Top Performer: Retail-Funded Bank Model

This article originally appeared on the Retail Banking Academy Blog – By 

It is well-known that Basel III categorizes retail deposits as a relatively stable source of funding for banks. The two key liquidity standards (Leverage Coverage Ratio and Net Stable Funding Ratio) reward banks that are mostly retail-funded. A recent study by the Bank of International Settlements (BIS) has placed retail-funded banks in a new and even more positive light.

The study consisted of 222 lenders for the period 2005-2013 which found that commercial banks that are funded mainly by retail deposits have the highest average return on equity (ROE) of 12.5% compared to investment (i.e., trading) banks which achieved an average ROE of 8.1%. Wholesale funded banks earned an average ROE of 5.8%.  The report also shows a spectacular average risk-adjusted ROE for retail-funded banks (8.76%), 2.5% for wholesale-funded banks and a conspicuously negative 9.55% for trading banks.

The report concludes, “regardless of the profitability metric, the retail-funded model is the top performer.” This conclusion is consistent with the findings in a paper by Altunbas et al (2011) who document that banks with a greater share of deposits in their funding mix fared significantly better in the recent financial crisis than those dependent on market funding.

Conclusion:There is evidence that commercial banks funded primarily by retail deposits are more profitable and more resilient in periods of economic shocks.

Written by Banking.com Staff