Bank lending models with a focus on lending to SMEs lending... · 11/12/2019 | Bank lending •A...

Bank lending models with a focus on lending to SMEs

Juan LopezStefano Di ColliFedercasseServizio Analisi economica e statistiche creditizie

Course in

Financial markets and management

11/12/2019 | Bank lending 2

Agenda

1. Introduction to banking

2. Types of banks

3. Relationship vs transaction lending model

4. Lending to SMEs


Agenda


2. Types of banks


4. Lending to SMEs

11/12/2019 | Bank lending

Financial intermediaries


Banks

1. Banks are deposit taking institutions

2. They are known as MFIs because

→ Their deposit liabilities form a major partof money supply

→ They are very relevant in the monetarypolicy transmission (credit multiplier)

3. Being MFIs they are subjected to heavierregulation than non-deposit takinginstitutions


1. Main source of funding is Customer deposits

2. Funding are invested in Loansand Fixed assets

Banks


Banks can engage a huge range of activities:

1. Accepting deposits

2. Issuing e-money

3. Implementing or carrying out contracts of insurance

4. Dealing in investments (as principal or agent)

5. Managing investments

6. Advising on investments

Bank activities


Banks can engage a huge range of activities:

7. Entering into regulated mortgage contracts

8. Establishing and managing collective investment schemes

9. Establishing and managing pension schemes

Bank activities


Agenda


2. Types of banking


4. Lending to SMEs


Traditional versus modern banking:

Types of banking


1. Retail or personal banking

2. Private banking

3. Corporate banking

4. Investment banking

5. Islamic banking

Types of banking


Retail banking:

• Retail or personal banking relates to financial services provided to consumers

• Clients of retail banks are usually small-scale

Types of banking


Private banking:

• Concerns the high-quality provision of a range of financial and related services to wealthy clients

→Services on offer combine retailbanking products (payment/accountfacilities)…

→… plus a wide range of up-marketinvestment-related services

Types of banking


Corporate banking:

• Relates to banking services provided to large firms

→Ex. In HSBC, firms with total assetsgreater than £30 million areconsidered “corporate”

Types of banking


Investment banking:

• Their main role is help clients to raise funds in the capital market, either through the issue of bonds or stock

• Their activities cover the following areas

→Provision of financial advisory services

→Asset management

→Other securities services

Types of banking


Islamic banking:

• Islamic Shariah law prohibits the payment of interest but does encourage entrepreneurial act

→Banks that offer IB services have todevelop products and services that donot charge (or pay) interest

→The solution is offering various profit-sharing related products

Types of banking


Islamic banking:

• Example of commonly used profit-sharing arrangement is Musharakah

→A bank and a borrower establish ajoint commercial enterprise

→Both contribute capital as well aslabour and management

Types of banking


• A variety of different types of banking offers services to retail customers:

→Commercial banks

→Savings banks

→Co-operative banks

→Building societies

→Credit Unions

→Finance Houses

Types of retail banking


Commercial banks:

• Are typically joint stock companies (publicily listed or privately owned)

• Deal both with retail and corporatecustomers

• Their main business is deposit taking and lending

• Have well-diversified deposit and lending books



Savings banks:

• Their original objective was to provide easily accessible savings products

• Differ from commercial banks by their broadly decentralised distribution network, providing local and regional outreach

• Pursue objectives related to the economic development of the region where they operate



Savings banks:

• Are important in many other countries, particularly in Europe

→ In Germany SB account for more than50% of the retail banking market

→German SB (Sparkassen) are publicinstitutions owned by federal or localgovernments



Co-operative banks:

• One head-one vote principle (all)

• Mutual ownership (BCC): the borrower/lender is also a member

– Limits in lending to members ( not less than 50% of total RWA)

• Broadly decentralised distribution network, focused on local economy

– Limits in lending to borrowers living in the main area of the bank branches (not less than 95%)



Co-operative banks:

→Are an important part of the bankingsector in Germany, Austria, Italy,France, the Netherlands, Spain andFinland

→A trend has been to group to form amuch larger istitutions

→Crédit Agricole (France), Rabobank(the Nether.)



