Latin American Banking Fragility: An Assessment of
the Role Played by Foreign Banks
Lindsay Jones and Stefan Krause∗
August 2007
Abstract
The purpose of this paper is to determine whether foreign bank presence has had
a stabilizing or destabilizing effect on the Latin American banking sector. Our results
suggest that, while "brick and mortar" operations of foreign banks in Latin American
countries contribute to the reduction of the probability of a banking crisis, there is no
significant effect of direct foreign lending initiated outside the country on the likelihood
of experiencing financial distress.
JEL classification: F34, G21, O54
Keywords: banking crises, foreign banks, credit growth
∗
Department of Economics, Emory University. Please send comments to skrause@emory.edu.
1
Introduction
In regions such as Latin America, where capital markets and alternative sources of fi-
nancing are not yet well developed, banks are largely responsible for the efficient allocation of
resources and credit in the domestic economy. Banking institutions in these countries, therefore, play an integral role in determining economic progress. Over the past three decades,
however, banking crises and general banking instability have been a recurring source of distress for the region, with numerous countries experiencing problems (see Table 1 for a list
of crises since the early 1980s). These banking problems are often widespread, affecting not
only individual banks, but whole banking sectors, and threatening the solvency of many
countries’ entire banking industry, as contended by Peek and Rosengren (2000). Because
of their systemic nature, banking crises have had severe financial repercussions for afflicted
economies, resulting in budgetary costs totaling as much as 55% of GDP.1 More importantly,
because long-run economic growth has been found to be linked to the strength and depth
of the financial sector, as discussed by Levine (1997), problems in the banking system, an
integral component of that sector, can take a significant macroeconomic toll and severely
disrupt economic development in emerging markets.
Another relevant trend in Latin America’s banking sector over the past two decades
has been an increasing importance of foreign bank financing. Although this has been true
for many emerging market economies, the trend is especially prominent in Latin America.
According to a study by the International Monetary Fund (IMF, 2000), the share of banking
assets held by foreign controlled banks in Latin America rose from 7.5 percent in 1994 to
25 percent in 1999. As a percentage of domestic credit, the claims of Bank of International
Settlements’ (BIS) reporting banks, another indicator of foreign bank presence, has also
increased dramatically over a period of twelve years, rising from 2.4 percent in 1993 to 30.2
percent in 2004 (see Figure 1). The theory about the possible effects of foreign ownership
is inconclusive, as there are equally plausible reasons why foreign bank entry might be both
1
See Caprio and Klingebiel (1996), and Hoggarth, Reis and Saporta (2002).
1
beneficial and harmful.
The purpose of this paper is to determine whether foreign bank presence has had a
stabilizing or destabilizing effect on the Latin American banking sector by examining its
effect on the probability of a banking crisis. We concentrate on Latin America for several
reasons. First, banking crises in this region have been extremely common during the period
in question, which makes a study of the causes and possible solutions to these crises very
relevant. Second, the general macroeconomic volatility of the region can have adverse effects
on its banks, and strategies to cope with this volatility, such as openness to foreign bank
entry, could therefore prove quite valuable. Third, with respect to foreign bank presence,
Latin America is an ideal region for empirical analysis due to the fact that it is one of the
areas that exhibits both a substantial change in foreign bank participation, and a significant
amount of variability across countries in terms of the relative importance banks of overseas
have on domestic financial markets.
We use a multivariate probability model in order to determine the effect of foreign bank
presence on the probability of experiencing a banking crisis. This regression also includes
various macroeconomic and financial variables as controls, and we investigate their respective
effects. Of particular interest is the role played by credit growth, since financial liberalization
and lending booms have been of particular importance in prompting crises in Latin America.2
Nevertheless, this hypothesis has not been investigated for this region in isolation, and as
argued by Caprio and Klingebiel (2000), the link between credit growth and banking crises
diminishes when a broader sample is examined.
