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Impact of Foreign Banks

Stijn Claessens () and Neeltje Van Horen ()

DNB Working Papers from Netherlands Central Bank, Research Department

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.

Keywords: foreign direct investment; international banking; distance (search for similar items in EconPapers)
JEL-codes: F21 F23 G21 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban and nep-geo
Date: 2013-02
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Related works:
Journal Article: Impact of Foreign Banks (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:dnb:dnbwpp:370

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