BANKING ON MULTINATIONALS: THE DETERMINANTS OF CROSS-BORDER CREDITS TO CENTRAL AND EASTERN EUROPE, 1990-2015

Abstract

Taking into account the rising dependence of Central and Eastern Europe on multinational banks’ credits, the main purpose of the article is to identify and examine the determinants of cross-border credits through a methodology based on “push” and “pull” factors. The author presents the results of a regression analysis on the determinants of cross-border credits provided by multinational banks from EU-15 to Central and Eastern Europe over the period of 1990-2015 by using the statistical data compiled and published by the Bank for International Settlements. The obtained results suggest that global as well as home and host country level determinants influence cross-border credits but to a different extent. According to our results, higher stability and predictability of global economic environment contribute to higher cross-border credit growth. The results of the host country determinants analysis indicate that more effective and profitable economies receive more credits from multinational banks. We also find that multinational banks provide more credits to countries with small markets, low inflation rate, high external debt burden, high capital account deficit, fixed exchange rate regime, and developed institutional environment. Regarding home level determinants, we find the existence of a negative correlation between home country economic cycle and the amount of cross-border credits received by the host country, which can be explained by low economic growth in continental Europe over the period under consideration that stimulated European banks to expand lending on foreign markets with higher profit opportunities. Thus, cross-border credits appear to have been countercyclical to growth in home countries and procyclical to growth in host countries. Finally, it is found that host country level determinants play the most important role in explaining changes in cross-border credits on host countries in Central and Eastern Europe during 1990-2015 period, which means that host countries have a control over their own destinies and the amount of received credits depends on their economic and political performance. Value/originality. The results of the research make it possible to provide a better understanding of the determinants of cross-border credits and practical importance of multinational banks’ lending as an important source of external finance for the catching-up process and a major component in the ongoing process of financial deepening in Central and Eastern Europe, and clarify whether these determinants differ in periods of financial stability and crisis.