Bank Risk-Taking Abroad: Does Home-Country Regulation and Supervision Matter?
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
February 24, 2011
European Banking Center Discussion Paper No. 2011-007
Tilburg University CentER Discussion Paper No. 2011-032
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.
Number of Pages in PDF File: 50
Keywords: bank regulation, cross-border nancial institutions, financial risk
JEL Classification: G21, G28, G32
Date posted: March 26, 2011