Impact of Foreign Banks

28 Pages Posted: 7 Feb 2013

See all articles by Stijn Claessens

Stijn Claessens

Bank for International Settlements (BIS)

Neeltje van Horen

Bank of England; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: February 5, 2013

Abstract

This paper provides a critical assessment of the costs and benefits of foreign bank ownership. It reviews the extensive literature on the impact of foreign banks and uses a unique database on bank ownership, covering 129 countries, to (re-)examine a number of the issues discussed. It documents (changes in) foreign bank presence between 1995 and 2009, highlighting important differences across host and home countries and strong bilateral patterns. It finds that foreign banks tend to outperform domestic banks in developing countries, countries with weak institutions and where foreign banks do not play a major role. In addition, being from a geographically close home country increases the profitability of foreign banks. In terms of impact, it shows that foreign banks can deter domestic financial sector development in developing countries, countries with weak institutions and where foreign banks play a minor role. Examining the impact of foreign banks on financial stability, it finds that during the global crisis, foreign banks reduced credit more compared to domestic banks in countries where they had a small role, but not when dominant or funded locally. These findings show that, when analyzing the impact of foreign bank presence accounting for heterogeneity, including bilateral ownership, is crucial.

Keywords: foreign direct investment, international banking, distance

JEL Classification: F21, F23, G21

Suggested Citation

Claessens, Stijn and van Horen, Neeltje, Impact of Foreign Banks (February 5, 2013). De Nederlandsche Bank Working Paper No. 370. Available at SSRN: https://ssrn.com/abstract=2212123 or http://dx.doi.org/10.2139/ssrn.2212123

Stijn Claessens (Contact Author)

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

Neeltje Van Horen

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

HOME PAGE: http://https://www.bankofengland.co.uk/research/Researchers/neeltje-van-horen

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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