Bank Risk-Taking Abroad: Does Home-Country Regulation and Supervision Matter

S. Ongena, A. Popov, G.F. Udell

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Abstract

This paper provides the first empirical evidence on how home-country regulation and supervision affects bank risk-tailing in hostr-country markets. We analyze lending by 136 banks to 8,253 firms in 1,513 different localities across 13 countries. We find strong evidence that laxer regulatory restrictions in the home country are associated with higher loan rejection rates by banks in host-country markets, but that the resulting loans are mostly to small, unaudited, nonexporting, and innovative firms. The results are stronger when banks are less efficiently supervised at home, and they are observed independently from the effect that bank balance sheet have on lending. These findings imply that loose home-country regulation and supervision are associated with important negative externalities for the host-country in terms of more risk-taking by cross-border banks.
Original languageEnglish
Place of PublicationTilburg
PublisherEuropean Banking Center
Volume2011-007
Publication statusPublished - 2011

Publication series

NameEBC Discussion Paper
Volume2011-007

Keywords

  • bank regulation
  • cross-border financial institutions
  • financial risk

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    Ongena, S., Popov, A., & Udell, G. F. (2011). Bank Risk-Taking Abroad: Does Home-Country Regulation and Supervision Matter. (EBC Discussion Paper; Vol. 2011-007). European Banking Center.