Does banks’ dual holding affect bank lending and firms’ investment decisions? Evidence from China

This study investigates the effect of banks’ dual holding on bank lending and firms’ investment decisions using a sample of listed firms in China. We find that dual holding leads to easier access to bank loans, a result that is more pronounced for non-state-owned enterprises (non-SOEs) than SOEs. We also find that dual holding distorts banks’ lending decisions and harms the investment efficiency for SOEs, while resulting in optimal lending decisions and enhanced investment efficiency for non-SOEs. For non-SOEs, further analysis suggests that optimal lending decisions and efficient investment can be achieved for firms with higher ownership concentration, and firms in which the family and foreign investors are the controlling shareholders. We argue that, in emerging markets, whether a bank plays a monitoring role by directly holding the debt and equity claims of companies relies heavily on whether the potential collusion between firm executives and bank managers can be averted, which in turn is determined by the firms’ governance framework and ownership structure.     

Joint size and ownership specialization in bank lending

During the period 1996–2003 consolidation reduces the size diversity of Spanish banks but diversity in ownership forms increases as savings banks and cooperatives gain market share. This paper examines the implications of these structural changes in Spanish credit markets in terms of banks’ specialization (large or small borrowers, relational or transactional lending) and consequent credit availability for small and opaque firms. We find that size-of-the-borrower/size-of-the-bank specialization follows a different pattern in savings banks than in commercial banks, suggesting lower organizational diseconomies of size in the former than in the latter, which helps to explain the increase in ownership diversity over time. We also find that savings banks and cooperatives specialize relatively more in relational lending than commercial banks so ownership diversity assures funding for small firms even if bank consolidation continues.     

Abnormal investment and firm performance

We find a negative relation between abnormal investment and future stock performance. Such a negative relation is mainly driven by under-investment, not over-investment. Our results are robust to various estimation methods and investment models. Both delayed market reaction and agency issues may lead to the apparently anomalous return predictability of under-investment. First, market investors may not react promptly to the fundamental information contained in under-investment about a firm’s future profitability, asset growth, and financial distress probability. Second, the negative relation between under-investment and future stock returns is more pronounced for firms with lower investor monitoring and higher agency costs.     

Capital ratios and bank lending: A matched bank approach

This paper examines the impact of bank capital ratios on bank lending by comparing differences in loan growth to differences in capital ratios at sets of banks that are matched based on geographic area as well as size and various business characteristics. We argue that such comparisons are most effective at controlling for local loan demand and other environmental factors. For comparison we also control for local factors using MSA fixed effects. We find, based on data from 2001 to 2011, that the relationship between capital ratios and bank lending was significant during and shortly following the recent financial crisis but not at other times. We find that the relationship between capital ratios and loan growth is stronger for banks where loans are contracting than where loans are expanding. We also show that the elasticity of bank lending with respect to capital ratios is higher when capital ratios are relatively low, suggesting that the effect of capital ratio on bank lending is nonlinear. In addition, we present findings on the relationship between bank capital and lending by bank size and loan type.     

Bank lending in Switzerland: Driven by business models and exposed to uncertainty

We study the bank lending channel in Switzerland over three decades using unbalanced quarterly bank-individual data spanning 1987 to 2016. We take an agnostic stance on which bank characteristic drives the heterogeneous lending responses to interest rate changes, and estimate the relevant classification of banks. In addition, our empirical model allows for within-group regime-specific lending responses, determined by a latent, estimated state indicator. No single bank characteristic identifies clearly the relevant classification of banks, as several characteristics determining banks’ business models underlie banks’ heterogeneous lending responses. The bank lending channel does not prevail continuously over the observation period. The overall negative effect of interest rate changes on loan growth is partly muted during periods when uncertainty is unusually low or high.     

Changes in bank lending standards and the macroeconomy

Identifying macroeconomic effects of credit shocks is difficult because many of the same factors that influence the supply of loans also affect the demand for credit. Using bank-level responses to the Federal Reserve's Loan Officer Opinion Survey, we construct a new credit supply indicator: changes in lending standards, adjusted for the macroeconomic and bank-specific factors that also affect loan demand. Tightening shocks to this credit supply indicator lead to a substantial decline in output and the capacity of businesses and households to borrow from banks, as well as to a widening of credit spreads and an easing of monetary policy.     

