When the Cat's Away the Mice will Play: Does Regulation at Home Affect Bank Risk Taking Abroad?

64 Pages Posted: 21 Nov 2012  

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: October 22, 2012

Abstract

This paper provides the first empirical evidence that bank regulation is associated with cross-border spillover effects through the lending activities of large multinational banks. We analyze business lending by 155 banks to 9613 firms in 1976 different localities across 16 countries. We find that lower barriers to entry, tighter restrictions on bank activities, and higher minimum capital requirements in domestic markets are associated with lower bank lending standards abroad. The effects are stronger when banks are less efficiently supervised at home, and are observed to exist independently from the impact of host-country regulation.

Keywords: bank regulation, cross-border financial institutions, lending standards, financial risk

JEL Classification: G21, G28, G32

Suggested Citation

Ongena, Steven and Popov, Alexander A. and Udell, Gregory F., When the Cat's Away the Mice will Play: Does Regulation at Home Affect Bank Risk Taking Abroad? (October 22, 2012). ECB Working Paper No. 1488. Available at SSRN: https://ssrn.com/abstract=2165196

Steven R. G. Ongena (Contact Author)

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

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

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