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Finance and Development

Paper Session

Sunday, Jan. 7, 2018 8:00 AM - 10:00 AM

Loews Philadelphia, Commonwealth Hall A2
Hosted By: American Finance Association
  • Chair: Emily Breza, Harvard University

Rise of Bank Competition: Evidence From Banking Deregulation in China

Haoyu Gao
,
Central University of Finance and Economics
Hong Ru
,
Nanyang Technological University
Robert Townsend
,
Massachusetts Institute of Technology
Xiaoguang Yang
,
University of Chinese Academy of Sciences

Abstract

Using proprietary loan-level data and detailed bank branch data in China, this paper investigates the effects of the 2009 bank branch deregulation on competition dynamics between new and incumbent banks and on real economic activities. Tracing out each of the loans firms borrowed, we find that new entrant banks target mostly the firms borrowing from incumbent banks. After deregulation, new entrant banks tend to lend significantly more to SOEs, low efficient firms, and relationship borrowers. Although bank entry deregulation makes credit allocation worse at macro level, it has significantly positive effects on firms with bank credit access at micro level. Increased interbank competition leads to lower interest rates, better internal ratings, more third-party guarantees, and lower delinquency rates of the loans from new entrant banks. This, in turn, leads to increases in firm investments, employments, sales, and efficiency, especially for private firms.

Creditor Rights, Threat of Liquidation, and Labor-Capital Choice of Firms

Shashwat Alok
,
Indian School of Business
Ritam Chaurey
,
Binghamton University
Vasudha Nukala
,
Indian School of Business

Abstract

We study how firms respond to a strengthening of creditor rights by focusing on their choice of inputs of production. Following a legal reform that allowed secured creditors in India to circumvent the lengthy and inefficient judicial process by giving them the power to directly seize and liquidate the defaulter's assets, we find that there was an increase in the number of workers employed, but a reduction in investment in fixed capital and plant and machinery. The results suggest that firms preemptively substitute capital with labor in their production process in response to stronger creditor rights. These results are consistent with stronger creditor rights leading to a higher threat of liquidation for firms, that subsequently substitute secured formal credit for trade credit. We also find that the legal reform had a disciplining influence on firms, and treated firms became more productive and profitable in the short-term following the law change. We find support for our main results across different labor regimes, regions with differing pre-policy court efficiency, as well as across industries with different elasticities of substitution between capital and labor.

Liquidity Requirements and Bank Deposits: Evidence from Ethiopia

Nicola Limodio
,
Bocconi University
Francesco Strobbe
,
World Bank

Abstract

Liquidity requirements can stimulate deposit growth by increasing depositor repayment in bad states. A stylized model shows that such deposit growth may exceed the intermediation margin decline in the presence of high credit risk, hence stimulate lending and branching. Our empirical test exploits a large and unexpected policy change, which fostered the liquid assets of Ethiopian banks by 33% in one quarter of 2011. A representative panel of bank depositors shows deposit growth among wealthy and highly educated individuals. Bank balance-sheets and two sources of bank exposure to the policy highlight an increase in deposits, loans and branches.
Discussant(s)
Sumit Agarwal
,
Georgetown University
Martin Kanz
,
World Bank
Janis Skrastins
,
Washington University-St. Louis
JEL Classifications
  • G3 - Corporate Finance and Governance