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What determines banks’ customer choice? Evidence from transition countries Anita Taci

What determines banks’ customer choice? Evidence from transition countries Anita Taci (with Ralph de Haas and Daniel Ferreira) 11th Conference of the ECB-CFS Research Network on "Capital Markets and Financial Integration in Europe“, Prague, October 20-21, 2008. Introduction - Motivation.

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What determines banks’ customer choice? Evidence from transition countries Anita Taci

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  1. What determines banks’ customer choice? Evidence from transition countries Anita Taci (with Ralph de Haas and Daniel Ferreira) 11th Conference of the ECB-CFS Research Network on "Capital Markets and Financial Integration in Europe“, Prague, October 20-21, 2008

  2. Introduction - Motivation • Main question: Role of banks in financing business activities, households and government. • Bank’s customer choice affects aggregate bank lending on economic development: • Transition economies focus on SMEs importance • Who banks lend to and what determines their customer choice?

  3. Introduction - Observations • Main changes in banking sector in transition economies: • Change in ownership structure: Large-scale penetration of foreign banking groups (15% of assets in Russia to almost 100% in Estonia). • Improvement in legal protection of creditor rights and enforcement through courts

  4. Literature • Why portfolio composition of banks is important • Who determines bank - customer relationship: banks choose firms or vs.? • Banks choose according to profitability and size limitations De Haas and Naaborg, 2006) • Firms choose multi bank relationship (Detragiache at al, 2000), (Berger at all, 2006) • Two-way bank – client relationship (Giannetti and Ongena, 2008) • Who banks lend to?

  5. Determinants of bank’s customer choice • Bank ownership and size • Foreign banks lend less to SMEs –technology based on hard information (Berger and Udell, 2002) • Presence of large and foreign banks leads to more SME lending in medium term- new lending procedures and technologies (Berger at al. 1998, Petersen and Rajan 2002). In transition countries foreign banks acquired local banks • Small banks are limited by size

  6. Determinants of bank’s customer choice (cont.) • Legal institutions important determinant of the amount of external financing available for business sector (La Porta e al 1997, 1998). • Better institutional environment: • Allows banks to reduce costs. • Affects supply response of banks by easing constraints to bank lending: lack of information, broaden the range of collateral used by banks and the frequency of collateral acceptance

  7. Data • Data sources: • Banking Environment and Performance Survey (BEPS): institutional environment and banks • BankScope • EBRD country and sector data, and legal indicator • World Bank Doing Business

  8. BEPS Survey • A random sample of 220 banks in 20 transition countries in 2005: 55% Foreign –owned, 7% state-owned, and 38% domestically-owned banks. • Perceptions of the institutional environment including the security rights of lenders, bankruptcy law and enforcement and effectiveness of banking regulation • Unique detailed data on lending by type of borrower (households, state, enterprises)

  9. Regression analysis • Ordinary Least Square (OLS) and 2SLS approach where banks’ perceived quality of the institutional environment is instrumented by objective institutional measures • First stage: Where CollatLaw is banks’ perception of institution environment; ENFORCE is the EBRD legal indicator on the enforcement of charged assets; DEPTH is the country-level World Bank Doing Business indicator on 'depth of credit information

  10. Regression analysis (continued) • Second stage: Where and is the percentage of loans to each specific client type

  11. Portfolio composition by bank type

  12. Bank ownership, institutional environment and loan composition

  13. Conclusions (1) • Foreign banks continue to maintain their advantage in skills and technology, while their focus on foreign clients is limited to the corporate segment: : • Foreign banks are strongly involved in mortgage lending (on average 6% larger than domestic banks) • Greenfield banks lend to subsidiaries of international firms • Domestic banks seem more suited to serve the relatively non-transparent SMEs

  14. Conclusions (2) • Bank size is important for corporate lending focus • Larger banks, when compared to smaller banks have a comparative advantage in lending to large companies: 13% less to SMEs and 11% more to large firms • Smaller banks lend relatively more to SMEs

  15. Conclusions (3) • Institutional environment affects the composition of loan portfolio of banks: Banks that perceive pledge and mortgage loans to be of high quality focus more on mortgage lending (9% point higher for one standard deviation increase) • Banks’ perception of the quality of collateral law does not affect the proportion of lending to SMEs or large firms (technologies of lending to SMEs rely less on availability of collateral)

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