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Impact of Foreign Banks

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Abstract

This paper provides a critical assessment of the costs and benefits of foreign bank ownership. It reviews the extensive literature on the impact of foreign banks and uses a unique database on bank ownership, covering 129 countries, to (re-) examine a number of the issues discussed. It documents (changes in) foreign bank presence between 1995 and 2009, highlighting important differences across host and home countries and strong bilateral patterns. It finds that foreign banks tend to outperform domestic banks in developing countries, countries with weak institutions, and where foreign banks do not play a major role. In addition, being from a geographically close home country increases the profitability of foreign banks. In terms of impact, it shows that foreign banks can deter domestic financial sector development in developing countries, countries with weak institutions, and where foreign banks play a minor role. Examining the impact of foreign banks on financial stability, it finds that, during the global crisis, foreign banks reduced credit more compared to domestic banks in countries where they had a small role, but not when dominant or funded locally. These findings show that, when analyzing the impact of foreign bank presence, accounting for heterogeneity, including bilateral ownership, is crucial.

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Article provided by EY Global FS Institute in its journal Journal of Financial Perspectives.

Volume (Year): 1 (2013)
Issue (Month): 1 ()
Pages: 29-42

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Handle: RePEc:ris:jofipe:0007
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Keywords: Foreign Direct Investment; International Banking; Distance;

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Find related papers by JEL classification:
  • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
  • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
  • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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Cited by:

  1. Laetitia Lepetit & Amine Tarazi & Nadia Zedek, 2013. "Excess control rights, bank capital structure adjustment and lending," Working Papers hal-00967892, HAL.
  2. Aadil Nakhoda, 2013. "Bank Competition and Export Diversification," EERI Research Paper Series EERI RP 2013/12, Economics and Econometrics Research Institute (EERI), Brussels.
  3. Stijn Claessens & Neeltje van Horen, 2015. "The impact of the global financial crisis on banking globalization," DNB Working Papers 459, Netherlands Central Bank, Research Department.
  4. Ongena, Steven & Tümer-Alkan, Günseli & von Westernhagen, Natalja, 2015. "Do exposures to sagging real estate, subprime or conduits abroad lead to contraction and flight to quality in bank lending at home?," Discussion Papers 09/2015, Deutsche Bundesbank, Research Centre.
  5. Feyen, Erik & Letelier, Raquel & Love, Inessa & Maimbo, Samuel Munzele & Rocha, Roberto, 2014. "The impact of funding models and foreign bank ownership on bank credit growth : is Central and Eastern Europe different ?," Policy Research Working Paper Series 6783, The World Bank.
  6. Anginer, Deniz & Cerutti, Eugenio & Martinez Peria, Maria Soledad, 2014. "Foreign bank subsidiaries'default risk during the global crisis : what factors help insulate affiliates from their parents ?," Policy Research Working Paper Series 7053, The World Bank.
  7. Leon, Florian, 2015. "Does bank competition alleviate credit constraints in developing countries?," Journal of Banking & Finance, Elsevier, vol. 57(C), pages 130-142.

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