Business models of banks for the financial markets in the EU

Abstract

PURPOSE: The purpose of the article is to identify models of banks’ activity in the securities and derivatives markets, as well as to analyse changes in these models on the example of the largest banks in the EU.

DESIGN/METHODOLOGY/APPROACH: The proposed method uses cluster analysis of the main indicators for banking investment based on the agglomerative hierarchical clustering algorithm of Ward and the Tau Index as the criterion for evaluating the optimal number of clusters. The research covers 29 largest EU banks, spanning the period 2007–2018.

FINDINGS: Before the global financial crisis it was possible to clearly identify two clusters, one of which reflected the high engagement of a number of banks in the securities and derivatives market, then after the Great Recession, can be distinguished four main models: (1) a highly active investment strategy in the securities and derivatives markets; (2) an active investment strategy in the securities market; (3) active mix-investment strategy in the securities and derivatives markets; (4) moderate investment strategy in the securities and derivatives markets.

PRACTICAL IMPLICATIONS: The data analysis shows that significant modifications in the investment strategies of banks confirm to some extent the effectiveness and the further need of certain additional regulations to ensure the financial soundness of banking institutions at the EU level, as well as the effectiveness and the further need of the changes in the national legislation of individual EU countries concerning the banking proprietary trading in the securities and derivatives markets.

ORIGINALITY/VALUE: The paper has enabled to develop an understanding of the modification of the business models of largest EU banks in the financial instruments market.