Bank Risk-Taking Abroad: Does Home-Country Regulation and Supervision Matter?

European Banking Center Discussion Paper No. 2011-007

Tilburg University CentER Discussion Paper No. 2011-032

50 Pages Posted: 26 Mar 2011  

Steven Ongena

University of Zurich - Department of Banking and Finance; Swiss Finance Institute

Alexander A. Popov

European Central Bank (ECB)

Gregory F. Udell

Indiana University - Kelley School of Business - Department of Finance

Date Written: February 24, 2011

Abstract

This paper provides the first empirical evidence on how home-country regulation and supervision affects bank risk-taking in host-country markets. We analyze lending by 136 banks to 8,253 firms in 1,513 different localities across 13 countries. We find strong evidence that laxer regulatory restrictions in the home country are associated with higher loan rejection rates by banks in host-country markets, but that the resulting loans are mostly to small, unaudited, nonexporting, and innovative firms. The results are stronger when banks are less efficiently supervised at home, and they are observed independently from the effect that bank balance sheets have on lending. These findings imply that loose home-country regulation and supervision are associated with important negative externalities for the host-country in terms of more risk-taking by cross-border banks.

Keywords: bank regulation, cross-border …nancial institutions, …financial risk

JEL Classification: G21, G28, G32

Suggested Citation

Ongena, Steven and Popov, Alexander A. and Udell, Gregory F., Bank Risk-Taking Abroad: Does Home-Country Regulation and Supervision Matter? (February 24, 2011). European Banking Center Discussion Paper No. 2011-007. Available at SSRN: https://ssrn.com/abstract=1793982 or http://dx.doi.org/10.2139/ssrn.1793982

Steven R. G. Ongena

University of Zurich - Department of Banking and Finance ( email )

Schönberggasse 1
Zürich, 8001
Switzerland

Swiss Finance Institute ( email )

Quartier UNIL-Dorigny, Bâtiment Extranef, # 211
40, Bd du Pont-d'Arve
CH-1015 Lausanne, CH-6900
Switzerland

Alexander A. Popov (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Gregory F. Udell

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

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

Paper statistics

Downloads
166
Rank
144,129
Abstract Views
1,238