Foreign Bank Penetration and the Bank Lending Channel in Emerging and Developing Countries, 2000-2014

This paper analyzes the effect of foreign bank penetration on the real credit growth during the crisis and the bank-lending channel of monetary transmission in developing and emerging economies. Based on a panel data of over 50 countries from six different regions during 2000- 2014, we specifically explore whether countries with a large number of foreign banks suffered more from the contraction in lending during the 2007-2009 financial crisis and whether foreign bank penetration weakened the monetary policy transmission through the bank lending channel as argued in the literature. Applying the system GMM method, we find consistent evidence that the increased level of foreign bank penetration has mitigated the contraction in bank credit during the crisis, lending support for the existence of internal capital markets for global banks. Additionally, our results indicate that host countries’ banking sectors with a larger number of foreign banks become more responsive to changes in monetary policy, independent of various macroeconomic and bank-specific measures as such as capitalization and credit risk.