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Why Do Banks Provide Leasing?

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Abstract

Banks are engaging in leasing activities at an increasing rate, which is demonstrated by aggregated data for both European and U.S. banking companies. However, little is known about leasing activities at the bank level. The contribution of this paper is the introduction of the nexus of leasing in banking. Beginning from an institutional basis, this paper describes the key features of banks’ leasing activities using the example of German regional banks. The banks in this sample can choose from different types of leasing contracts, providing the banks with a degree of leeway in conducting business with their clients. We find a robust and significant positive impact of banks’ leasing activities on their profitability. Specifically, the beneficial effect of leasing stems from commission business in which the bank acts as a middleman and is not affected by the potential defaults of customers.

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Notes

  1. Bundesverband Deutscher Leasing-Unternehmen eV: an association representing the interests of the German leasing industry.

  2. European Federation of Leasing Company Associations: representing approximately 93 percent of the entire European leasing market.

  3. As an outcome of the lawsuit at the European Court of Justice in July 2001, state guarantees given to German Landesbanks have been discontinued. In particular, the Landesbanks have traditionally benefited from these state guarantees. However, this watershed European Court of Justice event provoked the entire German Savings Banks Finance Group to restructure its internal organization to guarantee the future competitiveness and stability of the group. In hindsight, this restructuring proved quite successful for the regional savings banks and certain service providers for the total savings banks group. However, as we know from recent financial crises, the Landesbanks increased their risk exposure in the aftermath of the abolishment of the state guarantee on a massive basis (Gropp et al. 2010), thereby endangering not only their own existence but also the stability of the entire savings bank group.

  4. Theories explain why these two activities are united within commercial banks. See, in particular, Diamond and Rajan (2001) for a theoretical analysis of why it is an efficient arrangement to combine liquidity provision with the origination of non-marketable, monitoring-intense loans.

  5. For detailed descriptions and analyses of the German banking sector, see Krahnen and Schmidt (2004). A detailed discussion of the German Savings Banks Finance Group is provided by Schmidt (2009) and Bülbül (2013).

  6. In the letter of 11 April 2002, the German government accepted the amendment of the European Commission’s proposal for appropriate measures regarding the system of state guarantees to German public banks (Moser and Soukup 2002). Detailed information on the removal of the government guarantees can be found in Gropp et al. (2010).

  7. See Basel Committee on Banking Supervision (2006), p. 114.

  8. Two types of commission leasing are offered, “regular leasing transactions” and “standardized leasing transactions”. However, we cannot distinguish between these types in our sample. The difference between these two product types is mainly due to the eligible leasing volume. Regular leasing transactions can only be conducted if the leasing volume is greater than 100,000 Euro. Standardized leasing transactions are usually for assets worth less than 100,000 Euro. The regular leasing transaction is more costly in terms of processing because the bank has the obligation to conduct the rating of the customer, while the processing of the standardized leasing transaction is much more straightforward and less costly. The rating for the “standardized leasing transaction” is performed via a third-party firm (credit reform) and incorporated automatically into an online platform that the bank adviser has to use. The information is processed by the leasing company, and the feedback from the leasing company regarding acceptance or rejection of the contract can be available within 24 hours. In the contract, it is explicitly stated that all risk embedded in the leasing arrangement is covered by Deutsche Leasing.

  9. Unfortunately, we do not have detailed information on individual contract terms to further elaborate on this point.

  10. Valid instruments must be correlated with the endogenous explanatory variables but must not be correlated with the error term of the equation.

  11. We estimate different model specifications of a dynamic panel regression with xtabond2, developed by Roodman (2009a).

  12. This is a test for the key assumption that there is no serial correlation in the error terms of the level equation. This implies that the lagged level of variables will be uncorrelated with the differenced error terms and thus available as an instrument for the first-differenced equation.

  13. See the Stata help manual at www.stata.com.

  14. See for example Cebenoyan and Strahan (2004).

  15. It would be preferable to use a ratio of new leasing volume to banks’ new corporate loan volumes, but unfortunately, we lack this information.

  16. See Bundesbank (2010). The German central bank publishes performance and business numbers for the German banking system in September of each year. They report for the savings banks a net interest income of 78.6 % and net commission income of approximately 20 % for 2009.

  17. Including the dummy variable for East-Germany in the model does not qualitatively change the results.

  18. More precisely, the problem with the denominator.

  19. We investigate the impact of different leasing types on the Z-score and Return/Employees but do not report the results. According to our previous results, total leasing activities have no significant impact on the Z-score; this finding holds true when we investigate different types of leasing separately. Furthermore, we do not find a significant effect of different leasing types on our performance measure Return/Employees.

  20. To conserve space, we do not provide the result tables here but make the results available upon request.

  21. Descriptive statistics for the stock variable in million Euros are: mean: 4.49, standard deviation: 11.62, min: 0, max: 207.04.

  22. Marginal cost is derived from a translog cost function

    $$\begin{array}{lll}\label{Eq_Trans} \ln \mbox{Cost}_{it}& =&\beta_0 + \beta_1\,{\ln \mbox{TA}_{it}} + \frac{{\beta_2}}{2}\,{\ln{\mbox{TA}_{it}}}^{2}+ \sum\limits_{k=1}^3\gamma_{kt}\,{\ln W_{k,it}} + \sum\limits_{k=1}^3 \phi_{k}\, {\ln{\mbox{TA}_{it}}}\,{\ln W_{k,it}} \\[-4pt] && +\sum\limits_{k=1}^3 \sum\limits_{j=1}^3 {\ln W_{k,it}}\,{\ln W_{j,it}} + \epsilon_{it} \end{array}$$

    in which banking output is approximated by the total assets TA it and the three input prices W k,it are defined as the ratio of personnel expenses to the total assets (price of labor), the ratio of interest expenses to total deposits (price of funding) and the ratio of operating and administrative expenses to total assets (price of capital). The equation is estimated by introducing year fixed and bank specific effects with robust standard errors using panel data covering all banks between 1996 and 2006. Descriptive statistics for the Lerner index: mean 0.29, std 0.08, min − 0.017, max 0.55.

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Authors and Affiliations

  1. Goethe University Frankfurt, 60325, Frankfurt, Germany

    Dilek Bülbül & Felix Noth

  2. Zeppelin University, 88045, Friedrichshafen, Germany

    Marcel Tyrell

Authors
  1. Dilek Bülbül
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  2. Felix Noth
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  3. Marcel Tyrell
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Corresponding author

Correspondence to Dilek Bülbül.

Additional information

We thank the German Savings Banks Association (DSGV) and Deutsche Leasing AG for providing data. We are grateful for feedback from practitioners from savings banks and other institutions of the Savings Banks Finance Group. We are also grateful for comments received at the Brown Bag seminar series at Goethe University Frankfurt, the Northern Finance Association Conference 2009, the Southern Finance Association Conference 2009, the Midwest Finance Association Conference 2010, and the Financial Management Conference 2010 and are particularly grateful for those from Horst Entorf, Andre Güttler, Claudia Lambert, Reinhard H. Schmidt and Laurent Weil. We also thank editor Haluk Ünal and the anonymous referee for their insightful comments. The paper represents the authors’ personal opinions and not necessarily those of the DSGV or Deutsche Leasing AG. Any remaining errors are, of course, our own.

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Bülbül, D., Noth, F. & Tyrell, M. Why Do Banks Provide Leasing?. J Financ Serv Res 46, 137–175 (2014). https://doi.org/10.1007/s10693-013-0185-z

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