THE IMPACT OF CAPITAL ON LENDING IN ECONOMIC DOWNTURNS AND INVESTOR PROTECTION – THE CASE OF LARGE EU BANKS

Małgorzata Olszak, Mateusz Pipień, Iwona Kowalska (ikowalska@wz.uw.edu.pl) and Sylwia Roszkowska (sylwiaroszkowska@gmail.com)
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Iwona Kowalska: Department of Mathematics and Statistical Methods, Faculty of Management, University of Warsaw, Poland
Sylwia Roszkowska: University of Warsaw, Faculty of Management

No 62015, Faculty of Management Working Paper Series from University of Warsaw, Faculty of Management

Abstract: This paper attempts to find out whether better quality of investor protection matters for the effect of capital ratio on loan growth of large EU banks in 1996-2011. We focus on several measures of the quality of investor protection with a proven track record in the banking literature, i.e.: anti-self-dealing index, ex-antecontrol and ex-post-control of anti-self-dealing indices, and creditor protection rights index. Our results show that better investor protection increases the procyclical impact of capital on lending in the sample of banks reporting unconsolidated data. This is consistent with the view that better shareholders rights protection induces bank borrowers to take more loans and to engage in more risk-taking, in particular during economic booms, which results in greater sensitivity of bank lending to capital ratios in economic downturns. The opposite effect is found in the sample of banks reporting consolidated data. This effect is consistent with the view that better minority shareholders protection may reduce risk-taking incentives of large banks and result in better risk management of credit portfolio (and other investments of such banks).

Keywords: capital ratio; lending; shareholders protection; creditor power; procyclicality (search for similar items in EconPapers)
JEL-codes: E32 G21 G28 G32 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2015-10
New Economics Papers: this item is included in nep-ban, nep-cba, nep-eec and nep-rmg
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Related works:
Journal Article: The Impact of Capital on Lending in Economic Downturns and Investor Protection – the Case of Large EU Banks (2018)
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