XXVI Edition

14-15-16 December 2017"

Cost of Bank Capital and Credit Supply in Distant Countries: Evidence from a Lender Country Tax Reform

zhai wei, University of Bristol
Biswas Swarnava, University of Bristol
Gomez Fabiana, University of Bristol
Horvath Balint, University of Bristol

We study how a positive shock to the cost of bank capital affects cross-border lend- ing. A tax legislation in Belgium in 2006 effectively reduced the cost of equity. We use this plausibly exogenous shock to the cost of bank capital to establish a causality effect. We include time-varying industry-country fixed effects in our regressions in order to control for credit demand. We find that post-treatment, Belgian banks increase their credit supply (number of loans but not volume) in the cross border syndicated loan market. Further, we find that Belgian banks increase the credit supply disproportionately more to industries in distant, unfamiliar countries. Finally, we document that post-treatment, the loans that Belgian banks make to distant countries are more expensive and contain more restrictive terms.

Area: Banking

Keywords: Cross-border lending; Syndicated loans; Loan terms; Credit supply

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