Transcript ********* 1

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
Agenda
Goal and Motivation
 Literature review
 Data
 Empirical methodology
 Results
 Conclusions

2
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
3
Literature Review
Lehner 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

4
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.
5
Literature Review

Sytse, 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.
6
Data

Large (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
7
Data
Dependent variables
Variable
Business freedom
Freedom to trade
internationally
Regulations
Definition
Source
Measures the efficiency of government regulation of
business, and is derived from an array of measurements of Heritage dataset
the difficulty of starting, operating, and closing a business.
Measures a wide variety of restraints that affect
international
exchange:
tariffs,
quotas,
hidden
administrative restraints, and controls on exchange rates
and capital.
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).
Fraser dataset
8
Dependent variables’ characteristics
Variable
Business freedom
Freedom to trade
internationally
Regulations
Property rights
Business regulations



Obs.
2,188
Mean
65.668
St. Dev.
15.015
Min.
10
Max.
100
1,527
7.226
1.26
1.103
9.723
1,566
1,535
1,390
6.679
5.716
5.957
1.033
1.764
1.151
2.701
1.4
2.2
9.3
9.6
9.5
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
Correlations
Business freedom
Freedom to trade
internationally
Regulations
Property rights
Business regulations
Business
freedom
1.00
Freedom to trade
internationally
0.57
1.00
0.51
0.69
0.63
0.56
0.60
0.58
Regulations
1.00
0.58
0.74
Property
rights
1.00
0.73
9
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 Global Financial
shares are owned by foreigners (Claessens and van Development database
Horen, 2013).
GDP per capita
(log) Purchasing Power Parity (PPP) adjusted Gross
Domestic Product (GDP) per capita at 2005 constant Penn World Tables 7.1
international $ prices (Chain Series)
GDP growth
GDP growth (%)
Inflation
Inflation, GDP deflator (%)
Bank credit to
bank deposits
Bank credit to bank deposits (%)
Inward FDI flows Inward direct investment flows, as a share of GDP
Openness
World Development
Indicators
Global Financial
Development database
United Nations
Conference on Trade
and Development
(UNCTAD) statistics
Openness at 2005 constant prices, as a share of GDP Penn World Tables 7.1
10
Data (cont’d)
Additional explanatory variables (Enhanced model)
Variable
Definition
Source
Democracy
Polity2 measure of democracy
Polity IV database
Measures the consistency of monetary policy with long-term
Sound money
price stability, and the ease with which other currencies can be
used via domestic and foreign bank accounts.
Measures the size of government interference with the economy
Size of government (government consumption, transfers and subsidies, government Fraser dataset
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)
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
Chief executive
when party position can best be described as centrist (e.g. party
party orientation
advocates strengthening private enterprise in a social-liberal Database of Political
context) (value assigned=2); Left, for parties that are defined as Institutions
communist, socialist, social democratic, or left-wing (value
assigned=3).
Dummy variable that takes the value of 1 if legislators are
Plurality
elected using a winner-take-all / first past the post rule and 0
otherwise.
Legal origin and religion dummies
Djankov et al., 200711
Explanatory variables’ characteristics
(log) Foreign bank presence
(log) GDP per capita
GDP growth
Inflation
Bank credit to bank deposits
Inward FDI flows
Openness
Democracy
Sound money
Chief executive party
orientation
Plurality
Obs.
1,825
2,160
2,276
2,275
2,183
2,236
2,160
2,199
1,532
Mean
3.36
8.723
0.042
0.14
99.323
0
0.827
4.045
7.943
St. Dev.
0.915
1.321
0.046
1.251
63.941
0.001
0.517
6.42
1.689
Min.
0
5.62
-0.18
-0.328
8.612
-0.006
0.088
-10
0
Max.
4.605
11.822
0.89
53.995
898.048
0.007
4.33
10
9.9
2,261
-8.403
98.223
-999
3
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