Does bank capital affect lending behavior?

This paper investigates the existence of cross-sectional differences in the response of lending to monetary policy and GDP shocks owing to differences in bank capitalization. It adds to the literature by using the excess capital-to-asset ratio, which can better control the riskiness of banks' portfolios, and by disentangling the effects of the “bank lending channel” from those of the “bank capital channel.” The results, based on a sample of Italian banks, indicate that bank capital matters in the propagation of different types of shocks to lending, owing to the existence of regulatory capital constraints and imperfections in the market for bank fund-raising.     

Bank capital and economic activity

Banks argue that holding higher capital will have adverse implications on their lending activities and thereby on economic growth. Yet, the effect of a stronger capital base on economic growth remains largely unsettled. We argue that better capitalized banks improve financial stability conditions and, in dire times, they are able to sustain credit to the economy thereby containing adverse macroeconomic implications. Using various methods, we test for the presence and strength of a financial stability channel and a bank lending channel by drawing evidence from 47 advanced and developing countries over close to two decades. We find that higher capital ratios improve financial stability and help sustain bank lending, ultimately exerting a positive influence on economic activity. These effects on real GDP growth are economically significant, reaching up to 1¼ percentage points for each percentage point acceleration in capital. Our main results are robust to various sensitivity checks, supporting the conclusion that safer banking systems do not bridle economic activity.     

Community bank mergers and their impact on small business lending

There have been increasing concerns about the potential of larger banks acquiring community banks and the declining number of community banks, which would significantly reduce small business lending (SBL) and disrupt relationship lending. This paper examines the roles and characteristics of U.S. community banks in the past decade, covering the recent economic boom and downturn. We analyze risk characteristics of acquired community banks, compare pre- and post-acquisition performance, and investigate how the acquisitions have affected SBL. Contrary to the concerns, our analysis shows that the overall amount of SBL increases more after a merger when a community bank is acquired by a large bank. Data also suggest an overall (regardless of mergers) declining SBL trend for all bank size groups. In fact, the decline in the SBL ratio, on average, has been more severe among community banks, relative to large banks. Our results indicate that mergers involving community bank targets over the past decade have enhanced the overall safety and soundness of the banking system without adversely impacting SBL.     

Liquidity crisis,relationship lending and corporate finance

This paper investigates the consequences of the liquidity shocks in wholesale funding markets during the 2007–2009 financial crisis on bank lending and corporate financing. We show that banks that relied more heavily on wholesale funding contracted lending more severely than banks that relied more on insured deposits. We then examine the effects of loan contraction on the financial positions of publicly traded firms. We find that both during and after the crisis, the change in leverage of bank-dependent firms is less than that of firms with access to public debt markets. In addition, bank-dependent firms rely more on cash than net equity issuance to finance operations. We also find that firms with established bank lending relationships weather the crisis better. Such firms are able to attain higher levels of leverage during the crisis, add to their cash holdings, secure new bank credit, and achieve higher profitability as a result.     

Bank incentives and suboptimal lending decisions: Evidence from the valuation effect of bank loan announcements in Japan

Using a sample of bank loan announcements in Japan, we examine whether or not banks have incentives to engage in suboptimal lending that results in wealth transfer from the banks to the borrowing firms. We find that abnormal returns for borrowing firms are significantly positive, but those for lending banks are sometimes significantly negative. Furthermore, the announcement returns for borrowing firms are negatively related to those for lending banks, especially when poorly performing firms borrow from financially healthy (low-risk) banks. Our results suggest that the positive valuation effect of bank loan announcements for borrowing firms is mainly due to a wealth transfer from lending banks.     

