The Effect of Banking Regulation on Cross-Border Lending

Christa Hainz and Jarko Fidrmuc

No 140, ifo Working Paper Series from ifo Institute - Leibniz Institute for Economic Research at the University of Munich

Abstract: Banking regulations often differ between countries. For instance, some regulators oblige banks to document their evaluation of firms’ creditworthiness and thereby determine the banks’ lending technology. We study in a theoretical model how differences in regulation influence competition between domestic and foreign banks and the effect of regulatory harmonization on cross-border lending. We predict that lending rates are lower and Banking regulations often differ between countries. For instance, some regulators oblige banks to document their evaluation of firms’ creditworthiness and thereby determine the banks’ lending technology. We study in a theoretical model how differences in regulation influence competition between domestic and foreign banks and the effect of regulatory harmonization on cross-border lending. We predict that lending rates are lower and access to credit is easier for firms located in the border region if regulation differs. We confirm the model’s predictions using unique bank- and firm-level data from Germany by employing a difference-in-difference estimation.

JEL-codes: F23 G18 G21 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: The effect of banking regulation on cross-border lending (2013)
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