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Journal Article•DOI•

“When the cat's away the mice will play”: Does regulation at home affect bank risk-taking abroad? ☆

Steven Ongena1, Steven Ongena2, Alexander Popov3, Gregory F. Udell4•
Tilburg University1, Center for Economic and Policy Research2, European Central Bank3, Indiana University4
01 Jun 2013-Journal of Financial Economics (Elsevier Science)-Vol. 108, Iss: 3, pp 727-750
TL;DR: The authors found that lower barriers to entry, tighter restrictions on bank activities, and to a lesser degree higher minimum capital requirements in domestic markets are associated with lower bank lending standards in 16 countries.
About: This article is published in Journal of Financial Economics.The article was published on 2013-06-01 and is currently open access. It has received 312 citations till now. The article focuses on the topics: Bank regulation & Minimum capital.
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Citations
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Journal Article•DOI•
Multinational banks and the global financial crisis: Weathering the perfect storm?

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Ralph de Haas1, Ralph de Haas2, Iman van Lelyveld3, Iman van Lelyveld4•
Tilburg University1, European Bank for Reconstruction and Development2, De Nederlandsche Bank3, Tinbergen Institute4
01 Feb 2014-Journal of Money, Credit and Banking
TL;DR: This article used data on the 48 largest multinational banking groups to compare the lending of their 199 foreign subsidiaries during the Great Recession with lending by a benchmark group of 202 domestic banks, concluding that while multinational banks may contribute to financial stability during local bouts of financial turmoil, they also increase the risk of “importing” instability from abroad.
Abstract: We use data on the 48 largest multinational banking groups to compare the lending of their 199 foreign subsidiaries during the Great Recession with lending by a benchmark group of 202 domestic banks. Contrary to earlier, more contained, crises, parent banks were not a significant source of strength to their subsidiaries during the 2008-09 crisis. As a result, multinational bank subsidiaries had to slow down credit growth about twice as fast as domestic banks. This was particularly the case for subsidiaries of banking groups that relied more on wholesale-market funding. Domestic banks were better equipped to continue lending because of their greater use of deposits, a relatively stable funding source during the crisis. We conclude that while multinational banks may contribute to financial stability during local bouts of financial turmoil, they also increase the risk of “importing” instability from abroad.

380 citations

Cites background from "“When the cat's away the mice will ..."

  • ...See Ongena, Popov, and Udell (2013), Barth, Caprio, and Levine (2006), and Acharya, Wachtel, and Walter (2009)....

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Journal Article•DOI•
Trade Credit, the Financial Crisis, and SME Access to Finance

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Santiago Carbo-Valverde, Francisco Rodriguez-Fernandez, Gregory F. Udell
01 Feb 2016-Journal of Money, Credit and Banking
TL;DR: In this paper, the authors analyse whether trade credit provided an alternative source of external finance to SMEs during the credit crisis and find that credit constrained SMEs depend on trade credit, but not bank loans, to finance capital expenditures and that the intensity of this dependence increased during the financial crisis.
Abstract: We analyse for the first time whether trade credit provided an alternative source of external finance to SMEs during the credit crisis. Using firm level panel data on over 40,000 Spanish SMEs we find that credit constrained SMEs depend on trade credit, but not bank loans, to finance capital expenditures and that the intensity of this dependence increased during the financial crisis. Unconstrained firms, in contrast, are dependent on banks loans not trade credit. Overall, this suggests substitution between bank loans and trade credit that is conditional on the level of financing constraints and is more intense during the crisis. (100 words).

282 citations

Cites methods from "“When the cat's away the mice will ..."

  • ...One approach has been to use loan application data to control for demand (e.g., Puri et al. 2011, Popov and Udell 2012, Ongena et al. 2013, Presbitero et al. 2014)....

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Journal Article•DOI•
When Arm’s Length Is Too Far. Relationship Banking over the Credit Cycle

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Thorsten Beck1, Thorsten Beck2, Hans Degryse3, Hans Degryse1, Ralph de Haas4, Ralph de Haas5, Neeltje van Horen6, Neeltje van Horen1 •
Economic Policy Institute1, City University London2, Katholieke Universiteit Leuven3, Tilburg University4, European Bank for Reconstruction and Development5, De Nederlandsche Bank6
01 Jan 2018-Journal of Financial Economics
TL;DR: In this paper, the authors conduct face-to-face interviews with bank CEOs to classify 397 banks across 21 countries as either relationship or transaction lenders, and then use the geographic coordinates of these banks' branches and of 14,100 businesses to analyze how the lending techniques of banks in the vicinity of firms are related to credit constraints at two contrasting points of the credit cycle.

235 citations

Cites methods from "“When the cat's away the mice will ..."

  • ...While firm-level survey data have been widely used in the recent literature (e.g., Campello, Graham, and Harvey, 2010; Popov and Udell, 2012; Ongena, Popov, and Udell, 2013 ), concerns could arise about measurement error in firms’ responses to questions about why they do not apply for a loan, or…...

