The Lending Channel in Emerging Economics: Are Foreign Banks Different?

63 Pages Posted: 7 Sep 2006 Last revised: 21 Sep 2010

See all articles by Marcos Arena

Marcos Arena

University of Maryland - Department of Economics

Carmen M. Reinhart

Peter G. Peterson Institute for International Economics; National Bureau of Economic Research (NBER)

Francisco Vazquez

University of Maryland - Department of Economics

Date Written: June 2006

Abstract

This paper assembles a dataset comprising 1,565 banks in 20 Asian and Latin American countries during 1989-2001 and compares the response of the volume of loans, deposits, and bank-specific interest rates on loans and deposits, to various measures of monetary conditions, across domestic and foreign banks. It also looks for systematic differences in the behavior of domestic and foreign banks during periods of financial distress and tranquil times. Using differences in bank ownership as a proxy for financial constraints on banks, the paper finds weak evidence that foreign banks have a lower sensitivity of credit to monetary conditions relative to their domestic competitors, with the differences driven by banks with lower asset liquidity and/or capitalization. At the same time, the lending and deposit rates of foreign banks tend to be smoother during periods of financial distress, albeit the differences with domestic banks do not appear to be strong. These results provide weak support to the existence of supply-side effects in credit markets and suggest that foreign bank entry in emerging economies may have contributed somewhat to stability in credit markets.

Suggested Citation

Arena, Marcos and Reinhart, Carmen M. and Vazquez, Francisco, The Lending Channel in Emerging Economics: Are Foreign Banks Different? (June 2006). NBER Working Paper No. w12340. Available at SSRN: https://ssrn.com/abstract=912450

Marcos Arena

University of Maryland - Department of Economics ( email )

College Park, MD 20742
United States

Carmen M. Reinhart (Contact Author)

Peter G. Peterson Institute for International Economics ( email )

1750 Massachusetts Avenue, NW
Washington, DC 20036
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Francisco Vazquez

University of Maryland - Department of Economics ( email )

College Park, MD 20742
United States

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