12
Empirical Methodology

Three estimation techniques
1. Pooled OLS
Busreg it  a   Busreg it1   FBitn    j X jit1   t  uit
j
 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
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underlying economic, political and social forces.
Empirical Methodology
2. Panel GMM (Arellano – Bover / Blundel – Bond)
To account for:
 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 index
Sub-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
14
Empirical Methodology
3. Treatment effects model (two stage IV model)
• First stage: FBxit  b0  b1zit  eit
• 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:
Busreg itn  a0  a1Busreg it1  a2 FˆBxit   a3 X jitn   t n  uitn
j
• It models the response of the countries’ business regulations to foreign
bank presence (i.e., the “treatment”) relative to the countries with nonforeign 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
15
• System estimation
Main model – Heritage’s business freedom
Panel A: Pooled OLS
0.876***
0.862***
Lagged dependent
(64.557)
(65.514)
0.524***
Foreign bank presencet-2
(2.849)
0.635***
Foreign bank presencet-1
(3.722)
1.094***
1.156***
GDP per capita t-1
(6.674)
(7.116)
-2.348
-2.546
GDP growth
t-1
Legal
origin and religion(-0.756)
(-0.784)
dummies not reported-0.090**
-0.092***
Inflation t-1
(-2.783)
for pooled OLS (-2.357)
0.003*
0.003*
Bank credit/Deposits t-1
(1.892)
(1.900)
-236.696
-321.710
Inward FDI flow t-1
(-0.923)
(-1.187)
0.216
0.369
Openness t-1
(0.837)
(1.439)
Diagnostics
Obs.
1,507
1,485
No. of countries
110
110
Adj-Rsq.
0.90
0.89
No of GMM instruments
AR2
Panel B: GMM
0.921***
0.919***
(18.687)
(18.592)
1.516**
(2.372)
1.324*
(1.810)
0.964*
0.880*
(1.886)
(1.864)
-1.603
-2.373
(-0.343)
(-0.562)
-0.037**
-0.027*
(-2.171)
(-1.666)
0.010***
0.009*
(2.676)
(1.932)
306.430
276.806
(0.506)
(0.410)
-0.735
-0.494
(-1.277)
(-0.700)
1,543
114
1,517
114
47
-0.24
47
-0.55 16
Enhanced model – Heritage’s business freedom
Panel A: Pooled OLS
Lagged dependent
0.860***
0.844***
Foreign bank presencet-2
0.447**
Foreign bank presencet-1
0.560***
GDP per capita t-1
0.847***
0.883***
GDP growth t-1
-2.629
-2.666
Inflation t-1
0.006
0.024
Bank credit/Deposits t-1
0.003**
0.004**
Inward FDI flow t-1
-359.220
-411.763
Openness t-1
0.106
0.255
Legal origin and religion
Democracy t-1
0.019
0.021
dummies
not
reported
Size of government t-1
0.015
0.037
for
pooled
OLS
Property rights t-1
0.135
0.161*
Sound money t-1
0.079
0.097
Freedom to trade intern. t-1
0.021
-0.007
Regulations t-1
0.438**
0.466**
Government party orientation t-1
0.000
0.000
Plurality t-1
0.000
0.000
Diagnostics
Obs.
1,440
1,418
No. of countries
107
107
Adj-Rsq.
0.89
0.88
