Foreign Banks: Trends and Impact

Abstract

Over the past two decades, foreign banks have become much more important in domestic financial intermediation, heightening the need to understand their behavior. We introduce a new, comprehensive database, made publicly available, on bank ownership (including the home country of foreign banks) for 5,324 banks in 137 countries over the period 1995–2009. We document large increases in foreign bank presence in many countries, but with substantial heterogeneity in terms of host and banks’ home countries, bilateral investment patterns, and bank characteristics. In terms of impact, we document that the relation between private credit and foreign bank presence importantly depends on host country and banks’ characteristics. Specifically, foreign banks only seem to have a negative impact on credit in low‐income countries, in countries where they have a limited market share, where enforcing contracts is costly and where credit information is limited available, and when they come from distant home countries. This shows that accounting for heterogeneity, including bilateral ownership, is crucial to better understand the implications of foreign bank ownership.