1. The Determinants of Household’s Bank Switching Brunetti, Ciciretti and Djordevic Discussion by Geoffrey Tombeur – KU Leuven XVI Workshop on Quantitative Finance – Parma – 30 January 2015

2. Aim/summary Research Question ‘What determines the decision of households to switch their main bank?’ 1. Household-bank relationship features 2. Household characteristics 3. Bank characteristics Motivation & Focus o From the banks’ perspective and a regulatory perspective it is interesting to know what characteristics affect the ‘stability’ of a deposit o Banks can affects the relative stability of their deposits through Their relationship with the clients Attracting more stable clients Contribution o Bridging the gap between household finance literature & bank-firm relationship literature o Switching between banks during normal times ( distressed banks)

3. Aim/summary Sample & Method Bank of Italy Survey on Household Income and Wealth, supplemented with Bankscope Unbalanced panel of 5,081 observations, covering 3 bi-annual periods (2006-2012) Switch dummy: household uses different ‘main bank’ (25% of sample) Probit analysis Findings Households switch less often when They have an exclusive relationship and use their main bank more intensely They have a long-lasting relationship with the bank They are smaller, married, less educated and more financially literate Their main bank is cooperative or non-listed Households switch more often when They are taking out or paying off a mortgage Mortgage owners switch more often after switching costs are reduced

4. Strengths Interesting topic o Research concerning household-bank relationship is highly relevant o Household deposits are an important source of financing for banks o Insight into dynamics Very well written: clear and to the point Unique dataset Analysis well-executed

5. Questions & Suggestions What is the main bank? o Subjective answer by survey respondents o When there is clearly a main bank: not a problem o Suppose household A and B Both have 2 banks A does payments through bank 1, has a mortgage at bank 2 B has a mortgage at bank 1, does payments through bank 2 Both have bank 1 as their main bank o 90% use main bank for payments (what about the other 10%?) o Alternative objective definition of main bank could serve as a robustness test E.g., based on payments

6. Questions & Suggestions Why do households switch? Benefits of switching outweigh switching costs (Kiser, 2002) Take this into account for interpretation of results Benefits = better prices (e.g., lower fees, higher interest rates for savings account, lower loan interest rates) Benefits are not observed, most variables proxy for switching costs (exclusivity, intensity, scope, married, financial literacy, education, …) When do households switch? More likely to switch when they make an important financial decision (add service) Taking out a mortgage is one of the most important financial decisions, with high comparability across banks, hence important driver of bank choice (Reflected in results) Interaction terms between add mortgage and switching cost proxies

7. Questions & Suggestions What is the alternative to switching main bank? Not taking any action: stability in banking relations Adding (or dropping) a secondary bank Household still uses ‘main bank’ for e.g., its payments Adds or drops ‘alternative bank’ for another service e.g., portfolio management When a secondary bank is added (dropped) this is bad (good) news for the main bank Suggests a ranking in the changing of banking relations (from main bank perspective) 1. Drops a secondary bank 2. Stability in banking relations 3. Adds a secondary bank 4. Switches main bank, but not dropped 5. Switches and drops main bank An alternative to current model is an ordered or multinomial probit (see Degryse et al., 2011)

8. Minor Questions & Suggestions Findings o After switching costs are reduced, more households with a mortgage switch Can you give more details about former and current switching costs? But … Households that pay down a mortgage are more likely to switch! o Married households are less likely to switch Switched when getting married? More stable household?

9. Minor Questions & Suggestions Sample o For the diff-in-diff analysis you seem to use an extra two years of data Why not include it in the main analysis? o Your period contains a banking crisis & sovereign debt crisis Were there distressed banks in the sample? (i.e., banks that received bad media coverage)

10. Minor Questions & Suggestions Implications o From a bank perspective: mitigate the risk of switching By broadening the scope of their relation “[…] also by means of targeted strategies toward specific bank specialization [cooperative or not] and market status [listed or unlisted]” But these are choices not driven by the desire to prevent switching o From a policy/regulatory perspective the determinants of switching are important Deposit instability (dark side) But during normal times? Switching behavior also fosters competition (bright side) Too high switching costs are not desirable