Since the mid-1990s, much empirical research has been devoted to exploring the causes
and characteristics of banking crises. Foreign bank entry has also been the subject of many
studies. However, since most research has considered the two subjects independently, we
hope to contribute to the literature by simultaneously examining the effect of foreign bank
entry on banking sector stability and probability of crisis.
2
See Díaz-Alejandro (1985), De Gregorio and Guidotti (1995), and Gavin and Hausman (1998), among
others.
2
With respect to banking crises, no consensus has been reached regarding the factors that
definitively contribute to the emergence of financial distress. As stated earlier, distortions in
the banking sector can contribute to macroeconomic instability; however, the causal arrow
may actually point in both directions, with some studies showing macroeconomic shocks to
be a central cause of banking crises. Alternatively, others find structural and institutional
characteristics of the financial sector to be more significant contributors to crises. In general,
debates such as this one are yet to be settled, making crisis prevention analysis nearly
impossible.
Demirgüç-Kunt and Detragiache (1998) find the domestic macroeconomic environment
to be of particular importance in predicting banking crises, noting that low growth, high
inflation, and high real interest rates often precede crises. Another study by Eichengreen
and Rose (1998) also takes a macroeconomic approach; however, the authors argue that
adverse external conditions, as opposed to domestic factors, play the most important role in
triggering emerging markets banking crises. Specifically, they find that a rise in industrial
country interest rates can precipitate a crisis due to developing country banking systems’
subsequent lack of access to international funds.
Several theoretical and empirical studies have examined the effect of the regulatory and
institutional environment on probability of crises and overall macroeconomic performance.
Corsetti, Pesenti and Roubini (1999) derive a model of financial crisis that focuses on moral
hazard as the common source of overinvestment, excessive borrowing, and current account
deficits in an economy with a poorly supervised and regulated financial sector. DemirgüçKunt and Detragiache (1999, 2002) argue that the relationship between financial liberalization, financial development and growth should be analyzed cautiously whenever prudential
regulation and supervision are not fully developed. Furthermore, they find evidence suggesting negative effects of financial development on growth for twelve Latin American countries,
and argue that the negative effect is the result of financial liberalization in a poor regulatory
environment.
3
Finally, Barth, Caprio and Levine (Barth et al, 2001) find that tighter restrictions on
bank activities and bank ownership increase the likelihood of crises; moreover, they find
that neither of these restrictions produces beneficial effects on financial development. The
importance of regulation could indicate that openness to foreign bank ownership might
prove beneficial to banking sector stability and macroeconomic performance, although this
connection has not been directly examined in the literature to date.
The main conclusion to be extracted from the aforementioned studies is that banking
crises likely result from a combination of factors: macroeconomic, institutional, domestic,
and international. In a region as volatile as Latin America, it is likely that macroeconomic
pressures make crises possible by placing tension on an already vulnerable banking system.
The question, then, is which aspects of the banking environment can be instrumental in
reducing volatility and susceptibility to macroeconomic pressures.
Openness to foreign bank ownership has been suggested as one factor that might contribute to reducing macroeconomic vulnerability in emerging market countries. In one of
the first panel studies on the issue, Martinez Peria, Powell, and Vladkova (Martinez Peria
et al., 2002) investigate the stability of foreign bank claims in Latin America and find that,
although banks may transmit shocks from their home countries, this effect becomes diminished as their exposure to the host country increases. They also find that foreign lending is
not necessarily curtailed during times of domestic instability and crisis.
Other studies have similarly shown that foreign bank presence in developing countries
plays a beneficial role in the stability of the domestic banking sector. For example, Caprio
and Honohan (2003) find use short term aggregate balance sheet data to show that banking
systems with greater foreign ownership are more stable when faced with macroeconomic
shocks. Similarly, Hermes and Lensink (2004) examine the effect of foreign bank entry on
domestic bank performance and find that for low levels of financial development, increased
foreign bank presence can increase the costs and margins of domestic banks, while for higher
levels of financial development, foreign banks tend to have the opposite effect. These studies
4
do not, however, directly investigate the link between foreign banks and banking crises.
Thus, we intend to build upon the existing literature by studying the effect of foreign banks
in Latin America with regard to financial sector instability and crisis.