No of GMM instruments
AR2
(p-value)
Panel B: GMM
0.916***
0.922***
1.682**
1.414
0.859**
0.718**
0.859
-0.186
-0.041
-0.021
0.012***
0.011**
618.835
717.980
-0.873
-0.862
0.051
0.040
-0.149
-0.131
-0.023
-0.026
-0.070
-0.037
-0.271
-0.270
0.571*
0.528*
-0.002
-0.003
-0.000
0.000
1,490
111
1,464
111
55
-0.26
(0.79)
55
-0.63
17
(0.53)
Treatment effects model – Heritage’s business freedom
Panel A: 1 year ahead
Dependent at t-1
FB dummy 10 at t
0.75***
0.74***
0.74***
12.55
Bank credit/Deposits
Inward FDI flow
Openness
Foreign ownershipInvestment
restrictions
Constant
Obs.
Pseudo-Rsq.
0.63***
0.63***
-7.91
-1.04**
1.87***
0.52***
8.61*
1.93***
0.52***
9.20**
6.05
2.51***
0.52***
17.48*
4.53
1.92***
0.54***
-29.89
6.59
1.76***
0.63***
16.29*
FB dummy 40 at t
Inflation
0.65***
Panel C: 3 years ahead
-22.71
FB dummy 30 at t
GDP growth
0.74***
-8.04
FB dummy 20 at t
GDP per capita
Panel B: 2 years ahead
6.38*
2.74***
2.68***
2.80***
3.27***
-13.97* -11.87**
Legal -7.90
origin-8.16*
and religion
dummies
reported
-1.04**
-0.95* not
-0.98**
-3.19*** -3.14***
-14.08**
-14.43**
-3.12***
-6.17
3.56***
3.49***
3.61***
-22.44** -19.28***
-21.71***
-22.81***
-3.22***
-3.82**
-3.81***
-3.82***
-3.97***
0.00*
0.01**
0.01**
0.01**
0.01*
0.01***
0.01**
0.01***
0.01
0.01***
0.01**
0.01**
667.13*
483.33
450.96
461.66
971.60*
724.63
699.07
710.32
1205.37*
910.94*
897.67*
910.98*
0.53
0.36
0.45
0.44
0.41
0.36
0.64
0.38
0.50
0.41
-0.04*
0.04**
0.07***
0.07***
1.43***
0.24*
-0.29** -0.70***
1,330
0.00
1,330
0.00
1,330
0.01
1,330
0.01
0.54
0.30
First stage probit
-0.03
0.05**
0.08***
0.09***
-0.02
0.05***
0.09***
0.10***
1.36***
0.15
-0.42***
-0.82***
1.30***
0.09
-0.52***
-0.95***
1,228
0.00
1,228
0.01
1,228
0.01
1,228
0.01
1,127
0.00
1,127
0.01
1,127
0.01
1,127
18
0.02
Main model – Fraser’s variables
Foreign bank presencet-2
Foreign bank presence t-1
Diagnostics
Obs.
No. of countries
Adj-Rsq.
No of GMM instruments
AR2
(p-value)
Dependent variable is Freedom to trade internationally
Panel A: Pooled OLS
Panel B: GMM
0.017
0.376**
(1.544)
(2.076)
0.026**
0.448**
(2.168)
(2.068)
1,060
109
0.92
967
107
0.92
1,094
114
997
111
37
-0.58
(0.56)
34
-0.72
(0.47)
Dependent variable is Regulations
Foreign bank presencet-2
Foreign bank presence t-1
Diagnostics
Obs.
No. of countries
Adj-Rsq.
No of GMM instruments
AR2
(p-value)
Panel A: Pooled OLS
0.020
(1.306)
0.021
(1.278)
1,089
109
0.89
995
107
0.88
Panel B: GMM
-0.074
(-0.969)
-0.056
(-0.597)
1,123
114
1,025
111
45
0.53
(0.60)
41
0.62
(0.54)
19
Main model – Fraser’s variables (cont’d)
Foreign bank presencet-2
Foreign bank presence t-1
Diagnostics
Obs.
No. of countries
Adj-Rsq.
No of GMM instruments
AR2
(p-value)
Dependent variable is Property rights
