Identity of large owner, regulation and bank risk in developing countries

Abstract

This paper examines the impacts of bank owners and national bank regulation on the risk-taking of unlisted and listed banks in developing countries. National bank regulations reduce bank risk in 43 developing countries after controlling the shareholding level of large owners, other bank-level characteristics and country-level factors. Banks with large owners (governments, industrial companies, and foreigners) take less risk than other banks in developing countries when national regulation is considered. However, the marginal effect of regulation on bank risk varies with the identity of the large owner. National regulation and certain large bank owners (industrial companies and financial companies) have positive joint effects on bank risk. Regulations on capital adequacy, activity restriction, external auditing requirement, depositor protection scheme, and information disclosure are efficient in reducing bank risk. National bank regulations improve bank asset quality, boost liquidity and decrease bank sensitivity to market risk whilst they also increase management costs and hamper profitability of banks.