Mariassunta Giannetti

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Lending by ExampleDirect and Indirect
Effectsof Foreign bank Presence in Emerging
Markets

• Mariassunta Giannetti
• Stockholm School of Economics, CEPR ECGI
• Steven Ongena
• CentER Tilburg University CEPR

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Limits to Financial Integration?

• Financial development is key for growth (Levine,
  2005)
• Financial integration spurs financial development
• Limits to financial integration?
• Equity market liberalization reduces cost of
  capital only for large firms (Chari Henry, JF
  2004)
• Information asymmetries and weak creditors rights
  may hamper bank lending (Khwaja, Mian Zia,
  2007)
• Effect more pronounced for foreign banks lending
  to opaque borrowers (Mian, JF 2006)

? Credit to private sector may be even lower in
countries with widespread foreign bank
presence (Detragiache, Tressel Gupta, JF 2008)
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What about the Indirect Effects?

• Foreign banks may poach transparent /
  creditworthy firms
• Domestic banks can increase lending to opaque
  firms (DellAriccia Marquez, JFE 2004)
• More competition
• Domestic banks can reduce costs and select better
  borrowers, i.e. drop subsidized connected
  borrowers
• Removal of restrictions to foreign banks sharpens
  threat of take-over
• Domestic bank management improves lending
  policies
• No existing empirical evidence on the importance
  of the indirect effects for the real sector

? This paper
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This Paper

• Novel dataset with firm bank relationships
• Mostly unlisted firms
• Emerging markets experiencing substantial changes
  in foreign bank presence? 13 Eastern European
  Economies
• Which firms engage foreign banks?
• Complements the findings for India (Berger,
  Klapper, Soledad Martinez Peria Zaida, JFI
  2007)
• Dynamics of firm bank connections
• Direct and indirect effects of foreign bank
  connections on firms performance and access to
  funding

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Findings

• Large and foreign firms have relationships with
  foreign banks
• Foreign banks dont drop firms, even during the
  first three years after acquisition of domestic
  bank
• Except for state-owned firms.
• Acquired banks shift to younger and more
  productive firms.
• Foreign banks appear to allocate funds better.
• If foreign bank presence is limited, firms with
  foreign banks borrow, invest and prosper more. If
  foreign bank presence is widespread, all firms
  (benefit) the same.

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Related Empirical Literature

• Foreign bank presence, firm performance and
  access to credit
• Giannetti Ongena (RoF 2008) If foreign bank
  presence is more pervasive, young and unconnected
  borrowers have access to cheaper and larger
  loans, and perform better
• No information on bank firm relationships
  Impossible to distinguish direct and indirect
  effects of foreign banks
• Domestic Bank Consolidation
• Two new questions
• Do foreign and domestic consolidations lead to
  similar effects?
• Effects of consolidation on performance of small
  firms
• Particularly related to
• Reduction in small business lending more than
  offset by lending by other local banks (Berger,
  Saunders, Scalise Udell, JFE 1998)
• Relationship terminations / cost of credit
  (Sapienza, JF 2002)
• Credit allocation / firm performance (Karceski,
  Ongena Smith, JF 2005)
• Domestic Deregulation
• After US deregulation of bank branching, bank
  loan losses and loan rates decrease (Jayaratne
  Strahan, JLE 1998)

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Dependent Variables
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Independent Variables
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Perfomance effects
The nearest-neighbor with replacement propensity
score methodology (Dehejia and Wahba, REStat 2002)
Within-country comparison
Cross-country comparison
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Interpretation

• If foreign bank presence is limited, firms with
  foreign banks borrow, invest and prosper more.
• ?Positive direct effect
• If foreign bank presence is widespread, all firms
  (benefit) the same.
• ? Positive direct and indirect effects

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Preliminary Conclusions

• Large and foreign firms have relationships with
  foreign banks
• Foreign banks dont drop firms, even during the
  first three years after acquisition of domestic
  bank
• Except for state-owned firms.
• Acquired banks do shift towards younger and more
  productive firms.
• Foreign banks appear to allocate funds better.
• If foreign bank presence is limited, firms with
  foreign banks borrow, invest and prosper more. If
  foreign bank presence is widespread, all firms
  (benefit) the same.