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Does foreign ownership contribute to sounder banks in emerging markets? the Latin American experience

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Author Info
Jennifer S. Crystal
B. Gerard Dages
Linda S. Goldberg

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Abstract

Foreign bank entrants into emerging markets are usually thought to improve the condition and performance of acquired institutions, and more generally to enhance local financial stability. We use bank-specific data for a range of Latin American countries since the mid-1990s to address elements of this claim. Across the seven largest countries, we find that the financial strength ratings of local banks acquired by foreign entities generally show a slight improvement relative to their domestic counterparts. Our more in-depth case studies of Chile, Colombia, and Argentina do not indicate striking differences in health between larger foreign and domestic retail-oriented banks (although state banks are noticeably weaker). However, foreign banks often have higher average loan growth, higher average provisioning expense, and greater loss-absorption capacity. These results suggest that foreign ownership may provide important positive influences on the stability and development of emerging market banking systems.

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Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 137.

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Date of creation: 2001
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Handle: RePEc:fip:fednsr:137

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Keywords: International finance Latin America Banks and banking

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  1. Hancock, Diana & Wilcox, James A., 1998. "The "credit crunch" and the availability of credit to small business," Journal of Banking & Finance, Elsevier, vol. 22(6-8), pages 983-1014, August. [Downloadable!] (restricted)
  2. Diana Hancock and James A. Wilcox., 1998. "The "Credit Crunch" and the Availability of Credit to Small Business," Research Program in Finance Working Papers RPF-282, University of California at Berkeley.
  3. B. Gerard Dages & Linda Goldberg & Daniel Kinney, 2000. "Foreign and domestic bank participation in emerging markets: lessons from Mexico and Argentina," Economic Policy Review, Federal Reserve Bank of New York, issue Sep, pages 17-36. [Downloadable!]
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  4. Joe Peek & Eric S. Rosengren, 2000. "Implications of the globalization of the banking sector: the Latin American experience," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, issue Jun, pages 145-185. [Downloadable!]
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  5. William C. Gruben & Jahyeong Koo & Robert R. Moore, 1999. "When does financial liberalization make banks risky? : an empirical examination of Argentina, Canada and Mexico," Working Papers 0399, Federal Reserve Bank of Dallas. [Downloadable!]
  6. Linda S. Goldberg, 2001. "When Is U.S. Bank Lending to Emerging Markets Volatile?," NBER Working Papers 8209, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  7. Barajas, Adolfo & Steiner, Roberto & Salazar, Natalia, 2000. "The impact of liberalization and foreign investment in Colombia's financial sector," Journal of Development Economics, Elsevier, vol. 63(1), pages 157-196, October. [Downloadable!] (restricted)
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  1. Francisco F. Vázquez & Marco Arena & Carmen Reinhart, 2007. "The Lending Channel in Emerging Economies: Are Foreign Banks Different?," IMF Working Papers 07/48, International Monetary Fund. [Downloadable!]
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  2. Alicia García Herrero & Sonsoles Gallego Herrero & Jesús Saurina Salas, 2003. "The Asian and European Banking Systems: The case of Spain in the quest for development and stability," Finance 0304007, EconWPA. [Downloadable!]
  3. Gianni De Nicoló & Philip F. Bartholomew & Jahanara Zaman & M. G. Zephirin, 2003. "Bank Consolidation, Internationalization and Conglomeration: Trends and Implications for Financial Risk," IMF Working Papers 03/158, International Monetary Fund. [Downloadable!]
  4. Soledad Martinez Peria, Maria & Beck, Thorsten, 2008. "Foreign bank acquisitions and outreach : evidence from Mexico," Policy Research Working Paper Series 4467, The World Bank. [Downloadable!]
  5. Cull, Robert & Martinez Peria, Maria Soledad, 2007. "Foreign bank participation and crises in developing countries," Policy Research Working Paper Series 4128, The World Bank. [Downloadable!]
  6. Eric Van Tassel & Sharmila Vishwasrao, 2006. "Asymmetric Information and the Mode of Entry In Foreign Credit Markets," Working Papers 06002, Department of Economics, College of Business, Florida Atlantic University. [Downloadable!]
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  7. Maria Soledad Martinez Peria & Andrew Powell & Ivanna Vladkova-Hollar, 2005. "Banking on Foreigners: The Behavior of International Bank Claims on Latin America, 1985–2000," IMF Staff Papers, Palgrave Macmillan Journals, vol. 52(3), pages 4. [Downloadable!] (restricted)
  8. Ignacio Briones & André Villela, 2006. "European Bank Penetration During The First Wave Of Globalization: Lessons From Brazil And Chile, 1878/1913," Anais do XXXIV Encontro Nacional de Economia [Proceedings of the 34th Brazilian Economics Meeting] 23, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics]. [Downloadable!]
  9. Alejandro Micco & Ugo Panizza & Monica Yañez, 2004. "Bank Ownership and Performance," RES Working Papers 1016, Inter-American Development Bank, Research Department. [Downloadable!]
  10. Lucía Cuadro Sáez & Sonsoles Gallego Herrero & Alicia García Herrero, 2003. "Why Do Countries Develop More Financially Than Others? The Role Of The Central Bank And Banking Supervision," Finance 0304006, EconWPA. [Downloadable!]
  11. Caprio, Gerard Jr. & Honohan, Patrick, 2002. "Banking policy and macroeconomic stability - an exploration," Policy Research Working Paper Series 2856, The World Bank. [Downloadable!]
  12. Nicola Cetorelli & Linda Goldberg, 2006. "Risks in U.S. bank international exposures," Staff Reports 240, Federal Reserve Bank of New York. [Downloadable!]
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