Scale, scope and complexity: assessing banking business models

In this paper we study how the complexity of a bank’s business model is related to its returns. Our approach allows for the possibility that bank returns may be retained in part by mobile and powerful bankers and that the amount of rent extraction may vary across different lines of business. Using data on U.S. bank holding companies over the years 2003–12, we find strong evidence that the scope of a bank’s business is an important determinant of bank returns and that, all else equal, wide scope favors bank shareholders relative to bankers. Establishing a presence across a wide range of wholesale banking activities requires a complex organization that would be difficult to replicate elsewhere and in this way serves to moderate bankers’ compensation demands. We use our statistical results to shed light on the evolution of the business models of some of the largest U.S. banks over the last 10 years.