Foreign bank ownership and business regulations Manthos D. Delis Surrey Business School Georgios P. Kouretas Athens University of Economics and Business Chris Tsoumas University of Piraeus Centre for Financial Risk Analysis-EM Lyon Business School, Thursday 27 March 2014
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Foreign bank ownership and business regulations Manthos D. Delis Surrey Business School Georgios P. Kouretas Athens University of Economics and Business.
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Foreign bank ownership and business regulations
Manthos D. DelisSurrey Business School
Georgios P. KouretasAthens University of Economics and Business
Chris TsoumasUniversity of Piraeus
Centre for Financial Risk Analysis-EM Lyon Business School,
Thursday 27 March 2014
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Agenda
Goal and MotivationLiterature reviewDataEmpirical methodologyResultsConclusions
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Goal and motivation Motivation
◦ Entry of foreign banks into local banking markets, a worldwide phenomenon during the last decades that has attracted much attention in the literature.
◦ The depth of this entry has potentially important implications for financial and macroeconomic stability in host countries.
◦ But, what about institutions? Goal
To examine empirically the impact of foreign bank presence on host countries institutions, specifically business regulations
Question of increased importance due to its: Importance for long-run growth Permanent nature
Issue not addressed so far in the literature
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Literature ReviewLehner and Schnitzer (2008, JCE)
study the impact that foreign bank entry has on local banks in two ways: (a) spillover effects for local banks and (b) increasing competition in the local banking market. Findings: An increase in competition has positive welfare effects. Spillovers are less likely to have positive welfare effects the stronger bank competition is.
Clarke, Cull and Peria (2006, JCE) use survey data of firms operating in 35 developing and transition economies. They find that all firms of
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Literature Review any size report that they face lower financing
obstacles in countries with higher levels of foreign bank presence.
Giannetti and Ongena (2012) argue that capital inflows and entry of foreign banks can contribute to the development of a country’s financial system (investment and financial expertise). They find that firms have the same access to credit and ability to invest whether they borrow from a foreign bank or not. Foreign banks benefit all firms indirectly since they increase credit access.
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Literature ReviewSytse, Rejie and Rezaul (SMJ,
2006) they provide evidence that it is important to disaggregate foreign ownership into foreign institutional and foreign corporate shareholders. The main finding show that the impact of institutional investors on firm performance is not-clear.
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DataLarge (unbalanced) panel dataset
◦8 large databases employed◦Annual data◦114 countries (both advanced and
emerging)◦1995-2011 period◦5 distinct dependent variables◦Large array of control variables
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DataDependent variables
Variable Definition Source
Business freedom Measures the efficiency of government regulation of business, and is derived from an array of measurements of the difficulty of starting, operating, and closing a business.
Heritage dataset
Freedom to trade internationally
Measures a wide variety of restraints that affect international exchange: tariffs, quotas, hidden administrative restraints, and controls on exchange rates and capital.
Fraser dataset
Regulations Measures the regulatory environment for a country regarding credit market, labor market and business regulations.
Property rights Measures the degree to which a country’s laws protect private property rights, the quality of enforcement of such laws by the state, and the quality of contract enforcement.
Business regulations
Sub-component of the regulations index, measures the efficiency of government regulation of business (administrative requirements for running a business, bureaucracy costs, procedures for starting a business, bribes and favoritism, licensing restrictions and cost of tax compliance).
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Dependent variables’ characteristics
Heritage’s business freedom: Sample period: 1995-2011 Range: 10 to 100
Fraser’s variables: Sample period: 1995 and 2000-2011 Range: 0 to 10
Higher values indicate more efficient regulations
CorrelationsBusiness freedom
Freedom to trade internationally
RegulationsProperty
rightsBusiness freedom 1.00Freedom to trade internationally
Variable Obs. Mean St. Dev. Min. Max. Business freedom 2,188 65.668 15.015 10 100 Freedom to trade internationally
1,527 7.226 1.26 1.103 9.723
Regulations 1,566 6.679 1.033 2.701 9.3 Property rights 1,535 5.716 1.764 1.4 9.6 Business regulations 1,390 5.957 1.151 2.2 9.5
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Data (cont’d)Explanatory variables (Main model)
Variable Definition Source
Foreign bank presence
(log) Ratio of foreign banks to total banks. A foreign bank is a bank where 50% percent or more of its shares are owned by foreigners (Claessens and van Horen, 2013).
