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Multi-Strategic Behaviour of Croatian Banks by Sanja Jakovljević

Multi-Strategic Behaviour of Croatian Banks by Sanja Jakovljević. Comments by Ralph De Haas (EBRD). YES – 17 th Dubrovnik Economic Conference – June 2011. Overview of the paper. Spatial competition model with banks that produce two outputs Loans Deposits

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Multi-Strategic Behaviour of Croatian Banks by Sanja Jakovljević

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  1. Multi-Strategic Behaviour of Croatian Banks by Sanja Jakovljević Comments by Ralph De Haas (EBRD) YES – 17th Dubrovnik Economic Conference – June 2011

  2. Overview of the paper • Spatial competition model with banks that produce two outputs • Loans • Deposits • Local market power allows these banks to use: • Interest-rate strategies • Strategies in terms of the number and location of branches

  3. Overview of the paper • Data on 32 Croatian banks (2004-2010) to estimate demand elasticities for loans and deposits: • Own and competitor interest rates • Own and competitor branch networks • Main findings: • Interest-rate strategies more important than branching strategies • Before crisis: Deposit demand more sensitive than loan demand • During/after crisis: Loan demand more sensitive than deposit demand

  4. Overall assessment • Well-written, clear, and to the point • Careful analysis • More to explore...

  5. Some remarks (1) Literature review • Clear summary • What about information asymmetries between banks and their clients and the relationship with distance, spatial credit rationing (e.g. Degryse and Ongena)? What is the link? • At the end: clarify how this paper contributes to the literature

  6. Some remarks (2) Missing • Add a short section early on in the paper on the structure and development of the Croatian banking system (incl. current Figure 2) • Show some descriptive statistics: • Number of banks, variation in branch networks across the regions (include a map?) • Deposit and loan interest rates across banks • Other variables too (area, urban, highway, etc).

  7. Some remarks (3) • General criticism of this literature: treats all bank activities as one ‘market’ • Competition structure for corporate and household clients may be very different. Same holds for different types of corporate clients • E.g. the market for blue-chip companies may be very competitive whereas SME market leaves more room for (local) market power • Impact of distance may be different in particular • Acknowledge this somehow...

  8. Some remarks (4) • Not only different clients but also different banks • BankScope: 28 Croatian banks of which 14 foreign owned • Do foreign and domestic banks differ systematically? Or large banks versus small banks? • Foreign banks’ interest-rate strategies may differ • Different client structure? Different opportunity costs of lending? • Different funding structure, less interested in local deposits? • Branching strategies may differ too

  9. Some remarks (5) • “When potential clients are choosing between branches, they do so on the basis of several determinants: • Distance • Interest rate • Transportation costs τ related to distance” • What is the difference between (1) and (3)?

  10. Some remarks (6) • Clarify link between reality, theoretical model, and empirical model • Reality: banks compete in different markets (i.e. Croatian regions). In each market they set: • an interest rate (let’s assume customers are homogeneous) • a deposit rate (perhaps the same everywhere) • and operate one or more branches • How exactly does this translate to the models?

  11. Some remarks (7) • Imposed restriction: deposit and loan interest rates uniform across regions • “Unfortunately, bank data on regional interest rates is not currently available” • How much of a problem is this if your analysis is at the regional level and you are analysing interest rate strategies...?

  12. Some remarks (8) • For 20 regions: • Quarterly deposit volume • Quarterly loan volume • Number of bank branches (interpolated semi-annual data) • Not all banks span all 20 regions, so instead use three NUTS II regions • Really necessary? You throw away a lot of nice info...

  13. Some remarks (9) • Before crisis: Deposit demand more sensitive than loan demand • After crisis: Loan demand more sensitive than deposit demand • Current explanation quite ad hoc and not very convincing • The fact that the deposit insurance scheme became 4 times as generous made depositors switch from large to smaller banks • But doesn’t this imply an increase in the sensitivity to deposit rates? • Room to dig deeper

  14. Some remarks (10) • “So what?” What is the main (policy) lesson? • Two options to expand this paper a bit more: • Use Croatia as an interesting case study to derive broader lessons (e.g. on the impact of foreign bank entry on strategic behaviour of banks) • Go deeper into the Croatian case and derive lessons for Croatian policy makers: • E.g. how does competition look like compared to some benchmark (link back to the findings of the extant empirical literature) • More investments in physical infrastructure? Probably not the main recommendation you want to make on the basis of this paper • “Branch networks are relevant for market power” (Are they?) “So contemplate regulation of branching networks across markets”. Think twice... (see US evidence)

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