Cavalry or locust? Foreign ownership heterogeneity and bank lending cyclicality

Lowering the cyclicality of bank lending has become a significant regulatory goal due to its undesirable effects on the economy and financial stability. As foreign bank presence increases, particularly in emerging markets, existing studies have examined the lending cyclicality of foreign-controlled banks. However, the impact of minor foreign ownership in domestic banks remains largely unexplored. This paper explores whether and how major and minor foreign ownership influences the cyclicality of banks' lending behaviors, using a global bank-level dataset of 7027 banks from 2002 to 2021. This study finds that both major and minor foreign ownership increase the procyclicality of bank lending. Interestingly, banks with major foreign ownership exhibit stronger procyclical lending behaviors with lower deposit funding and loan quality, while those with minor foreign ownership do so under lower liquidity. Further analysis suggests improvements in institutional quality, bank competition, and responses to global crises can mitigate these effects. This paper sheds new light on foreign ownership and bank lending cyclicality, offering implications for bank ownership, financial openness and stability, and macroprudential policy design, particularly for emerging markets where foreign bank presence is growing rapidly.