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Related lending and banking development, Volume 1
 
Author:Cull, Robert; Haber, Stephen; Imai, Masami; Country:World;
Date Stored:2011/02/17Document Date:2011/02/01
Document Type:Policy Research Working PaperSubTopics:Bankruptcy and Resolution of Financial Distress; Economic Theory & Research; Banks & Banking Reform; Debt Markets; Labor Policies
Language:EnglishMajor Sector:Finance
Rel. Proj ID:1W-The Crisis And Beyond: Fy11-Fy13 -- -- P122136;Region:The World Region
Report Number:WPS5570Sub Sectors:General finance sector
Collection Title:Policy Research working paper ; no. WPS 5570Volume No:1

Summary: Does related lending have positive or negative effects on the development of banking systems? This paper analyzes a unique cross-country data set covering 74 countries from 1990 to 2007, and finds that related lending, on average, does not have any effect on the growth of credit. The authors do find, however, that there are conditional relationships: related lending tends to retard the growth of banking systems when rule of law is weak, while it tends to promote the growth of banking systems when rule of law is strong. They also find that related lending appears to be associated with looting when banks are owned by non-financial firms, but that it does not when non-financial firms are owned by banks. The results indicate that whether related lending is positive or pernicious depends critically on the institutional context in which it takes place; there is no single "best policy" regarding related lending. These findings are robust to alternative specifications, including instrumental variable regressions.

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