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Foreign and Domestic Bank Participation in Emerging Markets: Lessons from Mexico and Argentina

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  • Linda Goldberg
  • B. Gerard Dages
  • Daniel Kinney

Abstract

The Asian Crisis has highlighted the importance of strong domestic financial systems in overall economic development and stabilization. Less agreement is evident on the role of foreign banks in achieving this goal. We explore this issue by studying bank-specific data on lending by domestically- and foreign-owned banks in Argentina and Mexico. We find that foreign banks generally have had higher loan growth rates than their domestically-owned counterparts, with lower volatility of lending, contributing to lower overall volatility of credit. Additionally, in both countries, foreign banks show notable credit growth during crisis periods. In Argentina, the loan portfolios of foreign and domestic privately-owned banks are similar, and lending rates analogously respond to aggregate demand fluctuations. In Mexico, foreign and domestic banks with lower levels of impaired assets have similar loan responsiveness and portfolios. State-owned banks (Argentina) and banks with high levels of impaired assets (Mexico) have more stagnant loan growth and weak responsiveness to market signals. Overall, these findings suggest that bank health, and not ownership per se, is the critical element in the growth, volatility, and cyclicality of bank credit. Diversity in ownership appears to contribute to greater stability of credit in times of crisis and domestic financial system weakness.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7714.

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Date of creation: May 2000
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Publication status: published as 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.
Handle: RePEc:nbr:nberwo:7714

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  1. Linda S. Goldberg, 2001. "When is U.S. bank lending to emerging markets volatile?," Staff Reports, Federal Reserve Bank of New York 119, Federal Reserve Bank of New York.
  2. William C. Gruben & Jahyeong Koo & Robert R. Moore, 1999. "When does financial liberalization make banks risky? : an empirical examination of Argentina, Canada and Mexico," Center for Latin America Working Papers, Federal Reserve Bank of Dallas 0399, Federal Reserve Bank of Dallas.
  3. Eric S. Rosengren & Joe Peek, 2000. "Collateral Damage: Effects of the Japanese Bank Crisis on Real Activity in the United States," American Economic Review, American Economic Association, American Economic Association, vol. 90(1), pages 30-45, March.
  4. Diana Hancock and James A. Wilcox., 1998. "The "Credit Crunch" and the Availability of Credit to Small Business," Research Program in Finance Working Papers, University of California at Berkeley RPF-282, University of California at Berkeley.
  5. Graciela L. Kaminsky & Carmen M. Reinhart, 1996. "The twin crises: the causes of banking and balance-of-payments problems," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 544, Board of Governors of the Federal Reserve System (U.S.).
  6. Peek, Joe & Rosengren, Eric S, 1997. "The International Transmission of Financial Shocks: The Case of Japan," American Economic Review, American Economic Association, American Economic Association, vol. 87(4), pages 495-505, September.
  7. Hancock, Diana & Wilcox, James A., 1998. "The "credit crunch" and the availability of credit to small business," Journal of Banking & Finance, Elsevier, Elsevier, vol. 22(6-8), pages 983-1014, August.
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