Hostname: page-component-7c8c6479df-8mjnm Total loading time: 0 Render date: 2024-03-29T05:42:26.050Z Has data issue: false hasContentIssue false

Effects of Bank Regulation and Lender Location on Loan Spreads

Published online by Cambridge University Press:  04 October 2012

Li Hao
Affiliation:
li.hao@barclaysasia.com, Barclays Wealth, 41/F Cheung Kong Center, 2 Queen’s Road Central, Hong Kong
Debarshi K. Nandy
Affiliation:
dnandy@brandeis.edu, International Business School, Brandeis University, 415 South St, Waltham, MA 02454
Gordon S. Roberts
Affiliation:
groberts@schulich.yorku.ca, Schulich School of Business, York University, 4700 Keele St, Toronto, Ontario, M3J 1P3, Canada

Abstract

We investigate how differences in regulation regarding banking-commerce integration and banking sector concentration influence loan spreads across 29 countries. Theoretical research posits conflicting effects based on agency costs, information asymmetry costs, and market power. Increased integration is associated with lower loan spreads in countries with low concentration, but moving to high levels of integration increases spreads in countries with high concentration. Starting from lower levels, an increase in integration is associated with an increase in informational efficiency that disappears at higher levels of integration. We also show that market concentration affects loan spreads differently under high-, medium-, and low-integration regimes.

