The Supply of Credit by Multinational Banks in Developing and Transition Economies: Determinants and Effects

The entry of multinational banks (MNBs) into the developing and transition economies is expected to create more market discipline for domestic banks, thus making them more efficient and enhancing financial stability. But is this the case? Using data from the Bank for International Settlements and the International Monetary Fund, I first try to determine which factors tend to increase MNB lending activity in emerging economies and then I look at the impact of MNBs on credit supply (and informally on financial stability) in a substantial sample of economies. I conclude that domestic banks respond to increased MNB competition for the low-risk segment of the market with lower overall lending (measured as a ratio to GDP), especially in the early stages of international financial competition. However, when MNBs have acquired a large market share, domestic bank lending tends to rise with, or complement, MNB lending, in particular to the enterprise sector.