Bank supervision and corruption in lending

Which commercial bank supervisory policies ease—or intensify—the degree to which bank corruption is an obstacle to firms raising external finance? Based on new data from more than 2500 firms across 37 countries, this paper provides the first empirical assessment of the impact of different bank supervisory policies on firms’ financing obstacles. We find that the traditional approach to bank supervision, which involves empowering official supervisory agencies to monitor, discipline, and influence banks directly, does not improve the integrity of bank lending. Rather, we find that a supervisory strategy that focuses on empowering private monitoring of banks by forcing banks to disclose accurate information to the private sector tends to lower the degree to which corruption of bank officials is an obstacle to firms raising external finance. In extensions, we find that regulations that empower private monitoring exert a particularly beneficial effect on the integrity of bank lending in countries with sound legal institutions.     

Do bank regulations affect board independence? A cross-country analysis

Based on the hand-collected board structure data of 277 listed banks across 55 countries, and the bank regulation and supervision database compiled by the World Bank, this paper provides the first cross-country assessment of the impacts of bank regulations on board independence of banks. In line with Beck et al. (2006), we examine the effects of two types of regulation policies, the first involving the empowerment of supervisory agencies to monitor and discipline banks directly, and the second focusing on encouraging private monitoring of banks through requiring disclosure of more accurate and complete information. We find that empowering official supervisory agencies to discipline banks directly reduces board independence, but encouraging private sector monitoring of banks increases it. The findings suggest that the first type of regulations tends to crowd out the internal governance of banks, while the second crowds in it. We also find that the legal system with better investor rights protection and better contracts enforcement not only increases board independence but also enhances the crowding in effect of promoting private monitoring and decreases the crowding out effect of direct official supervision on board independence.     

TAKEOVER EXPOSURE, AGENCY, AND THE CHOICE BETWEEN PRIVATE AND PUBLIC DEBT

We examine how governance characteristics are related to the corporate choice between public and private debt. We find that firms with fewer takeover defenses and larger outside blockholder ownership are more likely to borrow from banks and to issue 144A debt. We also document that public debt cost is more sensitive to takeover exposure than bank debt cost. These results are consistent with the hypothesis that banks mitigate the expected negative effect of takeovers on debt value through covenants and debt renegotiations. Moreover, we show that firms with weaker internal monitoring are less likely to borrow from banks.     

Investor protection and the value effects of bank merger announcements in Europe and the US

Investor protection regimes have been shown to partly explain why the same type of corporate event may attract different investor reactions across countries. We compare the value effects of large bank merger announcements in Europe and the US and find an inverse relationship between the level of investor protection prevalent in the target country and abnormal returns that bidders realize during the announcement period. Accordingly, bidding banks realize higher returns when targeting low protection economies (most European economies) than bidders targeting institutions which operate under a high investor protection regime (the US). We argue that bidding bank shareholders need to be compensated for an increased risk of expropriation by insiders which they face in a low protection environment where takeover markets are illiquid and there are high private benefits of control.     

Effects of international institutional factors on earnings quality of banks

We examine the relation between legal, extra-legal and political institutional factors and earnings quality of banks across countries. We predict that earnings quality is higher in countries with legal, extra-legal and political systems that reduce the consumption of private control benefits by insiders and afford outside investors greater protection. Using a sample of banks from 35 countries during the pre-crisis period from 1993 to 2006, we find that all five measures of earnings quality studied are higher in countries with stronger legal, extra-legal and political institutional structures. We also find that banks in countries with stronger institutions are less likely to report losses, have lower loan loss provisions, and higher balance sheet strength during the 2007–2009 crisis period. Our findings highlight the implications of country level institutional factors for financial reporting quality and are relevant to bank regulators who are considering additional regulations on bank financial reporting.     

Bank ownership,privatization, and performance: Evidence from a transition country

This paper combines the static effect of ownership and the dynamic effect of privatization on bank performance in China over 1995–2010, reporting a significantly higher performance by private intermediaries – joint stock commercial banks and city commercial banks – relative to state-owned commercial banks. However, publicly traded banks, subject to multiple monitoring and vetting in capital markets, perform better regardless of ownership status. The privatization of banks has improved performance with respect to revenue inflow and efficiency gains in the short- or long-run (initial public offerings). The positive long-run effect is more relevant and significant for banking institutions with minority foreign ownership. Moreover, this paper innovatively estimates interest income efficiency and non-interest income efficiency at the same time. The results suggest that Chinese banks are much more efficient in generating interest income than raising non-interest revenue, although the latter aspect has improved significantly during the sample period.     

What determines debt structure in emerging markets: Transaction costs or public monitoring?

