Banking Sector Reforms and Corporate Borrowing Costs in Emerging Markets

Using a panel data set of syndicated bank loans in emerging markets, we find that banking sector reforms that improve bank competition and facilitate bank privatization lead to lower borrowing costs, suggesting that these reforms improve efficiency in credit markets. Reforms that tighten bank supervision, however, increase loan spreads, consistent with better risk pricing with effective oversight. Bank competition and supervision reforms affect borrowing costs primarily in countries with low corruption and well-functioning legal environment. Bank privatization reforms are effective in countries with better investment profiles. These results suggest that the success of banking reforms depend closely on the quality of institutions.