
- Profitability trends:
  - Profitability across all categories of business models is lower than pre-crisis, with the largest decline in investment bank and corporate bank models.
- Strategic shifts:
  - Most G-SIBs increased emphasis on consumer banking and some shifted toward wealth management; broad reduction in corporate and investment banking and markets businesses.
  - Eight G-SIBs altered their business mix sufficiently to migrate to a different business model; dominant shift toward universal banking to diversify revenue sources.
  - Banks generally strengthened core competencies rather than undertaking radical model changes.
  - Investment banks losing markets businesses aim to add revenues from corporate banking and wealth management (adjacent-business strategy).
- Deal activity:
  - Most G-SIBs’ business models stabilized by end-2010; consolidation within established lines of business followed.
  - Acquisition volume slowed sharply since the beginning of the financial crisis; divestitures supported adjustment.
  - G-SIBs’ assets plateaued after rapid growth leading into the crisis.

### XIII. Market risk intensity and balance-sheet usage
- Index and trends:
  - An index of market risk intensity for G-SIBs declined by roughly half between its peak in 2008 and 2018, particularly among US and European G-SIBs.
  - Investment banks and wealth managers saw sharp reductions in market risk intensity; wealth managers reduced exposures even more aggressively.
  - Both global and regional G-SIBs aggressively reduced market risk positions.
- Market risk intensity index components:
  - (1) market risk-weighted assets as percent of total RWA;
  - (2) Level 3 assets as percent of total assets;
  - (3) Notional amount of derivatives outstanding as percent of total assets;
  - (4) total value-at-risk (VAR) as percent of total RWA.

### XIV. Profitability outlook and remaining restructuring needs
- Outlook:
  - After a period of low ROE, overall profitability is improving.
  - Figure 19: returns across most business models are expected (on investment analysts’ median forecasts) to improve over the next few years.
- Caveat:
  - Some improvements in earnings outlook are premised on expectations of rising interest rates and widening net interest margins, which may turn out to be overly optimistic.
- Continuing challenges:
  - Some business models, such as investment banking, and some individual G-SIBs continue to struggle with very weak underlying profitability, indicating continuing need for restructuring (example noted: Deutsche Bank announced a major restructuring).

### XV. International focus and cross-border services
- Concerns:
  - Economic factors and regulatory reforms might lead to retrenchment in cross-border provision of services; cross-border bank lending has experienced a sharp and sustained decline (BIS definition excludes local lending by foreign subsidiaries and branches).
- Broader measure of internationalization (three indicators):
  - (1) revenues outside the home region as a share of total revenues;
  - (2) international loans (or assets where loans data are not available) as percentage of total loans;
  - (3) foreign deposits as percentage of total deposits.
- Observed trends:
  - By this broader measure, G-SIBs as a group have seen only a gradual decline in overall focus on international credit and services.
  - Banking subsidiaries outside home markets have been much more stable than cross-border credit; decline in direct cross-border lending partly compensated by increased lending from banks’ foreign offices (branches and subsidiaries).
- Regional patterns:
  - US banks initially retrenched domestically post-GFC and later delivered superior returns.
  - European G-SIBs increased international focus very slightly from an already elevated level.
  - Asian banks increased international focus, particularly since 2011, driven mainly by Japanese banks seeking higher returns abroad.
  - Chinese banks internationalized despite lower overseas profitability.
- By business model:
  - Most decline in international focus driven by consumer banks, universal banks with large consumer operations, and transaction banks.
  - Investment banks, corporate banks, and wealth managers remained more stable in international focus.
- By geographic orientation:
  - Global G-SIBs remained highly international.
  - Regional and local banks saw decline in degree of internationality.
- Panel 2 note:
  - Return on assets comparison used 2016-18 averages of domestic and foreign subsidiaries (sample of 255 domestic and 679 international subsidiaries).

### XVI. Emerging pressures on international banking models — Section II overview
- Two main international banking models analyzed: international wholesale and international PFS (consumer) models.
- Section IV (introductory note) transitions to detailed challenges to each model.

