Foreign Banks Trends, Impact and Financial Stability

This paper introduces a comprehensive database on bank ownership for 137 countries from 1995-2009 and reviews foreign bank behavior and its impact. It documents substantial increases in foreign bank presence, with many more home and host countries. Current market shares of foreign banks average 20 percent in OECD countries and 50 percent elsewhere. Foreign banks have higher capital and more liquidity, but lower profitability than domestic banks do. Only in developing countries is foreign bank presence negatively related to domestic credit creation. During the global crisis, foreign banks reduced credit more compared to domestic banks, except when they dominated the host banking systems. Although interrupted by the recent financial crisis, the past two decades have seen an unprecedented degree of globalization, especially in financial services. Not only have cross-border bank (and other capital) flows increased dramatically, but also many banks, from both advanced and developing countries, have ventured abroad and established presence in other countries. Although there are exceptions and regional differences, few countries have been left out of this trend of increasing financial integration. As a result, foreign banks have become important in domestic financial intermediation. For example, in terms of loans, deposits, and profits, current market shares of foreign banks average 20 percent in OECD countries and close to 50 percent in emerging markets and developing countries. Given the importance of foreign banks in many countries, understanding the motivations of foreign banks to enter a particular host country, the mode by which they do so, and the impact they have on financial sector development and lending stability has become essential. These questions have become even more prominent as a result of the financial crisis. Although much research has been conducted, many questions remain unanswered, however, partly because data availability has been limited.