Foreign Banks and Credit Growth in Eastern and Central Europe

Abstract

The study aims to identify systematical differences in bank lending with respect to ownership structure of the banks in Central and Eastern Europe, using bank-level data of 197 banks in the region for the period from 2004 to 2011, as well as macroeconomic indicators for 10 countries of the study. Panel data analyses reveal that ownership struc- ture indeed has an effect on credit growth among banks analyzed. Foreign owned banks are shown to have higher credit growth in comparison with domestic banks, which is largely explained by their higher ability to access funds on international market through parent financing. The analyses however also show that in a crisis scenario foreign banks reduce their lending at a faster pace than domestic banks of similar characteristics do. This suggests that foreign banks' credit growth is influenced by exogenous factors, including the stance of parents in home countries and their appetite for exposure to host countries. Among foreign banks, those that are the result of greenfield investment, displayed a higher reduction in credit in a crisis scenario, than those that resulted from takeover of established local banks - suggesting a lower independence of greenfield banks from their parent decisions. Interestingly, while before and during the crisis the credit growth of foreign banks was correlated with banks own balance sheet indicators, the relation is much looser after the crisis, indicating a higher dependency on parent companies' decisions and other factors exogenous to banks' characteristics and standalone financial strength.