Working Paper: NBER ID: w12340
Authors: Marco Arena; Carmen Reinhart; Francisco Vázquez
Abstract: This paper assembles a dataset comprising 1,565 banks in 20 Asian and Latin American countries during 1989-2001 and compares the response of the volume of loans, deposits, and bank-specific interest rates on loans and deposits, to various measures of monetary conditions, across domestic and foreign banks. It also looks for systematic differences in the behavior of domestic and foreign banks during periods of financial distress and tranquil times. Using differences in bank ownership as a proxy for financial constraints on banks, the paper finds weak evidence that foreign banks have a lower sensitivity of credit to monetary conditions relative to their domestic competitors, with the differences driven by banks with lower asset liquidity and/or capitalization. At the same time, the lending and deposit rates of foreign banks tend to be smoother during periods of financial distress, albeit the differences with domestic banks do not appear to be strong. These results provide weak support to the existence of supply-side effects in credit markets and suggest that foreign bank entry in emerging economies may have contributed somewhat to stability in credit markets.
Keywords: Foreign Banks; Emerging Economies; Monetary Conditions; Financial Stability; Credit Markets
JEL Codes: E51; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| foreign banks exhibit a lower sensitivity of credit supply to monetary conditions (E58) | domestic banks exhibit a higher sensitivity of credit supply to monetary conditions (E51) |
| lower asset liquidity and capitalization (G32) | weaker responses to changes in monetary conditions (E49) |
| loan and deposit growth are highly sensitive to economic activity (G21) | foreign banks display a slightly lower sensitivity in loan and deposit growth during tighter monetary conditions (G21) |
| foreign banks display a slightly lower sensitivity in loan and deposit growth during tighter monetary conditions (G21) | smoother behavior compared to domestic banks (G21) |
| foreign bank presence does not lead to increased instability in credit markets (F65) | foreign banks may provide some stability by being less reactive to adverse conditions (F65) |