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Impact of Foreign Banks

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Author Info

  • Claessens, Stijn

    ()
    (International Monetary Fund)

  • Van Horen, Neeltje

    ()
    (de Nederlandsche Bank)

Abstract

This paper provides a critical assessment of the costs and benefits of foreign bank ownership. It reviews the extensive literature on the impact of foreign banks and uses a unique database on bank ownership, covering 129 countries, to (re-) examine a number of the issues discussed. It documents (changes in) foreign bank presence between 1995 and 2009, highlighting important differences across host and home countries and strong bilateral patterns. It finds that foreign banks tend to outperform domestic banks in developing countries, countries with weak institutions, and where foreign banks do not play a major role. In addition, being from a geographically close home country increases the profitability of foreign banks. In terms of impact, it shows that foreign banks can deter domestic financial sector development in developing countries, countries with weak institutions, and where foreign banks play a minor role. Examining the impact of foreign banks on financial stability, it finds that, during the global crisis, foreign banks reduced credit more compared to domestic banks in countries where they had a small role, but not when dominant or funded locally. These findings show that, when analyzing the impact of foreign bank presence, accounting for heterogeneity, including bilateral ownership, is crucial.

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Bibliographic Info

Article provided by EY Global FS Institute in its journal Journal of Financial Perspectives.

Volume (Year): 1 (2013)
Issue (Month): 1 ()
Pages: 29-42

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Handle: RePEc:ris:jofipe:0007

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Keywords: Foreign Direct Investment; International Banking; Distance;

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References

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Citations

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Cited by:
  1. Nakhoda, Aadil, 2013. "Bank competition and export diversification," MPRA Paper 50774, University Library of Munich, Germany.
  2. Feyen, Erik & Letelier, Raquel & Love, Inessa & Maimbo, Samuel Munzele & Rocha, Roberto, 2014. "The impact of funding models and foreign bank ownership on bank credit growth : is Central and Eastern Europe different ?," Policy Research Working Paper Series 6783, The World Bank.
  3. Laetitia Lepetit & Amine Tarazi & Nadia Zedek, 2013. "Excess control rights, bank capital structure adjustment and lending," Working Papers hal-00967892, HAL.
  4. Ongena, S. & Peydro, J.L. & Horen, N. van, 2013. "Shocks Abroad, Pain at Home? Bank-firm Level Evidence on the International Transmission of Financial Shocks," Discussion Paper 2013-040, Tilburg University, Center for Economic Research.

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