Business lending and bank profitability in the UK

Ekpu, V. and Paloni, A. (2016) Business lending and bank profitability in the UK. Studies in Economics and Finance, 33(2), 302 -319. (doi:10.1108/SEF-04-2015-0097)

[img]
Preview
Text
111698.pdf - Accepted Version

439kB

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.

Item Type:Articles
Status:Published
Refereed:Yes
Glasgow Author(s) Enlighten ID:Paloni, Dr Alberto
Authors: Ekpu, V., and Paloni, A.
College/School:College of Social Sciences > Adam Smith Business School > Economics
Journal Name:Studies in Economics and Finance
Publisher:Emerald
ISSN:1086-7376
ISSN (Online):1755-6791
Copyright Holders:Copyright © 2015 Emerald
First Published:First published in Studies in Economics and Finance 33(2) 2015
Publisher Policy:Reproduced in accordance with the copyright policy of the publisher.

University Staff: Request a correction | Enlighten Editors: Update this record