Business Model Analysis

From Open Risk Manual

Definition

Business Model Analysis (BMA) is the analysis of a Business Model for example in the context of assessing Business Model Risk

Methodologies

Business model analysis may rely on various sources, including but not limited to:

  • financial reporting
  • business plans
  • internal reporting
  • relevant surveys and studies
  • dialogues with internal and external stakeholders of the firm.


All these sources help to understand the details of firm's lines of business, their sources of revenue and profit, their customer base, their operating approach, and the direction of the board management.

Business model analysis is conducted by looking at different dimensions and considering the firm's business environment and strategic and financial plans

Example

Under one approach, business model analysis (BMA) in the banking sector aims to assess[1]:

  • the ability of a bank or banking group’s business model to generate acceptable returns over the following 12 months; and
  • the ability of its strategy to generate acceptable returns over the following three years.


A BMA is based on a wide range of sources of information, such as the strategic plans of banks and banking groups; data collected through financial, internal or regulatory reporting; audit reports; and recovery and resolution plans.

A BMA starts by identifying the activities, market positions, business lines, products or group entities which are the most important for the bank or banking group in terms of viability or sustainability.

The BMA must be accompanied by an analysis of

  • the business environment in which the bank or banking group operates so as to help supervisors understand the macroeconomic conditions,
  • the market trends (including regulatory trends, technological trends, and societal or demographic trends),
  • the competitive landscape and how the business environment is likely to evolve.


When assessing the viability of a bank or banking group’s business model, supervisors should analyse its profitability, the breakdown of its incomes and costs, its impairment provisions and the trends in its profitability indicators. They should also examine its funding structure, assets and liabilities, and the trends in its solvency and liquidity positions. Furthermore, supervisors should consider the risk appetite of the bank or banking group and its concentrations in customers, sectors and geographies.

Supervisors should identify the external and internal factors or dependencies that influence the success of the business model, the areas in which the bank or banking group has a competitive advantage over its peers, and the strengths of its relationships with customers, suppliers or partners (including the reliance on its reputation, the loyalty of its customers and the effectiveness of its partnerships).

When assessing the sustainability of a bank or banking group’s strategy, supervisors should seek to understand the success drivers of the strategy and financial plan. They should also assess the plausibility and consistency of the assumptions that drive the strategy and forecasts as well as the capability of the bank or banking group to execute its strategy, taking account of the complexity and ambition of the strategy, by evaluating the adherence of the bank or banking group to its previous strategies and forecasts. These assessments may lead supervisors to take supervisory measures to address the identified problems or concerns.

References

  1. Basel Committee on Banking Supervision, "Overview of Pillar 2 supervisory review practices and approaches", June 2019

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