Foreign Bank Participation and Crises in Developing Countries

AuthorRobert Cull; María Soledad Martínez Pería
ProfessionFinance and Private Sector Development Research Group The World Bank
PagesWPS4128

    We are grateful to Soledad Lopez for outstanding research assistance. Contact information: Robert Cull, Senior Economist, Finance and Private Sector Development Research Group, World Bank, 1818 H Street, N.W., MSN MC3-300. Email: rcull@worldbank.org

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1 Introduction

Since the mid 1990s, due to a growing trend across countries towards globalization and financial integration, banking sectors in many developing countries have experienced some important transformations. Key among them has been a rapid increase in the degree of foreign bank participation. Between 1995 and 2002, the average share of banking sector assets held by foreign banks in 104 developing countries rose from 18 percent to 33 percent.1 Many studies have examined the causes and implications of foreign bank participation.2

The contribution of this paper is to describe the recent trends in foreign bank ownership in developing countries, summarize the existing evidence on the causes and implications of foreign bank presence and re-examine the link between banking crises and foreign bank participation. Using data on the share of banking sector assets owned by foreign banks in over 100 developing countries, we document a strong rise in foreign bank participation in two regions of the world: Eastern Europe and Central Asia and Latin America. Foreign bank presence has increased in Africa as well, but at a generally slower pace than in the other two regions. By contrast, foreign bank participation has remained stagnant or even declined in East and South Asia and in the Middle East and North Africa. Our empirical analysis shows that countries that experienced a banking crisis from 1995 to 2002 tended to have higher levels of foreign bank participation than those that did not.

Furthermore, panel regressions indicate that foreign bank participation increased as a result of crises rather than prior to them. However, post-crisis increases in foreign bank participation did not coincide with increased credit to the private sector. We speculate that this is due to the fact that in most countries foreign entrants acquired distressed banks with a high share of loans that needed to be written off. By contrast, in countries where the level of foreign bank participation was relatively high and stable, private credit levels were significantly higher than in other countries before, during, and after crises.

The paper is organized as follows. Section 2 examines the recent trends in foreign bank participation among developing countries. Section 3 reviews the existing literature on the causes Page 2 and implications of foreign bank participation. Section 4 examines the relationship between crises and foreign bank participation in developing countries and Section 5 concludes.

2. Trends in foreign bank participation

Statistics on the average share of banking assets held by foreign banks in developing countries over the last decade disguise important regional differences, as well as differences within each region. This section describes levels and trends in foreign bank participation across regions and also discusses the degree to which recent regional changes in foreign bank participation are common to most countries in the region or are driven by only a few exceptions.

As shown in Figure 1, between 1995 and 2002 foreign bank participation increased primarily in Eastern Europe and Central Asia, Latin America, and Sub-Saharan Africa.3 By 2002, close to 40 percent of assets in all three regions were in the hands of foreign banks. On the other hand, in Asia and in the Middle East and Northern Africa, foreign bank participation remained low ? close to 10 percent of banking sector assets ? and stagnant throughout the period. Even among the three regions where the share of assets held by foreign banks has been rising there are some differences both in the levels of foreign bank presence and in the speed with which it has increased in recent years. For example, whereas the average level of foreign bank participation during 1995-2002 was highest in Sub-Saharan Africa, both the absolute and relative increases in the share of assets held by foreign banks have been most significant in Eastern Europe and Central Asia and in Latin America. The share of assets held by foreign banks in Sub-Saharan Africa rose by 9 percentage points from 30 percent in 1995 to 39 percent in 2002. This represents a 1.3 times increase. In Eastern Europe and Central Asia the share of assets held by foreign banks roughly tripled from almost 13 percent in 1995 to 39 percent in 2002. In Latin America, foreign bank participation nearly doubled, going from 19 percent to 37 percent over this period.

While in Africa, many of the foreign banks have been operating since colonial times, entry in Eastern Europe and Latin America has been more recent. Most of the entry of foreign banks in Eastern Europe and Central Asia has resulted from the privatization of state-owned Page 3 banks following the fall of communism in the region. The largest five foreign banks with operations in Eastern Europe and Central Asia are KBC Bank (Belgium), Erste Bank (Austria), HVB Group (Austria), Socit Gnrale (France) and Unicredito Italiano (Italy). There are regional specializations of some foreign banks: large Scandinavian banks like Swedbank and Skandinavska Enskilda have the markets of the Baltic States, and Greek banks such National Bank of Greece, Piraeus Bank, Alpha Bank, and Emporiki Bank of Greece are present in the Balkan countries. At the same time, Austrian banks - Erste Bank, HVB Group and Raiffeisen - control large shares of banking assets in most Eastern European and Central Asian countries, with the exception of the Baltic States. In Latin America, entry has been driven by foreign bank acquisitions of domestic banks. In particular, two Spanish banks ? Banco Santander Central Hispano and Banco Bilbao Viscaya Argentaria (BBVA) ? have been particularly aggressive in acquiring banks in the region.4 However, other non-Spanish banks such as Citibank from the U.S. and HSBC from the U.K. also have an important presence in the region.

East Asia had the lowest levels of foreign bank participation throughout the period 1995- 2002 and also exhibited the smallest increase. The share of assets held by foreign banks was close to 7 percent throughout the entire period. In terms of levels of foreign bank presence, South Asia follows East Asia as the region with the lowest levels of foreign bank participation. In South Asia, the share of assets held by foreign banks was almost 9 percent in 1995 and rose to 12 percent in 2000 only to drop to 10 percent by 2002. Finally, foreign bank participation in Middle East and North Africa was close to 12 percent in 1995 and rose only to almost 13 percent by 2002.5

Table 1 presents detailed information on the share of assets held by foreign banks in each of 104 developing countries. This allows us to examine more closely whether the regional trends described above were driven by most or only some of the countries in each region. In Sub- Saharan Africa, the increase in foreign bank participation was a fairly widespread phenomenon. Foreign bank participation increased in 22 out of the 30 African countries for which we have data on foreign bank participation. In absolute terms (i.e., percentage point changes in the share of assets held by foreign banks), the increase in foreign bank participation was most significant Page 4 in Mozambique and Cote d?Ivoire, where the share of assets held by foreign banks increased by over 40 percentage points. In Mozambique, foreign bank participation increased from close to 22 percent in 1996 to over 72 percent in 2002. In Cote d?Ivoire, foreign bank presence rose from 20 percent in 1995 to 62 percent in 2002. In relative terms (i.e., with respect to their initial levels of foreign bank presence), both Sierra Leone and South Africa experienced significant increases in the share of foreign bank participation. In Sierra Leone, the share of assets held by foreign banks rose from 0 to over 29 percent and in South Africa it increased from 0.3 to almost 11 percent. On the other hand, the share of assets held by foreign banks declined in 6 countries in the region, namely: Burkina Faso, Burundi, Cameroon, Niger, Senegal, and Zimbabwe. In Ethiopia and Seychelles, foreign participation did not change.

In Eastern Europe and Central Asia, the increase in foreign bank participation observed over the last decade was also quite pervasive. Out of 25 countries in the region for which we have data on foreign bank participation, the share of assets held by foreign banks increased in 22 of them. The increase was particularly spectacular in Lithuania and the Slovak Republic, where the share of assets controlled by foreign banks rose by over 70 percentage points. In Lithuania, foreign bank participation rose from close to 19 percent in 1995 to over 90 percent in 2002. The Slovak Republic witnessed an increase in the share of assets held by foreign banks from 9 to almost 82 percent. Relative to the beginning levels of foreign bank presence, Romania also experienced a significant increase in foreign bank participation. In this country, the share of bank...

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