1
Foreign bank ownership and business regulations
Manthos D. DelisSurrey Business SchoolGeorgios P. KouretasAthens
University of Economics and BusinessChris TsoumasUniversity of
Piraeus
Centre for Financial Risk Analysis-EM Lyon Business School,
Thursday 27 March 2014AgendaGoal and MotivationLiterature
reviewDataEmpirical methodologyResultsConclusions2Goal and
motivationMotivationEntry 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?GoalTo examine empirically the impact of foreign bank
presence on host countries institutions, specifically business
regulationsQuestion of increased importance due to its:Importance
for long-run growthPermanent natureIssue not addressed so far in
the literature
3Literature 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
of4Literature Reviewany 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 countrys
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.5Literature 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.
6DataLarge (unbalanced) panel dataset8 large databases
employedAnnual data114 countries (both advanced and
emerging)1995-2011 period5 distinct dependent variablesLarge array
of control variables
7Data8Dependent variables VariableDefinitionSourceBusiness
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
datasetFreedom 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 datasetRegulations Measures the regulatory
environment for a country regarding credit market, labor market and
business regulations. Property rights Measures the degree to which
a countrys 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). Dependent
variables characteristics9Heritages business freedom:Sample period:
1995-2011Range: 10 to 100Frasers variables:Sample period: 1995 and
2000-2011Range: 0 to 10 Higher values indicate more efficient
regulations
CorrelationsBusiness freedomFreedom to trade
internationallyRegulationsProperty rightsBusiness
freedom1.00Freedom to trade
internationally0.571.00Regulations0.510.561.00Property
rights0.690.600.581.00Business regulations0.630.580.740.73Variable
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
Data (contd)10Explanatory variables (Main
model)VariableDefinitionSourceForeign 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 databaseGDP per
capita(log) Purchasing Power Parity (PPP) adjusted Gross Domestic
Product (GDP) per capita at 2005 constant international $ prices
(Chain Series)Penn World Tables 7.1GDP growthGDP growth (%)World
Development IndicatorsInflationInflation, GDP deflator (%)Bank
credit to bank deposits Bank credit to bank deposits (%)Global
Financial Development databaseInward FDI flowsInward direct
investment flows, as a share of GDPUnited Nations Conference on
Trade and Development (UNCTAD) statisticsOpennessOpenness at 2005
constant prices, as a share of GDPPenn World Tables 7.1Data
(contd)11Additional explanatory variables (Enhanced
model)VariableDefinitionSourceDemocracyPolity2 measure of democracy
Polity IV databaseSound 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
orientationMeasures 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 InstitutionsPluralityDummy
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 dummiesDjankov et al., 2007Explanatory
variables characteristicsObs.MeanSt. Dev.Min.Max.(log) Foreign bank
presence1,8253.360.91504.605(log) GDP per
capita2,1608.7231.3215.6211.822GDP
growth2,2760.0420.046-0.180.89Inflation2,2750.141.251-0.32853.995Bank
credit to bank deposits 2,18399.32363.9418.612898.048Inward FDI
flows2,23600.001-0.0060.007Openness2,1600.8270.5170.0884.33Democracy2,1994.0456.42-1010Sound
money1,5327.9431.68909.9Chief executive party
orientation2,261-8.40398.223-9993Plurality2,239-77.057267.68-999112Sample
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 detectedEmpirical MethodologyThree estimation
techniques Pooled OLS
Busreg: measure of business regulations in country i at time
tLagged dependent included to account for possible persistenceFB:
foreign bank presence (n takes the values 1 or 2)Xj: array of
variables that may affect business regulationsLegal origin and
religion dummies includedt: time dummiesTwo models: Main model: Xj
includes main macroeconomic variablesEnhanced model: Xj adds
institutional and political characteristicsYet, 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.
