Foreign Banks in Poor Countries: Theory and Evidence

50 Pages Posted: 22 Mar 2006

See all articles by Enrica Detragiache

Enrica Detragiache

International Monetary Fund (IMF) - European Department

Thierry Tressel

International Monetary Fund (IMF) - Research Department

Poonam Gupta

Delhi School of Economics

Multiple version iconThere are 3 versions of this paper

Date Written: January 2006

Abstract

We study how foreign bank penetration affects financial sector development in poor countries. A theoretical model shows that when foreign banks are better at monitoring high-end customers than domestic banks, their entry benefits those customers but may hurt other customers and worsen welfare. The model also predicts that credit to the private sector should be lower in countries with more foreign bank penetration. In the empirical section, we show that, in poor countries, a stronger foreign bank presence is robustly associated with less credit to the private sector both in cross-sectional and panel tests. In addition, in countries with more foreign bank penetration, credit growth is slower and there is less access to credit. We find no adverse effects of foreign bank presence in more advanced countries.

Keywords: Foreign banks, developing countries, adverse selection

JEL Classification: G21, O16

Suggested Citation

Detragiache, Enrica and Tressel, Thierry and Gupta, Poonam, Foreign Banks in Poor Countries: Theory and Evidence (January 2006). Available at SSRN: https://ssrn.com/abstract=891158 or http://dx.doi.org/10.2139/ssrn.891158

Enrica Detragiache (Contact Author)

International Monetary Fund (IMF) - European Department ( email )

700 19th Street NW
Washington, DC 20431
United States

Thierry Tressel

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States

Poonam Gupta

Delhi School of Economics ( email )

Department of Economics
Delhi University
Delhi, Delhi 110007
India

Register to save articles to
your library

Register

Paper statistics

Downloads
62
Abstract Views
777
rank
35,373
PlumX Metrics