Chapter 3
Do foreign banks do more harm than good?
Until the 2008-09 financial crisis the benefits of an integrated banking system in Europe were not seriously doubted. Cross-border and multinational banking was viewed as a natural element of economic integration and trade in services.6 In eastern Europe, foreign bank entry through take-overs or new ("greenfield") investments helped introduce modern business practices into underdeveloped banking sectors. Foreign-owned banks became dominant in many central, eastern and south-eastern European countries, both nationally (see Chart 3.1) and locally (see Box 3.2). This progression was viewed as a key ingredient of financial development and a driver of economic growth.7
Source: Claessens and Van Horen (2012).
The 2008-09 crisis changed this perception. Foreign banks seemed to be a (or even the) main culprit of the 2005–08 credit bubble in foreign currency, which burst by 2009 and contributed to large falls in output of about 6 per cent on average in the countries of central Europe and south-eastern Europe (SEE) and 14-17 per cent in the Baltic states.8 In addition, multinational banking was one of the conduits that transmitted the financial crisis from the West into the transition region.9 As a result, foreign banks mutated from paragons of integration to pariahs of the crisis within barely a year. A review of the wealth of literature on multinational and cross-border banking based on evidence from before, during and after the 2008–09 crisis shows that both of these images are exaggerated.
6 In this chapter the term "cross-border banking" refers to the provision of loans by a bank's headquarters in country A directly (across borders) to a firm in country B. In contrast, "multinational banking" refers to banking groups that are headquartered in country A and set up local subsidiaries and branches in country B (and other host countries) to provide local borrowers with credit.
7 See, for example, EBRD (2006).
8 See, among others, EBRD (2009), Bakker and Gulde (2010) and Bakker and Klingen (2012).
9 See Popov and Udell (2012).