Bank Ownership and Lending: Does Bank Ownership Matter?

Abstract

Using the Central and Eastern European (CEE) bank-level data covering 2004–12, this article examines the differences in foreign-owned banks’ loan growth and its determinants in comparison with privately-owned domestic banks. The results indicate the greatest differences in the context of bank capital and liquidity. Bank capital remains an important loan growth determinant only for domestic private banks during the non-crisis periods and bank liquidity is of greater importance to domestic private banks during the crisis periods. This highlights local regulatory authorities’ limited ability to harness loan growth and excessive risk-taking during the non-crisis periods and points at the benefits of multinational banking groups’ internal capital markets during the crisis periods.

KEY WORDS:

• bank loans
• bank ownership
• Central and Eastern Europe
• crisis

Acknowledgments

The author would like to thank the participants of the research seminars at the Tallinn University of Technology and from the 4th International Conference “Economic Challenges in Enlarged Europe” (held in Tallinn, June 17–19, 2012) for their useful suggestions on the earlier drafts of this article. The constructive feedback of four anonymous referees is also highly acknowledged.

Notes

1. As at the end of 2010, the average banking assets owned by foreign-owned banks in the CEE amounted to 77 percent. (Source: World Bank http://econ.worldbank.org/WBSITE/EXTERNAL/EXTDEC/EXTGLOBALFINREPORT/0,,contentMDK:23267421~pagePK:64168182~piPK:64168060~theSitePK:8816097,00.html).

2. It should be noted that De Haas et al. (2012) include in their CEE dataset a big number of countries from the Commonwealth of Independent States and Southeastern Europe that are not covered in this article.

3. It does appear that for almost half of the selected eleven countries (e.g., Latvia, Lithuania, Romania, Croatia, Bulgaria, Slovakia) covered also in many previous studies, the banking sector coverage obtained from BankScope (after thorough index matching) is more than two times smaller before 2004.

4. The recent bank efficiency research provides strong support for foreign ownership’s bank efficiency enhancing role in developing countries (e.g., Akin, Bayyurt, and Zaim 2013; Hasan and Xie 2013; Hou et al. 2013).

5. This is rather surprising, considering that ownership structure’s impact on company operations has been widely acknowledged in research focusing on nonfinancial institutions (for review, see Laidroo 2009) and recent research in the context of banks also supports significant impact of bank ownership on banks’ operations (e.g., Hasan and Xie 2013; Hou et al. 2013; Laidroo and Ööbik 2014).

6. This process involved also a consistency check for the same bank’s data across years and if some commercial banks with significant market share were missing from the dataset, their numbers were added using official unconsolidated annual reports disclosed on banks’ websites. In total, nineteen banks’ data was corrected/added in this process and for elven of them consolidated numbers were used (as no unconsolidated data was available, but the banks’ market share in each respective country was above 10 percent).

7. Average banking sector coverage numbers remains below 90 percent as the BankScope database does not include branches of foreign banks and smaller banks. Also the total banking assets number includes other types of banks besides commercial banks, which have an impact on banking sector coverage of Bulgaria, Poland, and Romania.

8. Most of the previous studies have used a 50.01 percent threshold, however, the use of a 20.01 percent threshold enables categorizing two government-owned Slovenian banks that are under government control and have had government ownership ranging from 35 to 40 percent. Lowering the government-owned bank threshold has had no impact on other government-owned banks’ categorization.

9. In most cases the ownership was determined based on the BankScope data. For some banks with missing ownership data in BankScope, the ownership information was gathered from the respective banks’ annual reports retrieved from their websites.

10. They used a combination of banking crises years with a fixed time period (2007–9) for all other countries not experiencing a banking crisis.

11. For example, in 2008 Estonia experienced a −4.2 percent and Latvia −3.3 percent real GDP decline. At the same time the real GDP growth rates in the remaining nine countries ranged from 0.9 to 7.3 percent. However, while in 2010 Croatia, Latvia and Romania experienced −2.3 percent to −0.9 percent real GDP decrease; the remaining countries experienced a real GDP increase of 0.4 to 4.4 percent.

12. It is possible to use crisis period definitions based on deviations of real GDP from its long-term trend as in Duprey (2012). However, the data availability limitations would lead to a long-term trend calculation based on a rather short time period of 2000–12. This would provide results which poorly capture the developments over the recent business cycle.

13. The model was initially also estimated using random effects; however, the Hausman test indicated that the fixed-effects model should be preferred.

14. In the CEE context Männasoo and Mayes (2009) show that CEE banks’ funding is an important determinant of banks’ fragility, especially during the crisis periods.

15. The models with bank fixed-effects were also run without bank ownership variables and this did not significantly alter the sign and significance of coefficients. As the focus is also on the differences in loan growth rates across bank ownership types, all results presented in this article include ownership dummies in bank fixed-effects regressions.

16. Market funding ratio’s coefficient for government-owned banks is 0.245 (0.778–0.533) with a p-value of 0.56 and the liquidity ratio coefficient is −0.062 (−0.544+0.482) with a p-value of 0.78.

17. It is important to bear in mind that Brei and Schclarek (2013) had CEE countries as part of their larger sample of countries and their private bank definition included both foreign-owned and domestic private banks.

18. Foreign-owned banks’ equity ratio’s coefficient during the non-crisis years is 0.112 (p-value 0.21) and −0.310 (p-value 0.77) during the crisis periods. Foreign-owned banks’ squared equity ratio’s coefficient during the non-crisis period is −0.001 (p-value 0.84) and during the crisis period is −0.02 (p-value 0.18).

19. The coefficient of government-owned banks’ equity ratio is −2.711 (p-value 0.37) during the non-crisis periods and 11.419 (p-value 0.14) during the crisis periods. Squared equity ratio during the crisis periods has a coefficient of −0.894 (p-value 0.06).

20. The spread’s coefficient for government-owned banks in crisis periods becomes 3.021 (p-value 0.12).

21. http://www.ttu.ee/laivi-laidroo.

Additional information

Funding

The author is grateful for the financial support provided by the Estonian Ministry of Education and Research via project SF0140059s12. The financing institution had no involvement in the design and content of the research article.