The Politics of Bank Non Lending Activities Regulation: A Cross Country and Time Dynamic Study of the Role of Government and Private Industry Groups

155 Pages Posted: 17 Sep 2011

See all articles by Carlos Humberto Méndez

Carlos Humberto Méndez

Tulane University - A.B. Freeman School of Business ; Universidad Francisco Marroquin - School of Business

Date Written: September 16, 2011

Abstract

Building on Braun and Raddatz, B&R (2008) exogenous shock-event methodology, I propose an ordered probit switching model that provides a rich framework to test different interest group regulatory reform theories in a cross country and time dynamic context. Based on this methodology, I studied and contrasted the influence of interest groups (government and incumbent private industries) on regulation reform regarding bank entry into non-lending activities (non-financial firms, insurance, real estate and securities activities). The evidence suggests that governments that became more (less) corrupt around the shock date where also more (less) likely to restrict bank-entry into non-lending activities. The data also suggest that countries that restricted non-lending activities achieved lower levels of financial development with respect to those that provided more freedoms. Hence I found strong evidence supportive of Tollbooth Theory. I also found weak support for Public Interest Theory because governments that were perceived of as high regulatory quality did not chose to free bank non-lending activities; instead their regulatory changes resembled a flip-flopping pattern. This suggests that regulators might be clueless regarding what an adequate policy on non-lending activities out to be. Furthermore, I was also able to disentangle some evidence suggesting that industries, classified as promoters of financial development, have a preference to restrict bank-entry into non-lending activities, particularly non-financial firms and insurance activities. This result is consistent with a bank power aversion flavor of Private Interest Theory; however it raises the question of why promoter industries favor restrictions given that such a regulatory preference works against financial development. It seems that some industrial incumbents suffer from unjustified bank power aversion. As a whole, the results suggest that improvements in government control of corruption has a dominant role over incumbent industry private interests, in increasing the likelihood of less restrictions being put in place on bank entry into non-lending activities.

Keywords: bank non-lending activities, bank regulation, group interest theory, tollbooth theory, private interest theory, public interest theory, bank regulation reform, ordered probit switching model, financial development

JEL Classification: G21, G28, K20

Suggested Citation

Méndez, Carlos Humberto, The Politics of Bank Non Lending Activities Regulation: A Cross Country and Time Dynamic Study of the Role of Government and Private Industry Groups (September 16, 2011). Midwest Finance Association 2012 Annual Meetings Paper, Available at SSRN: https://ssrn.com/abstract=1928799 or http://dx.doi.org/10.2139/ssrn.1928799

Carlos Humberto Méndez (Contact Author)

Tulane University - A.B. Freeman School of Business ( email )

7 McAlister Drive
New Orleans, LA 70118
United States

Universidad Francisco Marroquin - School of Business

6 calle final, zona 10
Guatemala
50223387906 (Phone)

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