Foreign Bank Penetration and Private Sector Credit in Central and Eastern Europe

Abstract

We analyse foreign bank penetration in Central and Eastern Europe (CEE) and its influence on private sector credit. By combining BIS data and BankScope data into a unique database we make a clear distinction between cross-border credit and credit by foreign bank subsidiaries. We show that the relative importance of foreign bank subsidiaries has increased considerably during recent years. We do not find evidence of foreign banks deserting CEE during financial crises or economic downturns. Although cross-border credit did decrease during some periods, foreign banks expanded the credit supply of their subsidiaries simultaneously.

Keywords: Foreign banks, cross-border credit, financial stability, transition countries

JEL Classification: F36, G21