eThesis - Kauppakorkeakoulun sähköiset gradut

PURPOSE OF THE STUDY The purpose of the study is to build understanding on the mechanisms of banking relationships through the analysis of a unique corporate client data set provided by a leading Nordic bank. First, the work tests the findings of the previous research on the impact of physical distance, local bank competition, and client company age on lending margins. Second, the scope is extended to the effects and determinants of cross-selling, hold-up problem, and soft budget constraint using a set of novel research methods.

DATA The data set used in the analyses comprises approximately 650 client firms residing in Finland, and 2,000 firm years over a four-year observation period in the 2000's. All company size categories and legal forms are represented in the data. In addition to the revenue and exposure data on all banking products, the bank also provides credit scores, addresses, and financial information for most clients. The missing and supplementary data on client company characteristics and competing bank’s branch office locations are picked from the databases of an independent credit rating firm, national statistics authority, national banking association, individual banks, and free online address databases. Finally, the addresses are turned into distance and competition data with the help of an online map database.

RESULTS The key findings of the work indicate, first of all, that the distance effects recorded by previous research also emerge in the present Finnish data set from the online banking era. Unlike expected, the effect appears, however, stronger for large companies. Second, the ratio of lending from the case bank to the client’s total asset base, which is used to measure clients’ dependency on the bank, has a clear impact on lending spread and cross-selling. Interestingly, for small firms the impact of this variable is negative both on lending spread and cross-selling while for large companies the impact is positive. Third, the share of cross-sold non-lending products in the total revenue generated through a client relationship has a negative impact on the lending spread. Finally, no clear evidence of the effects of soft budget constraint is found in the data indicating that its role, at least in the Finnish banking market, is questionable.