Toronto, Canada. 2. Overview ... 0.411. 10. 2. Unrestricted

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How Bank Regulation, Supervision and Lender
Identity Impact Loan Pricing A Cross- Country
Comparison

• Li Hao
• Debarshi K. Nandy
• Gordon S. Roberts
• Schulich School of Business
• York University
• Toronto, Canada

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Overview

• Barth, Nolle, and Rice (1997) document a wide
  range of banking structures and supervisory
  practices across countries.
• Demirguc-Kunt, Laeven, and Levine (2004)
  highlight the importance of bank regulation and
  supervision.
• Bank regulation affects net interest margins and
  overhead costs.
• We address how differences in a countrys bank
  regulation and supervision practices impact
  financial activities.

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Research Goals

• To examine how differences in a countrys bank
  regulation and supervision practices impact loan
  pricing after accounting for the effects of the
  countrys legal and institutional
  characteristics.
• To investigate whether bank regulation and
  supervision practices have different impacts on
  the lending pattern and loan prices of foreign
  and domestic lenders.

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Bank regulation and supervision variables

• Banking-commerce integration
• Banks own non-financial firms
• Non-financial firms own banks
• Banking concentration
• Concentration of assets
• Concentration of deposits

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Law, Institutions and the determinants of Loan
Price

• Qian and Strahan (2005)
• Test how legal and institutional variables affect
  loan pricing.
• Provide evidence that loan contracts reflect
  differences in investor protection and law
  enforcement.

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The determinants of loan price

• The present paper
• Introduces the impacts of bank regulation and
  supervision on private loan contracts.
• Differentiates the impact on loan prices (due to
  law and institutional variables) between lending
  by foreign and domestic lenders.
• Shows the different impact of bank regulation and
  supervision on lending by foreign and domestic
  lenders

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Banking-Commerce Integration Effects

• Banking-commerce integration has significant
  impact on firms investment decisions.
• John, John and Saunders (1994), Saunders (1994),
  and Prowse (1990), among others
• The benefits and costs of banking-commerce
  integration.
• Barth, Caprio, and Levine (2004)

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Banking/ Commerce Intergration Impacts

• Sharing information
• Lower agency costs
• Subsidies and transfers

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Hypotheses

• Banking-commerce integration and loan spreads
• Hypothesis 1 Non-financial firms owning bank
  shares impact on loan pricing
• Domestic banks negative
• Foreign banks positive
• Hypothesis 2 Banks owning non-financial firms
  same expected impacts

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Banking concentration

• Market-power theory
• Banks collude and use their market power to
  extract monopoly rents
• Efficient-structure theory
• Concentration increases overall efficiency as
  more efficient banks grow more rapidly than less
  efficient ones

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Hypotheses

• Banking concentration and loan spreads
• Hypothesis 3 Concentration of assets
• Increases market power and spreads for domestic
  banks
• Improves efficiency and reduces spreads for
  foreign banks
• Hypothesis 4 Concentration of deposits Same
  hypotheses for different metric

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The base specification

• Similar to that in Qian and Strahan (2005)
• Three legal origin dummies
• Private credit
• Rule of Law
• Creditor Rights
• Borrowers credit ratings, SIC dummies
• Loan purpose, loan type, syndicated loan,
  covenant dummies, loan size, the number of
  lenders

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Data

• Using DealScan database for loan and borrower
  information.
• Employing World Bank survey for bank regulation
  and supervision information.
• The data set contains 54,279 loan facilities
  covering 49 countries for the period January 1989
  to April 2004.

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Main findings

• Banking-commerce integration and banking
  concentration are important determinants of loan
  prices.
• Domestic and foreign lenders react differently to
  host countries regulation and supervision
  practices.
• In countries with high integration of banking and
  commerce, domestic lenders charge lower spreads
  and foreign lenders extract higher loan rents
• In countries with higher banking concentration,
  foreign lenders tend to provide favorable
  contract terms.

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Main findings-continued

• The benefit of lower loan costs received from
  domestic lenders vanishes in countries with high
  banking concentration.
• We present corroborative evidence that host
  countries legal and institutional variables are
  important determinants of international loan
  contracts terms.
• In some cases the impact of these variables on
  loan prices differs between domestic and foreign
  lenders.

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Robustness checks

• We conduct various robustness checks by
• Excluding U.S. data
• Bootstrapping
• Controlling for additional loan features

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Conclusions

• Differences in countries bank regulation and
  supervision practices impact loan pricing
• Lender identity (domestic vs. foreign) plays an
  important role in the determination of loan
  pricing.
• The favorable effects of equity link between the
  bank and the firm on loan pricing vanish in
  countries with high banking concentration.