Does Foreign Bank Penetration Affect the Risk of Domestic Banks? Evidence from Emerging Economies

Abstract

We investigate whether foreign bank penetration affects the risk-taking of domestic banks in emerging economies. By using bank-level data from 35 markets during the period of 2000-2014, we find significant evidence that the riskiness of domestic banks increases with the presence of foreign banks, and this finding is shown to be consistent in a series of robustness examinations. We also explore various conditions for the heterogeneity of the nexus between foreign bank penetration and domestic banks’ risk-taking, including: (1) what types of domestic banks are affected more by the presence of foreign banks, and (2) what patterns of foreign penetration exert more pronounced impact.

Keywords: Foreign bank penetration, bank risk-taking, emerging economies

JEL Classification: G21, G15, F36, E44