Does Banking Sector Structure Affect Bank Lending and Its Sensitivity to Capital Ratio? A Cross-country Study

Abstract

Does the banking sector’s structure affect bank lending and its sensitivity to the capital ratio? Looking at banks operating in over 60 countries in the years 2000–2011, this chapter aims to resolve this puzzle. Its goal is also to find out whether country development and capital account openness, and inclusion in the Central and Eastern Europe (CEE) region explain the potential diversity of the banking sector structure and lending nexus. To resolve this problem we apply a two-step generalized method of moments (GMM) robust estimator. We find that an increase in concentration of the banking sector results in reduced bank lending and that concentration seems to affect the link between lending and the capital ratio. This effect is particularly strong in CEE.