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Bank reforms, foreign ownership, and financial stability

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  • Lee, Chien-Chiang
  • Hsieh, Meng-Fen

Abstract

Numerous studies have focused on foreign ownership of banks, but instead of linkages to financial stability, they typically analyzed other issues and used country-level data. This article fills the gap in the literature by applying the GMM techniques on dynamic panels using bank-level data for Asian countries to investigate the impact of foreign ownership on financial stability, as well as whether the relation between foreign ownership and stability changes under different conditions of bank reforms in the host country. Specifically, we reach five conclusions. First, the existence of the home field advantage hypothesis is supported; nevertheless, when considering the effects of bank reforms, the global advantage hypothesis holds. Second, an inverse U-shaped relation between foreign ownership and stability is supported. Third, a higher degree of credit control liberalization mitigates the negative effect of foreign ownership on stability. Fourth, liberalization of interest rate control and banking supervision do enhance stability. Fifth and finally, we confirm a significantly negative relation between an explicit deposit and stability.

Suggested Citation

  • Lee, Chien-Chiang & Hsieh, Meng-Fen, 2014. "Bank reforms, foreign ownership, and financial stability," Journal of International Money and Finance, Elsevier, vol. 40(C), pages 204-224.
  • Handle: RePEc:eee:jimfin:v:40:y:2014:i:c:p:204-224
    DOI: 10.1016/j.jimonfin.2013.09.001
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    Keywords

    Foreign ownership; Financial stability; Bank reform; Interest control; Asia;

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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