This paper empirically analyzes the relation between foreign bank ownership and the three pillars of the New Basel Capital Accord (i.e., capital regulatory oversight, supervisory oversight, and market discipline). Using a new database covering 153 countries, we find that countries with greater market discipline have a lower presence of foreign banks operating in their economy. Furthermore, our evidence indicates that capital regulatory oversight and supervisory oversight are not significantly related to foreign bank ownership.

This paper studies the linkages between bank performance, connections to powerful politicians, and the degree of economic freedom in a bank’s home state. We find that bank performance is positively related to state economic freedom. We also reconfirm the finding of Gropper et al. (2013) that bank performance is improved by political connections. However, the positive effect of political connections appears to be significantly reduced when there is a higher degree of economic freedom in the state, indicating that political connections may matter less to banks when there is more economic freedom. Economic freedom in a state can have a beneficial effect on state economic growth and hence may outweigh any political connection benefits. However, the declines in state economic freedom in recent years could make political connections potentially more valuable to banks.

Does a politician with power in the U.S. Congress positively affect the value of firms headquartered in their home state? We investigate this question by examining the profitability and stock performance of commercial banks. Banks can be enormously influenced by the political and regulatory environment. We find that banks headquartered in states where a Senator or member of the House of Representatives serves as the chairman on their respective banking committee in Congress outperform banks headquartered in other states. In addition, we find that this “chair effect” is more pronounced when the committee chairs are strongly aligned with other politicians in Congress, when they are more experienced, and when banks are clustered in the home state, suggesting that the potential benefits generated from chairmanship are in more demand. Overall, our results suggest that there are some important value implications of a local politician’s power in Congress.