We examine the predilection for private bonds over bank financing (debt structure) for emerging markets within the frameworks of both transaction cost economics and a transparency explanation, emphasizing the distinction between public monitoring (bonds) and private monitoring (banks), as well as considering the influence of national culture on institutions. Employing several tests, including structural equation modeling, we find, among many results that in emerging markets bonds are preferred over bank loans when there is less corporate opacity and fewer foreign access restrictions, as well as in environment of greater political instability, transaction cost, and limits to legal protection. Bonds are also favored over banks in cultural environments of greater uncertainty avoidance, masculinity, long-term orientation, and indulgence and less individualism. Overall, we attribute our results to culture and institutional quality together influencing debt structure, particularly by impacting attitudes toward public monitoring. Our results will be of great interest to researchers interested in the legal, social, and cultural environments of emerging markets.     

Banking crises and market discipline: International evidence

This paper analyzes the effect of banking crises on market discipline in an international sample of banks. We also evaluate how bank regulation, supervision, institutions, and crisis intervention policies shape the effect of banking crises on market discipline. We control for unobservable bank, country, and time specific effects using a panel data set of banks from 66 countries around 79 banking crises. The results suggest that on average market discipline weakens after a banking crisis. This weakening is higher in countries where bank regulation, supervision, and institutions promoted market discipline before the banking crisis, and where a more accommodative approach is adopted to resolve it.     

Regulating a model

We study a situation in which a regulator relies on risk models that banks produce in order to regulate them. A bank can generate more than one model and choose which models to reveal to the regulator. The regulator can find out the other models by monitoring the bank, but in equilibrium, monitoring induces the bank to produce less information. We show that a high level of monitoring is desirable when the bank’s private gain from producing more information is either sufficiently high or sufficiently low. When public models are more precise, banks produce more information, but the regulator may end up monitoring more.     

Aggregate uncertainty, money and banking

This paper addresses the problem of monitoring the monitor in a model of money and banking with private information and aggregate uncertainty. There is no need to monitor a bank if it requires loans to be repaid partly with money. A market arises at the repayment stage and generates information-revealing prices that perfectly discipline the bank. This mechanism also applies when there exist multiple banks. With multiple banks, competition of private monies improves welfare. A prohibition on private money issue not only eliminates money competition but also triggers free-rider problems among banks, which is detrimental to welfare.     

How does competition affect bank systemic risk?

Using bank level measures of competition and co-dependence, we show a robust negative relationship between bank competition and systemic risk. Whereas much of the extant literature has focused on the relationship between competition and the absolute level of risk of individual banks, in this paper we examine the correlation in the risk taking behavior of banks. We find that greater competition encourages banks to take on more diversified risks, making the banking system less fragile to shocks. Examining the impact of the institutional and regulatory environment on bank systemic risk shows that banking systems are more fragile in countries with weak supervision and private monitoring, greater government ownership of banks, and with public policies that restrict competition. We also find that the negative effect of lack of competition can be mitigated by a strong institutional environment that allows for efficient public and private monitoring of financial institutions.     

Do bank regulation,supervision and monitoring enhance or impede bank efficiency?

The recent global financial crisis has spurred renewed interest in identifying those reforms in bank regulation that would work best to promote bank development, performance and stability. Building upon three recent world-wide surveys on bank regulation (,  and ), we contribute to this assessment by examining whether bank regulation, supervision and monitoring enhance or impede bank operating efficiency. Based on an un-balanced panel analysis of 4050 banks observations in 72 countries over the period 1999–2007, we find that tighter restrictions on bank activities are negatively associated with bank efficiency, while greater capital regulation stringency is marginally and positively associated with bank efficiency. We also find that a strengthening of official supervisory power is positively associated with bank efficiency only in countries with independent supervisory authorities. Moreover, independence coupled with a more experienced supervisory authority tends to enhance bank efficiency. Finally, market-based monitoring of banks in terms of more financial transparency is positively associated with bank efficiency.     

Governance,efficiency and risk taking in Chinese banking

We employ a hand-collected unique dataset on banks operating in China between 2003 and 2011 to investigate the impact of board governance features (size, composition and functioning) on bank efficiency and risk taking. Our evidence suggests that board characteristics tend to have a greater influence on banks' profit and cost efficiency than on loan quality. We find that the proportion of female directors on the board appears not only to be linked to higher profit and cost efficiency but also to lower traditional banking risk. Similarly, board independence is associated with higher profit efficiency of banks; while the opposite is found for executive directors and in the presence of dual leadership of the CEO/chairperson. Among the control variables, we found that liquidity negatively affects profit and cost efficiency, while positively affecting risk. Interestingly, we find some evidence of an incremental effect of specific board characteristics on efficiency for banks with more concentrated ownership structures and state-owned institutions; while for banks with CEO performance-related pay schemes the effect on efficiency when significant is usually negative. Our results offer useful insights to policy makers in China charged with the task of improving the governance mechanisms in banking institutions.     

