The financial crisis and bank–client relationships: Foreign ownership, transparency, and portfolio selection

Abstract

Using a unique dataset that matches banks with their client firms, we investigate the differences between foreign and domestic banks in a developing country. In particular, we are interested in examining how foreign banks solve the information asymmetries that characterize lending relationships and whether those relationships have changed since the financial crisis of 2008. Foreign banks are likely to limit their lending activity to larger firms or more transparent firms because they are at an informational disadvantage relative to domestic banks. We find that foreign banks focus on relationships with foreign, listed, and larger firms. In addition, their portfolio is more heavily weighted towards firms in less competitive industries and exporting firms. Comparing outcomes for 2006 and 2009, we find that banks are more concerned with leverage in 2009 and have reduced the number of firms in their portfolio post-crisis.