Type
Research Articles
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2012

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Barth, J. R.; Caprio, G. Jr.; and Levine, R.. “Bank Regulation and Supervision: What Works Best?Journal of Financial Intermediation, 13 (2004), 205248.CrossRefGoogle Scholar
Beck, T.; Demirgüç-Kunt, A.; and Levine, R.. “Bank Supervision and Corruption in Lending.” Journal of Monetary Economics, 53 (2006), 21312163.CrossRefGoogle Scholar
Berger, A. N. “The Profit-Structure Relationship in Banking: Tests of Market-Power and Efficient-Structure Hypotheses.” Journal of Money, Credit and Banking, 27 (1995), 404431.CrossRefGoogle Scholar
Berger, A. N.; Klapper, L. F.; and Udell, G. F.. “The Ability of Banks to Lend to Informationally Opaque Small Businesses.” Journal of Banking and Finance, 25 (2001), 21272167.CrossRefGoogle Scholar
Bharat, S.; Dahiya, S.; Saunders, A.; and Srinivasan, A.. “So What Do I Get? The Bank’s View of Lending Relationships.” Journal of Financial Economics, 85 (2007), 368419.CrossRefGoogle Scholar
Carey, M., and Nini, G.. “Is the Corporate Loan Market Globally Integrated? A Pricing Puzzle.” Journal of Finance, 62 (2006), 29693007.CrossRefGoogle Scholar
Clarke, G. R. G.; Cull, R.; Martinez Peria, M. S.; and Sanchez, S. M.. “Bank Lending to Small Businesses in Latin America: Does Bank Origin Matter?Journal of Money, Credit and Banking, 37 (2005), 83118.CrossRefGoogle Scholar
Corvoisier, S., and Gropp, R.. “Bank Concentration and Retail Interest Rates.” Journal of Banking and Finance, 26 (2002), 21552189.CrossRefGoogle Scholar
Demirgüç-Kunt, A., and Huizinga, H.. “Determinants of Commercial Bank Interest Margins and Profitability: Some International Evidence.” World Bank Economic Review, 13 (1999), 379408.CrossRefGoogle Scholar
Demirgüç-Kunt, A.; Laeven, L.; and Levine, R.. “Regulations, Market Structure, Institutions, and the Cost of Financial Intermediation.” Journal of Money, Credit, and Banking, 36 (2004), 593622.CrossRefGoogle Scholar
Diamond, D. W. “Financial Intermediation and Delegated Monitoring.” Review of Economic Studies, 51 (1984), 393414.CrossRefGoogle Scholar
Esty, B.“When Do Foreign Banks Finance Domestic Investments? New Evidence on the Importance of Legal and Financial Systems.” Working Paper, Harvard University (2004).CrossRefGoogle Scholar
Fama, E. F. “What’s Different About Banks?Journal of Monetary Economics, 15 (1985), 2939.CrossRefGoogle Scholar
Faulkender, M., and Petersen, M. A.. “Does the Source of Capital Affect Capital Structure?Review of Financial Studies, 19 (2006), 4579.CrossRefGoogle Scholar
Giannetti, M., and Ongena, S.. “‘Lending by Example’: Direct and Indirect Effects of Foreign Banks in Emerging Markets.” Working Paper, Stockholm School of Economics (2009).CrossRefGoogle Scholar
Haubrich, J. G., and Santos, J. A. C.. “Banking and Commerce: A Liquidity Approach.” Journal of Banking and Finance, 29 (2005), 271294.CrossRefGoogle Scholar
Ho, T. S. Y., and Saunders, A.. “Fixed Rate Loan Commitments, Take-Down Risk, and the Dynamics of Hedging with Futures.” Journal of Financial and Quantitative Analysis, 18, (1983), 499516.CrossRefGoogle Scholar
Houston, J.; Itzkowitz, J.; and Naranjo, A.. “Borrowing Beyond Borders: The Geography and Pricing of Syndicated Bank Loans.” Working Paper, University of Florida (2007).CrossRefGoogle Scholar
John, K.; John, T. A.; and Saunders, A.. “Universal Banking and Firm Risk-Taking.” Journal of Banking and Finance, 18 (1994), 307323.CrossRefGoogle Scholar
Kaufmann, D.; Kraay, A.; and Mastruzzi, M.. “Governance Matters VI: Governance Indicators for 1996–2006.” World Bank Policy Research Working Paper 4280 (2007).CrossRefGoogle Scholar
La Porta, R.; Lopez-de-Silanes, F.; Shleifer, A.; and Vishny, R. W.. “Legal Determinants of External Finance.” Journal of Finance, 52 (1997), 11311150.CrossRefGoogle Scholar
La Porta, R.; Lopez-de-Silanes, F.; Shleifer, A.; and Vishny, R. W.. “Law and Finance.” Journal of Political Economy, 106 (1998), 11131155.CrossRefGoogle Scholar
Levine, R.; Loayza, N.; and Beck, T.. “Financial Intermediation and Growth: Causality and Causes.” Journal of Monetary Economics, 46 (2000), 3177.CrossRefGoogle Scholar
Levine, R., and Zervos, S.. “Stock Markets, Banks, and Economic Growth.” American Economic Review, 88 (1998), 537558.Google Scholar
Macey, J. R., and Miller, G. P.. “Universal Banks Are Not the Answer to America’s Corporate Governance ‘Problem’: A Look at Germany, Japan, and the U.S.” Journal of Applied Corporate Finance, 9 (1997), 5773.CrossRefGoogle Scholar
Mian, A.Distance Constraints: The Limits of Foreign Lending in Poor Economies.” Journal of Finance, 61 (2006), 14651505.CrossRefGoogle Scholar
Park, S.Effects of the Affiliation of Banking and Commerce on the Firm’s Investment and the Bank’s Risk.” Journal of Banking and Finance, 24 (2000), 16291650.CrossRefGoogle Scholar
Petersen, M. A. “Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches.” Review of Financial Studies, 22 (2009), 435480.CrossRefGoogle Scholar
Petersen, M. A., and Rajan, R. G.. “The Effect of Credit Market Competition on Lending Relationships.” Quarterly Journal of Economics, 110 (1995), 407443.CrossRefGoogle Scholar
Prowse, S. D. “Institutional Investment Patterns and Corporate Financial Behavior in the United States and Japan.” Journal of Financial Economics, 27 (1990), 4366.CrossRefGoogle Scholar
Qian, J., and Strahan, P. E.. “How Laws and Institutions Shape Financial Contracts: The Case of Bank Loans.” Journal of Finance, 62 (2007), 28032834.CrossRefGoogle Scholar
Sengupta, R.Foreign Entry and Bank Competition.” Journal of Financial Economics, 84 (2007), 502528.CrossRefGoogle Scholar