The regulation of international lending IMF support, the debt crisis, and bank stockholder wealth

Abstract

In a recent article, Cornell, Landsman and Shapiro (1986) provide insight in to the impact of selected regulatory responses to the international debt crisis on bank stock prices. The current study concentrates on the reaction of bank shareholders to the legislative events that ultimately led to the passage of the International Lending Supervision Act (ILSA) and to greater U.S. support of the International Monetary Fund (IMF). While Cornell, Landsman and Shapiro restricted their legislative analysis to when the relevant bills were passed, this study also examines when such legislation was introduced in the House or the Senate. The empirical results indicate that the introduction of such legislation materially influenced bank stockholder expectations. In contrast to Cornell, Landsman and Shapiro, the effect of these events on the risk/return complexion of banks is measured. Furthermore, the sensitivity of bank stockholders' reactions to the above legislative events is appraised in light of banks' Latin American loan portfolio risk. Analysis of the expected impact of greater IMF support and the ILSA on bank stockholders supplements the work of Cornell, Landsman and Shapiro by providing additional insight into the expected impact of such legislation on bank industry risk. Unlike Cornell, Landsman and Shapiro, this study provides evidence that the joint effect of a greater IMF quota and the ILSA was a net benefit to stockholders. Analysis suggests that the perceived benefit of a greater IMF quota was apparently diminished by the ILSA. However, stockholders evidently perceived a general decrease in the risk of the banking industry as a result of the legislative events.