### XVII. A. International Wholesale Banking Model: Challenged
- Structure and function:
  - Typically structured as a network of country branch entities linked financially and legally to home country parents.
  - Provides flexibility to allocate liquidity and book credit efficiently across countries, economizing on balance sheet and capital.
  - Balance sheet “due from” and “due to” positions measure intra-group funding and credit flows.
- Observed shifts:
  - Branches’ intragroup positions have been either shrinking on a gross basis (both gross due from and due to declining) or shifting toward net borrowing vis-à-vis overseas affiliates.
  - The US, UK and Hong Kong show declines in gross intragroup borrowings relative to total assets.
  - Global cross border intragroup flows have declined on a flow basis over much of the post-crisis period.
  - Branches in most reporting countries register a shift toward net intra-group borrowing.
- Regulatory and supervisory drivers:
  - Local supervisors reduce banks’ scope to extend credit across borders to avoid losses and conserve liquidity for domestic deployment.
  - Examples of “structural initiatives” include Intermediate Holding Company Law, combined US operations (CUSOs), EU Intermediate Holding Company framework, and “ring-fencing” provisions such as Vickers.
  - Host supervisors extending resolution planning and operational liquidity requirements to include foreign entities (examples: RLAP and RLEN requirements in 2018; in 2019 the Federal Reserve proposed considering direct liquidity requirements on US branches of foreign banks).
  - Under RLEN: measure stand-alone liquidity of each material entity to ensure liquidity is available to meet deficits of a 30-day period.
  - RLAP: establishes a plan to balance pre-positioning of liquidity within each entity and available HQLA from the parent.
- Consequences and risks:
  - Pressure for local branches to build liquidity and reduce interconnectedness or shift toward net borrowing could impair balance sheet efficiency and ability to offer flexible cross-border services.
  - Continued strengthening of these forces could pose a fundamental challenge to the international wholesale banking business model.

### XVIII. B. International Consumer Banking — lower profitability than domestic incumbents
- Empirical observations:
  - G-SIBs’ overseas bank subsidiaries on average generate higher returns than their own domestic banking businesses — likely because many operate in developing banking systems with relatively higher margins.
  - However, G-SIBs’ foreign bank subsidiaries are less profitable than domestic incumbents in host countries.
  - RoA measured as 2016-18 averages; blue dots in panel 1 indicate developed economies; orange dots are emerging economies.
- Decomposition of profitability difference:
  - G-SIBs’ bank subsidiaries generate relatively lower gross interest income but also lower interest expense and operating expense.
  - They underperform on margins, but outperform on credit costs and efficiency.
  - Possible source of lower profitability: greater orientation toward relatively low margin US dollar intermediation and lower involvement in higher-margin local currency business.
- Competitive dynamics:
  - Local players in host countries are gaining experience; competitive pressures on G-SIBs likely to build over time.
  - Declining PFS banking margins in emerging markets—often a by-product of financial deepening—pose an increasing challenge to international PFS banking models.

### XIX. V. Conclusion (selected findings relevant to international models)
- Post-GFC adjustments:
  - Banks have materially adjusted business models; profitability across categories is lower than pre-crisis, with the largest declines in investment bank and corporate bank models.
  - Eight G-SIBs (over one quarter) have altered their business mix sufficiently to migrate to a different business model.
  - Dominant shift: from corporate banking and markets towards consumer banking and wealth management; some consumer banks are reducing corporate banking and markets exposures.
- International activity and resilience:
  - G-SIBs as a group have mostly maintained international presence and activities according to measures of internationalization, despite regulatory tightening, competition from nonbanks, and low interest rates.
- Structural vulnerability and monitoring priorities:
  - The international wholesale model appears most vulnerable due to reliance on flexible cross-border flows of wholesale funding among branches.
  - Subsidiarized models are less vulnerable, relying more on nationally segregated funding.
  - G-SIBs’ international subsidiaries are less profitable than domestic incumbents in many host countries, particularly in emerging economies.
  - These structural trends require close monitoring for effects on liquidity of global markets, fungibility of local liquidity pools, and global financial system resilience to shocks.

*Source — wpiea2019295-print-pdf (content supplied).*

### References .............................................................................................................

### wpiea2019295-print-pdf - References .............................................................................................................

### I. Introduction — role and scale of G-SIBs
- The Global Financial Crisis (GFC) prompted an overhaul of the regulatory framework and long-lasting changes to the economic and financial environment that reshaped banking strategies.
- Focus: 30 banks currently designated as G-SIBs (using the list identified in 2018).
- Key scale statistics:
  - The 30 G-SIBs together hold more than $50 trillion in assets.
  - They account for more than one-third of the global banking system’s total assets and loans.
  - In several product markets, they collectively comprise 75 percent or more global market shares.
- Purpose: develop a novel, granular taxonomy of bank business models that leverages banks’ own reporting (revenues by business lines, geographic revenue mixes, entity-level data) to track evolution of main business model aspects and international structures relevant to global financial stability.