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Panel GMM (Arellano Bover / Blundel Bond)To account
for:Endogeneity issues (i.e., reverse causation from business
regulations to foreign bank presence)Countries fixed effectsIdeal
method for large N - small T, as in our caseXjs instrumented with
their lagged values (i.e., L2; L3)FB instrumented with:Frasers
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
14Empirical MethodologyTreatment effects model (two stage IV
model)First stage:
FBxit is a dummy with 1 for foreign bank presence and 0
otherwiseFour distinct dummies employed:FB10: 1 if foreign bank
presence >=10%FB20: 1 if foreign bank presence >=20%FB30: 1
if foreign bank presence >=30%FB40: 1 if foreign bank presence
>=40%zit is the instrument used in the panel GMM caseSecond
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 groupn takes values 1, 2 and 3Busregit-1 accounts for the
possible differences in the trend of the dependent variable between
the treated and control groups before the treatmentSystem
estimation15Empirical Methodology
16Panel A: Pooled OLS Panel B: GMM Lagged dependent 0.876***
0.862*** 0.921*** 0.919*** (64.557) (65.514) (18.687) (18.592)
Foreign bank presencet-2 0.524*** 1.516** (2.849) (2.372) Foreign
bank presencet-1 0.635*** 1.324* (3.722) (1.810) GDP per capita t-1
1.094*** 1.156*** 0.964* 0.880* (6.674) (7.116) (1.886) (1.864) GDP
growth t-1 -2.348 -2.546 -1.603 -2.373 (-0.756) (-0.784) (-0.343)
(-0.562) Inflation t-1 -0.090** -0.092*** -0.037** -0.027* (-2.357)
(-2.783) (-2.171) (-1.666) Bank credit/Deposits t-1 0.003* 0.003*
0.010*** 0.009* (1.892) (1.900) (2.676) (1.932) Inward FDI flow t-1
-236.696 -321.710 306.430 276.806 (-0.923) (-1.187) (0.506) (0.410)
Openness t-1 0.216 0.369 -0.735 -0.494 (0.837) (1.439) (-1.277)
(-0.700) Diagnostics Obs. 1,507 1,485 1,543 1,517 No. of countries
110 110 114 114 Adj-Rsq. 0.90 0.89 No of GMM instruments 47 47 AR2
(p-value) -0.24 -0.55 (0.81) (0.58) Legal origin and religion
dummies not reported for pooled OLSMain model Heritages business
freedom 17Enhanced model Heritages business freedom Panel A: Pooled
OLSPanel B: GMMLagged dependent
0.860***0.844***0.916***0.922***Foreign bank
presencet-20.447**1.682**Foreign bank presencet-10.560***1.414GDP
per capita t-10.847***0.883***0.859**0.718**GDP growth
t-1-2.629-2.6660.859-0.186Inflation t-10.0060.024-0.041-0.021Bank
credit/Deposits t-10.003**0.004**0.012***0.011**Inward FDI flow
t-1-359.220-411.763618.835717.980Openness
t-10.1060.255-0.873-0.862Democracy t-10.0190.0210.0510.040Size of
government t-10.0150.037-0.149-0.131Property rights
t-10.1350.161*-0.023-0.026Sound money
t-10.0790.097-0.070-0.037Freedom to trade intern.
t-10.021-0.007-0.271-0.270Regulations
t-10.438**0.466**0.571*0.528*Government party orientation
t-10.0000.000-0.002-0.003Plurality
t-10.0000.000-0.0000.000DiagnosticsObs.1,4401,4181,4901,464No. of
countries107107111111Adj-Rsq.0.890.88No of GMM
instruments5555AR2(p-value)-0.26-0.63(0.79)(0.53)Legal origin and
religion dummies not reported for pooled OLS18Treatment effects
model Heritages business freedom Panel A: 1 year aheadPanel B: 2
years aheadPanel C: 3 years aheadDependent at
t-10.75***0.74***0.74***0.74***0.65***0.63***0.63***0.63***0.54***0.52***0.52***0.52***FB
dummy 10 at t-8.04-22.71-29.89FB dummy 20 at t12.5516.29*17.48*FB
dummy 30 at t6.598.61*9.20**FB dummy 40 at t4.536.056.38*GDP per
capita
1.76***1.92***1.87***1.93***2.51***2.74***2.68***2.80***3.27***3.56***3.49***3.61***GDP
growth
-7.91-6.17-7.90-8.16*-13.97*-11.87**-14.08**-14.43**-22.44**-19.28***-21.71***-22.81***Inflation
-1.04**-1.04**-0.95*-0.98**-3.19***-3.14***-3.12***-3.22***-3.82**-3.81***-3.82***-3.97***Bank
credit/Deposits
0.00*0.01**0.01**0.01**0.01*0.01***0.01**0.01***0.010.01***0.01**0.01**Inward
FDI flow
667.13*483.33450.96461.66971.60*724.63699.07710.321205.37*910.94*897.67*910.98*Openness
0.530.360.450.440.540.300.410.360.640.380.500.41First stage
probitForeign ownership-Investment
restrictions-0.04*0.04**0.07***0.07***-0.030.05**0.08***0.09***-0.020.05***0.09***0.10***Constant1.43***0.24*-0.29**-0.70***1.36***0.15-0.42***-0.82***1.30***0.09-0.52***-0.95***Obs.1,3301,3301,3301,3301,2281,2281,2281,2281,1271,1271,1271,127Pseudo-Rsq.0.000.000.010.010.000.010.010.010.000.010.010.02Legal
origin and religion dummies not reported19Main model Frasers
variablesDependent variable is Freedom to trade
internationallyPanel A: Pooled OLSPanel B: GMMForeign bank
presencet-2 0.0170.376**(1.544)(2.076)Foreign bank presence
t-10.026**0.448**(2.168)(2.068)DiagnosticsObs.1,0609671,094997No.