The remainder of this paper is organized as follows. In Section 2 we further discuss the
role that the presence of foreign banks play in the development of financial markets; and
formalize the model to be estimated. Section 3 provides a description of the data set and
the main variables of interest; in particular, we focus on the distinction between financing by
foreign banks stemming from “brick and mortar” operations in local currency, and financing
denominated in foreign currency. In Section 4 we present and analyze our main findings: our
results suggest that, while “brick and mortar” operations of foreign banks in Latin American
countries significantly contribute to the reduction of the probability of a banking crisis, the
effect of direct foreign lending initiated outside the country is not a significant determinant
of financial distress. Finally, Section 5 concludes and explores some policy implications.
2
The Role of Foreign Bank Presence
As stated in the introduction, foreign bank entry could have both positive and nega-
tive effects on Latin American countries’ banking sectors.3 Foreign banks are a potentially
destabilizing influence on the domestic banking system for several reasons. Disturbances
stemming from the banks’ home economies might affect their behavior in the host country,
and foreign banks might retrench during domestic banking disturbances by shrinking operations in host countries or by withdrawing completely. Thus, foreign banks are thought
to stimulate capital flight due to a lack of commitment to the host country. Also, Lensink
and Hermes (2004) show that, at relatively low levels of economic development, foreign bank
entry is associated with higher costs and margins for domestic banks. Finally, as argued by
Stiglitz (1993), if the competition from foreign banks weakens domestic banks, monetary and
3
Claessens, S., A. Demirgüç-Kunt and E. Detragiache provide an exhaustive review on the effects of the
international expansion of banks.
5
regulatory authorities will be less able to affect bank behavior, as foreign banks will become
unresponsive to domestic credit needs.
Conversely, foreign banks may indeed contribute to greater banking sector stability in
several important ways. First, some believe that they are actually less affected by domestic
shocks, thereby providing more stable sources of financing during times of domestic disturbance than domestic banks. In this way, they certainly would not stimulate capital flight,
but rather would perform better than domestic banks during stressful times. Additionally,
foreign banks can be a good source of funds for recapitalization of banks in the aftermath
of a crisis. Finally, foreign banks usually bring advanced technologies to the host country,
which can lead to improvements in the domestic banking sector as a whole.4
Since theory on foreign bank entry in developing countries is inconclusive, empirical
analysis is essential in determining foreign banks’ effects on Latin American banking sector
stability. In general, we expect the results to show foreign banks to be a stabilizing force in
the region for several reasons. First, the argument that foreign banks might stimulate capital
flight due to negative host shocks has been refuted in several previous empirical studies of
emerging markets.5 These studies show that foreign claims are relatively stable during times
of domestic disturbance, indicating indeed that foreign banks might be more reliable than
domestic banks. Second, it has been empirically shown that foreign banks have become less
likely over time to transmit shocks from their home countries, as documented by Martinez
Peria, et al. (2002). Third, foreign bank entry into emerging markets with relatively less
developed financial sectors has been shown to improve domestic banking efficiency, thereby
improving the overall quality of the banking sector as argued by Demirgüç-Kunt and Detragiache (1998). Therefore, due to the compelling evidence supporting the view that foreign
banks can be a positive influence, we predict the results to indicate a negative correlation
between foreign bank presence and probability of a banking crisis.
In order to identify the effect of foreign bank presence on banking sector stability, we
4
5
For a more detailed discussion of these arguments, see Peek and Rosengren (2000).
See Martinez Peria, et al (2002), and Caprio and Honohan (2003) for an in-depth analysis.
6
follow the general model employed in several other previous analyses,6 and utilize a multivariate probability model with panel data. Specifically, we use a logit model in which the
probability of a systemic banking crisis is a function of multiple explanatory variables, including a measure of foreign bank influence. The general specification of the model is as
follows:
P r(Yit = 1) = F (αi + β 1 F oreignit + β 2 Creditit + β 3 Zit + εit ) ,
(1)
where F oreign is one of the measures of foreign bank presence, as described below; Credit
is a measure of credit growth; Z is a set of macroeconomic control variables; α represents a
country-specific effect; and ε is an error term.
