Retail banking in the aftermath of the financial crisis

198 Pages·2017·3.39 MB·English

by  Jaakko Sääskilahti

JYVÄSKYLÄ STUDIES IN BUSINESS AND ECONOMICS
182
KJaaarek kNoo Srväaäpskaliolahti
Retail Banking in the Aftermath
of the Financial Crisis
JYVÄSKYLÄ STUDIES IN BUSINESS AND ECONOMICS 182
Jaakko Sääskilahti
Retail Banking in the Aftermath
of the Financial Crisis
Esitetään Jyväskylän yliopiston kauppakorkeakoulun suostumuksella
julkisesti tarkastettavaksi yliopiston päärakennuksen salissa C4
tammikuun 19. päivänä 2018 kello 12.
Academic dissertation to be publicly discussed, by permission of
the Jyväskylä University School of Business and Economics,
in the Main building, hall C4, on January 19, 2018 at 12 o’clock noon.
UNIVERSITY OF JYVÄSKYLÄ
JYVÄSKYLÄ 2018
Retail Banking in the Aftermath
of the Financial Crisis
JYVÄSKYLÄ STUDIES IN BUSINESS AND ECONOMICS 182
Jaakko Sääskilahti
Retail Banking in the Aftermath
of the Financial Crisis
UNIVERSITY OF JYVÄSKYLÄ
JYVÄSKYLÄ 2018
Editors
Tuomo Takala
Jyväskylä University School of Business and Economics
Pekka Olsbo, Sini Tuikka
Open Science Centre, University of Jyväskylä
.
Permanent link to this publication: http://urn.fi/URN:ISBN:978-951-39-7277-6
URN:ISBN:978-951-39-7277-6
ISBN 978-951-39-7277-6 (PDF)
ISBN 978-9951-39-7276-9 (print)
ISSN 1457-1986
Copyright © 2018, by University of Jyväskylä
Jyväskylä University Printing House, Jyväskylä 2018
ABSTRACT
Sääskilahti, Jaakko
Retail banking in the aftermath of the financial crisis
Jyväskylä: University of Jyväskylä, 2018, 196 p.
(Jyväskylä Studies in Business and Economics
ISSN 1457-1986; 182)
ISBN 978-951-39-7276-9 (print)
ISBN 978-951-39-7277-6 (pdf)
Finnish summary
Diss.
This thesis considers the effects of the global financial crisis that started in 2008
on the retail banking environment and on banks’ behavior during and in the
aftermath of the crisis. The thesis consists of an introductory chapter and three
empirical articles that use unique datasets on Finnish cooperative banks. The
introductory chapter provides background and an overview of the thesis and
considers the effects of the crisis on retail banking from an overall perspective.
The empirical articles investigate the roles of a competitive environment, a low
interest rate environment, and relationship banking during the crisis and in the
post-crisis period.
The first article looks at whether the effects of the financial crisis on the
volumes and prices of small-business loans depended on the pre-crisis local
competitive environment. The second article explores the relationship between
market interest rates and retail bank interest margins and its implications in the
low interest rate environment that resulted from the financial crisis. The third
article examines the association of bank relationship strength with the
performance of small and medium-sized enterprises (SMEs) after the onset of
the financial crisis.
Keywords: retail banking, financial crisis, bank competition, low interest rate
environment, relationship banking
Author’s address Jaakko Sääskilahti
School of Business and Economics
University of Jyväskylä
[email protected]
Supervisors Professor Ari Hyytinen
School of Business and Economics
University of Jyväskylä
Professor Jaakko Pehkonen
School of Business and Economics
University of Jyväskylä
Reviewers Dr. Esa Jokivuolle
Head of Research, Bank of Finland
Professor Panu Kalmi
University of Vaasa
Opponent Professor Panu Kalmi
University of Vaasa
ACKNOWLEDGEMENTS
I would like to thank several people that made this dissertation possible and
helped in various stages of the project. First and foremost, I express my sincere
gratitude to my supervisors Jaakko Pehkonen and Ari Hyytinen. Jaakko
encouraged me to the PhD studies with the idea to learn more about banking
and to make the dissertation. Ari and Jaakko provided great support and advice
to my dissertation work. Elaborate and fast comments had emphasized
importance as I made the dissertation physically outside the university
community.
I made the dissertation in the facilities of OP Financial Group and had
great opportunity to employ the detailed bank data in my empirical research. I
wish to thank many people for that. Overall, Jaakko Pehkonen made this
arrangement possible. Toni Honkaniemi helped all kind of practical matters.
Regarding data collection, thanks go to Arto Kuhmonen, Kirsi Saari, Ari
Saarinen, Jarno Soininen, Esa Vilhonen, and Lauri Vuorio.
I wish to express my gratitude for the pre-examiners, Head of research Dr.
Esa Jokivuolle from Bank of Finland and Professor Panu Kalmi from University
of Vaasa, for reviewing my dissertation and providing valuable comments and
suggestions.
I am grateful about the financial support from the OP Group Research
Foundation and the Yrjö Jahnsson Foundation.
Finally, I thank my parents, siblings, and friends for their encouragement
and support during these years. Most importantly, I thank my wife Leena and
my children Hilla, Eero and Helka. They have helped to put things in order of
importance and provided great mental relaxation during the project.
Porvoo, November 2017
Jaakko Sääskilahti
CONTENTS
ABSTRACT
ACKNOWLEDGEMENTS
LIST OF INCLUDED ARTICLES
CONTENTS
1 INTRODUCTION .............................................................................................. 11
1.1 Background ................................................................................................ 12
1.2 Previous research ...................................................................................... 15
1.2.1 Bank lending during crises .......................................................... 15
1.2.2 Bank competition .......................................................................... 17
1.2.3 Bank interest margins ................................................................... 20
1.2.4 Transmission mechanism of monetary policy and a low
interest rate environment ............................................................ 22
1.2.5 Relationship banking .................................................................... 25
1.2.6 Research on the Finnish banking sector .................................... 29
