IDEAS home Printed from https://ideas.repec.org/a/eme/sefpps/v33y2016i2p302-319.html
   My bibliography  Save this article

Business lending and bank profitability in the UK

Author

Listed:
  • Victor Ekpu
  • Alberto Paloni

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 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.

Suggested Citation

  • Victor Ekpu & Alberto Paloni, 2016. "Business lending and bank profitability in the UK," Studies in Economics and Finance, Emerald Group Publishing, vol. 33(2), pages 302-319, June.
  • Handle: RePEc:eme:sefpps:v:33:y:2016:i:2:p:302-319
    as

    Download full text from publisher

    File URL: http://www.emeraldinsight.com/10.1108/SEF-04-2015-0097?utm_campaign=RePEc&WT.mc_id=RePEc
    Download Restriction: Access to full text is restricted to subscribers

    As the access to this document is restricted, you may want to search for a different version of it.

    More about this item

    Keywords

    Financialisation; Bank profitability; Bank ownership; Bank size; Business lending; UK banking system; Panel data econometrics; E44; G20; G21;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eme:sefpps:v:33:y:2016:i:2:p:302-319. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Virginia Chapman). General contact details of provider: http://www.emeraldinsight.com .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.