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Foreign Banks: Trends, Impact and Financial Stability

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  • Stijn Claessens
  • Neeltje van Horen

Abstract

Using a new, comprehensive database on bank ownership, identifying also the home country of foreign banks, for 137 countries over the period 1995-2009, this paper provides an overview of foreign bank activity and its impact of financial development and stability. We document substantial increases in foreign bank presence, especially in emerging markets and developing countries, but which slowed down dramatically with the onset of the global crisis. Over time, banks from many more home countries have become active as investors, with several emerging countries becoming important exporters. Investment, however, remains mostly regional. In terms of loans, deposits and profits, current market shares of foreign banks average 20 percent in OECD countries and close to 50 percent in developing countries and emerging markets. Foreign banks differ from domestic banks in key balance sheet variables, notably having higher capital and more liquidity, but lower profitability. Cross-country analysis shows that only in developing countries is foreign bank presence negatively correlated with domestic credit creation. Finally, using panel regressions, we show that during the global crisis foreign banks reduced credit more compared to domestic banks, but not when dominant in the host country.

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Bibliographic Info

Paper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 330.

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Date of creation: Dec 2011
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Handle: RePEc:dnb:dnbwpp:330

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Keywords: foreign banks; foreign direct investment; cross-border banking; bilateral investment; financial globalization; financial sector development; financial stability; spillovers; financial crisis;

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References

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  1. Ralph de Haas & Iman van Lelyveld, 2011. "Multinational Banks and the Global Financial Crisis. Weathering the Perfect Storm?," DNB Working Papers 322, Netherlands Central Bank, Research Department.
  2. Stijn Claessens & Neeltje van Horen, 2008. "Location Decisions of Foreign Banks and Institutional Competitive Advantage," DNB Working Papers 172, Netherlands Central Bank, Research Department.
  3. Nicola Cetorelli & Linda S. Goldberg, 2010. "Global banks and international shock transmission: evidence from the crisis," Staff Reports 446, Federal Reserve Bank of New York.
  4. Ralph de Haas & Iman van Lelyveld, 2003. "Foreign Banks and Credit Stability in Central and Eastern Europe: A Panel Data Analysis," DNB Staff Reports (discontinued) 109, Netherlands Central Bank.
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  7. Ralph de Haas & Iman van Lelyveld, 2006. "Internal Capital Markets and Lending by Multinational Bank Subsidiaries," DNB Working Papers 101, Netherlands Central Bank, Research Department.
  8. Maria Soledad Martinez Peria & Ashoka Mody, 2004. "How foreign participation and market concentration impact bank spreads: evidence from Latin America," Proceedings, Federal Reserve Bank of Cleveland, pages 511-542.
  9. Sudheer Chava & Amiyatosh Purnanandam, 2006. "The effect of a banking crisis on bank-dependent borrowers," Proceedings 1030, Federal Reserve Bank of Chicago.
  10. Ralph de Haas & Neeltje van Horen, 2011. "Running for the Exit: International Banks and Crisis Transmission," DNB Working Papers 279, Netherlands Central Bank, Research Department.
  11. Van Horen, Neeltje, 2007. "Foreign banking in developing countries; origin matters," Emerging Markets Review, Elsevier, vol. 8(2), pages 81-105, May.
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  15. Claessens, Stijn, 2006. "Competitive implications of cross-border banking," Policy Research Working Paper Series 3854, The World Bank.
  16. Haber, Stephen, 2004. "Comment on "How Foreign Participation and Market Concentration Impact Bank Spreads: Evidence from Latin America" by Maria Soledad Martinez Peria and Ashoka Mody," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(3), pages 539-42, June.
  17. Micco, Alejandro & Panizza, Ugo & Yanez, Monica, 2007. "Bank ownership and performance. Does politics matter?," Journal of Banking & Finance, Elsevier, vol. 31(1), pages 219-241, January.
  18. Giorgio Barba Navaretti & Giacomo Calzolari & Alberto Franco Pozzolo & Micol Levi, 2010. "Multinational Banking in Europe: Financial Stability and Regulatory Implications;Lessons from the Financial Crisis," Mo.Fi.R. Working Papers 40, Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences.
  19. Arturo Galindo & Alejandro Micco & César Manuel Serra, 2003. "Better the Devil that You Know: Evidence on Entry Costs Faced by Foreign Banks," Research Department Publications 4313, Inter-American Development Bank, Research Department.
  20. Luc Laeven & Fabian Valencia, 2010. "Resolution of Banking Crises," IMF Working Papers 10/146, International Monetary Fund.
  21. Arturo Galindo & Alejandro Micco & César Manuel Serra, 2003. "Better the Devil that You Know: Evidence on Entry Costs Faced by Foreign Banks," IDB Publications 6500, Inter-American Development Bank.
  22. Simeon Djankov & Caralee McLiesh & Andrei Shleifer, 2005. "Private Credit in 129 Countries," NBER Working Papers 11078, National Bureau of Economic Research, Inc.
  23. Claessens, Stijn & Demirguc-Kunt, Asl[iota] & Huizinga, Harry, 2001. "How does foreign entry affect domestic banking markets?," Journal of Banking & Finance, Elsevier, vol. 25(5), pages 891-911, May.
  24. Brealey, R. A. & Kaplanis, E. C., 1996. "The determination of foreign banking location," Journal of International Money and Finance, Elsevier, vol. 15(4), pages 577-597, August.
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