Foreign-Owned Banks

The Role of Ownership in Post-Communist European Countries

Paola Bongini, Bartosz Witkowski, Małgorzata Iwanicz-Drozdowska, Paweł Smaga

• Publisher: Palgrave Macmillan
• Year: 2018
• Print ISBN:
  9783030011109
• eBook ISBN:
  9783030011116
• Topic: Business
• Subtopic: Financial Services
• Index: Business

Focuses on the evolving role played by foreign banks

Offers a multifaceted analysis of advantages and disadvantages of foreign-owned banks' presence

Answers the question of 'who is the winner of foreign-owned banks' presence, juxtaposing the answer from both perspectives

© The Author(s) 2018

Małgorzata Iwanicz-Drozdowska, Paola Bongini, Paweł Smaga and Bartosz WitkowskiForeign-Owned BanksStudies in Economic Transitionhttps://doi.org/10.1007/978-3-030-01111-6_1

Begin Abstract

1. Introduction

Małgorzata Iwanicz-Drozdowska¹

(1)

SGH Warsaw School of Economics, Warsaw, Poland

Małgorzata Iwanicz-Drozdowska

Keywords

Domestic-owned bankForeign-owned bankParent bankSubsidiaryTransformationGlobal financial crisis

End Abstract

The role and market behaviour of foreign-owned banks have been analysed for both well-developed countries (e.g. Peek and Rosengren 1997, 2000; Sturm and Wiliams 2008) and emerging markets (e.g. Cull and Martínez-Pería 2013; Havrylchyk and Jurzyk 2011). The presence of foreign-owned banks as well as cross-border activity of international banks is attributable to the liberalisation of capital flows and globalisation. In this book we focus on foreign-owned banks , not the cross-border activity of international banks. However, in order to present a broader picture, we do refer, whenever needed, to studies in both veins. Financial sectors in Central, Eastern, and South-Eastern Europe (CESEE) are bank-based and the banking sector was and still is the biggest player on the CESEE markets and is of crucial importance to the national economy. A comprehensive study covering all the European countries in transition , the results of which are presented in this book, shows the impact which the openness of the banking sector to foreign investment exerted over the last two decades on financial stability , which is a public good, and on economic development , which is crucial in the further catching-up process.

After the collapse of the communism in CESEE (these countries are also called post-communist countries or countries in transition ), these markets opened to international cooperation and investments restoring their links with the Western world. After the initial reforms shifting the countries towards the market economy , which were severe to their societies, attractiveness of the countries in transition encouraged foreign investors to explore investment opportunities in this region.¹ One of the key directions of foreign investment was the financial sector, underdeveloped in comparison with the Western countries, and potentially very attractive due to the catching-up process. International banks entered the CESEE markets by setting up their subsidiaries or taking over existing banks, fairly often through the privatisation process.

Until the outbreak of the global financial crisis (GFC) the presence of foreign-owned banks was regarded as an advantage for the national economy because foreign investors were treated as a source of stability and a helping hand for their local subsidiaries . The outbreak of the GFC and financial troubles faced by many international banks brought concerns about the transfer of shocks from the parent banks to their subsidiaries and therefore their role for the CESEE markets. These concerns were caused by the turmoil on global financial markets, the lack of trust on interbank markets, and a sudden stop of cross-border financing . Against this background, our goal is to present the role of foreign capital in the banking sector in post-communist countries with regard to financial stability and economic development over two decades. This book presents the results of the study prepared, thanks to the support of the Polish National Science Centre (UMO-2014/13/B/HS4/01619), for the project titled “Foreign capital in the Central and Eastern European banking sectors – the impact on financial stability and economic development ” conducted in 2015–2018.

The analysis of the impact of foreign capital in the banking sector is important to various stakeholders, including policymakers. While assessing country’s internal policy and past decisions, one can use the results of our study as a benchmark. Some CESEE countries are still on a relatively early stage of the catching-up process, mostly due to the late start of reforms and/or a long-lasting military conflict. In order to shape their economic policy properly, it is valuable to know the outcome of other countries’ policies, not only from a stand-alone perspective, but on a cross-section and cross-country basis.

The book consists of seven chapters. Chapter 1 is of an introductory character, while Chap. 2 presents a brief history of the CESEE countries, with special attention paid to the process of economic and political transformation . Chapters 3, 4, 5, and 6 present the state-of-the-art research based on a review of extant literature and the empirical results of our work. Chapter 3 shows foreign bank entry in the CESEE banking sectors with different strategies, as well as the evolution of their presence and their performance. In Chap. 4, we present the credit activity of the CESEE banks for different types of owners, including state-owned banks , domestic private-owned banks , and foreign-owned banks . We analyse determinants of credit growth and its procyclicality . Bank credit plays a special role for financial stability and economic development . Both issues are thoroughly analysed in the following chapters. Chapter 5 starts with the description of the GFC impact on post-communist countries. Before presenting the determinants of financial stability in the region, we analyse different measures of financial stability , searching for the best one for post-communist countries. Chapter 6 refers to the finance-growth nexus, from both the theoretical and empirical perspectives. We analyse the determinants of economic growth expanding macroeconomic model by financial sector-specific determinants, including the role of foreign-owned banks . Conclusions are presented in the last chapter, where we attempt to identify the winners of foreign banks’ presence in CESEE.

As a project leader, I would like to extend my thanks to my co-authors, Paola Bongini, Paweł Smaga, and Bartosz Witkowski, for their involvement in the project and intensive work at many stages. Moreover, I would like to thank Paweł Smaga for his valuable support in editorial works for this book and my PhD candidates (Łukasz Kurowski and Karol Rogowicz) for their support in data collection.

We hope this book will be an interesting voice in the discussion on the role of foreign capital in emerging markets and may help shape the future economic policy in the CESEE region.

Bibliography

1. Cull R, Martínez-Pería M (2013) Bank ownership and lending patterns during the 2008–2009 financial crisis: Evidence from Latin America and Eastern Europe. J Bank Financ 37(12): 4861–4878. https://​doi.​org/​10.​1016/​j.​jbankfin.​2013.​08.​017 Crossref
2. Havrylchyk O, Jurzyk E (2011) Inherited or earned? Performance of foreign banks in Central and Eastern Europe. J Bank Financ 35(5):1291–1302. https://​doi.​org/​10.​1016/​j.​jbankfin.​2010.​10.​007 Crossref
3. Peek J, Rosengren E (1997) The International Transmission of Financial Shocks: The Case of Japan. Am Econ Rev 87(4): 495–505
4. Peek J, Rosengren E (2000) Collateral Damage: Effects of the Japanese Bank Crisis on Real Activity in the United States. Am Econ R...

Table of contents

• Cover
• Front Matter
• 1. Introduction
• 2. CESEE Countries: Historical Background, Transition, and Development
• 3. Foreign Bank Entry into CESEE Countries in the 1990s and Afterwards
• 4. Credit Activity of Foreign-Owned Banks in CESEE
• 5. Impact of Foreign-Owned Banks on Financial Stability
• 6. Impact of Foreign-Owned Banks on Economic Development
• 7. Concluding Remarks: Who Is the Winner of Foreign Banks’ Presence?
• Back Matter