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Financialisation, Business Lending And Profitability In The Uk

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  • Victor Ekpu
  • Alberto Paloni

Abstract

This paper addresses the question whether business lending is still an important source of bank profits in the UK banking system. This research question is motivated by the effects of the process of financialisation. It has been argued that one of the consequences of financialisation is a dramatic change in business strategies by financial institutions, which have turned to new fields of profitability – namely, transactions in open financial markets and household/consumer lending – moving away from traditional business lending. However, the extent to which commercial banks have embraced financialisation and the contribution of business lending to bank profitability are likely to be the result of bank-specific characteristics. This paper investigates, therefore, whether the profitability of business lending is driven by bank heterogeneity or whether it is possible to identify systematic characteristics which affect it. Using bank level data from BankScope for a total sample of 83 UK banks and building societies for the period 2005-2009 and employing panel fixed effects estimation, we find very strong size effects: in particular, while business lending is a statistically significant source of bank profits, its quantitative importance varies dramatically across bank size. For large banks, business lending contributes to the rate of return on equity very little. This finding is not due to the occurrence of the financial crisis. Indeed, large size effects are found even when the financial crisis is controlled for. While we detected strong size effects, we could not detect any ownership effects. The profitability of business lending depends on whether banks are large or small, not on whether they are domestic or foreign. One possible policy implication of our findings is that capital injections into the larger banks per se are unlikely to lead to an expansion of credit to business.

Suggested Citation

  • Victor Ekpu & Alberto Paloni, 2015. "Financialisation, Business Lending And Profitability In The Uk," Working Papers 2015_18, Business School - Economics, University of Glasgow.
  • Handle: RePEc:gla:glaewp:2015_18
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    File URL: http://www.gla.ac.uk/media/media_424705_en.pdf
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    References listed on IDEAS

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    1. K. Kosmidou & F. Pasiouras & M. Doumpos & C. Zopounidis, 2006. "Assessing performance factors in the UK banking sector: A multicriteria methodology," Central European Journal of Operations Research, Springer;Slovak Society for Operations Research;Hungarian Operational Research Society;Czech Society for Operations Research;Österr. Gesellschaft für Operations Research (ÖGOR);Slovenian Society Informatika - Section for Operational Research;Croatian Operational Research Society, vol. 14(1), pages 25-44, February.
    2. K. Kosmidou & F. Pasiouras & M. Doumpos & C. Zopounidis, 2004. "Foreign versus domestic banks’ performance in the UK: a multicriteria approach," Computational Management Science, Springer, vol. 1(3), pages 329-343, October.
    3. Matthews, Kent & Murinde, Victor & Zhao, Tianshu, 2007. "Competitive conditions among the major British banks," Journal of Banking & Finance, Elsevier, vol. 31(7), pages 2025-2042, July.
    4. Berger, Allen N, 1995. "The Relationship between Capital and Earnings in Banking," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(2), pages 432-456, May.
    5. Berger, Allen N. & Black, Lamont K., 2011. "Bank size, lending technologies, and small business finance," Journal of Banking & Finance, Elsevier, vol. 35(3), pages 724-735, March.
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    9. Bolt, Wilko & de Haan, Leo & Hoeberichts, Marco & van Oordt, Maarten R.C. & Swank, Job, 2012. "Bank profitability during recessions," Journal of Banking & Finance, Elsevier, vol. 36(9), pages 2552-2564.
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    Cited by:

    1. M. Turkes; M. Turkes, 2018. "Comparative Analysis Of Banking Performance Of Comercial Banks Groups. Case Study: Turkey Vs. Romania," Вестник Киевского национального университета имени Тараса Шевченко. Экономика., Socionet;Киевский национальный университет имени Тараса Шевченко, vol. 3(198), pages 87-94.

    More about this item

    Keywords

    business lending; bank profitability; financialisation; UK banking system; bank size; bank ownership; panel data econometrics;

    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

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