Role of Foreign Capital in Stability of Banking Sectors in CESEE Countries

Finance a úvěr-Czech Journal of Economics and Finance, vol. 67, no. 6, 2017

Posted: 26 Dec 2017

See all articles by Malgorzata Iwanicz-Drozdowska

Malgorzata Iwanicz-Drozdowska

Warsaw School of Economics, Institute of Finance

Paweł Smaga

Warsaw School of Economics (SGH) - Department of Finance and Management; National Bank of Poland

Bartosz Witkowski

Warsaw School of Economics (SGH)

Date Written: December 20, 2017

Abstract

We investigate whether foreign ownership in the banking sector is a key determinant of its stability in Central, Eastern and South-Eastern European (CESEE) countries, as there is no consensus in the current literature on emerging markets. To this end, we introduce a financial strength index (FSI) as a proxy for financial stability. We used binary regressions for both pooled and panel data to model bank- and country-level data for 20 CESEE countries from 1995 to 2014. Our findings indicate that there is no significant direct link between the share of foreign-owned banks and stability in CESEE banking sectors; instead, financial stability is dependent on banks’ credit policies and their balance sheet structures, irrespective of the type of ownership. We argue that positive macroeconomic development drives financial stability in CESEE countries, increases penetration by foreign banks and encourages them to expand through the pursuit of aggressive credit policies. Such policies, rather than the share of foreign capital per se, may have negative impacts on financial stability, exacerbating boom–bust cycles.

Keywords: financial stability, financial strength, foreign capital, CESEE, subsidiary

JEL Classification: F36, G21, G32

Suggested Citation

Iwanicz-Drozdowska, Malgorzata and Smaga, Paweł and Witkowski, Bartosz, Role of Foreign Capital in Stability of Banking Sectors in CESEE Countries (December 20, 2017). Finance a úvěr-Czech Journal of Economics and Finance, vol. 67, no. 6, 2017 , Available at SSRN: https://ssrn.com/abstract=3091172

Malgorzata Iwanicz-Drozdowska (Contact Author)

Warsaw School of Economics, Institute of Finance ( email )

Warsaw
Poland

Paweł Smaga

Warsaw School of Economics (SGH) - Department of Finance and Management ( email )

Warsaw
Poland

National Bank of Poland ( email )

Poland

Bartosz Witkowski

Warsaw School of Economics (SGH) ( email )

aleja Niepodleglosci 162
PL-Warsaw, 02-554
Poland

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