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  • ...Second, we add to this specification an indicator of whether the firm was overdue by more than 90 days on any payments to utilities or tax authorities (following Ongena, Popov, and Udell, 2013 )....

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Journal Article•DOI•
Institutional development and bank stability: Evidence from transition countries

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Yiwei Fang1, Iftekhar Hasan2, Iftekhar Hasan3, Katherin Marton3•
Illinois Institute of Technology1, Bank of Finland2, Fordham University3
01 Feb 2014-Journal of Banking and Finance
TL;DR: In this article, the authors take advantage of the dynamic nature of institutional reforms in transition economies and explore the causal effects of those reforms on bank risk, finding that banks' financial stability increases substantially after these countries reform their legal insti- tutions, liberalize banking, and restructure corporate governance.
Abstract: G21 P30 P34 P52 abstract This paper takes advantage of the dynamic nature of institutional reforms in transition economies and explores the causal effects of those reforms on bank risk. Using a difference-in-difference approach, we show that banks' financial stability increases substantially after these countries reform their legal insti- tutions, liberalize banking, and restructure corporate governance. We also find that the effects of legal and governance reforms on bank risk may critically depend on the progress of banking reforms. A further examination of alternative risk measures reveals that the increases in financial stability among banks mainly come from the reduction of asset risk. Banks tend to have lower ROA volatility and fewer nonper- forming loans after reforming the institutional environment. Finally, we split our sample into foreign and domestic banks and find that the enhancement of financial stability is more pronounced for domestic banks.

178 citations

Cites background from "“When the cat's away the mice will ..."

  • ...Another reason could be that foreign banks tend to lower lending standards when going abroad to countries with less restrictive banking regulations (Ongena et al., 2013)....

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  • ...Recent studies have suggested that multinational banks tend to take advantage of the cross-country differences in regulations to lend more and lend with lower standard to countries where banking regulation is less strict (Houston et al., 2012; Ongena et al., 2013)....

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Posted Content•
The Regulation and Supervision of Banks Around the World - a New Database

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Hiau Looi Kee1•
World Bank1
30 Apr 2001-Social Science Research Network
TL;DR: In this paper, the authors studied the relationship between trade, productivity, and economic growth in Singapore's manufacturing industries. But productivity is more important as a source of growth in the electronics industry, while factor endowments make a larger contribution in other industries.
Abstract: Productivity and factor endowments both play an important role in growth in Singapore's manufacturing industries. But productivity is more important as a source of growth in the electronics industry, while factor endowments make a larger contribution in other industries. Productivity and the Rybczynski effects of factor endowments have been highlighted as the two main reasons behind the growth of newly industrializing economies in East Asia. However, empirical studies at the aggregate level do not find support for these claims. Focusing on Singapore's manufacturing industries, Kee estimates the contributions of productivity and factor endowments to sectoral growth. The results show that both are important. But productivity is more important as a source of growth in the electronics industry, while factor endowments make a larger contribution in other industries. This paper - a product of Trade, Development Research Group - is part of a larger effort in the group to study the relationship between trade, productivity, and economic growth.

158 citations

References
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Journal Article•DOI•
A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity

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Halbert White
01 May 1980-Econometrica
TL;DR: In this article, a parameter covariance matrix estimator which is consistent even when the disturbances of a linear regression model are heteroskedastic is presented, which does not depend on a formal model of the structure of the heteroSkewedness.
Abstract: This paper presents a parameter covariance matrix estimator which is consistent even when the disturbances of a linear regression model are heteroskedastic. This estimator does not depend on a formal model of the structure of the heteroskedasticity. By comparing the elements of the new estimator to those of the usual covariance estimator, one obtains a direct test for heteroskedasticity, since in the absence of heteroskedasticity, the two estimators will be approximately equal, but will generally diverge otherwise. The test has an appealing least squares interpretation.

25,689 citations

Journal Article•DOI•
Sample Selection Bias as a Specification Error

[...]

James J. Heckman
01 Jan 1979-Econometrica
TL;DR: In this article, the bias that results from using non-randomly selected samples to estimate behavioral relationships as an ordinary specification error or "omitted variables" bias is discussed, and the asymptotic distribution of the estimator is derived.
Abstract: Sample selection bias as a specification error This paper discusses the bias that results from using non-randomly selected samples to estimate behavioral relationships as an ordinary specification error or «omitted variables» bias. A simple consistent two stage estimator is considered that enables analysts to utilize simple regression methods to estimate behavioral functions by least squares methods. The asymptotic distribution of the estimator is derived.

23,995 citations

Book•
The Theory of Economic Regulation

[...]

