The Impact of Changes in Bank Ownership Structure on the Allocation of Capital: International Evidence

A new wave of bank privatizations in the past decade has significantly changed the ownership structure of banking systems around the world. This paper explores how these changes affect the allocation of capital within countries. We show that the decline in government ownership of banks has a different impact on capital allocation efficiency, depending on whether foreigners or large domestic shareholders acquire the stakes relinquished by the government. In general, an increase in domestic blockholder presence in the banking sector hampers capital allocation efficiency. Countries experiencing increased domestic blockholder presence in the banking sector tend to allocate more credit to industries that are less productive and less dependent on external financing. This result is more pronounced in countries with higher levels of corruption and with more politically connected firms. This is consistent with the looting view, which argues that banks controlled by large domestic blockholders, who usually have substantial interests in other nonfinancial firms, direct a significant portion of their lending activities to related, yet inefficient companies. By pursuing such activities, other firms in need of financing may be neglected and unable to obtain funding. An analysis of bank level data for a subset of countries corroborates these findings. In addition, we find some evidence that foreign presence improves capital allocation efficiency through increased lending to more productive industries. This finding adds support to the findings of Giannetti and Ongena (2007), and is consistent with the view that foreign banks improve capital allocation efficiency by mitigating the related lending problems associated with government or domestic blockholder ownership of banks. JEL Classifications: G21, G32