The Real Effect of Foreign Banks

44 Pages Posted: 26 Oct 2008 Last revised: 25 Jun 2009

See all articles by Robert B. H. Hauswald

Robert B. H. Hauswald

American University - Department of Finance and Real Estate

Valentina Bruno

American University - Department of Finance and Real Estate

Multiple version iconThere are 2 versions of this paper

Date Written: March 2009

Abstract

Although foreign banks can act as catalysts for financial and economic development their role remains controversial because they might simply displace local lenders thereby tightening firms' overall access to credit. To settle this issue we study their effect on real economic activity in a large cross-section of developing and advanced countries whose industrial sectors differ in their external financing needs. We find that foreign banks alleviate the consequences of financial constraints and increase real growth. The greater their presence the less does external financial dependence impede firm performance. Foreign banks also mitigate the adverse consequences of banking crises on growth but do not significantly affect economic activity in advanced countries with well-functioning financial markets. Our results provide strong evidence that foreign entry alleviates financial constraints without hurting economic growth prospects, especially in developing countries whose companies often lack access to alternative sources of finance.

JEL Classification: G21, F34, L25, G23, G32

Suggested Citation

Hauswald, Robert B.H. and Bruno, Valentina Giulia, The Real Effect of Foreign Banks (March 2009). Paolo Baffi Centre Research Paper No. 2009-50; AFA 2010 Atlanta Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1289813 or http://dx.doi.org/10.2139/ssrn.1289813

Robert B.H. Hauswald (Contact Author)

American University - Department of Finance and Real Estate ( email )

Kogod School of Business
4400 Massachusetts Ave., N.W.
Washington, DC 20016-8044
United States
202-885-1996 (Phone)
202-885-1946 (Fax)

Valentina Giulia Bruno

American University - Department of Finance and Real Estate ( email )

Kogod School of Business
4400 Massachusetts Ave., N.W.
Washington, DC 20016-8044
United States

HOME PAGE: http://www.american.edu/kogod/faculty/bruno.cfm

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