George J. Stigler
01 Jan 1971
TL;DR: In this article, the authors argue that regulation is acquired by the industry and is designed and operated primarily for its benefit, and that the state has one basic resource which in pure principle is not shared with even the mightiest of its citizens.
Abstract: The state—the machinery and power of the state—is a potential resource or threat to every industry in the society. With its power to prohibit or compel, to take or give money, the state can and does selectively help or hurt a vast number of industries. Regulation may be actively sought by an industry, or it may be thrust upon it. A central thesis of this paper is that, as a rule, regulation is acquired by the industry and is designed and operated primarily for its benefit. The state has one basic resource which in pure principle is not shared with even the mightiest of its citizens: the power to coerce. The state can seize money by the only method which is permitted by the laws of a civilized society, by taxation. The state can ordain the physical movements of resources and the economic decisions of households and firms without their consent.

7,956 citations

Book•
The Economics of Welfare

[...]

Arthur Cecil Pigou
01 Jan 1920
TL;DR: Aslanbeigui et al. as mentioned in this paper discussed the relationship between the national dividend and economic and total welfare, and the size of the dividend to the allocation of resources in the economy and the institutional structure governing labor market operations.
Abstract: The Economics of Welfare occupies a privileged position in economics. It contributed to the professionalization of economics, a goal aggressively and effectively pursued by Pigou's predecessor and teacher Alfred Marshall. The Economics of Welfare also may be credited with establishing welfare economics, by systematically analyzing market departures and their potential remedies. In writing The Economics of Welfare, Pigou built a bridge between the old and the new economics at Cambridge and in Britain. Much of the book remains relevant for contemporary economics. The list of his analyses that continues to play an important role in economics is impressive. Some of the more important include: public goods and externalities, welfare criteria, index number problems, price discrimination, the theory of the firm, the structure of relief programs for the poor, and public finance. Pigou's discussion of the institutional structure governing labor-market operations in his Wealth and Welfare prompted Schumpeter to call the work "the greatest venture in labor economics ever undertaken by a man who was primarily a theorist." The Economics of Welfare established welfare economics as a field of study. The first part analyzes the relationship between the national dividend and economic and total welfare. Parts II and III link the size of the dividend to the allocation of resources in the economy and the institutional structure governing labor-market operations. Part IV explores the relationship between the national dividend and its distribution. In her new introduction, Nahid Aslanbeigui discusses the life of Pigou and the history of The Economics of Welfare. She also discusses Pigou's theories as expressed in this volume and some of the criticisms those theories have met as well as the impact of those criticisms. The Economics of Welfare is a classic that repays careful study.

5,145 citations

Journal Article•DOI•
The Effect of Credit Market Competition on Lending Relationships

[...]

Mitchell A. Petersen1, Raghuram G. Rajan2•
Northwestern University1, University of Chicago2
01 May 1995-Quarterly Journal of Economics
TL;DR: The authors showed that the extent of competition in credit markets is important in determining the value of lending relationships and that creditors are more likely to finance credit constrained firms when credit markets are concentrated because it is easier for these creditors to internalize the benefits of assisting the firms.
Abstract: This paper provides a simple model showing that the extent of competition in credit markets is important in determining the value of lending relationships. Creditors are more likely to finance credit constrained firms when credit markets are concentrated because it is easier for these creditors to internalize the benefits of assisting the firms. The model has implications about the availability and the price of credit as firms age in different markets. The paper offers evidence for these implications from small business data. It concludes with conjectures on the costs and benefits of liberalizing financial markets, as well as the timing of such reforms.

3,259 citations

"“When the cat's away the mice will ..." refers background in this paper

  • ...Moreover, in pricing regressions both age and firm size have been shown to be negatively related to loan interest rates consistent with these characteristic being associated with lower ex ante risk (Petersen and Rajan, 1995; and Berger and Udell, 1995)....

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Frequently Asked Questions (7)
Q1. What contributions have the authors mentioned in the paper "When the cat's away the mice will play: does regulation at home affect bank risk taking abroad?" ?

This paper provides the first empirical evidence that bank regulation is associated with cross-border spillover effects through the lending activities of large multinational banks. The authors analyze business lending by 155 banks to 9613 firms in 1976 different localities across 16 countries. 

To tackle that issue, the authors use country-level data on banking sector profitability and risk from the World Bank Financial Structure dataset (see Beck, Demirgüç-Kunt, and Levine, 2010). 

A second challenge is that using loan rejection rates to define risk taking may be prone to a selection bias as applicant firms may be a systematically truncated sub-sample of all firms. 

This could be because the industrial composition in localities dominated by banks domiciled in countries with higher barriers to entry is skewed towards sectors that for technological reasons do not need much external finance. 

Given the organizational frictions associated with lending a la Stein (2002), this reduced monitoring ability could have a disproportional effect on credit availability. 

In terms of the exclusion restriction, the variables competition, subsidized, and corruption are included in this demand model, but excluded from the rest of the exercises. 

In the latter case, the authors estimate that when self-selection is accounted for (column (6) of Panel B), an informationally opaque firm has a 9% lower probability of having its loan application rejected if it is dealing with banks at the 75th percentile instead of with banks at the 25th percentile of the sample home-country regulatory stringency.