In the first set of regressions, the dependent variable include all years for which a banking
crisis is in place. However, the behavior of some of the explanatory variables, such as
credit growth, GDP growth, and interest rate, is quite probably affected by a crisis, which
could skew the results. Thus, following Demirgüç-Kunt and Detragiache (1998), we run an
alternative set of regressions, where all years during which a crisis is ongoing are excluded.
We discuss this issue in more detail on Section 4.
3
Data Description
To determine years of financial crises, we use Caprio and Klingebiel’s 2003 World Bank
database, which identifies and dates 117 systemic banking crises, defined as all or much of
bank capital being exhausted, for the years 1970 through 2002. The crisis variable takes a
value of one if the country is experiencing the first year of a systemic crisis and zero otherwise.
In order to measure foreign bank presence, we use data from the Bank of International
Settlements (BIS) consolidated banking statistics, as detailed in the Data Appendix. Foreign
banks can provide financing to Latin American countries through two channels. The first
is to establish “brick and mortar” branches and subsidiaries inside the countries, providing
6
See, for example, Demirgüç-Kunt and Detragiache (1998), Eichengreen and Rose (1998), and Barth et
al (2001).
7
financing using local funding. The second is to directly finance from their headquarters
outside the region (Martinez Peria et. al., 2002). In order to capture both sources, we
run separate regressions using two different measures of foreign bank influence. The first,
which we denote by Local Foreign, is the amount of local claims of BIS reporting banks
denominated in local currency. This measure captures the local financing from “brick and
mortar” operations. Nevertheless, it includes not only claims on the private sector, but also
claims on the public sector, and it also excludes direct foreign lending in other currencies.
Finally, local currency claims represent less than half of total foreign claims and therefore
may not be an appropriate measure of foreign bank presence.
The second measure we include, denoted by International Foreign, is the amount of
international bank claims on the non-bank private sector. This measure reports cross-border
claims and claims on local residents denominated in foreign currencies and therefore includes
direct foreign lending. It is worthwhile to note that this measure excludes public sector
lending, and that it does not capture local currency lending by foreign banks’ “brick and
mortar” affiliates.
Finally, in order to control for macroeconomic factors, we include the real GDP growth
rate, CPI inflation, and nominal exchange rate devaluation. We also include a measure of
credit growth, which is given by the percent change in total credit to the private sector.
Finally, a trend variable is included to account for factors that are common to the countries
in our sample. The sources for this data are the World Bank Development Indicators and
the International Financial Statistics.
In general, our controls are similar to the ones commonly employed in several empirical
studies,7 with two principal differences. First, we employ bank liquidity (measured by the
ratio of bank reserves to bank assets) and the ratio of M2 to reserves as instruments for the
foreign bank presence variables, instead of using them directly as controls. Second, due to
data limitations, we do not include the results when controlling for the real interest rate,
7
See Demirgüç-Kunt and Detragiache (1998), and Buyukkarabacak and Valev (2006), among others.
8
the terms of trade, and the current account balance, since the sizeable reduction in the
sample poses a problem in terms of providing a direct comparison of the results. We further
elaborate these latter points in Section 4.
Combining the above described data sources results in a panel of 10 Latin-American
countries (that experienced banking crises), for a period of 23 years (i.e., between 1982 and
2004).8 In Section 4 we proceed to present and discuss the impact (if any) that foreign banks
have had in the onset or prevention of financial sector crises.
4
Results
4.1
Baseline Specification
We estimate the effect of foreign bank presence on the probability of a banking crisis using
a country-specific fixed effects logit estimation, since our specification tests provide us with
strong evidence to prefer the individual country effects over a pooled regression. We believe
that this is indicative of idiosyncrasies in the likelihood that a given country will experience
a period of financial distress. The main results of estimating equation (1) are presented in
Tables 2 through 5. The first three columns of Table 2 report the regression analysis using
the Local Foreign bank measure as the explanatory variable, while controlling for two lags
of private credit growth, GDP growth and a common time trend. Local Foreign appears in
all regressions with a negative and significant (to the 5% level) coefficient. This suggests
that brick and mortar operations by foreign banks can be a mitigating factor in the onset
of a potential banking crisis, consistent with the claim that a larger participation by foreign
banks in financing private credit may indeed contribute to greater banking sector stability.
