BOFIT Discussion Papers, Institute for Economies in Transition, Bank of Finland
No 31/2015:
Did foreign banks “cut and run” or stay committed to Emerging Europe during the crises?
John P. Bonin ()
and Dana Louie ()
Abstract: Our objective is to examine empirically the behavior of
foreign banks regarding real loan growth during a financial crisis for a
set of countries in which these banks dominate the banking sectors due
primarily to having taken over large existing former state-owned banks. The
eight countries are among the most developed in Emerging Europe, their
banking sectors having been modernized by the beginning of the time
period.We consider a data period that includes an initial credit boom (2004
– 2007) followed by the global financial crisis (2008 & 2009) and the onset
of the Eurozone crisis (2010). Our main innovations with respect to the
existing literature on banking during the financial crisis are to include
explicit consideration of exchange rate dynamics and to separate foreign
banks into two categories, namely, subsidiaries of the Big 6 European MNBs
and all other foreign-controlled banks. Our results show that bank lending
was impacted adversely by the crisis but that the two types of foreign
banks behaved differently. The Big 6 banks remained committed to the region
in that their lending behavior was not different from that of domestic
banks corroborating the notion that these countries are a “second home
market” for these banks. Contrariwise, the other foreign banks were
primarily responsible for fueling the credit boom prior to the crisis but
then “cut and ran” by decreasing their lending appreciably during the
crisis. Our results also indicate different bank behavior in countries with
flexible exchange rate regimes from those in the Eurozone. Hence, we
conclude that both innovations matter in empirical work on bank behavior
during a crisis in the region and may, by extension, be relevant to other
small countries in which banking sectors are dominated by foreign financial
institutions.
Keywords: foreign bank lending; financial crisis; multinational banks; Emerging Europe; (follow links to similar papers)
JEL-Codes: G01; G15; P34; (follow links to similar papers)
29 pages, November 4, 2015
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