54. Business model analysis embodies the risk that the bank has failed to structure its organisation and operations (expertise, systems, and processes) in a way that leads to achieving its primary business and strategic objectives.

55. Strategic risks arise when the bank’s business model, organisation structure, operations, and/or strategy are no longer adequate to deliver the objective of the bank as specified by the Board.

56. The bank should conduct regular business model analysis (BMA) to assess its business and strategic risks to determine:

57. An effective BMA contains a through-the-cycle view of the sustainability of the business model in its current state and against a projected view of the bank’s funding structure, return on equity (ROE), capital supply, and capital demand, the effect this has on the product, service pricing, and resource requirements. The business planning should be clear, aligned, and integrated with the bank’s strategy, governance, risk-appetite statement, recovery plans, internal controls, stress tests, and internal reporting (MIS).

58. Each bank should elaborate on the linkage and consistency between their strategic decisions, risk appetite, and the resources allocated for achieving those strategies. The bank should articulate the frequency of monitoring and quantifying changes in its financial projections (e.g. balance sheet, profit and loss, and concentrations) regularly to verify that they are consistent with the business model, risk appetite, and the achievement of the bank’s strategic goals.

59. An effective BMA enables banks to identify vulnerabilities at an early stage and assess their ability to adapt to changes in their specific operating environment therefore helps to promote the safety and soundness of banks. A well-designed and comprehensive BMA approach provides banks with the basis to understand, analyse, assess the sustainability of their business models, enhance proactive, forward-looking operations, and strategy evaluation.

60. Each bank’s business model should be based on analyses and realistic assumptions (stress tests, scenario analyses, and driver analyses, etc.) about the effect of strategic choices on financial and economic outcomes of operations performed. This will enable the bank and the Central Bank to understand the nature of the business model and the inherent risks. Each bank should perform an analysis that involves identifying, challenging the dependency of strategies on uncontrollable external factors, and assumptions (e.g. market interest rates, demand growth in the target customer markets, degree of competition in the markets, cost of entry, and compliance costs).

61. An effective BMA addresses the banks’ ability to produce aggregate financial data across the banking group as a whole, and the bank solo level, for each of its main business units and business lines. Moreover, to make the best use of this data and transform it into relevant inputs, banks need to develop and use analytical tools including stress tests, peer group assessments, profitability forecasts and analysis, and scenario analyses.

62. The documentation provided in support of the business model should contain an overview of the business activities of the bank and an overview of the structure/organisational details of the bank. For example a brief description of the business model, present financial condition, any expected changes in the present business model, the expected future business environment, business plans, and the projected financial condition for the following year.

63. The following additional information and documentation should be referenced (if not part of) the ICAAP report:

64. Business model analysis may act as a base for the development of Reverse Stress Test scenarios.