Turning to the control variables, in all specifications the coefficient on real GDP growth
is negative and significant (at the 1% level), indicating that a boost in aggregate economic
8
Unfortunately, from the 12 countries listed on Table 1, the data on Colombia’s and Peru’s episodes could
not be used, since they experienced crises starting in 1982 and 1983, respectively.
9
activity may play a significant role in reducing the probability of crisis. However, even
though the coefficients on inflation and devaluation are positive (as expected), neither of
these factors appear to be significantly associated with a higher probability of financial
distress.9 These results suggest that the domestic macroeconomic environment is indeed
important in explaining crises, as argued by Demirgüç-Kunt and Detragiache (1998), with
real variables playing a more relevant role than nominal variables.
Finally, private credit growth is positively correlated with the probability of a crisis. Since
Latin America has not previously been considered in isolation, these results support recent
literature findings that suggest how credit booms might be of importance in prompting crises
in the region. Gavin and Hausman (1998) argue that periods of credit expansion can lead
to a decline in the quality of bank assets, which contributes to vulnerability by worsening
bank portfolios. This decline in asset quality is largely due to information problems: during
times of abundant credit, it might be more difficult for banks to distinguish between good
and bad credit risks. Additionally, the speed of portfolio growth during a lending boom
may further worsen banks’ information problems because managers may rapidly seek out
new clients about whom they have little information. Thus, credit booms can increase the
risk of banks’ portfolios, which contributes to instability and can ultimately lead to a crisis.
Noticeably, the effect of a lending expansion is largest and most significant when the credit
boom considered is the one taking place two years prior. This observation may indicate that
instead of a rapid boom and bust phenomenon, the accumulation of credit - and, tangentially,
the gradual worsening of bank portfolios - may take slightly longer to become visible and to
directly affect the banking system in the form of financial distress.10
The International Foreign regressions reported on Tables 3 and 5, however, provide less
9
Also, using a more restricted sample, we find evidence suggesting that the real interest rate is positively
and significantly correlated with a crisis, consistent with the theory that the banking system can be vulnerable
to interest rate shocks when the interest paid by banks on deposits increases, exceeding the rate of return
on assets. These results are available upon request from the authors.
10
We note that employing the one-lag or the two-lag private credit growth variables separately does not
change our main findings: The coefficients on Local Foreign and real GDP growth remain negative and
significant, while the effects continue to be largest when considering the two-lagged value of credit growth
versus the one-lagged value. These additional results are available upon request from the authors.
10
convincing support for the argument that foreign bank presence lowers the likelihood of a
crisis. International Foreign takes a positive sign in several of the specifications; however,
its coefficient is never significant. Thus, the effect of this type of foreign lending on the
probability of financial distress is less certain. These results are sensible when one considers
the differences between each of the measures of foreign presence. Since Local Foreign measures claims in local currency, it mostly captures foreign presence in the form of brick and
mortar operations within the host country. Intuitively, it is not surprising that this form
of foreign presence would be comparatively steadier, and thus contribute more to banking
sector stability, than direct cross border lending, which is captured best by International
Foreign. With regard to the theory, this latter type of lending by foreign banks is likely
easier to be withdrawn in stressful times. This is not to say, however, that this withdrawal
would definitely occur. Thus, although the results do not as strongly suggest that it is always
a stabilizing influence, direct cross-border financing is not necessarily destabilizing, either.
