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

Małgorzata Olszak, Mateusz Pipień, Iwona Kowalska () and Sylwia Roszkowska ()
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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 72015, Faculty of Management Working Paper Series from University of Warsaw, Faculty of Management

Abstract: 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, publicly-traded 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. 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. Finally, we find empirical support for the view that lending of privately- held banks is not constrained by capital ratio in economic downturns.

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: 23 pages
Date: 2015-11
New Economics Papers: this item is included in nep-ban, nep-cfn and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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