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How Bank Names Affect Depositor Behaviour

Russians associate banks whose names they perceive as foreign with higher risks.

STUDY AUTHORS:

Maria Semenova, Senior Research Fellow, International Research Laboratory for Institutional Analysis of Economic Reforms, HSE Centre for Institutional Studies.

Antonina Kozlova, trainee, type.today

A bank's name can get send customers a signal about its ownership. For Russian consumers, a foreign-sounding name suggests foreign ownership and potential higher risks of losing their savings, according to Semenova and Kozlova's study 'Foreign Banks and Market Discipline in the Russian Market for Personal Deposits: What's in a Name'.*

Customers Discipline Some Banks More Than Others

As of May 1, 2017, 67 banks with 100% foreign participation operated in Russia via local subsidiaries, since Russian law does not permit foreign banks to set up branches in the country.

In Russia, foreign financial companies either operate under their own brand names or use those of local banks they have acquired.

In the latter case, Russian consumers may not perceive them as foreign banks. In contrast, in the former case, the bank's foreign ownership is obvious and affects depositor behaviour. In depositing funds with banks having foreign names, depositors perceive greater risks, leading to a rise in market discipline.

Market discipline means that customers expect higher interest rates on their deposits with less reliable banks (price discipline) and tend to reduce or withdraw their deposits if they suspect excessive risk-taking by the bank (quantitative discipline).

According to the study, Russian customers do not tend to discipline banks with Russian-sounding names in the same way – a phenomenon which the authors describe as 'consumer ethnocentrism', i.e. "Russian consumers' tendency to use domestic rather than imported goods and services."

Reliability Check

Banks sending "foreign ownership signals" can see higher deposit growth rates in response to better liquidity and capital adequacy ratios, reflected in their ability to pay depositors on time, meet obligations and compensate unforeseen losses.

However, ethnocentric Russian consumers are not as sensitive to financial performance ratios of banks with Russian-sounding names.

As far as price discipline is concerned, the study's findings are similar: only for banks with foreign names, lower interest rates on deposit are associated with greater reliability – e.g., an increase in the bank's assets by 1% leads to a 0.4 p.p. decrease in the average interest rate on deposits (customers tend to accept lower interest rates from larger banks perceived as more reliable).

Crises Affect Discipline? 

Can the situation change in times financial instability? According to the study's findings, it might – at least partially.

Price discipline tends to weaken during a financial crisis. "A bank's name suggesting foreign ownership will no longer make a difference in terms of increasing depositor sensitivity to financial performance or expectation of higher interest rates from less reliable banks," according to the researchers.

However, quantitative discipline will persist even in a crisis, and the bank's size, capital adequacy and asset quality will still matter for banks with foreign ownership. The authors consider this finding extremely important, given that during the two recent crises of 2008 and 2014, the inflow of deposits to foreign banks increased: many Russian consumers withdrew their savings from domestic private banks and deposited them with state-owned and foreign banks, whose subsidiaries with 100% foreign capital showed an above-market growth of deposits.

*The study uses data on 56 Russian subsidiaries of foreign banks for 2007 to 2015. The names of some 70% of the banks studied suggest their foreign origin.

Author: Svetlana Saltanova, June 19, 2017