# Presentation: 297502

## How Bank Regulation, Supervision and Lender Identity Impact Loan Pricing: A Cross- Country Comparison

**Li Hao**
**Debarshi K. Nandy**
**Gordon S. Roberts**** **
**Schulich School of Business**
**York University**
**Toronto, Canada**

## Overview

- Barth, Nolle, and Rice (1997) document a wide range of banking structures and supervisory practices across countries.
- Demirguc-Kunt, Laeven, and Levine (2004) highlight the importance of bank regulation and supervision.
- Bank regulation affects net interest margins and overhead costs.
- We address how differences in a country’s bank regulation and supervision practices impact financial activities.

## Research Goals

- To examine how differences in a country’s bank regulation and supervision practices impact loan pricing after accounting for the effects of the country’s legal and institutional characteristics.
- To investigate whether bank regulation and supervision practices have different impacts on the lending pattern and loan prices of foreign and domestic lenders.

## Bank regulation and supervision variables

**Banking-commerce integration**
- Banks own non-financial firms
- Non-financial firms own banks
**Banking concentration**
- Concentration of assets
- Concentration of deposits

## Law, Institutions and the determinants of Loan Price

- Qian and Strahan (2005):
- Test how legal and institutional variables affect loan pricing.
- Provide evidence that loan contracts reflect differences in investor protection and law enforcement.

## The determinants of loan price

- The present paper
- Introduces the impacts of bank regulation and supervision on private loan contracts.
- Differentiates the impact on loan prices (due to law and institutional variables) between lending by foreign and domestic lenders.
- Shows the different impact of bank regulation and supervision on lending by foreign and domestic lenders

## Banking-Commerce Integration Effects

- Banking-commerce integration has significant impact on firms’ investment decisions.
- John, John and Saunders (1994), Saunders (1994), and Prowse (1990), among others
- The benefits and costs of banking-commerce integration.
- Barth, Caprio, and Levine (2004)

## Banking/ Commerce Intergration: Impacts 

- Sharing information
- Lower agency costs
- Subsidies and transfers

## Hypotheses

- Banking-commerce integration and loan spreads
_**Hypothesis 1:**_ Non-financial firms owning bank shares impact on loan pricing:
- Domestic banks: negative
- Foreign banks: positive
_**Hypothesis 2:**_*** ***Banks owning non-financial firms: same expected impacts

## Banking concentration

**Market-power theory**
- Banks collude and use their market power to extract monopoly rents
**Efficient-structure theory**
- Concentration increases overall efficiency as more efficient banks grow more rapidly than less efficient ones

## Hypotheses

- Banking concentration and loan spreads
_**Hypothesis 3:**_ Concentration of assets
- Increases market power and spreads for domestic banks
- Improves efficiency and reduces spreads for foreign banks
_**Hypothesis 4:**_***  ***Concentration of deposits: Same hypotheses for different metric

## The base specification

- Similar to that in Qian and Strahan (2005):
- Three legal origin dummies
- Private credit
- Rule of Law
- Creditor Rights
- Borrower’s credit ratings, SIC dummies
- Loan purpose, loan type, syndicated loan, covenant dummies, loan size, the number of lenders

## Data

- Using DealScan database for loan and borrower information.
- Employing  World Bank survey for bank regulation and supervision information.
- The data set contains 54,279 loan facilities covering 49 countries for the period January 1989 to April 2004.

## Slide 14

## Main findings

- Banking-commerce integration and banking concentration are important determinants of loan prices.
- Domestic and foreign lenders react differently to host countries’ regulation and supervision practices.
**In countries with high integration of banking and commerce, domestic lenders charge lower spreads and foreign lenders extract higher loan rents **
**In countries with higher banking concentration, foreign lenders tend to provide favorable contract terms.**

## Main findings-continued

- The benefit of lower loan costs received from domestic lenders vanishes in countries with high banking concentration.
- We present corroborative evidence that host countries’ legal and institutional variables are important determinants of international loan contracts terms.
- In some cases the impact of these variables on loan prices differs between domestic and foreign lenders.

## Slide 17

## Robustness checks

- We conduct various robustness checks by:
- Excluding U.S. data
- Bootstrapping
- Controlling for additional loan features

## Conclusions

- Differences in countries bank regulation and supervision practices impact loan pricing
- Lender identity (domestic vs. foreign) plays an important role in the determination of loan pricing.
- The favorable effects of equity link between the bank and the firm on loan pricing vanish in countries with high banking concentration.