of countries109107114111Adj-Rsq.0.920.92No of GMM
instruments3734AR2(p-value)-0.58(0.56)-0.72(0.47)Dependent variable
is RegulationsPanel A: Pooled OLSPanel B: GMMForeign bank
presencet-2 0.020-0.074(1.306)(-0.969)Foreign bank presence
t-10.021-0.056(1.278)(-0.597)DiagnosticsObs.1,0899951,1231,025No.
of countries109107114111Adj-Rsq.0.890.88No of GMM
instruments4541AR2(p-value)0.53(0.60)0.62(0.54)20Main model Frasers
variables (contd)Dependent variable is Property rights Panel A:
Pooled OLSPanel B: GMMForeign bank presencet-2
0.0100.144(0.755)(0.943)Foreign bank presence
t-10.0100.177(0.658)(1.140)DiagnosticsObs.1,0639691,097999No. of
countries109108114112Adj-Rsq.0.950.95No of GMM
instruments3734AR2(p-value)1.16(0.24)1.24(0.22)21Treatment effects
model Frasers Freedom to trade internationallyPanel A: 1 year
aheadPanel B: 2 years aheadPanel C: 3 years aheadFB dummy 10 at
t-1.90-2.85-5.29(-1.57)(-1.24)(-0.91)FB dummy 20 at
t1.98*1.52**1.61**(1.91)(2.12)(2.31)FB dummy 30 at
t1.37***1.05***1.09***(2.58)(2.73)(3.00)FB dummy 40 at
t0.88***0.74***0.76***(3.00)(2.84)(3.08)First stage probitForeign
ownership-Investment
restrictions-0.08**0.08**0.10***0.14***-0.060.10***0.13***0.17***-0.040.11***0.15***0.20***(-2.03)(2.30)(3.20)(4.50)(-1.44)(2.66)(3.72)(4.80)(-0.98)(2.82)(4.01)(5.17)Constant1.77***0.13-0.41*-0.99***1.63***-0.04-0.65***-1.22***1.51***-0.18-0.88***-1.52***(6.48)(0.56)(-1.95)(-4.60)(5.52)(-0.15)(-2.72)(-5.00)(4.67)(-0.64)(-3.24)(-5.44)Obs.828828828828727727727727626626626626Pseudo-Rsq.0.010.010.010.020.000.010.020.020.000.010.020.03Panel
A: Pooled OLSPanel B: GMMForeign bank
presencet-20.034*0.254(1.870)(1.501)Foreign bank
presencet-10.034*0.729**(1.736)(2.002)DiagnosticsObs.1,0049111,038941No.
of countries109107114111Adj-Rsq.0.840.83No of GMM
instruments3936AR2(p-value)-1.04-0.31(0.29)(0.76)22Main model
Frasers Business regulationsTreatment effects model Frasers
Business regulationsPanel A: 1 year aheadPanel B: 2 years
aheadPanel C: 3 years aheadFB dummy 10 at
t-4.32**-5.35*-7.87(-2.18)(-1.68)(-1.22)FB dummy 20 at
t6.174.543.73*(1.24)(1.52)(1.69)FB dummy 30 at
t3.99*2.95**2.25**(1.78)(2.12)(2.31)B dummy 40 at
t2.37***1.83***1.35***(2.75)(2.99)(2.91)First stage probitForeign
ownership-Investment
restrictions-0.11**0.050.07**0.11***-0.09*0.07*0.09**0.14***-0.070.08*0.12***0.19***(-2.46)(1.39)(2.12)(3.40)(-1.85)(1.71)(2.55)(3.83)(-1.31)(1.92)(2.91)(4.39)Constant1.97***0.28-0.24-0.83***1.81***0.14-0.44*-1.07***1.65***-0.01-0.67**-1.43***(6.14)(1.16)(-1.05)(-3.61)(5.19)(0.53)(-1.70)(-4.12)(4.27)(-0.03)(-2.29)(-4.76)Obs.783783783783682682682682580580580580Pseudo-Rsq.0.010.000.010.010.010.000.010.020.000.010.010.02ConclusionsForeign
bank presence does affect business regulations, measured byBusiness
freedom (difficulty of starting, operating, and closing a
business)Business regulations (administrative requirements for
running a business, bureaucracy costs, procedures for starting a
business, bribes and favoritism, licensing restrictions and cost of
tax compliance)Freedom to trade internationallyEvidence for impact
2 and 3 years aheadImpact for foreign bank presence larger than
30%Larger than 20% for freedom to trade internationally
23Thank you for your attention!
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