Excess control rights, bank capital structure adjustments, and lending

Abstract

We investigate whether excess control rights of ultimate owners in pyramids affect banks׳ capital ratio adjustments. When control and cash flow rights are identical, to boost capital ratios banks issue equity without cutting lending. However, when control rights exceed cash flow rights, instead of issuing equity, banks downsize by reducing lending. Such a finding is mostly prevalent in countries with weak shareholder protection or for family-controlled banks. Other factors also explain the extent to which such banks reduce lending. Our findings contribute to the capital structure adjustment literature and have critical policy implications for the implementation of Basel III and the debate on capital requirements and bank lending.