Foreign Penetration, Lending Behavior and Risk in Southeast Asian Banks: Does Bank Competition Matter?

Abstract

This paper attempts to analyze the joint impact of foreign penetration and competition on financial intermediation and risk in banking. Our empirical results from a sample of commercial banks in ASEAN-5 over the 1999-2012 period suggest that banks in countries with higher foreign bank penetration exhibit higher loan growth and lower riskiness. However, the positive impact of foreign bank penetration at the country level on bank loan growth and stability only holds for banks operating in countries with higher competition in banking. Finally, this paper also highlights several policy implications to strengthen financial intermediation and bank stability in ASEAN-5.