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Bank Ownership and Lending Patterns during the 2008-2009 Financial Crisis: Evidence from Latin America and Eastern Europe

Maria Soledad Martinez Peria's picture

The recent global financial crisis reignited the debate on the ownership structure of the banking sector and its consequences for financial intermediation. Some have pointed to the presence of foreign banks in developing countries as a key mechanism for transmitting the 2008-2009 crisis from advanced to developing countries (e.g., IMF, 2009). At the same time, developing countries like Brazil, China, and India, where government-owned banks are systemically important, recovered quickly from the crisis, generating interest in the potential mitigating role that these banks can play during periods of financial distress. [1]

 In a recently released paper, Bob Cull and I examine the impact of bank ownership on credit growth before and during the recent crisis. [2] Using bank-level data from 2004 to 2009, we analyze the growth of banks’ overall loan portfolios, as well as changes in corporate, consumer, and residential mortgage loans. In particular, we compare results for a sample of countries from two regions: Latin America (Argentina, Brazil, Chile, Colombia, Mexico, and Peru) and Eastern Europe (Bulgaria, Croatia, Czech Republic, Hungary, Poland, Romania, Slovakia, and Slovenia). We selected these regions because they have important similarities, but also interesting differences. Both regions include middle-income countries that have among the highest levels of foreign bank participation in developing countries (Claessens and van Horen, 2012). However, there are also contrasts in the types of foreign banks that entered the two regions and in the role and size of state-owned banks. For example, in Latin America the dominant foreign players were Spanish banks, which are said to have funded most of their operations in those countries with local deposits, and extended most of their loans in local currency (Kamil and Rai, 2010). In Eastern Europe, (non-Spanish) banks from neighboring Western European nations were the dominant foreign players. These banks mainly resorted to wholesale funding from non-local sources and denominated most of their loans in foreign currencies.  With regard to government-owned banks, though both regions entered the 1990s with sizable government bank participation, governments in Eastern Europe had divested their shareholdings more fully than those in Latin America by the late 2000s.

Our estimations reveal that while domestic private banks both in Eastern Europe and Latin America experienced a sharp contraction in the growth of lending during the 2008-2009 crisis, there are differences across these regions in the behavior of foreign and government-owned banks. In Eastern Europe, loan growth by foreign banks fell more than that of domestic private banks during the crisis, driven largely by a steep reduction in corporate loans. Prior to the crisis, lending to corporate entities by foreign banks grew more swiftly than that of domestic private banks. The loan growth of government-owned banks in Eastern Europe was similar to that of domestic private banks during the crisis, and was not counter-cyclical. The opposite was true in Latin America, where government-owned banks’ lending growth during the crisis exceeded that of domestic private and foreign-owned banks. This pattern was true for the overall loan portfolio as well as for the growth of corporate and consumer loans. Furthermore, and contrary to the case of Eastern Europe, foreign banks in Latin America did not appear to fuel loan growth prior to the crisis and did not contract their loans at a faster pace than domestic banks during the crisis.

Identifying what is at the heart of the differences in bank behavior across regions is difficult. We offer some tentative explanations based on evidence we are able to gather. We find that foreign parent characteristics can explain some of the variation in foreign bank lending in Eastern Europe, while subsidiary solvency was important in the case of Latin America. We speculate that this might explain why foreign bank lending declined more relative to domestic bank loan growth in Eastern Europe. At the same time, larger bank profits among government banks in Latin America and smaller fiscal deficits might explain why government bank lending in this region was resilient to the crisis. Overall, our results caution against making sweeping generalizations about the behavior of foreign and government-owned banks during the recent crisis, and point to the need for more research to better understand what is driving the differences we document.

In drawing conclusions from our paper, two important caveats need to be considered. First, our analysis focuses only on the behavior of banks’ loan growth immediately before and during the 2008-2009 crisis. Hence, the paper does not provide a comprehensive examination of whether financial globalization is good or bad for Latin America and Eastern Europe.  Similarly, because we cannot analyze the quality of government bank lending during the crisis, it is not possible to determine whether the increase observed in Latin America was ultimately a good thing for the region.

References

Claessens, Stijn, and Neeltje van Horen, 2012. “Foreign Banks: Trends, Impact and Financial Stability,” IMF Working Paper Series WP/12/10.

International Monetary Fund (IMF), 2009. World Economic Outlook. April.

Kamil, Herman, and Kulwant Rai, 2010. “The Global Credit Crunch and Foreign Banks’ Lending to Emerging Markets: Why Did Latin America Fare Better?” IMF Working Paper WP/10/102. 

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1 See for example the discussion in the following articles: “They Must Be Giants,” The Economist, May 15, 2010. “Falling in Love with the State Again,” The Economist, April 3, 2010. “Not Just Straw Men,” The Economist, June 20, 2009.

2 Read the pdf file

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