4.2
Robustness Exercises
We need to acknowledge that the extent to which foreign banking is present in an
economy may be affected by the onset of a banking crisis, thereby leading to potential
endogeneity problems. One option is for both Local Foreign and International Foreign to
enter the regressions with one- or two-year lags. Alternatively, we can employ an instrumental
variable approach to maintain the integrity of our model specification in equation (1). We
combine these two approaches and instrument for both foreign bank presence variables using
one- and two-year own lags, a one-year lag of real GDP growth, and control for differences
in the banking system: Bank liquidity and the ratio of M2 to reserves. The results of this
IV-approach are reported in columns 4 through 6 of Tables 2 and 3, for the Local Foreign
and International Foreign measures, respectively.
The IV-estimation reinforce our previous findings: Local Foreign presence remains a
significant (now at the 1% level) variable in reducing the probability of a banking crisis;
11
while the coefficient of International Foreign, even though it becomes positive and larger in
absolute terms, is still insignificant. The results on the control variables are also unchanged:
real GDP growth still enters the regression with a negative and significant coefficient, while
inflation and devaluation have no perceptible effect on the probability of financial turmoil.
Since determining the end date for a crisis period can be somewhat arbitrary, we perform
a robustness check by running another set of regressions in which all years during which a
crisis is ongoing are excluded. Tables 4 and 5 report analogous regression results to the ones
in Tables 2 and 3, respectively, but exclude observations during which crises are on-going.
The main findings are once again unchanged: While Local Foreign enters the regression with
a negative and significant sign, the coefficient on International Foreign remains insignificant.
This result also holds when employing the IV-estimation.
4.3
Implications
In general, the above results support the hypothesis that foreign bank entry in emerg-
ing markets can have positive effects on the domestic banking system. This hypothesis
states that foreign banks might constitute a more stable source of financing during domestic
macroeconomic disturbances and that they can improve domestic banks by bringing new
technology. Indeed, both of these effects would likely contribute to stability as a whole, as
indicated by the results. Conversely, the results does not find any evidence that foreign banks
can have destabilizing effects on the banking system by transmitting disturbances from their
home country or retreating during times of domestic disturbance.
In terms of policy implications, GDP growth and foreign bank presence, especially in the
form of brick and mortar operations, seem to be “blue flags” as to the prevention of a banking
crisis. The most relevant “red flag” for policy makers to monitor is rapid credit growth,
which is associated with a significant increase in the probability of a crisis in Latin America,
consistent with the findings of Demirgüç-Kunt and Detragiache (1998), and Buyukkarabacak
and Valev (2006) for a broader sample of countries. The fact that inflation and depreciation
12
are insignificant across all specifications seems to indicate that these variables are not as
relevant with respect to the prevention of financial distress in Latin American countries.
5
Conclusions
In this paper we address several questions with respect to the roots of Latin American
banking crises and the role played by foreign banks. In a region as volatile as Latin America,
low GDP growth and unsustainable private credit growth are contributing factors to potential
financial turmoil. However, we find that foreign banks can be a mitigating factor and be
instrumental in reducing the vulnerability of the domestic banking system, thereby lessening
the chance of a resultant crisis.
These findings must be interpreted with care, however, as the dependent banking crisis
variable might present certain problems. Because it is a discrete variable, it is impossible to
objectively and qualitatively distinguish between crises of varying extremity. All observations
are classified as either “crisis” or “no crisis”, and not in terms of their severity.
There are several important policy implications of these results. First, openness to foreign bank entry, especially in the form of brick and mortar operations, should be pursued
as a general policy objective. However, this openness should not be without qualifications.
Regulatory bodies should be careful and deliberate with respect to direct cross-border lending, which has a less certain effect on stability, at least until further studies on this topic are
conducted.
The second policy implication has to do with the credit growth results. Because high
credit growth is strongly associated with subsequent crisis, monetary policy should be conducted with an eye toward the speed of credit expansion. If central banks actively monitor
and address lending booms in order to slow the pace of credit growth, some future crises
might be avoided or alleviated. For example, Gavin and Hausman (1998) suggest that central bank adjustment of bank reserve or liquidity requirements might be beneficial during
13
Latin American credit booms, in order to oblige banks to expand their loan portfolios more
gradually.
