Liberalization, Bank Governance, and Risk Taking
Manuel Illueca Muñoz
Universitat Jaume I
Erasmus University Rotterdam (EUR) - Rotterdam School of Management (RSM); Erasmus Research Institute of Management (ERIM)
Gregory F. Udell
Indiana University - Department of Finance
November 16, 2011
EFA 2008 Athens Meetings Paper
AEA 2012 Chicago Meetings Paper
We study the effects of the interplay between deregulation and governance on risk taking in the financial industry. We consider a large natural experiment in Spain where the removal of regulatory geographic constraints for savings banks led to a nationwide expansion of these banks during the past two decades. Based on a unique data set that combines information on the geographic distribution of bank lending, matched lender-borrower financial statements, and borrower defaults, we find that the governance of savings banks significantly affects the way in which they expand their lending activities. In particular, political influence at these banks is associated with higher ex ante risk taking and higher ex post loan defaults. Our study highlights the broader implications of the impact of global deregulation and consolidation and their interaction with governance issues.
Number of Pages in PDF File: 54
Keywords: Deregulation, Bank loans, Risk taking, Geographic expansion, Bank ownership
JEL Classification: G10, G21, G30, H11, L30working papers series
Date posted: March 15, 2011 ; Last revised: November 16, 2011
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