Co-operative banks:

→ The importance of cooperative banks (…) has notyet received appropriate attention in theempirical literature. The literature devotesdisproportionately little attention to cooperativebanks in comparison with commercial banks,smaller than would correspond, for example, totheir market share. For example, only about 0.1percent of all banking-related entries in EconLit, amajor database of economic research, relates to

cooperative banking (Hesse e Čihák, 2007)



Co-operative banks:

→ Despite their importance, cooperatives do notreceive much attention in current mainstreameconomics. An indication of this is the neglect ofcooperatives in most popular introductoryeconomics textbooks. The typical textbook doesnot even recognize cooperatives as a form ofbusiness organisation (…). The absence ofmaterial on cooperatives in textbooks means thatmany students do not become familiar with the

concept. (Kalmi 2007)



Building societies:

• Similar to SB and CoopB, they have mutual ownership and focus primarily on retail deposit taking and mortgage lending

→Prevalent in the UK and various othercountries (Australia and South Africa)

→Limits in raising funds from thewholesale market (50% in the UK)



Credit Unions:

• Are another type of mutual deposit institution

→Non-profit co-operative institutions

→Usually regulated differently frombanks

→Many of their staff are part-time


11/12/2019 | Bank lending 28

Agenda


2. Types of banking


4. Lending to SMEs


Lending activity can be performed by financial intermediaries alternatively as:

• Relationship lending (RL, Rajan 1992, Petersen and Rajan 1994)

• Transactions lending (TL)

Relationship vs trans. lending


Difference among RL and TL is related to the bank-customer relationships as a series of repeated interactions allowing the bank:

• To accumulate non public information

• To amortize costs incurred for collectingsuch information over the years or…

• … to cover them through the sales of a range of customer services



Transaction-oriented banking

• is generally viewed as being focused on informationally transparent borrowers…

• … who are asked to deliver assets as collateral…

• … and whose creditworthiness is analyzed by means of hard information (primarily financial statement data)

• Berger and Udell, 2006



Transaction-oriented banking

• focuses on a single transaction with a customer, or multiple identical transactions with various customers

• In other words, transaction lending is viewed as arms-length financing focusing on that particular transaction

• Boot and Thakor, 2000



Relationship banking

• Tipically small/local/mutual banks

• Benefit from intense customer relationships collecting soft-information related with a direct knowledge of the customer

• This allow them to evaluate more precisely the riskiness of their corporate clients



Relationship banking

• Mitigate adverse selection through the screening of potential borrowers

• Minimize moral hazard directly and continuously monitoring the borrower

• Reduce time inconsistency problemthrough long term relationship with customers



Summarising


Big banks Small/local banks Coop/mutual B.

Asymmetric

information

Transaction

banking model

Relationship

banking model

Relationship

banking model”

Credit selection

efficiency

Efficient with hard

information

Efficient with soft

information

Particular efficient

with soft

information

Monitoring

Arm-length

relationship

Peer monitoring Peer monitoring +

Social monitoring


Benefits of Relationship banking

• Firms, particularly the more informationally opaque ones:

–Can take advantage of these deeper relationships because they may achieve better lending conditions

–They may also benefit from stronger support by their bank



Benefits of Relationship banking

• Counterciclycality

• More flexibility of banking relationship

• Long-term relationship

• Higher credit quality

• Positive impact lon local development



Drawbacks of Relationship banking

• Customer holding-up

–Monopolistic information on the customer can be used by bank to applyworst credit conditions

• Soft budget constraint

–The bank could have higher incentive to give more credit to firms under default


11/12/2019 | Bank lending 39

Agenda


2. Types of banking


4. Lending to SMEs


• For the Italian recovery after the crisis the relative performance of lending is close to the 25th percentile, with a cumulated decrease in loans of 6%

Creditless recovery?