### II. Business model framework — four dimensions
- The taxonomy identifies business models along four dimensions:
  - (1) lines-of-business;
  - (2) geographic orientation;
  - (3) international funding structure; and
  - (4) entity (branches and subsidiaries) structure of foreign operations.
- Dimensions (1) and (2) are based on consolidated (global) reporting; (3) and (4) draw on consolidated financials, regulatory filings, and entity-level data.

### III. Lines-of-business taxonomy and thresholds
- Lines-of-business categories (revenue pools used in classification):
  - Consumer banking: predominantly PFS banking, mainly for households.
  - Wealth management: private banking, funds management and insurance.
  - Commercial banking: lending to small and medium-sized companies.
  - Corporate banking: lending to corporate customers, particularly large corporates (may include underwriting and corporate advisory).
  - Markets: brokerage revenues and related gains and losses on trading positions.
  - Transaction services: payments, cash management and settlement and clearing services.
- Business-model classification thresholds (from revenue mix):
  - Wealth manager: Wealth management >50 (Percent of consolidated revenue)
  - Transaction bank: Transaction services >50 (Percent of consolidated revenue)
  - Investment bank: Corporate and investment banking plus Markets >50 AND Markets alone >25 (Percent of consolidated revenue)
  - Consumer bank: Consumer banking plus wealth management >75 (Percent of consolidated revenue)
  - Corporate bank: Corporate banking plus commercial banking >75 (Percent of consolidated revenue)
  - Universal bank: Either, PFS banking and corporate banking Each >40 OR, more than three lines of business Each >20 (Percent of consolidated revenue)
- Partitioning result among the 30 G-SIBs:
  - Three smaller clusters of narrower strategies (investment banks, transaction banks and wealth managers).
  - Two clusters of broader strategies (4 corporate banks and 8 consumer banks).
  - A large cluster of 12 universal banks.

### IV. Geographic-orientation taxonomy and thresholds
- Geographic scope measured from consolidated revenue by region (home market plus North America; Europe, Middle East and Africa; Latin America; and Asia-Pacific).
- Classification thresholds:
  - Local: From domestic market > 80 (Percent of consolidated revenue)
  - Global: Either, from two regions Each > 10 Or, from three regions Each > 5 (Percent of consolidated revenue)
  - Regional: From domestic market < 80 And, from home region > 50 And, Bank is not Global (Percent of consolidated revenue)
- Aggregate asset shares by line-of-business and geographic reach (Figure 7):
  - By line-of-business (% of G-SIB assets):
    - Universal Bank 62.2
    - Consumer Bank 22.4
    - Corporate Bank 4.6
    - Investment Bank 6.2
    - Wealth Manager 3.5
    - Transaction Bank 1.2
  - By geographic reach (Percent of G-SIB assets):
    - Global 51.7
    - Regional 18.1
    - Local 30.2
    - Total 100.0

### V. International business-model structures (funding and entity)
- International models distinguished by:
  - Funding structure: “PFS/local funding” versus “international wholesale/centralized funding.”
    - PFS models depend relatively heavily on local funding—mainly local-currency deposits from host-country sources.
    - International wholesale models rely more on centralized funding and wholesale instruments (interbank, commercial paper, repo, swaps) and on intragroup funding.
  - Entity structure: branches versus locally incorporated subsidiaries.
    - Foreign subsidiaries facilitate access to local deposits; regulators commonly allow tapping insured deposits only through local subsidiaries.
    - Branches are more associated with wholesale funding and greater use of intragroup transfers.
- Mapping summary:
  - International wholesale: wholesale and market-based instruments; centrally coordinated liquidity; extensive intragroup cross-border transfers; predominately operates through international branches; home regulator is primary supervisor of branch operations.
  - International retail: large stable deposit franchises; decentrally managed local funding; extensive use of locally incorporated subsidiaries; country subsidiaries supervised by host authority.

