Achieving a sustainable cost-efficient business model in banking: The case of European commercial banks

We analyze banks’ abilities to achieve a sustainable business model. We first argue that assessment of the sustainability of a business model on the market requires consideration of the broad set of choices bank managers face, because such a set of business strategies and their adjustment affect performance in both the short and long-run. By measuring the variety of bank business strategies using a diversity index, we present a new framework to analyze the effect of a business model on bank performance (measured by a state-of-the-art stochastic frontier model). In particular, our method links the business model to performance by taking into account the long- and short-run effects. Using data that includes European commercial banks over the period 1993–2016, we find that a combination of (i) a persistent income business model together with the adjustment of an asset-focused business model in the long-run and (ii) diversification of the funding and income portfolios in the short run describes a sustainable cost-efficient business model. Our findings are robust to alternative specifications.