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The impact of capital on lending in publicly-traded and privately- held banks in the EU

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  • Malgorzata Olszak

    () (Department of Banking and Money Markets, Faculty of Management, University of Warsaw, Poland)

  • Mateusz Pipien

    () (Department of Econometrics and Operations Research, Cracow University of Economics, Poland)

  • Iwona Kowalska

    () (Department of Mathematics and Statistical Methods, Faculty of Management, University of Warsaw, Poland)

  • Sylwia Roszkowska

    () (University of Warsaw, Faculty of Management)

Abstract

This paper extends the literature on the link between lending and capital by examining the role of equity ownership structure for this link in banks operating in the European Union. As theory predicts, publicly-traded banks are more prone to heightened agency problems (moral hazard and adverse selection) due to dispersed ownership and therefore have stronger incentives to engage in excessive risk-taking especially in economic expansions. This may bring about procyclical lending effect in economic downturns. Theory also predicts that these banks are also more affected by capital market frictions in economic downturns. Applying Blundell and Bond (1998) two step robust GMM estimator we predict and find that the link between lending and capital in economic downturns is stronger in publicly-traded banks than in privately- held banks. Additionally, the link between lending and capital during expansions is stronger in the case of privately- held banks reporting unconsolidated data, but not for banks reporting consolidated financial reports. Finally, we find empirical support for the view that lending of privately- held banks is not constrained by capital ratio in economic downturns.

Suggested Citation

  • Malgorzata Olszak & Mateusz Pipien & Iwona Kowalska & Sylwia Roszkowska, 2015. "The impact of capital on lending in publicly-traded and privately- held banks in the EU," Faculty of Management Working Paper Series 72015, University of Warsaw, Faculty of Management.
  • Handle: RePEc:sgm:fmuwwp:72015
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    Keywords

    capital ratio; lending; shareholders protection; creditor power; procyclicality;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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