### VI. Key findings on post-GFC model adjustments and implications
- Major observations (as stated in the paper):
  - Banks have made substantial adjustments in bank business models in the wake of the GFC.
  - According to the authors’ classifications, eight G-SIBs (over one quarter) have altered their business mix sufficient to migrate to a different business model.
  - Changes along business lines have broadly been in line with the thrust of strengthened regulation aimed at reducing systemic risk.
  - Market risk intensity has declined from pre-crisis by roughly half (measure developed in the paper).
  - As a group, G-SIBs have maintained their degree of international orientation, providing evidence that unintended consequences of diminished international activity in credit and lending have been avoided.
  - G-SIB models continue to evolve as banks address emerging challenges to entity structures and funding models in international operations.
  - The international wholesale model may be most vulnerable given its reliance on flexible cross-border flows of wholesale funding among international branches as regulation and ringfencing may inhibit cross-border liquidity flows, along with increased emphasis on subsidiarization.

### VII. Methodological notes used by the taxonomy
- The framework emphasizes using banks’ own reporting (revenues by business lines and geographic revenue mixes) and entity-level data to align classification thresholds with banks’ management descriptions.
- Lines-of-business and geographic orientation are derived from consolidated reporting; funding and entity dimensions use consolidated and entity-level/regulatory filings.
- Thresholds are uniformly applied across banks to allow aggregation and grouping into specific business models.
- To reduce single-year distortions, revenue mixes in figures capture average revenue mix over 2017 and 2018 where noted.

*Italic: Source — wpiea2019295-print-pdf (content supplied).*

### 1. Foreign Bank Subsidiaries 2. Foreign Bank Branches

### 1. Foreign Bank Subsidiaries 2. Foreign Bank Branches

### Customer focus and funding localization
- International consumer business models tend to be more heavily subsidiarized and rely more on local funding, while international wholesale models are more branch-based and rely less on local deposits (Figure 11, panels 1 and 2).
- Localization of international funding = Foreign offices’ local liabilities in local currency as a percent of consolidated total foreign liabilities (definition preserved).
- Consumer asset focus = Global loans to households as percent of total assets (insufficient data to measure banks’ consumer loans outside their home jurisdictions).
- Note: Banks in Switzerland, Japan and China are excluded from certain G-SIB data due to insufficient granularity.

### Funding composition across jurisdictions (selected country breakdowns as presented)
- Country labels used: US, GB, DE, JP, CA, HK, KR, TW, ZA, CL, PL, TK.
- Funding components shown in the source figures include: Deposits, Wholesale funding, Intra-group, Other (with ‘Other’ including non-funding items such as payables).

### Degree of subsidiarization and business model patterns
- Degree of subsidiarization = Assets of material banking subsidiaries as percent of consolidated assets (definition preserved).
- Figure 11 and accompanying text: international consumer business models are more subsidiarized and local-funding reliant; international wholesale models are more branch-based and less deposit reliant.

### How the Global Financial Crisis reshaped bank business models (Section III)
- The GFC led to: an overhaul of the regulatory framework; long-lasting changes to the economic and financial environment; and shifts in the competitive landscape for financial services.
- G-SIBs faced a complex set of challenges and earnings shocks including: bad debt and losses on trading and investment positions; large multi-billion dollar penalties and legal charges for some US and European G-SIBs; sustained low interest rates compressing interest income; dampened market volatility suppressing trading volumes and revenues.
- A strengthened global capital framework (Basel III) and a more stringent global liquidity management regime followed the GFC.
- New frameworks introduced by national/regional regulators include total loss-absorbing capital (TLAC) and similar concepts (e.g., MREL).
- Supervisory responses included vastly enhanced stress-testing processes and new resolution regimes.
- Regulators imposed measures such as increased risk-asset weightings for capital market activities, capital charges related to the fundamental review of the trading book, and simple leverage ratios to better align capital with risk exposures.

### Profitability dynamics and business-line impacts
- Pretax Return on Assets (ROA) and Return on Equity (ROE) analyses indicate:
  - Wealth management and consumer banking remained relatively profitable during the crisis period and aftermath.
  - Corporate and investment banking generated sub-standard profitability both before the financial crisis and more recently.
  - Corporate and investment banking profitability came under pressure across revenues, expenses and capital structure.
- Panel comparisons used in the source: Pretax ROA by line of business (three-year intervals to reduce episodic effects); ROE by business model, 2005–07 versus 2016–18 (basis points).

