The politics of bank non-lending activities regulation: A cross country and time dynamic study of the role of government and private industry groups
Building on Braun and Raddatz, B&R (2008) exogenous shock-event methodology, I propose an ordered probit switching model that provides a rich framework to test different interest group regulatory reform theories in a cross country and time dynamic context. Based on this methodology, I studied and contrasted the influence of interest groups (government and incumbent private industries) on regulation reform regarding bank entry into non-lending activities (non-financial firms, insurance, real estate and securities activities). The evidence suggests that governments that became more (less) corrupt around the shock date where also more (less) likely to restrict bank-entry into non-lending activities. The data also suggest that countries that restricted non-lending activities achieved lower levels of financial development with respect to those that provided more freedoms. Hence I found strong evidence supportive of Tollbooth Theory. I also found weak support for Public Interest Theory because governments that were perceived of as high regulatory quality did not chose to free bank non-lending activities; instead their regulatory changes resembled a flip- flopping pattern. This suggests that regulators might be clueless regarding what an adequate policy on non-lending activities out to be. Furthermore, I was also able to disentangle some evidence suggesting that industries, classified as promoters of financial development, have a preference to restrict bank-entry into non-lending activities, particularly non-financial firms and insurance activities. This result is consistent with a bank power aversion flavor of Private Interest Theory; however it raises the question of why promoter industries favor restrictions given that such a regulatory preference works against financial development. It seems that industrial incumbents suffer from unjustified bank power aversion. As a whole, the results suggest that improvements in government control of corruption has a dominant role, over incumbent industry private interests, in increasing the likelihood of less restrictions being put in place on bank entry into non-lending activities.