Does Foreign Bank Branch Activity Affect Lending Behavior?

Abstract

In this study, we examine the effects of foreign branch activity on commercial banks in the Central, Eastern, and Southeastern European countries for the period 1995-2015. We show that more foreign bank branches are present in countries that have higher taxes and regulatory restrictions on bank activity. The increased activity of bank branches negatively affects foreign-owned bank lending, and to a lesser extent, that of state-owned banks. We attribute this finding to the fact that branches and foreign-owned banks compete for the same type of clients, namely, multinational corporations. The branch effect seems to be larger for corporate loans than for consumer loans, which confirms our assumptions. Moreover, we find that the negative effect is stronger for foreign banks owned by multinational banks than by non-bank entities.