Capital Market Regimes and Bank Structure in Europe

Authors


  • Ronald Shrieves received support for this project as a Research Visitor at the European Central Bank during the fall of 2005, and is also indebted the University of Tennessee Faculty Development Program for granting leave for that period. The authors are especially grateful for encouragement and comments from Philipp Hartmann, Reint Gropp, Rafael Repullo, and participants in the ECB Research Division internal seminar series. ECB librarian Jean-Paul Genot provided important assistance with the databases needed for the project. The views presented in the paper are those of the authors and do not necessarily represent the views of the ECB. The paper has also benefited from comments by Tracie Woidtke, Joe Carcello, C. Warren Neel, and other participants in the University of Tennessee Corporate Governance Center. We especially thank the editor and anonymous referees.

Abstract

We hypothesize that fundamental features that distinguish European capital markets have predictably influenced emerging national differences in bank capitalization and loan growth. Using bank-level data from 13 European countries, 1998 to 2004, we find evidence of positive effects of “equity-friendly” market features on bank capitalization and positive effects of both “equity-friendly” and “credit-friendly” market features on loan growth. The findings are strongest in small banks and in banks with cooperative charters. Our results suggest that ongoing and prospective integration of European banking markets is mitigated by relatively static features of the equity and credit markets on which banks rely.

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