The impact of capital on lending in publicly-traded and privately- held banks in the EU

• Authors: Olszak Małgorzata , Pipień Mateusz , Kowalska Iwona , Roszkowska Sylwia
• Languages of publication: EN

Abstracts

EN

This paper extends the literature on the link between lending and capital by examining the role of equity ownership structure for this link in banks operating in the European Union. As theory predicts, publiclytraded banks are more prone to heightened agency problems (moral hazard and adverse selection) due to dispersed ownership and therefore have stronger incentives to engage in excessive risk-taking especially in economic expansions. This may bring about procyclical lending effect in economic downturns. Theory also predicts that these banks are also more affected by capital market frictions in economic downturns. Applying Blundell and Bond (1998) two step robust GMM estimator we predict and find that the link between lending and capital in economic downturns is stronger in publicly-traded banks than in privately- held banks, which may be a result of greater conditional accounting conservatism of publicly-traded banks. Additionally, the link between lending and capital during expansions is stronger in the case of privately- held banks reporting unconsolidated data, but not for banks reporting consolidated financial reports, consistent with the view that limited access to capital markets increases the cost of external finance of private banks. Finally, we find empirical support for the view that lending of privately- held banks is not constrained by capital ratio in economic downturns. Our results stress the importance of conditional conservatism for the effectiveness macroprudential policy, in particular countercyclical capital buffers.

Keywords

EN

loan supply; capital ratio; procyclicality; accounting conservatism privately-held and publicly-traded banks

• Publisher: Uniwersytet Warszawski. Wydział Nauk Ekonomicznych
• Journal: Faculty of Management Working Paper Series
• Year: 2015
• Issue: WPS 7/2015
• Pages: 1-25

Dates

online

2015-12-16

Contributors

author

Olszak Małgorzata

• Department of Banking and Money Markets, Faculty of Management, University of Warsaw, Poland

author

Pipień Mateusz

• Department of Econometrics and Operations Research, Cracow University of Economics, Poland

author

Kowalska Iwona

• Department of Mathematical and Statistical Methods, Faculty of Management, University of Warsaw, Poland

author

Roszkowska Sylwia

• Chair of Macroeconomics, Faculty of Economic and Social Sciences, University of Łódź, Poland