Leverage and investment under a state-owned bank lending environment: Evidence from China

This study examines the relations between leverage and investment in China's listed firms, where corporate debt is principally provided by state-owned banks. We obtain three major findings. First, there is a negative relation between leverage and investment. Second, the negative relation between leverage and investment is weaker in firms with low growth opportunities and poor operating performance than in firms with high growth opportunities and good operating performance. Third, the negative relation between leverage and investment is weaker in firms with a higher level of state shareholding than in firms with a lower level of state shareholding. Overall, our results are consistent with the hypothesis that the state-owned banks in China impose fewer restrictions on the capital expenditures of low growth and poorly performing firms and also firms with greater state ownership. This creates an overinvestment bias in these firms.     

Small business lending under the PPP and PPPLF programs

We use Call Report data to examine the effects of the Paycheck Protection Program (PPP) and the PPP Liquidity Facility (PPPLF) on small business and farm lending by individual commercial banks. As program participation was associated with small business lending, we adopt an instrumental variables approach to identify causal implications based on historical bank relationships with the Small Business Administration and the Federal Reserve’s discount window. Our results indicate that both programs encouraged lending growth over the first half of 2020. However, while the PPP encouraged greater lending across all banks, only small and medium-sized bank lending growth was significantly related to participation in the PPPLF.     

Competitive pressure and firm investment efficiency: Evidence from corporate employment decisions

This study examines the link between product market competition and labour investment efficiency. We find that competitive pressure distorts the efficiency of corporate employment decisions by creating an underinvestment problem. This finding withstands a battery of robustness checks and remains unchanged after accounting for endogeneity concerns. Additional analysis shows that the relationship between product market competition and labour investment efficiency is stronger for firms facing higher competitive threats, greater financial constraints, higher information asymmetry and higher labour adjustment costs. Our results suggest that as competition increases bankruptcy risk, it leads managers to underinvest in labour to avoid incurring labour-related costs.     

Bank runs and investment decisions revisited

We examine how the possibility of a bank run affects the investment decisions made by a competitive bank. Cooper and Ross [1998. Bank runs: liquidity costs and investment distortions. Journal of Monetary Economics 41, 27-38] have shown that when the probability of a run is small, the bank will offer a contract that admits a bank-run equilibrium. We show that, in this case, the bank will chose to hold an amount of liquid reserves exactly equal to what withdrawal demand will be if a run does not occur; precautionary or “excess” liquidity will not be held. This result allows us to show that when the cost of liquidating investment early is high, an increase in the probability of a run will lead the bank to invest less. However, when liquidation costs are moderate, the level of investment is increasing in the probability of a run.     

A theoretical model of bank lending: Does ownership matter in times of crisis?

The present study investigates theoretically the lending responses of government-owned and private banks in the event of unexpected financial shocks. Our model predicts that public banks provide more loans to the real sector during times of crisis, compared to private banks which cut down on lending and increase liquidity holdings. We put forth three reasons for this heterogeneous behavior. First, the objective of public banks, in contrast to their private peers, is not only to maximize profits given risks, but also to stabilize and promote the recovery of the economy. Second, public banks may suffer less deposit withdrawals or avoid a bank run in a severe crisis, because the state has better access to additional funds making a recapitalization more likely. And finally, public banks may suffer less deposit withdrawals due to their higher credibility in promising a future recapitalization in the case of a severe crisis.     

A darker side to decentralized banks: Market power and credit rationing in SME lending

We use loan-level data to study how the organizational structure of banks impacts small business lending. We find that decentralized banks—where branch managers have greater autonomy over lending decisions—give larger loans to small firms and those with “soft information.” However, decentralized banks are also more responsive to their own competitive environment. They are more likely to expand credit when faced with competition but also cherry pick customers and restrict credit when they have market power. This “darker side” to decentralized banks in concentrated markets highlights that the level of local banking competition is key to determining which organizational structure provides better lending terms for small businesses.     

The influencing factors of satisfaction and lending intention in online lending investment: an empirical study based on the Chinese market

This paper develops a platform‐based influencing factors model which considers value perception, risk prevention measure, non‐default experience, trust and incentive gap, to better examine the impact of platforms on investors’ satisfaction and lending intention based on the Chinese market. The results reveal that the first four factors positively influence the satisfaction of the investors, while the incentive gap has a negative impact, and there is a positive association between investors’ satisfaction and lending intention. Some specific features of China’s online lending market are identified, which provides valuable insights for online lending platforms and the government.