The Lending Channel in Emerging Economics: Are Foreign Banks Different?

Abstract

This paper assembles a dataset comprising 1,565 banks in 20 Asian and Latin American countries during 1989-2001 and compares the response of the volume of loans, deposits, and bank-specific interest rates on loans and deposits, to various measures of monetary conditions, across domestic and foreign banks. It also looks for systematic differences in the behavior of domestic and foreign banks during periods of financial distress and tranquil times. Using differences in bank ownership as a proxy for financial constraints on banks, the paper finds weak evidence that foreign banks have a lower sensitivity of credit to monetary conditions relative to their domestic competitors, with the differences driven by banks with lower asset liquidity and/or capitalization. At the same time, the lending and deposit rates of foreign banks tend to be smoother during periods of financial distress, albeit the differences with domestic banks do not appear to be strong. These results provide weak support to the existence of supply-side effects in credit markets and suggest that foreign bank entry in emerging economies may have contributed somewhat to stability in credit markets.

Foreign bank penetration and the lending channel in emerging economies: Evidence from bank-level panel data

“…7 For example, some Argentinean banks, such as Banco de la Nacion Argentina, also operate in Brazil. In Arena et al (2006) they are not "foreign" banks because Argentina is not a member of OECD, but in our paper and in reality, they are. Using an alternative definition of foreign banks, which come from OECD countries only, we examine the differences and robustness of our main results in Section 4.3.…”

“…Arena et al (2006) are a sole exception, to our knowledge, and they examined differences in the behavior of domestic banks and foreign banks in response to changes in monetary conditions in 20 Asian and Latin American countries during 1989-2001. Our paper is distinctive from Arena et al by providing extended analysis in various directions.…”

“…For every year between 1996 and 2003, a bank is defined as "foreign" if more than 50 percent of its capital is owned by foreign individuals, foreign firms (including banks), or international organizations. 8 Departing from the identification in Arena et al (2006), we do not only classify the banks from industrialized OECD countries as "foreign", but also treat any bank whose majority owner is not from the host country as "foreign". 9 The BankScope database records the ownership of banks only for the most recent year, so we have to resort to various other sources to track the ownership status of the banks in every year during the period from 1996 to 2003.…”

Monetary Transmission Mechanism in Nigeria: A Causality Test

“…But, the small firms, who have more limited access to short-term credit markets, tend to de-accumulate inventories by cutting work-hours and production alike.Similarly, Domac (1999) obtains similar results for the study on Malaysia. Christiano, Eichenbaum and Evans (1996) study how the flow of funds between different sectors response to a monetary shock (see also Ahmad,2008;Altunbas et al,2002;Arena et al,.2006 ) The results indicate that business and household sector do not adjust their financial assets and liabilities similarly after a monetary shock.…”

Foreign Bank Penetration, Resource Allocation and Economic Growth: Evidence from Emerging Economies

“…6 Departing from the identification found in Arena et al (2006), we do not only classify the banks from industrialized OECD countries as "foreign", but also treat any bank whose owner is not from the host country as "foreign". As BankScope records the ownership of banks only for the most recent year, we resort to various other sources to pin down the ownership status of the banks for every year during our sample period from 1996 to 2003.…”