The Risks and Financial Vulnerability of Foreign Bank Ownership in CEECs: Evidence from Exchange Rate Depreciation after the Financial Crisis

ABSTRACT

The banking sector in Central and Eastern European countries is characterized by cross-border mergers and acquisitions. Financial integration improved firm access to international capital markets but also posed a serious challenge in terms of financial vulnerability. We use bank data to analyze the determinants of bank lending between 1998 and 2016. Our results confirm significant differences in lending behavior between domestic and foreign banks. In particular, foreign banks are more sensitive to exchange rate changes but less sensitive to domestic demand. Currency depreciation has a larger negative impact on lending by foreign banks, with a lower ratio of deposits to equity.

KEYWORDS:

• Bank lending
• CEECs
• EU
• financial vulnerability
• foreign ownership

JEL CLASSIFICATION:

• C25
• D14
• G21

Acknowledgments

This research was funded by the Czech Science Foundation via grant No. 19-22488S “Interactions between the financial sector and the real economy.” We benefited from comments and suggestions made by Jesus Crespo Cuaresma, Ľuboš Pástor, Martin Šuster, Evžen Kočenda, Max Gillman, Fabian Reck, and other participants of the Annual Congress of the European Economic Association, Lisbon, August 2017; the Annual International Conference on Macroeconomic Analysis and International Finance, Crete, May 2019; and the Annual Conference of the Western Economic Association, San Francisco, June 2019.

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

1. Our dataset includes banks in Bulgaria, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia, and Slovenia.

Additional information

Funding

This work was supported by the Czech Science Foundation [Grant No. 19-22488S, “Interactions between the financial sector and the real economy”].