Does Banking Sector Structure Affect Bank Lending and Its Sensitivity to Capital Ratio? A Cross-country Study
Does the banking sector’s structure affect bank lending and its sensitivity to the capital ratio? Looking at banks operating in over 60 countries in the years 2000–2011, this chapter aims to resolve this puzzle. Its goal is also to find out whether countr
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Using data on individual banks in over 60 countries, this chapter aims to find out whether the concentration in the banking sector affects loan growth and the link between lending and capital, both during economic booms and during periods of crisis. We expect that this association may be impacted by economic development, capital-account openness and location in the region of Central and Eastern Europe (CEE). This chapter is related to two streams in the literature. The first focuses on the role of banking sector concentration for the lending activities of banks. This literature makes contradictory predictions about the impact of concentration on loan supply. On the one hand, classical economic theory predicts that market power results in a lower supply at higher I. Kowalska • M. Olszak (*) • F. Świtała Faculty of Management, University of Warsaw, Szturmowa 1/3, 02-678, Warszawa, Poland [email protected]; [email protected]; [email protected] © The Author(s) 2017 E. Miklaszewska (ed.), Institutional Diversity in Banking: Small Country, Small Bank Perspectives, Palgrave Macmillan Studies in Banking and Financial Institutions, DOI 10.1007/978-3-319-42073-8_7
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costs, thus reducing real sector firm growth (the so-called structure–performance hypothesis, see Beck et al. 2004, pp. 630). On the other hand, considering information asymmetries and agency costs leads to theories that expect a positive or non-linear relation between market power and access to loans for opaque borrowers in a dynamic setting (the so called information-based theories). As Beck et al. (2004) suggest, information asymmetries between lenders and borrowers, resulting in adverse selection, moral hazard, may change the relation between market structure and access to loans from a negative to a positive or non-linear one. The other stream in the literature stresses the importance of competition and concentration for risk-taking and stability in the banking industry. This literature may be helpful in predicting the effect of banking sector concentration on the link between loan growth and the capital ratio. With respect to the impact of market structure on the stability of the banking sector, both economic theory and empirical evidence produce mixed results. In the literature, there are two contrasting views on the relationship between concentration and risk-taking. On the one hand, the “competition–fragility” view posits that more competition among banks leads to more fragility. This “charter value” view of banking, introduced by Keeley (1990), perceives banks as choosing the risk of their asset portfolio (see also Hellmann et al. 2000; Repullo 2004; Beck 2008). In a more competitive environment, with more pressure on profits, banks have greater incentives to engage in risky investments, which results in higher fragility (through eroded charter-value). On the other hand, the “concentration-stability” view argues that more competitive and less concentrated banking systems result in more financial stabil
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