Banking business models and the nature of financial crises

In our paper we analyze the heterogeneity between various business models among systemically important banks in 65 countries over the period of 2000-2012. For the first time, we are able to identify true banking strategies consisting of different combinations of bank asset and funding sources and assess their impact on the mortgage crisis. We then estimate how distinct strategies have affected bank profitability and risk before the crisis, and what impact they have put on the mortgage crisis. Our results prove that the asset structure of banks was responsible for the systemic risk before the mortgage crisis, whereas the liability structure was responsible for the crisis itself. Finally, we show that countries with banks that rely on investment activities experienced a greater but more short-lived drop in GDP compared to countries that have a predominantly traditional banking sector.