Does foreign ownership contribute to sounder banks in emerging markets? the Latin American experience

Jennifer S. Crystal, B. Gerard Dages and Linda Goldberg

No 137, Staff Reports from Federal Reserve Bank of New York

Abstract: Foreign bank entrants into emerging markets are usually thought to improve the condition and performance of acquired institutions, and more generally to enhance local financial stability. We use bank-specific data for a range of Latin American countries since the mid-1990s to address elements of this claim. Across the seven largest countries, we find that the financial strength ratings of local banks acquired by foreign entities generally show a slight improvement relative to their domestic counterparts. Our more in-depth case studies of Chile, Colombia, and Argentina do not indicate striking differences in health between larger foreign and domestic retail-oriented banks (although state banks are noticeably weaker). However, foreign banks often have higher average loan growth, higher average provisioning expense, and greater loss-absorption capacity. These results suggest that foreign ownership may provide important positive influences on the stability and development of emerging market banking systems.

Keywords: Latin America; International finance; Banks and banking (search for similar items in EconPapers)
Date: 2001
New Economics Papers: this item is included in nep-mfd and nep-pke
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