Foreign Bank Entry and Credit Allocation in Emerging Markets

Abstract

We employ a unique data set containing bank-specific information to explore how foreign bank entry determines credit allocation in emerging markets. We investigate the impact of the mode of foreign entry – greenfield and takeover – on banks’ portfolio allocation to borrowers with different degrees of informational transparency, as well as by maturities and currencies. The impact of foreign entry on credit allocation may stem from the superior performance of foreign entrants (“performance hypothesis”), or reflect borrower informational capture (“portfolio composition hypothesis”). Our results are broadly in line with the theoretical models underpinning the portfolio composition hypothesis, showing that borrower informational capture determines bank credit allocation. In particular, we find that foreign banks that enter via greenfield investment devote a higher share of their portfolios to transparent borrowers, lend more at shorter maturity and in foreign currency. We find few differences between the portfolio composition of takeover and domestic private banks. We also document that there is a significant convergence over time between foreign and domestic banks in terms of groups of borrowers they lend to, while there is no convergence in terms of maturity and currency. Finally, we do not find any impact of bank ownership and mode of entry on lending rates.

Keywords: banks, ownership, credit allocation

JEL Classification: G21, G28, G34, L11