Foreign and domestic bank participation in emerging markets: lessons from Mexico and Argentina

It is generally agreed that strong domestic financial systems play an important role in attaining overall economic development and stabilization. The role played by foreign banks in achieving this goal, however, is still controversial. This article brings new evidence to the debate over foreign participation by examining the lending patterns of domestic and foreign banks in Argentina and Mexico during the 1990s. The authors conclude that foreign banks in both countries typically have stronger and less volatile loan growth than their domestic counterparts. The corollary to this finding, however, is that bank health?not ownership per se?is the critical element in the growth, volatility, and cyclicality of bank credit. Still, diversity of ownership is found to contribute to greater credit stability in times of financial system turmoil and weakness.