We conclude that foreign banks have the potential of significantly improving domestic
banking stability and lessening the chance of a banking crisis, especially in the form of “brick
and mortar” operations within the country. More research should be done on the effect of
direct cross-border lending, so that its repercussions can be more definitively determined.
6
Appendix: Data Description and Sources
Local Foreign is defined as the ratio of local currency claims of reporting banks on
local residents to domestic credit provided by banking sector; while International Foreign
is defined as the ratio of total claims of international reporting banks to domestic credit to
private sector. The measure for Credit Growth is given by the growth of domestic credit
to the private sector as a percentage of GDP. GDP Growth, Inflation, and Depreciation are
given by the percent changes per year of the respective variables. Liquidity is given by the
ratio of bank liquid reserves to bank assets, while M2/Reserves is given by the ratio of M2
to gross international reserves.
All data were obtained from the World Bank Development Indicators and the International Financial Statistics, except for the Foreign Bank Presence Measures, which stem from
bank reports to the BIS.
14
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the World Bank Annual Conference on Development Economics, pp. 19—52.
17
Table 1: Episodes of Systemic Banking Crises in
Latin America and the Caribbean since 1982
Country
Start date(s)
Argentina
1989, 1995, 2001
Bolivia
1986, 1994
Brazil
1990, 1994
Colombia
1982
Ecuador
1996, 1998
El Salvador
1989
Jamaica
1994, 1995
Mexico
1994
Paraguay
1995
Peru
1983
Uruguay
2002
Venezuela
1994
Source: Caprio and Klingebiel 2003.
18
Figure 1: Local Currency Claims of BIS reporting banks on
Latin American residents (proportion of entire region’s
domestic credit provided by banking sector)
0.35
0.3
0.25
0.2
0.15
0.1
0.05
0
1983
1985
1987
1989
1991
1993
1995
Source: Own computations based on BIS and World Bank data
19
1997
1999
2001
2003
Table 2: Local Foreign Bank Measure (Country-specific fixed effects)
Local Foreign
(1)
(2)
(3)
-17.915
(0.03)
-17.388
(0.04)
-16.685
(0.04)
Local Foreign (IV)
(4)
(5)
(6)
-20.378
(0.03)
-19.316
(0.04)
-19.097
(0.04)
Credit Growth t-1
1.193
(0.41)
1.000
(0.59)
0.946
(0.55)
0.676
(0.64)
-0.030
(0.98)
0.091
(0.96)
Credit Growth t-2
5.162
(0.01)
5.066
(0.00)
4.887
(0.01)
4.557
(0.01)
4.227
(0.02)
4.083
(0.02)
GDP Growth
-0.230
(0.01)
-0.225
(0.01)
-0.213
(0.01)
-0.241
(0.00)
-0.228
(0.00)
-0.217
(0.01)
Trend
0.159
(0.10)
0.161
(0.09)
0.166
(0.09)
0.235
(0.05)
0.244
(0.04)
0.247
(0.04)
0.017
(0.82)
Inflation
0.048
(0.61)
Depreciation
Number of observations
Chi-statistic
0.057
(0.50)
0.086
(0.48)
192
192
192
176
176
176
25.86
(0.00)
25.91
(0.00)
26.26
(0.00)
22.91
(0.00)
23.43
(0.00)
23.89
(0.00)
Banking crisis dummy takes the value one if there is a crisis and zero otherwise. p-values are in
parentheses.
