We hypothesize that fundamental features that distinguish European capital
markets have predictably influenced emerging national differences in bank
capitalization and loan growth. Using bank-level data from 13 European
countries, 1998 to 2004, we find evidence of positive effects of "equityfriendly"
market features on bank capitalization and positive effects of both
"equity-friendly" and "credit-friendly" market features on loan growth. The
findings are strongest in small banks and in banks with cooperative charters.
Our results suggest that ongoing and prospective integration of European
banking markets is mitigated by relatively static features of the equity and
credit markets on which banks rely.
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