Do Foreign Banks Drive Foreign Currency Lending in Central and Eastern Europe?

24 Pages Posted: 17 Feb 2009 Last revised: 10 Feb 2011

See all articles by Peter R. Haiss

Peter R. Haiss

WU Vienna University of Economics and Business; UniCredit Bank Austria; IES Vienna - Institute for the International Education of Students

Andreas Paulhart

Vienna University of Economics and Business

Wolfgang Rainer

Vienna University of Economics and Business

Date Written: February 15, 2009

Abstract

Foreign direct investment (FDI) by banks into Central and Eastern Europe (CEE) has increased considerably, resulting in foreign bank ownership of up to 90% in some countries in the region. Most CEE countries also recorded a substantial rise in foreign currency (FX) denominated credit, leading to concerns about the potential risks of asset deterioration in the domestic banking sector and of accusations about foreign banks "exporting" risks. While there is a lot of research on dollarization in emerging markets, empirical evidence about the role of foreign banks in promoting fx-lending in CEE is scarce. This paper aims at filling this gap, analyzing whether there exists a significant relationship between foreign banks' asset share and the level of fx-lending. Using a linear regression model with data on 16 transition countries for the period 1999 to 2006 we find that foreign banks do not increase the risk of foreign currency lending. Our results show that foreign currency denominated lending seems to be a function of the level of fx-deposits, changes in the real exchange rate and the concentration of the banking sector.

Keywords: Foreign banks, foreign currency lending, credit euroization, loan growth, currency regime

JEL Classification: F31, F36, G15, G21, P34

Suggested Citation

Haiss, Peter R. and Paulhart, Andreas and Rainer, Wolfgang, Do Foreign Banks Drive Foreign Currency Lending in Central and Eastern Europe? (February 15, 2009). Available at SSRN: https://ssrn.com/abstract=1343557 or http://dx.doi.org/10.2139/ssrn.1343557

Peter R. Haiss

WU Vienna University of Economics and Business ( email )

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Andreas Paulhart

Vienna University of Economics and Business ( email )

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Vienna, Wien 1020
Austria

Wolfgang Rainer (Contact Author)

Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna, Wien 1020
Austria

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