Business lending and bank profitability in the UK (2016)
Author(s):
Victor Ekpu (Adam
Smith Business School (Economics Division), University of Glasgow,
Glasgow, UK)
Alberto Paloni (Adam
Smith Business School (Economics Division), University of Glasgow,
Glasgow, UK)
Abstract:
Purpose
The purpose of this paper is to investigate the importance of
business lending as a source of bank profits in the UK banking system. The
paper also examines whether the profitability of business lending is mostly
driven by heterogeneous characteristics of individual banks or whether it is
affected by systematic characteristics such as bank size and ownership
structure.
Design/methodology/approach
The study uses bank level data from BankScope for a total sample
of 83 UK banks and building societies. The period under consideration extends
from 2005 to 2009. Econometric estimation is by panel fixed effects.
Findings
Our empirical results show that business lending is a
statistically significant determinant of bank profits. However, this average
effect masks important systematic differences among banks. In particular, we
find strong size effects: the profitability of business lending is considerable
for small banks but negligible for large banks. In contrast, we could not
detect any ownership effects for domestic and foreign banks. These findings
persist when the occurrence of the financial crisis is accounted for.
Research
limitations/implications
Interestingly, our study relates these findings to the process
of financialisation. Yet, the extent of the latter and its impact on various
groups of banks (i.e. large, small, domestic and foreign banks) have not been
examined. Further research in this area would make an important contribution to
the literature.
Practical
implications
Our findings suggest that business lending is not a driving
factor of profitability for large banks. One possible policy implication –
which may be of interest especially to regulators and policy makers – is that
capital injections into the larger banks per
se are unlikely to lead to an
expansion of credit to business.
Originality/value
There is very little research in the literature on the questions
addressed in this paper, especially for the UK banking system. Moreover, the
process of financialisation, which motivates the enquiry of this paper, is a
growing area of research. Thus, the contribution of this paper is twofold.
Keywords:
Financialisation, Bank profitability, Bank ownership, Bank
size, Business lending, UK banking system, Panel data econometrics, E44, G20, G21
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