Does Foreign Ownership Contribute to Sounder Banks in Emerging Markets? The Latin American Experience

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Does Foreign Ownership Contribute to Sounder Banks in Emerging Markets? The Latin American Experience

September 2001 Number 137

JEL classification: F3, F4

Authors: Jennifer S. Crystal, B. Gerard Dages, and Linda S. Goldberg

Foreign bank entrants into emerging markets are usually thought to improve the condition and performance of acquired institutions, and more generally to enhance local financial stability. We use bank-specific data for a range of Latin American countries since the mid-1990s to address elements of this claim. Across the seven largest countries, we find that the financial strength ratings of local banks acquired by foreign entities generally show a slight improvement relative to their domestic counterparts. Our more in-depth case studies of Chile, Colombia, and Argentina do not indicate striking differences in health between larger foreign and domestic retail-oriented banks (although state banks are noticeably weaker). However, foreign banks often have higher average loan growth, higher average provisioning expense, and greater loss-absorption capacity. These results suggest that foreign ownership may provide important positive influences on the stability and development of emerging market banking systems.

Available only in PDF PDF

50 pages / 129 kb

For a published version of this report, see Jennifer Crystal, Linda Goldberg, and B. Gerard Dages, "Does Foreign Ownership Contribute to Sounder Banks? The Latin American Experience," in R. Litan, M. Pomerleano, P. Masson, eds., Open Doors: Foreign Participation in Emerging Financial Systems. Washington DC: The Brookings Institution: 217-66.

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