### Business model response and strategic adjustments (A. Business Model Response)
- Profitability across all categories of business models is lower than pre-crisis, with the largest decline in investment bank and corporate bank models.
- Most G-SIBs increased emphasis on consumer banking and some shifted toward wealth management; broad reduction in corporate and investment banking and markets businesses.
- Eight G-SIBs altered their business mix sufficiently to migrate to a different business model (Figure 15); the dominant shift has been toward universal banking to diversify revenue sources.
- Banks have sought to strengthen core competencies rather than radical model changes; examples include wealth managers emphasizing wealth management lines and consumer banks de-emphasizing corporate banking and markets.
- Investment banks losing markets businesses aim to add revenues from corporate banking and wealth management (adjacent-business strategy).

### Strategic stabilization and deal activity
- Most G-SIBs’ business models stabilized by end-2010; consolidation within established lines of business followed.
- Acquisition volume slowed sharply since the beginning of the financial crisis; divestitures supported adjustment.
- G-SIBs’ assets plateaued after rapid growth leading into the crisis.

### Market risk intensity and balance-sheet usage
- An index of market risk intensity for G-SIBs declined by roughly half between its peak in 2008 and 2018, particularly among US and European G-SIBs (Figure 18, panel 1).
- Investment banks and wealth managers saw sharp reductions in market risk intensity; wealth managers reduced exposures even more aggressively.
- Both global and regional G-SIBs aggressively reduced market risk positions.
- Market risk intensity index components: (1) market risk-weighted assets as percent of total RWA; (2) Level 3 assets as percent of total assets; (3) Notional amount of derivatives outstanding as percent of total assets; (4) total value-at-risk (VAR) as percent of total RWA.

### Profitability outlook and remaining restructuring needs
- After a period of low ROE, overall profitability is improving.
- Figure 19: returns across most business models are expected (on investment analysts’ median forecasts) to improve over the next few years.
- Caveat in source: Some improvements in earnings outlook are premised on expectations of rising interest rates and widening net interest margins, which may turn out to be overly optimistic.
- Some business models, such as investment banking, and some individual G-SIBs continue to struggle with very weak underlying profitability, indicating continuing need for restructuring (example noted: Deutsche Bank announced a major restructuring).

### International focus and cross-border services (B. International Focus)
- Concerns exist that economic factors and regulatory reforms might lead to retrenchment in cross-border provision of services; cross-border bank lending has experienced a sharp and sustained decline (BIS definition excludes local lending by foreign subsidiaries and branches).
- Broader measure of internationalization used in the source: sum of degree of internationalization of loans, deposits and revenues (three indicators): (1) revenues outside the home region as a share of total revenues; (2) international loans (or assets where loans data are not available) as percentage of total loans; (3) foreign deposits as percentage of total deposits.
- By this broader measure, G-SIBs as a group have seen only a gradual decline in overall focus on international credit and services (Figure 20, panel 1).
- Banking subsidiaries outside home markets have been much more stable than cross-border credit; decline in direct cross-border lending partly compensated by increased lending from banks’ foreign offices (branches and subsidiaries).
- Regional patterns:
  - US banks initially retrenched domestically post-GFC and later delivered superior returns.
  - European G-SIBs increased international focus very slightly from an already elevated level.
  - Asian banks increased international focus, particularly since 2011, driven mainly by Japanese banks seeking higher returns abroad.
  - Chinese banks internationalized despite lower overseas profitability, possibly reflecting long-term aspirations to build global footprints or diversify exposures.
- By business model:
  - Most decline in international focus driven by consumer banks, universal banks with large consumer operations, and transaction banks.
  - Investment banks, corporate banks, and wealth managers remained more stable in international focus.
- By geographic orientation:
  - Global G-SIBs remained highly international.
  - Regional and local banks saw decline in degree of internationality.
- Panel 2 note: Return on assets comparison used 2016-18 averages of domestic and foreign subsidiaries (sample of 255 domestic and 679 international subsidiaries).

### Emerging pressures on international banking models (introductory note for Section IV)
- The source transitions to consider challenges to the two main international banking models introduced earlier; Section IV begins this analysis.

