La guerra de las ondas: Segunda Guerra Mundial (1939-1945).

Matter?

The analysis so far has shown that bank lending declines when uncertainty increases, and that this effect can be heterogeneous across banks depending on their balance sheet structure. However, we have not yet accounted for the effect of uncertainty depending on heterogeneity in the degree of internationalization. In recent decades, banking has become more international, and shocks might be transmitted through international activities of banks (Cetorelli and Goldberg, 2011; De Haas and Van Horen, 2012). We contribute to this literature by asking whether foreign-owned banks or banks that are located in more financially integrated countries are affected less by uncertainty because they can diversify shocks across borders.

We measure internationalization at the level of the individual bank (Table 2.4) and at the level of the country (Table 2.5). We begin by exploiting the (foreign) owner- ship data by Claessens and Van Horen (2014). These data allow analyzing whether

Chapter 2: Uncertainty, Bank Lending, and Bank-Level Heterogeneity

foreign-owned banks react differently to uncertainty in their host country compared with domestically owned banks while controlling for uncertainty in the residence coun- try of the foreign owner. As the database is limited to the years 1995-2009, we assume that the ownership status of the banks has remained unchanged in the years 2010- 12 compared with 2009. The database indicates whether a bank is domestically or foreign-owned. A bank is identified as foreign-owned if foreigners hold 50 percent or more of its shares. In case a bank is foreign-owned, the country of the largest foreign shareholder is indicated.11

Using the information on ownership status, we essentially estimate the baseline model except for the interactions with bank-level variables, but we now include a foreign ownership dummy. The measure for uncertainty in banking derived from bank- level data in country j – the host country, if foreign banks are considered – is captured

by U ncBankjt. We interact the uncertainty measure in the country of location with

the foreign ownership status F own(0/1). The dummy takes a value of one if the bank is foreign-owned and zero otherwise. Given that a bank is foreign-owned, we addition- ally consider the effect of uncertainty in the country of residence of the foreign owner

U ncBankkt. If a bank is domestically owned, we set U ncBankkt to zero.

Table 2.4 shows the regression results. Signs and quantities of bank characteristics are comparable with our previous results and, in particular, the effect of uncertainty on bank lending is significantly negative for domestic banks. We only find weak support for the hypothesis that foreign-owned banks are differently affected by host country uncertainty than domestically owned banks. The coefficients on the interaction terms of the uncertainty measure with F own(0/1) are mostly insignificant. Only in column 3, for the case of the dispersion of shocks to productivity, we find that foreign-owned banks respond differently to uncertainty in the host country than domestically owned banks: the average marginal effects reveal that foreign-owned banks increase their loan supply by 0.6 percent, while domestically owned banks reduce it by 1.1 percent if un- certainty increases by one standard deviation.

We control for the impact of uncertainty in banking in the country of the largest shareholder, as this might impact and presumably reduce the loans supplied by foreign- owned banks. This is indeed the case if we consider the dispersion of shocks to short- term funding (column 2) or productivity (column 3). This arises due to the fact that foreign-owned banks can be affected by developments in the home and the host country. In Table 2.5, we turn to the question whether it may not be the ownership status

11_{There might be cases in which the bank is identified as foreign-owned, but the largest foreign}

shareholder does not hold the largest amount of shares. However, we cannot identify such cases from the information in the database.

of individual banks which affects the response to uncertainty but the openness of the financial system. Inter alia, we would expect that lending by banks in financially open countries is affected less by uncertainty because cross-border lending and borrowing can be used to mitigate the impact of uncertainty shocks.

To focus on the question whether banks in more financially integrated countries respond differently to uncertainty, we use data on cross-border activities of a country’s banking system of the Bank for International Settlements (BIS). We calculate an open- ness measure for each country reporting to the Locational Banking Statistics, which is defined as total assets held by the banking system in reporting country j toward the rest of the world relative to nominal GDP in countryj (in percent). The standardized variableOpennesst is then interacted with our measure of uncertainty in banking.

Table 2.5 shows the results. Financial openness in and of itself has a negative im- pact on loan supply. Given that our dependent variable measures changes in bank loans relative to the balance sheet total of banks, this result implies that, in countries that are financially more open, traditional lending business of banks is less important than in financially closed economies. The signs of the remaining variables again remain un- changed. The sign of the interaction term between openness and uncertainty confirms our prior: the significant and positive coefficient of the interaction term indicates that in more financially open countries, the negative effect of uncertainty on loan supply is mitigated. Although the effect of ownership status was rather weak, this suggests that it is the openness of the banking system as such that affects banks’ response to uncertainty.

2.5.4

Robustness 1: Alternative Measures of Uncertainty

For comparison, we next consider the effect of the alternative uncertainty measures which are related to the financial and the real sector: bank stock return volatility, stock market volatility, firm return dispersion, and GDP volatility (Table 2.6). In line with our descriptive statistics, volatility of bank stock returns yields results similar to those for the cross-sectional dispersion measures: lending declines as uncertainty increases. Hence, cross-sectional dispersion and time-series volatility measures related to the banking sector capture similar features of uncertainty. Stock market volatility as such has no significant effect.

A higher level of firm return dispersion, which might capture uncertainty in the real sector and borrower default risk, has a negative effect on bank lending. The result for uncertainty stemming from the real sector is supported by the significantly negative

Chapter 2: Uncertainty, Bank Lending, and Bank-Level Heterogeneity

who shows that banks reduce lending in times of increased default risk of banks but also of borrowers due to higher uncertainty.

In unreported regressions, we simultaneously include one dispersion measure and its interactions with the bank-level variables and one of the four alternative measures and the interactions with the bank-level variables. This helps ensure that the estimated effect of our dispersion measure on lending is not driven by omitted variables. The effect of our cross-sectional dispersion measures on bank lending remains qualitatively unaltered, except for the case of dispersion of shocks to profitability: the coefficient becomes insignificant if bank stock return volatility is included simultaneously.