Related lending and banking development

Robert Cull, Stephen Haber and Masami Imai

No 5570, Policy Research Working Paper Series from The World Bank

Abstract: Does related lending have positive or negative effects on the development of banking systems? This paper analyzes a unique cross-country data set covering 74 countries from 1990 to 2007, and finds that related lending, on average, does not have any effect on the growth of credit. The authors do find, however, that there are conditional relationships: related lending tends to retard the growth of banking systems when rule of law is weak, while it tends to promote the growth of banking systems when rule of law is strong. They also find that related lending appears to be associated with looting when banks are owned by non-financial firms, but that it does not when non-financial firms are owned by banks. The results indicate that whether related lending is positive or pernicious depends critically on the institutional context in which it takes place; there is no single"best policy"regarding related lending. These findings are robust to alternative specifications, including instrumental variable regressions.

Keywords: Banks&Banking Reform; Debt Markets; Bankruptcy and Resolution of Financial Distress; Labor Policies; Economic Theory&Research (search for similar items in EconPapers)
Date: 2011-02-01
New Economics Papers: this item is included in nep-ban and nep-fdg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (21)

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