Foreign bank presence in emerging markets: help or hindrance to banking system stability?

Abstract

With financial liberalization during the 1990s, there was a marked increase in the involvement of foreign banks in emerging market economies. This study uses data from 32 emerging markets for the period 1999 to 2005 to investigate whether the presence of foreign banks promotes or hurts the stability of the banking systems in these economies. We find consistently that a greater presence of foreign banks does not harm banking system stability and, under some definitions, is associated with a statistically significant fall in the probability of a banking crisis. This result is robust across different ways of distinguishing foreign from domestic banks, thus providing useful information to policy makers and banking regulators.

Acknowledgements

We thank Deborah Haas-Wilson, Fred Leonard and participants at a session of the Eastern Economic Association meetings, 2007, for helpful comments and discussions. All remaining errors are our own.

Notes

¹Others have begun also to focus on this issue for emerging markets. For example, Uiboupin (2004) examines the impact of foreign bank entry on loan loss reserves for a group of 10 CEE countries from 1995 to 2001 using a micro-level dynamic panel data set.

²The countries are as follows: Albania, Azerbaijan, Bangladesh, Belarus, Bulgaria, China, Croatia, Cyprus*, Czech Republic, Hong Kong, Hungary, India, Israel, Indonesia*, Jordan*, Kazakhstan, Korea*, Kuwait, Latvia, Macedonia, Malta, Pakistan, Philippines*, Poland, Russia, Slovakia, Slovenia, Sri Lanka*, Thailand*, Turkey*, Ukraine and Vietnam. Only eight of these countries (those marked with a *) were included in the Demirguc-Kunt et al. (1998) study.