Cross-Border Financing by the Industrial Sector Increases Competition in the Domestic Banking Sector
51 Pages Posted: 12 Jul 2015
Date Written: July 11, 2015
Abstract
We predict that access to cross-border financing by the industrial sector reduces firms’ reliance on domestic banks, thereby leading to lower rents for banks and greater competition in the domestic banking sector. We also predict that banks take on more risk to offset these lost rents and remain competitive. Using mandatory adoption of International Financial Reporting Standards (IFRS) to identify variation in cross-border financing, we find evidence consistent with our hypotheses. Additional tests verify that the effects emanate from the demand-side (i.e., firms not relying on banks) rather than the supply-side (i.e., banks not willing to lend to firms). Overall, we document how competition from overseas financial markets influences the domestic banking sector.
Keywords: Bank competition, cross border financing, foreign portfolio investment, bank risk taking
JEL Classification: G21, M41
Suggested Citation: Suggested Citation