1.3 Institutional framework ........................................................................... 30
1.3.1 Overview of the European and Finnish banking systems
and the effects of the financial crisis .......................................... 31
1.3.2 Evolution of loans and deposits before and after the crisis .... 34
1.3.3 Competitive environment and loan and deposit prices .......... 37
1.3.4 Summary ........................................................................................ 42
1.4 Summaries of the research articles ......................................................... 43
1.4.1 Local bank competition and small business lending
after the onset of the financial crisis .......................................... 43
1.4.2 Retail bank interest margins in low interest rate
environments ................................................................................ 44
1.4.3 Relationship banking and the financial difficulties of
SMEs in the aftermath of the crisis ............................................ 46
1.5 Implications of the thesis ......................................................................... 47
1.5.1 Business implications ................................................................... 47
1.5.2 Public policy implications ............................................................ 49
1.5.3 Implications for future research .................................................. 50
REFERENCES ..................................................................................................... 51
APPENDIX 1 The main changes in the European banking regulatory
environment .............................................................................................. 66
APPENDIX 2 ....................................................................................................... 68
APPENDIX 3 ....................................................................................................... 68
2 LOCAL BANK COMPETITION AND SMALL BUSINESS LENDING
AFTER THE ONSET OF THE FINANCIAL CRISIS .................................... 69
2.1 Introduction ............................................................................................... 70
2.2 Competitive environment and lending in normal and crisis
periods ........................................................................................................ 72
2.2.1 Loan pricing and lending standards .......................................... 72
2.2.2 Risks and risk-taking .................................................................... 74
2.2.3 Funding structure and costs ........................................................ 74
2.2.4 Relationship banking .................................................................... 75
2.2.5 Empirical predictions ................................................................... 75
2.3 Data and empirical approach .................................................................. 76
2.3.1 The cooperative banks of OP-Pohjola Group ........................... 76
2.3.2 Data sources ................................................................................... 77
2.3.3 Small business lending data and dependent variables ........... 78
2.3.4 Competition measures.................................................................. 80
2.3.5 Control variables and descriptive statistics ............................... 82
2.3.6 Empirical specifications ............................................................... 85
2.4 Empirical analysis ..................................................................................... 87
2.4.1 Main results .................................................................................... 87
2.4.2 Robustness checks ......................................................................... 90
2.5 Discussion and auxiliary analysis .......................................................... 93
2.5.1 Discussion of the main results ..................................................... 93
2.5.2 Auxiliary analyses of the competitive environment effects .... 94
2.6 Conclusion ................................................................................................. 98

REFERENCES ..................................................................................................... 99
APPENDIX 1 Measurement of the degree of competition ......................... 104
APPENDIX 2 ..................................................................................................... 106
3 RETAIL BANK INTEREST MARGINS IN LOW INTEREST RATE
ENVIRONMENTS ........................................................................................... 107
3.1 Introduction ............................................................................................. 108
3.2 Level of market interest rates as a determinant of bank
interest margins....................................................................................... 111
3.3 Data and empirical approach ................................................................ 114
3.3.1 Bank data and institutional background ................................. 114
3.3.2 Other data and variable definitions ......................................... 116
3.3.3 Econometric approach ................................................................ 120
3.4 Empirical results ..................................................................................... 122
3.4.1 Results of the linear regression analysis .................................. 122
3.4.2 Results from smooth transition regression analysis .............. 125
3.4.3 Robustness tests ........................................................................... 130
3.5 Auxiliary analyses and discussion ....................................................... 131
3.5.1 Analysis of average monthly loan and deposit spreads ....... 131
3.5.2 Profitability and net interest margin ........................................ 134
3.5.3 Retail bank interest rate pass-through ..................................... 136
3.6 Conclusion ............................................................................................... 138