Panel A: Pooled OLS
Panel B: GMM
0.010
0.144
(0.755)
(0.943)
0.010
0.177
(0.658)
1,063
109
0.95
969
108
0.95
(1.140)
1,097
114
999
112
37
1.16
(0.24)
34
1.24
(0.22)
20
Treatment effects model –
Fraser’s Freedom to trade internationally
Panel A: 1 year ahead
FB dummy 10 at t
-1.90
(-1.57)
1.52**
(2.12)
1.61**
(2.31)
1.05***
(2.73)
0.88***
(3.00)
FB dummy 40 at t
Obs.
Pseudo-Rsq.
-5.29
(-0.91)
1.37***
(2.58)
FB dummy 30 at t
Constant
Panel C: 3 years ahead
-2.85
(-1.24)
1.98*
(1.91)
FB dummy 20 at t
Foreign ownershipInvestment restrictions
Panel B: 2 years ahead
1.09***
(3.00)
0.74***
(2.84)
0.76***
(3.08)
-0.08**
(-2.03)
0.08**
(2.30)
0.10***
(3.20)
0.14***
(4.50)
First stage probit
-0.06
0.10***
(-1.44)
(2.66)
1.77***
0.13
-0.41*
-0.99***
1.63***
-0.04
-0.65***
-1.22***
1.51***
-0.18
-0.88***
-1.52***
(6.48)
828
0.01
(0.56)
828
0.01
(-1.95)
828
0.01
(-4.60)
828
0.02
(5.52)
727
0.00
(-0.15)
727
0.01
(-2.72)
727
0.02
(-5.00)
727
0.02
(4.67)
626
0.00
(-0.64)
626
0.01
(-3.24)
626
0.02
(-5.44)
626
0.03
0.13***
(3.72)
0.17***
(4.80)
-0.04
(-0.98)
0.11***
(2.82)
0.15***
(4.01)
0.20***
(5.17)
21
Main model – Fraser’s Business regulations
Panel A: Pooled OLS
0.034*
(1.870)
0.034*
(1.736)
Foreign bank presencet-2
Foreign bank presencet-1
Diagnostics
Obs.
No. of countries
Adj-Rsq.
No of GMM instruments
AR2
(p-value)
1,004
109
0.84
Panel B: GMM
0.254
(1.501)
0.729**
(2.002)
911
107
0.83
1,038
114
941
111
39
-1.04
(0.29)
36
-0.31
(0.76)
Treatment effects model – Fraser’s Business regulations
Panel A: 1 year ahead
FB dummy 10 at t
-4.32**
(-2.18)
4.54
(1.52)
3.73*
(1.69)
2.95**
(2.12)
2.37***
(2.75)
B dummy 40 at t
Obs.
Pseudo-Rsq.
-7.87
(-1.22)
3.99*
(1.78)
FB dummy 30 at t
Constant
Panel C: 3 years ahead
-5.35*
(-1.68)
6.17
(1.24)
FB dummy 20 at t
Foreign ownershipInvestment restrictions
Panel B: 2 years ahead
-0.11**
(-2.46)
1.97***
(6.14)
783
0.05
(1.39)
0.28
(1.16)
783
0.07**
(2.12)
-0.24
(-1.05)
783
0.01
0.00
0.01
1.83***
(2.99)
First stage probit
0.11***
-0.09*
0.07*
(3.40)
(-1.85)
(1.71)
-0.83*** 1.81***
0.14
(-3.61)
(5.19)
(0.53)
783
682
682
0.01
2.25**
(2.31)
0.01
0.00
1.35***
(2.91)
0.09**
(2.55)
-0.44*
(-1.70)
682
0.14***
(3.83)
-1.07***
(-4.12)
682
-0.07
(-1.31)
1.65***
(4.27)
580
0.08*
(1.92)
-0.01
(-0.03)
580
0.12***
(2.91)
-0.67**
(-2.29)
580
0.19***
(4.39)
-1.43***
(-4.76)
580
0.01
0.02
0.00
0.01
0.01
0.02
22
Conclusions

Foreign bank presence does affect business regulations,
measured by
◦ Business 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 internationally


Evidence for impact 2 and 3 years ahead
Impact for foreign bank presence larger than 30%
◦ Larger than 20% for freedom to trade internationally
23
Thank you for your attention!
24