Loan growth, ownership, and regulation in the European Banking Sector: Old versus new banking landscape

Abstract

The purpose of this paper is to examine the dynamic interactions of loan growth, ownership structure and regulatory framework for the European banking sector before, during and after the 2007–2009 financial crisis. We use a panel dataset of 1170 banks from the EU-15 countries and newly accessed economies (Central and Eastern European countries, Cyprus, and Malta) for the period 2000 to 2016. We show that foreign banks in CEE countries increased their loan growth in the pre-crisis period. However, they rationed their credit supply during and after the crisis, whereas government-owned banks increased their lending activity. Similar pattern holds for total loan growth by foreign and domestic banks in the EU-15 countries as well as for three loan categories namely, corporate, and industrial, consumer and residential mortgages. CAMEL ratings (variables) are shown to be important determinants of loan growth. We also document that the capital requirements index, the official supervisory power index, and market discipline index are important determinants of loan growth. Finally, the results are robust across different estimation methods.