When the Going gets Tough, the Tough Get Going! The Role of Banks' Specialists on Banks Profitability

Antti Fredriksson, Daniela Maresch, Matthias Fink, Andrea Moro

Research output: Contribution to journalJournal articleResearchpeer-review

19 Downloads (Pure)

Abstract

A bank’s lending decision is affected by the amount of information it can access and by its capability to manage this information. The latter aspect implies that the bank has to decide whether borrowers should be managed in a local branch of the bank or in its headquarters. By looking at a sample of Finnish banks, the present research investigates a bank’s capability to extract profitability from both locally and centrally managed firms. We find that banks are able to properly discriminate between firms: those which should be managed by loan managers with expert knowledge in the bank’s headquarters due to their complexity, and those firms which should be managed in the bank’s local branch because they are simpler and need standard products and services. As a result, banks are able to extract risk-adjusted profitability (RAP) from both centrally and locally managed customers. Our findings clearly support the argument that the decision to centralise or decentralise the lending decision process is not an either/or decision: banks should implement both approaches and apply according to the type of firm they serve.
Original languageEnglish
JournalThe Journal of Entrepreneurial Finance
Volume19
Issue number1
Pages (from-to)83-104
Number of pages22
ISSN2373-1753
Publication statusPublished - 2017
Externally publishedYes

Fingerprint

Bank profitability
Lending decisions
Profitability
Headquarters
Bank lending
Expert knowledge
Managers
Decision process
Loans
Product standards

Keywords

  • Small firms
  • Local Banks
  • Transaction Lending
  • Relationship Lending
  • Risk- Adjusted Profitability

Cite this

@article{059d97f2637b440cbef5cccf4c55266f,
title = "When the Going gets Tough, the Tough Get Going!: The Role of Banks' Specialists on Banks Profitability",
abstract = "A bank’s lending decision is affected by the amount of information it can access and by its capability to manage this information. The latter aspect implies that the bank has to decide whether borrowers should be managed in a local branch of the bank or in its headquarters. By looking at a sample of Finnish banks, the present research investigates a bank’s capability to extract profitability from both locally and centrally managed firms. We find that banks are able to properly discriminate between firms: those which should be managed by loan managers with expert knowledge in the bank’s headquarters due to their complexity, and those firms which should be managed in the bank’s local branch because they are simpler and need standard products and services. As a result, banks are able to extract risk-adjusted profitability (RAP) from both centrally and locally managed customers. Our findings clearly support the argument that the decision to centralise or decentralise the lending decision process is not an either/or decision: banks should implement both approaches and apply according to the type of firm they serve.",
keywords = "Small firms, Local Banks , Transaction Lending, Relationship Lending , Risk- Adjusted Profitability",
author = "Antti Fredriksson and Daniela Maresch and Matthias Fink and Andrea Moro",
year = "2017",
language = "English",
volume = "19",
pages = "83--104",
journal = "The Journal of Entrepreneurial Finance",
issn = "2373-1753",
number = "1",

}

When the Going gets Tough, the Tough Get Going! The Role of Banks' Specialists on Banks Profitability. / Fredriksson, Antti; Maresch, Daniela; Fink, Matthias; Moro, Andrea.

In: The Journal of Entrepreneurial Finance, Vol. 19, No. 1, 2017, p. 83-104.

Research output: Contribution to journalJournal articleResearchpeer-review

TY - JOUR

T1 - When the Going gets Tough, the Tough Get Going!

T2 - The Role of Banks' Specialists on Banks Profitability

AU - Fredriksson, Antti

AU - Maresch, Daniela

AU - Fink, Matthias

AU - Moro, Andrea

PY - 2017

Y1 - 2017

N2 - A bank’s lending decision is affected by the amount of information it can access and by its capability to manage this information. The latter aspect implies that the bank has to decide whether borrowers should be managed in a local branch of the bank or in its headquarters. By looking at a sample of Finnish banks, the present research investigates a bank’s capability to extract profitability from both locally and centrally managed firms. We find that banks are able to properly discriminate between firms: those which should be managed by loan managers with expert knowledge in the bank’s headquarters due to their complexity, and those firms which should be managed in the bank’s local branch because they are simpler and need standard products and services. As a result, banks are able to extract risk-adjusted profitability (RAP) from both centrally and locally managed customers. Our findings clearly support the argument that the decision to centralise or decentralise the lending decision process is not an either/or decision: banks should implement both approaches and apply according to the type of firm they serve.

AB - A bank’s lending decision is affected by the amount of information it can access and by its capability to manage this information. The latter aspect implies that the bank has to decide whether borrowers should be managed in a local branch of the bank or in its headquarters. By looking at a sample of Finnish banks, the present research investigates a bank’s capability to extract profitability from both locally and centrally managed firms. We find that banks are able to properly discriminate between firms: those which should be managed by loan managers with expert knowledge in the bank’s headquarters due to their complexity, and those firms which should be managed in the bank’s local branch because they are simpler and need standard products and services. As a result, banks are able to extract risk-adjusted profitability (RAP) from both centrally and locally managed customers. Our findings clearly support the argument that the decision to centralise or decentralise the lending decision process is not an either/or decision: banks should implement both approaches and apply according to the type of firm they serve.

KW - Small firms

KW - Local Banks

KW - Transaction Lending

KW - Relationship Lending

KW - Risk- Adjusted Profitability

M3 - Journal article

VL - 19

SP - 83

EP - 104

JO - The Journal of Entrepreneurial Finance

JF - The Journal of Entrepreneurial Finance

SN - 2373-1753

IS - 1

ER -