References

• Basel Committee on Banking Supervision (BCBS) (2011): Basel III: a global regulatory framework for more resilient banks and banking systems. Basel: Bank for International Settlements.
• Ang, J., Cole, R., & Lin, J. (2000): Agency costs and ownership structure. Journal of Finance 55: 81–106.
• Ball, R. and L. Shivakumar. (2005): Earnings Quality in UK Private Firms: Comparative Loss Recognition Timeliness. Journal of Accounting and Economics 3 (1): 83–128.
• Bank for International Settlements (BIS), Financial Stability Board (FSB), International Monetary Fund (IMF) (2011) Macroprudential Policy Tools and Frameworks. Progress Report to G20, 27 October 2011.
• Basel Committee on Banking Supervision (BCBS) (2011): Basel III: a global regulatory framework for more resilient banks and banking systems. Basel: Bank for International Settlements.
• Basu, S. (1997): The conservatism principle and the asymmetric timelines of earnings. Journal of Accounting & Economics 24(1): 3–37.
• Beatty, A, Liao S. (2011): Do delays in expected loss recognition affect banks willingness to lend? Journal of Accounting and Economics 52: 1-20
• Beatty, A, Liao S. (2014): Financial accounting in the banking industry: A review of the empirical literature Jounral of Accounting and Economics 58:339-383
• Beatty, A., Ke, B., & Petroni, K. (2002): Earnings management to avoid earnings declines across publicly and privately held banks. The Accounting Review 77(3): 547–570.
• Beaver, W., & Ryan, S. (2005). Conditional and unconditional conservatism: Concepts and modeling. The Review of Accounting Studies 10(2/3): 269–309.
• Berger, A.N. Udell, G.F. (1994): Did Risk – Based Capital Allocate Bank Credit and Cause a “Credit Crunch” in the United States? Journal of Money, Credit and Banking 26(3): 585 – 628.
• Berrospide, J.M., Edge, R.M. (2010): The effects of bank capital on lending: What do we know? And What does it mean? International Journal of Central Banking. December 2010: 5-54.
• Bliss J.H. (1924) Management through accounts. New York, NY: the Ronald Press Co.
• Blundell, R., Bond, S. (1998): Initial conditions and moment restrictions in dynamic panel data model. Journal of Econometrics 87: 115-143.
• Borio, C., Zhu, V. H. (2012): Capital Regulation, Risk-Taking, and Monetary Policy: A Missing Link in the Transmission Mechanism? Journal of Financial Stability 8: 236-251.
• Bridges, J., Gregory, D., Nielsen, M., Pezzini, S., Radia, A., Spaltro, M. (2014): The impact of capital requirements on bank lending. Working Paper No. 486. Bank of England.
• Carlson, M., Shan, H., Warusawitharana, M. (2013): Capital ratios and bank lending: A matched bank approach. Journal of Financial Intermediation 22:663-687
• Claessens S, (2014) An Overview of Macroprudential Policy Tools. IMF Working Paper No WP/14/214.
• Claessens S, Ghosh S R, Mihet R (2014) Macro-Prudential Policies to Mitigate Financial System Vulnerabilities. IMF Working Paper WP/14/155.
• Demski, J. (2003): Endogenous expectations. The Accounting Review 79(2): 519–539. DIRECTIVE 2013/36/EU OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC ((L 176), (CRDIV).
• Fonseca, A.R., González, F. (2008): Cross-country determinants of bank income smoothing by managing loan-loss provisions. Journal of Banking and Finance 32:217-228.
• Fonseca, A.R., González, F. (2010): How bank capital buffers vary across countires: The influence of cost of deposits, market power and bank regulation. Journal of Banking and Finance 34: 892-902.
• Franses, P.H., Dijk, D. (2005): The forecasting performance of various models for seasonality and nonlinearity for quarterly industrial production. International Journal of Forecasting 21: 87–102.
• Gambacorta, L.,Marqués-Ibáñez, D. (2011): The bank lending channel. Lessons from the crisis. Working Paper Series No 1335/May 2011. European Central Bank. International Monetary Fund (IMF) (2011) Macroprudential Policy: An Organizing Framework. Paper prepared by the Monetary and Capital Markets Department, International Monetary Fund.
• International Monetary Fund (IMF) (2014): Global Financial Stability Report. Risk-taking, Liquidity, and Shadow Banking. Curbing Excess while Promoting Growth.
• Jensen, M., Meckling, W. (1976): Theory of the firm: managerial behaviour. agency costs and ownership structure. Journal of Financial Economics 3: 305-360.
• Labonne, C., Lame, G. (2014): Credit Growth and Bank Capital Requirements: Binding or Not? Working Paper Lenart, Ł., Pipień, M. (2013): Almost Periodically Correlated Time Series in Business Fluctuations Analysis. Acta Physica Polonica A 123(3): 70-86.
• Merton, R. C. (1974): On the pricing of corporate debt: the risk structure of interest rates. Journal of Finance 29: 449–70.
• Mora, N., Logan, A. (2012): Shock to bank capital: Evidence from UK Banks at Home and Away. Applied Economics 44 (9): 1103-1119.
• Myers, S., Majluf, N. (1984): Corporate financing and investment decisions when firms have information that investors do not have. Journal of Financial Economics 13: 187-221
• Nichols, D. C., Wahlen , J. M., Wieland, M.W. (2009): Publicly-traded versus privately held: implications for conditional conservatism in bank accounting. Review of Accounting Studies 14: 88-122.
• Olszak M., Pipień M., Roszkowska S., Kowalska I. (2014): The effects of capital on bank lending of large EU Banks? – the role of procyclicality, income smoothing, regulations and supervision. Faculty of Management Working Paper Series 5/2014, Retrieved from: papers.ssrn.com/sol3/papers.cfmabstract_id=2543675
• Parzen, E., Pagano, M. (1979): An approach to modeling sezonally stationary time-series. Journalof Econometrics 9: 137–153.
• Peek, J., Rosengren, E. (1995): The capital crunch: Neither a borrower nor a lender be. Journal ofMoney, Credit, and Banking. 27: 625–638. REGULATION (EU) No 575/2013 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012 (L 176), (CRR)
• Resti, A., Sironi, A. (2007): Risk management and shareholders’ value in banking. John Wiley and Sons Ltd.
• Roberts, M.R., Whited, T.M. (2011): Endogeneity in Empirical Corporate Finance. Financial Research and Policy Working Paper No. FR 11-29. The Bradley Policy Research Center. University of Rochester.
• Roodman, D. (2009): Practitioners Corner: A Note on the Theme of Too Many Instruments. Oxford Bulletin of Economics and Statistics 71: 135-156.
• Stultz, R. M. (2014): Governance, Risk Management, and Risk-Taking in Banks. Working Paper 20274. National Bureau of Economic Research, Massachusetts.
• Wagster, J.D. (1999): The Basle Accord of 1988 and the International Credit Crunch of 1989-1992, Journal of Financial Services Research 15: 123-143.
• Watts, R. (2003). Conservatism in accounting part I: explanations and implications. Accounting Horizons 17(3): 207–227.
• Windmeijer, F. (2005): A finite sample correction for the variance of linear efficient two step GMM estimators. Journal of Econometrics 126(1): 25–51.

Identifiers

ISSN

2300-4371