Effects of Bank Regulation and Lender Location on Loan Spreads

We investigate how differences in a country's regulation regarding banking-commerce integration and the concentration of its banking sector influence loan spreads on domestic and foreign loans. Theoretical research suggests conflicting effects on loan spreads, based on agency costs, information asymmetry costs, and market power. This paper analyzes these issues and documents the impact of two aspects of bank regulation (banking-commerce integration and industry market structure) on loan spreads across 30 countries. Our results show that banking-commerce integration lowers loan spreads up to a certain degree of integration, however unrestricted integration does not lead to additional reductions in spread. Further, the impact of integration on loan spreads differs between concentrated and competitive banking environments and also between domestic and foreign lenders. In addition, we show that market concentration affects loan spreads differently under high, medium, and low integration regimes. Our results support the notion that when starting from lower levels, an increase in integration is associated with an increase in informational efficiencies that disappear at higher levels of integration