20
Table 3: International Foreign Bank Measure (Country-specific fixed effects)
International Foreign
(1)
(2)
(3)
-1.433
(0.51)
-1.420
(0.52)
-1.379
(0.53)
International Foreign (IV)
(4)
(5)
(6)
19.767
(0.55)
18.838
(0.58)
17.511
(0.60)
Credit Growth t-1
1.505
(0.28)
1.437
(0.31)
1.514
(0.28)
1.734
(0.18)
1.706
(0.20)
1.747
(0.18)
Credit Growth t-2
3.924
(0.01)
3.906
(0.01)
3.905
(0.01)
4.015
(0.00)
4.009
(0.00)
4.001
(0.00)
GDP Growth
-0.224
(0.00)
-0.222
(0.00)
-0.218
(0.00)
-0.205
(0.01)
-0.214
(0.01)
-0.200
(0.01)
Trend
0.008
(0.90)
0.012
(0.85)
0.014
(0.82)
-0.451
(0.54)
-0.428
(0.57)
-0.394
(0.60)
0.008
(0.78)
Inflation
0.012
(0.60)
Depreciation
Number of observations
Chi-statistic
0.004
(0.90)
0.009
(0.68)
195
195
195
192
192
192
16.99
(0.00)
17.05
(0.00)
17.20
(0.00)
16.94
(0.00)
16.95
(0.00)
17.08
(0.00)
Banking crisis dummy takes the value one if there is a crisis and zero otherwise. p-values are in
parentheses.
21
Table 4: Local Foreign Bank Measure (Country-specific fixed effects)
Excluding years of ongoing crisis
Local Foreign
(1)
(2)
(3)
-20.139
(0.01)
-19.173
(0.01)
-19.222
(0.01)
Local Foreign (IV)
(4)
(5)
(6)
-23.581
(0.01)
-22.347
(0.01)
-22.318
(0.01)
Credit Growth t-1
0.888
(0.68)
0.519
(0.82)
0.605
(0.79)
-0.215
(0.91)
-0.904
(0.69)
-0.716
(0.75)
Credit Growth t-2
5.934
(0.01)
5.537
(0.01)
5.618
(0.01)
5.413
(0.01)
4.731
(0.04)
4.880
(0.03)
GDP Growth
-0.385
(0.00)
-0.374
(0.00)
-0.371
(0.00)
-0.410
(0.00)
-0.391
(0.00)
-0.387
(0.00)
Trend
0.211
(0.04)
0.221
(0.03)
0.219
(0.03)
0.317
(0.01)
0.330
(0.01)
0.327
(0.01)
0.089
(0.60)
Inflation
0.075
(0.65)
Depreciation
Number of observations
Chi-statistic
0.131
(0.42)
0.109
(0.49)
161
161
161
148
148
148
32.28
(0.00)
32.64
(0.00)
32.56
(0.00)
30.50
(0.00)
31.39
(0.00)
31.15
(0.00)
Banking crisis dummy takes the value one if there is a crisis and zero otherwise (excluding the years of
ongoing crisis). p-values are in parentheses.
22
Table 5: International Foreign Bank Measure (Country-specific fixed effects)
Excluding years of ongoing crisis
International Foreign
(1)
(2)
(3)
0.596
(0.83)
0.593
(0.83)
0.616
(0.83)
International Foreign (IV)
(4)
(5)
(6)
45.056
(0.28)
44.600
(0.28)
44.533
(0.29)
Credit Growth t-1
2.441
(0.23)
2.485
(0.22)
2.509
(0.22)
3.088
(0.15)
3.088
(0.15)
3.095
(0.15)
Credit Growth t-2
4.440
(0.01)
4.412
(0.01)
4.413
(0.01)
4.133
(0.01)
4.133
(0.01)
4.132
(0.01)
GDP Growth
-0.311
(0.00)
-0.308
(0.00)
-0.306
(0.00)
-0.285
(0.00)
-0.285
(0.00)
-0.285
(0.00)
Trend
0.005
(0.93)
0.010
(0.88)
0.010
(0.88)
-0.977
(0.29)
-0.977
(0.29)
-0.976
(0.29)
0.008
(0.77)
Inflation
0.007
(0.75)
Depreciation
Number of observations
Chi-statistic
0.003
(0.92)
0.003
(0.91)
163
163
163
160
160
160
20.61
(0.00)
20.68
(0.00)
20.69
(0.00)
21.86
(0.00)
21.86
(0.00)
21.87
(0.00)
Banking crisis dummy takes the value one if there is a crisis and zero otherwise (excluding the years of
ongoing crisis). p-values are in parentheses.
23