This study examines the impact of political factors on the behaviour and performance of commercial banks in 11 Central European countries from 1995 to 2008. Using a unique dataset of commercial banks and political factors, we find that state-owned banks report significantly smaller net interest income ratios during the years of parliamentary elections. The proxy cumulative amount of net interest income lost by state-owned banks during the election years equals, on average, 0.38% of each country's GDP. The decrease in the profitability of state-owned banks is caused primarily by the lower interest rates charged on loans. In contrast, we document that the lending growth of state-owned banks is not affected by the political cycle. Hence, to a certain extent, this study supports the view that state-owned banks constitute a tool that serves political goals in Central European countries.

This study examines how various facets of social and political freedom shape the impact of political connections on bank lending. Using a new dataset covering the period 2007–2018 and more than 100 countries, we find that the establishment of political connections stimulates lending, but only in countries with constrained media freedom and restricted freedom of association and expression, as well as in those scoring low on political rights and civil liberties. These results suggest that social and political freedom constitute critical factors that limit the resource-allocation distortions caused by political connections.

In this study, we examine whether political connections affect market reactions to rating changes. Using a new and comprehensive dataset on ten advanced emerging markets, we find that political connections attenuate negative reactions linked to rating downgrades. This effect is shaped by political ties involving influential politicians and concerns all sample firms and a subsample of nonfinancial companies. Moreover, we establish that state-owned companies or companies with significant state ownership do not benefit from the mitigation effect of political connections.

We examine the interactions of bank lending dynamics, ownership structures, and crisis phenomena in the banking systems of Central and Eastern European (CEE) countries. Using a panel dataset of more than 400 banks for the period from 1994–2010, we show that the impact of ownership structure on a bank’s lending activities in CEE countries was conditional upon the type of crisis, namely, whether it was a host, home, global, or simultaneous crisis. In contrast, our evidence indicates that bank-specific characteristics, such as deposit growth and profitability ratios, are significant determinants of credit growth during both normal economic times and crisis periods, regardless of the crisis type. Moreover, we provide indirect evidence of the benefits of banking sector diversification dependent upon the criterion of parent banks’ country of origin.

This paper investigates the relationship between local banking structures and SMEs’ access to debt and performance. Using a unique dataset on bank branch locations in Poland and firm-, county-, and bank-level data, we conclude that a strong position for local cooperative banks facilitates access to bank financing, lowers financial costs, boosts investments, and favours growth for SMEs. Moreover, counties in which cooperative banks hold a strong position are characterized by a more rapid pace of new firm creation. The opposite effects appear in the majority of cases for local banking markets dominated by foreign-owned banks. Consequently, our findings are important from a policy perspective because they show that foreign bank entry and industry consolidation may raise valid concerns for SME prospects in emerging economies.

The Central European banking industry is dominated by foreign-owned banks. During the recent crisis, for the first time since the transition, foreign parent companies were frequently in a worse financial condition than their subsidiaries. This situation created a unique opportunity to study new aspects of market discipline exercised by non-financial depositors. Using a comprehensive data set, we find that the recent crisis did not change the sensitivity of deposit growth rates to accounting risk measures. We establish that depositors’ actions were more strongly influenced by negative press rumors concerning parent companies than by fundamentals. The impact of rumors was especially perceptible when rumors turned out ex post to be founded. Additionally, we document that public aid announcements were primarily interpreted by depositors as confirmation of a parent company’s financial distress. Our results indicate that depositors react rationally to sources of information other than financial statements; this discovery has policy implications, as depositor discipline is usually the only viable and universal source of market discipline for banks in emerging economies.

In this study, we assess capabilities of different types of banks to cater to the financial needs of small and medium-sized enterprises (SMEs). Using a comprehensive dataset from an emerging economy, including the information on local banks’ corrective programs, we find that local banks remain difficult-to-replace lenders for SMEs. We show that presence of healthy local banks in an SME's vicinity immunizes the SME against the deterioration of access to bank financing linked to other local banks’ corrective programs. In contrast, large banks are unable to replace the lost lending from local competitors under corrective programs.