*Source: wpiea2019295-print-pdf (IMF staff analysis and figures as provided in the supplied content).*

### Section II, the international wholesale and international PFS models. In wholesale banking,

### Section II, the international wholesale and international PFS models. In wholesale banking,

### A. International Wholesale Banking Model: Challenged
- Structure and function
  - Typically structured as a network of country branch entities linked financially and legally to home country parents.
  - Provides flexibility to allocate liquidity and book credit efficiently across countries, economizing on balance sheet and capital.
  - Balance sheet “due from” (lending to overseas affiliates) and “due to” (borrowing from related parties) positions measure intra-group funding and credit flows.
- Observed shifts
  - Branches’ intragroup positions have been either shrinking on a gross basis (both gross due from and due to declining) or shifting toward net borrowing vis-à-vis overseas affiliates.
  - The US, UK and Hong Kong show declines in gross intragroup borrowings relative to total assets.
  - Global cross border intragroup flows have declined on a flow basis over much of the post-crisis period.
  - Branches in most reporting countries register a shift toward net intra-group borrowing.
- Regulatory and supervisory drivers
  - Local supervisors reduce banks’ scope to extend credit across borders to avoid losses and conserve liquidity for domestic deployment.
  - Examples of “structural initiatives” include Intermediate Holding Company Law, combined US operations (CUSOs), EU Intermediate Holding Company framework, and “ring-fencing” provisions such as Vickers.
  - Host supervisors extending resolution planning and operational liquidity requirements to include foreign entities (examples: RLAP and RLEN requirements in 2018; in 2019 the Federal Reserve proposed considering direct liquidity requirements on US branches of foreign banks).
  - Under RLEN: measure stand-alone liquidity of each material entity to ensure liquidity is available to meet deficits of a 30-day period.
  - RLAP: establishes a plan to balance pre-positioning of liquidity within each entity and available HQLA from the parent.
- Consequences and risks
  - Pressure for local branches to build liquidity and reduce interconnectedness or shift toward net borrowing could impair balance sheet efficiency and ability to offer flexible cross-border services.
  - Continued strengthening of these forces could pose a fundamental challenge to the international wholesale banking business model.

### B. International Consumer Banking—Lower Profitability than Domestic Incumbents
- Empirical observations
  - G-SIBs’ overseas bank subsidiaries on average generate higher returns than their own domestic banking businesses (Figure 20, panel 2) — likely because many operate in developing banking systems with relatively higher margins.
  - However, G-SIBs’ foreign bank subsidiaries are less profitable than domestic incumbents in host countries (Figure 23, panel 1).
  - RoA measured as 2016-18 averages; blue dots in panel 1 indicate developed economies; orange dots are emerging economies.
- Decomposition of profitability difference
  - G-SIBs’ bank subsidiaries generate relatively lower gross interest income but also lower interest expense and operating expense.
  - They underperform on margins, but outperform on credit costs and efficiency (Figure 23, panel 2).
  - Possible source of lower profitability: greater orientation toward relatively low margin US dollar intermediation and lower involvement in higher-margin local currency business.
- Competitive dynamics
  - Local players in host countries are gaining experience; competitive pressures on G-SIBs likely to build over time.
  - Declining PFS banking margins in emerging markets—often a by-product of financial deepening—pose an increasing challenge to international PFS banking models.

### V. Conclusion (Selected findings relevant to international models)
- Post-GFC adjustments
  - Banks have materially adjusted business models; profitability across categories is lower than pre-crisis, with the largest declines in investment bank and corporate bank models.
  - Eight G-SIBs (over one quarter) have altered their business mix sufficiently to migrate to a different business model.
  - Dominant shift: from corporate banking and markets towards consumer banking and wealth management; some consumer banks are reducing corporate banking and markets exposures.
- International activity and resilience
  - G-SIBs as a group have mostly maintained international presence and activities according to measures of internationalization, despite regulatory tightening, competition from nonbanks, and low interest rates.
- Structural vulnerability and monitoring priorities
  - The international wholesale model appears most vulnerable due to reliance on flexible cross-border flows of wholesale funding among branches.
  - Subsidiarized models are less vulnerable, relying more on nationally segregated funding.
  - G-SIBs’ international subsidiaries are less profitable than domestic incumbents in many host countries, particularly in emerging economies.
  - These structural trends require close monitoring for effects on liquidity of global markets, fungibility of local liquidity pools, and global financial system resilience to shocks.

*Source: Section II, the international wholesale and international PFS models. In wholesale banking, (excerpt from wpiea2019295-print-pdf).*

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_Source: https://www.imf.org/-/media/files/publications/wp/2019/wpiea2019295-print-pdf.pdf_