Italy’s premier risk management consultancy, Prometeia, will be the sole consultancy firm to join a high level European Banking Authority workshop next month.
At the 5th European Banking Authority Policy Research Workshop on “Competition in banking: implications for financial regulation and supervision”, Prometeia will rub shoulders with research institutions, supervisory and monetary authorities and universities, including the European Central Bank, the Bank of England, Deutsche Bundesbank, the London School of Economics, and the EBA itself.
Prometeia will feature in the second session, dedicated to “Risk-taking and business models”, and will present the paper “European banks in the XXI century – are their business models sustainable?”. Prometeia has developed a new proprietary methodology to identify different business models and peer groups of European banks, as well as evaluating their performance over the business cycle.
“It is a great honour to present our work to such a qualified audience,” said Lea Zicchino, Head of Prometeia’s Markets and Financial Intermediaries Analysis unit.
Business model analysis is one of the pillars of the Supervisory Review and Evaluation Process (SREP) conducted within the SSM, the Euro area’s Single Supervisory Mechanism. It aims to assess a bank's ability to achieve satisfactory short-term profits and medium-term sustainability. Based on the final score assigned to each bank’s areas of evaluation, the SSM may require a bank to adjust its capital base, liquidity or take management actions. In its guidelines, the EBA recognises the principle of proportionality by categorising banks in four distinct categories according to their systemic relevance, dimension, organisational complexity, cross border activity.
“Based on EBA’s criteria, we identified nine homogeneous peer groups of banks,” continued Zicchino. “This statistical methodology allows us to exploit our expertise on the banking sector to assign a restricted set of banks (the so-called “training banks”) to the different peer groups, which are statistically identified”.
After controlling for macroeconomic factors, Prometeia’s analysis reveals that among retail banks, those that are more operationally complex and international performed significantly better in periods of lower financial stress. On the contrary, complex but domestic retail banks were the best performers in more recent years, because of their higher diversification of income sources and lower exposure to international risks.
This tool, based on a statistical learning approach, could be used by banks for benchmarking analysis: to compare their performance with other members of their peer group and extract useful information on their areas of strength and weakness related to profitability, risk, efficiency, asset and liability composition, etc.
Moreover, it represents the basis for assessing a bank's ability to achieve satisfactory short and medium-term profits compared to their peers, a key component of the banks’ SREP final score.
The workshop will take place in London on November 28th and 29th. Prometeia is a global leader in risk management consulting and software solutions, with over 40 years of experience in economic research, quantitative analysis and model development.