Banking - fixed and variable costs

Hi there, 

I am not banking expert, but I would guess banking has probably very low variable cost and high fix cost and it declines with scale. I guess most cost can be saved with AI and digitalization, allowing banks to overcome the tradeoff between providing good service and minimizing operating costs.

Lucie

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Hi there,

Variable costs are always related to units.

Here, the units would essentially be customers (or, bank accounts).

So, any costs relating to each additional customer or customer action (transaction cost, server cost, etc.). 

I wouldn't do FC/VC OR Direct/indirect.

Rather, I'd breakdown costs into their main functions/categories (and this would depend on the type of bank)

Hello!

Both can be right and would be accepted (the criteria here is always, can you justify this well? Then it will go through). 

Usually in cases, when setting up a profitability tree, there is not a single right answer, but many, and what to put in variable vs. fix is a clear example of it. 

Hope it helps!

Cheers, 

Clara

Hi! There are many many ways how you can structure costs. You can do it according to business lines (for example interest vs non interest), business processes, functional groups, logical categories (e.g., fixed and variable), or many other. There is no "best" option! You have to just be aware of the fact that there are many possibilities, and that it is your task to find out, which kind of categorization makes most sense given the context and data available. This is done by means of clear communication with the interviewer.

Cheers, Sidi

The primary variable cost would be staff costs i.e salaries, bonuses etc. fixed costs would depend for e.g. real estate (owned vs leased).

From a Business unit perspective, direct and indirect costs are important as well as cost allocations. For example, if IT is a cost centre, how are the IT costs (indirect costs) allocated to different P&L's of the business units responsible for revenue.

You are asking what makes more sense: a fixed vs. variable or a direct vs. indirect.

Here's the deal: you didn't state a goal. Without a goal it is impossible to know which one is better. Also, without a goal and a time period you don't even know what is variable (variable depends…on the specific variable / cost driver you are trying to optimize).