Multinational banks and credit growth in transition economics

Abstract

This thesis examines the impact of multinational banks (MNBs) on the financial development of European transition countries. On the basis of our results, we conclude that the gradual deepening of the banking systems in Central and Eastern Europe and the Baltic countries (CEB) has enabled firms to get closer to the financing structures they deem optimal. Moreover, the structural increase in the amount of bank credit to the CEB business sector has not been accompanied by an increase in the volatility of this funding source. The large-scale entry of MNBs has had a stabilising influence on the total credit supply in the CEB region. This conclusion holds especially for greenfield MNBs, which expanded credit during crisis periods (when domestic banks reduced their lending). Taken together with the observation from the existing literature that MNB entry has increased the efficiency of the CEB banking systems, our results thus show that financial globalisation has as yet not been characterised by a trade-off between banking efficiency and banking stability in transition economies. Note, however, that cross-border financing by MNBs has been more volatile than lending by MNB subsidiaries. This reflects the long-term commitment of those MNBs that decided to set up bricks-and-mortar operations in the region, as compared to the shorter timescale of international banks operating cross-border.

Our findings also point out that privatising domestic banks to foreign strategic investors does not transform these banks into foreign banks overnight. Over a substantial period following a takeover, former domestic banks behave more like domestically owned banks than greenfield MNBs. Also, differences between parent banks’ strategies with regard to their CEB affiliates are substantial. As an example, our interview results show that headquarters differ considerably with regard to the degree of independence they afford their local subsidiaries. Some banks have fully integrated local affiliates into a group-wide treasury, while other parent banks allow their subsidiaries to fund themselves largely independently. This is also reflected in our econometric results, which show that greenfield subsidiaries are sensitive to both home-country economic growth and parent-bank health, whereas takeover subsidiaries do not react to changes in these variables.

With regard to the composition of bank credit, we find no support for the often-heard hypothesis that MNBs do not lend to SMEs. In contrast, MNBs have exploited their competitive advantage in screening and monitoring techniques, risk management and marketing by exporting this know-how to their CEB subsidiaries. This process is increasingly also benefiting smaller customers. At the same time, however, it should be acknowledged that our analysis in Chapter 4 shows that, in Bulgaria, the Czech and Slovak Republics and Poland, small firms have become more underleveraged after the financial crises during the second half of the 1990s. This shows that, while MNBs have recently and gradually started to increase their credit supply to SMEs, this development is not as yet evident in all countries in the region.