IESE Business School Report

Challenges to the business models of banks
Banks perform several key functions in the economy by allowing investors and
borrowers to reallocate funds more effectively thanks to reduced opacity, less
information asymmetries, longer maturities, lower risks, and lower transaction
costs. This intermediation role has been performed through different business
models, which have evolved over time depending on technological developments
and market conditions and based on the risk appetite of the specific bank.
The Covid-19 outbreak and its adverse economic effects come at the end of a
decade of significant transformation for the banking industry around the world
due to three main factors. The first is the persistent low level of interest rates,
with negative nominal rates in some jurisdictions in the recent years. While
low interest rates affect bank profitability positively in the short term, their
persistence has negative consequences through reduced net interest margins as
well as weaker monitoring incentives and laxer lending standards, in particular
for those institutions that are more reliant on maturity transformation and net
interest income.

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