WPS3862

# **Bank Ownership Type and Banking Relationships**

# **Allen N. Berger**

Board of Governors of the Federal Reserve System, Washington, DC 20551 U.S.A. Wharton Financial Institutions Center, Philadelphia, PA 19104 U.S.A. aberger@frb.gov

# **Leora F. Klapper**

Development Research Group, World Bank, Washington, DC 20433 U.S.A. lklapper@worldbank.org **Maria Soledad Martinez Peria** Development Research Group, World Bank, Washington, DC 20433 U.S.A. mmartinezperia@worldbank.org **Rida Zaidi** Wolfson College, University of Cambridge, Cambridge CB2 1TN, UK. rz213@hermes.cam.ac.uk

# **Abstract**

We formulate and test hypotheses about the role of bank ownership types – foreign, state-owned, and private domestic banks – in banking relationships, using data from India. The empirical results are consistent with all of our hypotheses with regard to foreign banks. These banks tend to serve as the main bank for transparent firms, and firms with foreign main banks are most likely to have multiple banking relationships, have the most relationships, and diversify relationships across bank ownership types. The data are also consistent with the hypothesis that firms with state-owned main banks are relatively unlikely to diversify across bank ownership types. However, state-owned banks often do not provide the main relationship for firms they are mandated to serve (e.g., small, opaque firms), and the predictions of negative effects on multiple banking and number of relationships hold for only one type of state-owned bank.

JEL Classification Numbers: G21, G28, G34, F33 Keywords: Banks, Government Policies, International.

World Bank Policy Research Working Paper 3862, March 2006 _The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the view of the World Bank, its Executive Directors, or the countries they represent. Policy Research Working Papers are available online at http://econ.worldbank.org._ The authors thank the two anonymous referees and editor, George Pennacchi for comments and suggestions that improved the paper. We also thank Priya Basu, Sumon Bhaumik, Lamont Black, Elena Carletti, Sandeep Dahiya, Asli Demirguc-Kunt, Inessa Love, Manju Puri, Charlotte Ostergaard, Anjan Thakor, Susan Thomas, Niraj Verma, Paul Wachtel, seminar participants at the Norwegian School of Management and participants at the DIW/JFI/Philadelphia Fed Conference on Bank Relationships, Credit Extension, and the Macroeconomy, Berlin, for very useful comments, Mahesh Vyas at CMIE for generous assistance with the data, and Xuxin Yu and Varun Kshirsagar for valuable research assistance. The opinions expressed do not necessarily reflect those of the Federal Reserve Board, the World Bank, or their staffs.

Please address correspondence to Allen N. Berger, Mail Stop 153, Federal Reserve Board, 20th and C Streets. NW, Washington, DC 20551, call 202-452-2903, fax 202-452-5295, or email aberger@frb.gov.