Bank Supervision and Corruption in Lending

Abstract

Which commercial bank supervisory policies ease or intensify the degree to which bank corruption is an obstacle to firms raising external finance? Based on new data from more than 2,500 firms across 37 countries, this paper provides the first empirical assessment of the impact of different bank supervisory policies on firms' financing obstacles. We find that the traditional approach to bank supervision, which involves empowering official supervisory agencies to directly monitor, discipline, and influence banks, does not improve the integrity of bank lending. Rather, we find that a supervisory strategy that focuses on empowering private monitoring of banks by forcing banks to disclose accurate information to the private sector tends to lower the degree to which corruption of bank officials is an obstacle to firms raising external finance. In extensions, we find that regulations that empower private monitoring exert a particularly beneficial effect on the integrity of bank lending in countries with sound legal institutions.

Bank Competition and Financial (In)Stability in Europe: A Sensitivity Analysis

“…Similarly, foreign ownership is related to bank stability meaning that the openness to foreign institutions leads to competition and profit margins due to the adoption of better practices that enhance further operational performance. Bank soundness peters out as official supervision becomes more stringent on the grounds that some degree of corruption in lending activities undermines systemic efficiency (Beck et al, 2006b). Last, private monitoring is highly significant with a negative bearing on banking system stability despite the fact that too-big-to-fail banks have been subject to close monitoring and inspection due to their potential systemic repercussions.…”

The impact of banking regulations on banks' cost and profit efficiency: Cross-country evidence

“…Beck et al (2006a) find that empowerment of private monitoring assists efficient corporate finance and has a positive effect on the integrity of bank lending in countries with sound legal institutions. Demirguc-Kunt et al (2008) show that the reporting of regular and accurate financial data to regulators and market participants results in sounder banks; however Pasiouras et al (2006) find a negative relationship between credit ratings and disclosure requirements (though this is significant only at the 10% level and not robust across their specifications).…”

“…5 The official supervision approach argues that official supervisors have the capabilities to avoid market failure by directly overseeing, regulating, and disciplining banks. Consequently, as Beck et al (2006a) suggest, a powerful supervisor could enhance the corporate governance of banks, reduce corruption in bank lending, and improve the functioning of banks as financial intermediaries. By contrast, the private monitoring approach argues that powerful supervision might be related to corruption or other factors that impede bank operations, whereas regulations that promote market discipline through private monitoring from depositors, debt-holders and equity holders, will result in better outcomes for the banking sector.…”

“…At the international level, Barth et al (2004a) investigate the effect of a broad range of regulatory and supervisory measures on bank stability, development and performance, while Demirguc-Kunt et al (2006) and Pasiouras et al (2006) study the effect of similar measures on banks' overall soundness, as measured by credit ratings. Similarly, other studies have examined the effect of regulations on banking sector crisis (Demirguc-Kunt and Detragiache, 2002;Beck et al, 2006a) and banks' risk taking behaviour (Gonzalez, 2005;Laeven and Levine, 2006). An issue that has received comparatively little attention, however, is what impact the regulatory environment has on bank efficiency, as opposed to other measures of bank performance.…”

Corporate Governance of Banks: The Current State of the Debate

“…Their paper constitutes a further empirical support to the evidence provided in Barth, Caprio and Levine (2006), who find that these two pillars of Basle 2 neither promote bank stability nor bank efficiency. Furthermore, not only do not these two pillars have any positive effects but also powerful supervisory agencies tend to increase corruption in lending (Beck et al 2007). Laeven and Levine find also that regulation focused on allowing firms to engage in non-lending activities, in countries with active securities markets, or encouraging banks to hold diversified loan portfolios do reduce bank risk.…”