Source: Eramo et alii (2018)


Three subsamples:

1. Recoveries followingrecessions involving fourquarters or more of 31 episodes («deep»)

2. Recoveries followingrecessions associated to banking crises

3. Creditless recoveries (with loans <100 at T+12)

• The dynamic of real lending in Italy is in line with the median evolution of recoveries following similar recessions

Creditless recovery?

Source: Eramo et alii (2018)


Stefani et alii (2016) analysed loans of Italianbanks distinguishing local and other banks

• Lending decreased from 2007 to 2014

• Loan rates of change of local banks duringthe crisis were higher wrt those other banks

• This was true in particular

–During the first years of the crisis

– For loans to SMEs

Lending to SMEs


Demma (2015) analysed loans of Italian banksdistinguishing the 5 biggest banking groupsand the small banks

• Lending decreased from 2005 to 2012

• Loan rates of change of 5 biggest groupsduring the crisis were

– Lower wrt those of small banks before the crisis and during the first years of the crisis

– Not significantly different during the secondphase of the crisis

Lending to SMEs


35.7%

24.2%

14.0%17.1%

5.9%2.7%

27.6%

32.6%

-6.7%

7.2%

-6.1% -6.9%-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

no-profit companies households firms > 20 empl. micro firms limited companies firms < 20 empl.

Loans ("in bonis", % change from 2008 to 2011)

BCCs

All banks

44

Lending to SMEs

5.4%

-2.6%

-15.7%

-10.3%

-20.8%-18.5%

-11.6%

-5.6%

-18.3%-16.8%

-26.2%-23.7%

-30.0%

-25.0%

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%



BCCs

All banks

-6.8%

11.3%

6.7%

-2.0% -2.7%

-16.4%

-12.2%

14.2%

-4.2% -3.5%-1.3%

-20.7%-25.0%

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%



BCCs

All banks

11/12/2019 | Bank lending 45

Lending to SMEs

• Local bank (BCC) market shares increased in the most relevant economic sectors

11.3%

9.1%

16.5%

19.7%

13.3%

6.2%

15.1%

8.6%

19.7%

24.5%

18.6%

7.4%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

No-profit instit. households micro firms firms < 20 empl. firms > 20 empl. limited companies

BCC - Loan (without NPL) market shares

2008 2011 2014 2018

11/12/2019 | Bank lending 46

Lending to SMEs

45.0%

50.0%

55.0%

60.0%

65.0%

70.0%

75.0%

80.0%

85.0%

90.0%

95.0%

Dec-08Jun-09Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 Jun-18 Dec-18 Jun-19

Medium - Long term Loans -Ratio between applications received and approved

BCCs

Other Banks

80.0%

90.0%

100.0%

110.0%

120.0%

130.0%

140.0%

150.0%

160.0%

Dec

-08

Mar

-09

Jun-

09

Sep

-09

Dec

-09

Mar

-10

Jun-

10

Sep

-10

Dec

-10

Mar

-11

Jun-

11

Sep

-11

De

c-1

1

Ma

r-1

2

Jun-

12

Sep

-12

De

c-1

2

Ma

r-1

3

Jun-

13

Sep

-13

De

c-1

3

Ma

r-1

4

Jun-

14

Sep

-14

De

c-1

4

Ma

r-1

5

Jun-

15

Sep

-15

De

c-1

5

Ma

r-1

6

Jun-

16

Sep

-16

Dec

-16

Mar

-17

Jun-

17

Sep

-17

Dec

-17

Mar

-18

Jun-

18

Sep

-18

Dec

-18

Mar

-19

Jun-

19

Medium - Long Term Loans - Ratio between disbursment and repaiments

BCCs

Other Banks

11/12/2019 | Bank lending 47

Thanks for the attention

[email protected]

[email protected]

mailto:[email protected]

mailto:[email protected]

11/12/2019 | Bank lending 48

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Petersen M.A., Rajan R.G., 1994, «The benefits of lending relationships», in Journal of Finance 49, 3–37

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