Does Foreign Ownership Contribute to Sounder Banks in Emerging Markets? The Latin American Experience

50 Pages Posted: 2 Aug 2006  

Jennifer Crystal

Federal Reserve Banks - Federal Reserve Bank of New York

B. Gerard Dages

Federal Reserve Banks - Federal Reserve Bank of New York

Linda S. Goldberg

Federal Reserve Bank of New York; National Bureau of Economic Research (NBER)

Date Written: September 2001

Abstract

Foreign bank entrants into emerging markets are usually thought to improve the condition and performance of acquired institutions, and more generally to enhance local financial stability. We use bank-specific data for a range of Latin American countries since the mid-1990s to address elements of this claim. Across the seven largest countries, we find that the financial strength ratings of local banks acquired by foreign entities generally show a slight improvement relative to their domestic counterparts. Our more in-depth case studies of Chile, Colombia, and Argentina do not indicate striking differences in health between larger foreign and domestic retail-oriented banks (although state banks are noticeably weaker). However, foreign banks often have higher average loan growth, higher average provisioning expense, and greater loss-absorption capacity. These results suggest that foreign ownership may provide important positive influences on the stability and development of emerging market banking systems.

Keywords: bank, emerging markets, foreign ownership, soundness, Latin America

JEL Classification: F3, F4

Suggested Citation

Crystal, Jennifer and Dages, B. Gerard and Goldberg, Linda S., Does Foreign Ownership Contribute to Sounder Banks in Emerging Markets? The Latin American Experience (September 2001). FRB of New York Staff Report No. 137. Available at SSRN: https://ssrn.com/abstract=921614 or http://dx.doi.org/10.2139/ssrn.921614

Jennifer Crystal

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

B. Gerard Dages

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Linda S. Goldberg (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States
212-720-2836 (Phone)
212-720-6831 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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