Chapter 9

A SUSTAINABLE BANK BUSINESS MODEL: CAPITAL, LIQUIDITY AND LEVERAGE

The global financial crisis has had the effect of making all participants in the banking industry – from regulators, central banks and governments to bank boards, directors and trade associations – undertake a fundamental review of the principles of banking. Issues such as capital and liquidity management as well as systemic risk became the subject of renewed focus. In practical terms, legislators realized that they needed to address the issue of the ‘too-big-to-fail’ bank, and this issue remains unresolved.

From the point of view of bank practitioners, the most important task is to address the issues of capital, liquidity and risk management and work them into a coherent strategy that is designed to produce sustainable returns over the business cycle. In this chapter we discuss these topics and consider how bank strategy can be formulated to handle the changed requirements of the post-crisis age. The contents are laid out as follows:

  • bank business models
  • strategy
  • corporate governance
  • liquidity risk and the liquid asset buffer.

We conclude with a view on sustainable banking.

The new bank business model

The basic bank business model has remained unchanged ever since banks became an integral part of modern society. Of course, as it more of an art than science, the model parameters themselves can be set to suit the specific strategy of the individual bank, depending on whether the strategy operates at ...

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