Bank Regulation: One Size Does Not Fit All

Abstract

Bank business models show diverse risk characteristics, but these differences are not sufficiently considered in Pillar 1 of the regulatory framework. Even if the business model is analyzed within the European SREP, global Pillar 2 approaches differ and could lead to competitive disadvantages. Using the framework of Miles et al. [1], we examine a dataset of 115 European banks, which is split into retail, wholesale, and trading banks. We show that shifts in funding structure affect business models differently. Consequently, a “one size†approach in Pillar 1 for the regulation of banks does not fit all.JEL classification numbers: G21, G28, G32Keywords: Bank Business Models, Bank Capital Requirements, Cost of Capital, Leverage Ratio, Regulation, SREP