Financial contagion and depositor monitoring

This paper analyzes market discipline in a many-bank economy where contagion and bank runs interact. We present a model with differently-informed depositors, where those depositors that are more informed have incentives to monitor banks’ investments. It is shown that when banks are undercapitalized, and the probability of success of the risky asset is low, depositors might prefer a contract that is subject to bank runs in the interim period to a contract that allows banks to gamble with their funds and maintain their investment.The results of the paper emphasize the benefits of private monitoring of banks in order to promote market discipline.     

Ownership structure and risk-taking: Comparative evidence from private and state-controlled banks in China

This study examines the impact of ownership structure on Chinese banks' risk-taking behaviours. We classify the Chinese commercial banks into three categories based on the types of controlling shareholder, and find that banks controlled by the government (GCBs) tend to take more risks than those controlled by state-owned enterprises (SOECBs) or private investors (PCBs). This is attributed to the severe political intervention and weak incentives to follow prudent bank management practices for GCBs. We also find that the results are more pronounced among banks with concentrated ownership presumably because the large controlling power helps to enhance the monitoring of the management and promotes prudent operating procedures. Our findings have important implications for the ongoing reform in the Chinese banking sector.     

Banks as Tax Planning Intermediaries

We provide the first large‐scale empirical evidence of banks functioning as tax planning intermediaries. We posit that some banks specialize in assisting corporate clients with tax planning. In this role, banks make use of their centrality in financial relationships; access to private information; and ability to structure, execute, and participate in tax planning transactions for clients. We measure bank‐client relationships using loan contracts and measure client tax planning using either the cash effective tax rate or the unrecognized tax benefit balance. Using a difference‐in‐differences design, we find that firms experience meaningful tax reductions when they begin a relationship with a bank whose existing clients engage in above‐median tax planning. The effects of pairing with such tax intermediary banks are concentrated in relationships with larger or longer maturity loans, clients with foreign income or greater credit risk, and when the bank is an industry specialist or has above‐median investment banking activities. Finally, we find that potential clients are more likely to choose tax intermediary banks than nontax intermediary banks, suggesting that tax intermediary banks benefit by attracting new business. Collectively, our results suggest that some banks act as tax planning intermediaries, a role beyond the traditional one of financial intermediary.     

Effect of collateral characteristics on bank performance: Evidence from collateralized stocks in Taiwan

Taiwanese law requires directors of listed firms to disclose their stocks collateralized at banks creating the possibility of examining the characteristics of collateralized stocks and their influence on bank performance. This study demonstrates that the risk (value) attributes of collateralized stocks increase (reduce) bank efficiency yet reduce (increase) bank profits. Government-owned banks but not private banks require sufficiently high margins to prevent stock loans from non-performing. Furthermore, banks charge higher interest to cover the non-performing risk. Directors who lack funds, hold high turnover stocks, and/or have weak relationships with their banks prefer to collateralize their stocks at private banks.     

How bank capital buffers vary across countries: The influence of cost of deposits,market power and bank regulation

This paper analyzes the bank and country determinants of capital buffers using a panel data of 1337 banks in 70 countries between 1992 and 2002. After controlling for adjustment costs and the endogeneity of explanatory variables, the results show that capital buffers are positively related to the cost of deposits and bank market power, although the relations vary across countries depending on regulation, supervision, and institutions. Their impact is the result of two generally opposing effects: restrictions on bank activities and official supervision reduce the incentives to hold capital buffers by weakening market discipline, but at the same time they promote higher capital buffers by increasing market power. Institutional quality has the two opposite effects. Better accounting disclosure and less generous deposit insurance, however, have a clear positive effect on capital buffers by both strengthening market discipline and making charter value better able to reduce risk-taking incentives.     

Determinants of domestic and cross-border bank acquisitions in the European Union

This paper analyzes the determinants of bank acquisitions both within and across countries in the EU-25 over the period 1997–2004. Our results suggest poorly managed banks (high cost to income) and larger banks are more likely to be acquired by other banks in the same country. The probability of being a target in a cross-border deal is larger for banks that are quoted in the stock market. Finally, banks operating in more concentrated markets are less likely to be acquired by other banks in the same country but are more likely to be acquired by banks in other EU-25 countries.     

Does proximity matter in international bond underwriting?

In this study, we analyze a sample of 3982 international bond issues from 31 countries to examine the impact of geographic proximity on the selection of lead underwriter in the international bond market. We find that proximate banks are more likely to lead underwrite risky bonds and non-rated bonds. On average, the total issue cost is lower if the lead underwriter is a proximate bank. The overall results suggest that geographically proximate banks have better access to private information about issuing companies. We also find that the cost reduction effect of proximate underwriting only appears in developed markets. In addition, this cost reduction effect is relatively weak in countries with a legal system that provides good investor protection.