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Liberalization, Bank Governance, and Risk Taking

EFA 2008 Athens Meetings Paper

AEA 2012 Chicago Meetings Paper

54 Pages Posted: 15 Mar 2011 Last revised: 14 May 2014

Manuel Illueca Muñoz

Universitat Jaume I

Lars Norden

Brazilian School of Public and Business Administration (EBAPE), Getulio Vargas Foundation (FGV)

Gregory F. Udell

Indiana University - Kelley School of Business - Department of Finance

Date Written: November 16, 2011

Abstract

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.

Keywords: Deregulation, Bank loans, Risk taking, Geographic expansion, Bank ownership

JEL Classification: G10, G21, G30, H11, L30

Suggested Citation

Illueca Muñoz, Manuel and Norden, Lars and Udell, Gregory F., Liberalization, Bank Governance, and Risk Taking (November 16, 2011). EFA 2008 Athens Meetings Paper . Available at SSRN: https://ssrn.com/abstract=1785793 or http://dx.doi.org/10.2139/ssrn.1785793

Manuel Illueca Muñoz (Contact Author)

Universitat Jaume I ( email )

Dep. Finance and Accounting
Campus del Riu Sec
Castellón de la Plana, E-12071
Spain
34964387135 (Phone)

Lars Norden

Brazilian School of Public and Business Administration (EBAPE), Getulio Vargas Foundation (FGV) ( email )

Praia de Botafogo, 190
Rio de Janeiro, 22250-900
Brazil
+552137995759 (Phone)

Gregory F. Udell

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States

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