Foreign banks in CEE’s economies. A panel data analysis

Abstract

Although foreign banks operate in Central and Eastern European (CEE) countries since the early 1990s, the consequences of the 2007-2010 economic crisis and the uneven economic development in these countries over the last years have determined researchers to reconsider the importance, the risks and effects of foreign banks’ presence in the host economies. The positive consequences, such as supplementary capital, corporate practices, efficient allocation of resources, competition, and shock resilience are strongly contradicted by foreign banks’ selectivity and preference for large and consolidated clients, the centralization of decisionmaking, reduced lending during crises, worsening pro-cyclical phenomena, opaque practices in the repatriation of profits etc. Our paper examines the relationship between foreign banks’ assets (as share of foreign banks’ assets in total bank assets) and several macroeconomic indicators (change of real GDP, inflation and unemployment), and, respectively, bank performance indicators (i.e. interest rates on bank credit to the private sector, and bank cost to income ratio), for CEE countries, from 1996 to 2013. For each indicator, we estimate a panel data model. The results show that the foreign bank assets are positively and significantly associated only with the rate of change of real GDP, meanwhile with the other two macroeconomic indicators (i.e. inflation and unemployment), the foreign bank assets are negatively and statistically significant correlated. Moreover, we found that foreign bank assets are not correlated with the bank cost/income ratio, but negatively correlated with interest rates on bank credit to the private sector. The results show that, during the financial crisis, an increase in the assets of foreign banks reduced inflation, unemployment rate and interest rate, but less significantly than during a typical, non-crisis period.