Foreign banks can play an important role in facilitating international trade. They can provide trade financing, enforce contracts, and reduce information asymmetries. Studies have shown that trade financing is an important channel to boost exports. For example, Claessens and others (2015) show that sectors that are more dependent on external finance have more bilateral exports when a foreign bank from that trade partner is present in the country. Much like immigrant networks and colonial ties (Rauch 1999), foreign banks can play a role in reducing information asymmetries for exporting firms, especially in countries where there are fewer financing constraints. Foreign banks have strong ties with their parent country, and are better placed to assess the profitability of a given product in that market and provide information about export market conditions.
Since the late 1990s, the importance of multinational banks has grown dramatically. Between 1999 and 2009 the average share of bank assets held by foreign banks in developing countries rose from 26 percent to 46 percent. The bulk of the pre-global crisis evidence analyzing the consequences of this significant transformation in bank ownership suggests that foreign bank participation brought many benefits to developing countries, especially in terms of bank competition and efficiency.
The recent global financial crisis, however, highlighted the role of multinational banks in the transmission of shocks across countries. Most of the research has focused on transmission through the lending channel – how foreign bank lending behaved during the crisis. A number of papers, including some before the recent global crisis, have documented that lending by foreign bank affiliates declines when parent banks’ financial conditions deteriorate.
Small and medium-size enterprises (SMEs) account for close to 60 percent of global manufacturing employment. So it is no surprise that financing for SMEs has been a subject of great interest to both policymakers and researchers. More important, a number of studies using firm-level survey data have shown that SMEs perceive access to finance and the cost of credit to be greater obstacles than large firms do—and that these factors really do constrain the growth of SMEs.
In recent years a debate has emerged about the nature of bank financing for SMEs: Are small domestic private banks more likely to finance SMEs because they are better suited to engage in “relationship lending,” which requires continual, personalized, direct contact with SMEs in the local community in which they operate? Or can large foreign banks with centralized organizational structures be as effective in lending to SMEs through arm’s-length approaches (such as asset-based lending, factoring, leasing, fixed-asset lending, and credit scoring)? And how well do state-owned banks—for which expanding access to finance is often among their top objectives—serve SMEs?