Global Financial Development database
GDP per capita(log) Purchasing Power Parity (PPP) adjusted Gross Domestic Product (GDP) per capita at 2005 constant international $ prices (Chain Series)
Penn World Tables 7.1
GDP growth GDP growth (%)World Development Indicators
Inflation Inflation, GDP deflator (%)
Bank credit to bank deposits
Bank credit to bank deposits (%)Global Financial Development database
Inward FDI flows Inward direct investment flows, as a share of GDP
United Nations Conference on Trade and Development (UNCTAD) statistics
Openness Openness at 2005 constant prices, as a share of GDP Penn World Tables 7.1
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Data (cont’d)Additional explanatory variables (Enhanced model)
Variable Definition SourceDemocracy Polity2 measure of democracy Polity IV database
Sound moneyMeasures the consistency of monetary policy with long-term price stability, and the ease with which other currencies can be used via domestic and foreign bank accounts.
Fraser datasetSize of governmentMeasures the size of government interference with the economy (government consumption, transfers and subsidies, government enterprises and investment, top marginal tax rate)
Institutional variables employed as dependent in other econometric specifications (i.e., freedom to trade internationally, property rights, regulations)
Chief executive party orientation
Measures the chief executive party's orientation with respect to economic policy: Right, for parties that are defined as conservative, Christian democratic, or right-wing (value assigned =1); Center, for parties that are defined as centrist or when party position can best be described as centrist (e.g. party advocates strengthening private enterprise in a social-liberal context) (value assigned=2); Left, for parties that are defined as communist, socialist, social democratic, or left-wing (value assigned=3).
Database of Political Institutions
PluralityDummy variable that takes the value of 1 if legislators are elected using a winner-take-all / first past the post rule and 0 otherwise.
Legal origin and religion dummies Djankov et al., 2007
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Explanatory variables’ characteristicsObs. Mean St. Dev. Min. Max.
(log) Foreign bank presence 1,825 3.36 0.915 0 4.605
(log) GDP per capita 2,160 8.723 1.321 5.62 11.822
GDP growth 2,276 0.042 0.046 -0.18 0.89
Inflation 2,275 0.14 1.251 -0.328 53.995
Bank credit to bank deposits 2,183 99.323 63.941 8.612 898.048
Inward FDI flows 2,236 0 0.001 -0.006 0.007
Openness 2,160 0.827 0.517 0.088 4.33
Democracy 2,199 4.045 6.42 -10 10
Sound money 1,532 7.943 1.689 0 9.9Chief executive party orientation
2,261 -8.403 98.223 -999 3
Plurality 2,239 -77.057 267.68 -999 1
Sample period dictated by foreign bank presence availability (1995-2009)
Foreign bank assets to total bank assets not used because of much shorter time period availability (2004-2009)
No collinearities detected
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Empirical MethodologyThree estimation techniques
1.Pooled OLS
Busreg: measure of business regulations in country i at time t Lagged dependent included to account for possible persistence
FB: foreign bank presence (n takes the values 1 or 2)
Xj: array of variables that may affect business regulations
Legal origin and religion dummies included
• εt: time dummies
Two models:
Main model: Xj includes main macroeconomic variables
Enhanced model: Xj adds institutional and political
characteristics Yet, pooled OLS may not be appropriate when both business
regulations and foreign bank presence are driven by some other underlying economic, political and social forces.
Endogeneity issues (i.e., reverse causation from business regulations to foreign bank presence)
Countries’ fixed effects Ideal method for large N - small T, as in our case Xj’s instrumented with their lagged values (i.e., L2; L3) FB instrumented with:
Fraser’s Foreign ownership/investment restrictions indexSub-component of the Freedom to trade internationally index, based on the following two Global Competitiveness Report questions: “How prevalent is foreign ownership of companies in your country?”; and “How restrictive are regulations in your country relating to international capital flows?”
Two models (main, enhanced), as in pooled OLS
Empirical Methodology
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3. Treatment effects model (two stage IV model)• First stage:
• FBxit is a dummy with 1 for foreign bank presence and 0 otherwise
• Four distinct dummies employed:1.FB10: 1 if foreign bank presence >=10%2.FB20: 1 if foreign bank presence >=20%3.FB30: 1 if foreign bank presence >=30%4.FB40: 1 if foreign bank presence >=40%
• zit is the instrument used in the panel GMM case
• Second stage:
• It models the response of the countries’ business regulations to foreign bank presence (i.e., the “treatment”) relative to the countries with non-foreign bank presence, which serve as the control group
• n takes values 1, 2 and 3• Busregit-1 accounts for the possible differences in the trend of the
dependent variable between the treated and control groups before the treatment