Foreign banks and credit conditions in EMEs

A large literature assesses the benefits that foreign banks bring to emerging market economies (EMEs), drawing evidence from datasets that track the ownership of banks located in a particular country. Similarly, previous work has demonstrated that crossborder credit – both direct cross-border credit and indirect cross-border credit that is routed via resident banks – fuelled the boom-bust credit cycle in EMEs around the 2007?09 financial crisis. This paper explores this credit cycle from a different perspective, using a dataset that simultaneously delineates between bank ownership and the location of the borrowers. This helps to isolate the share of total bank credit – which includes domestic credit and cross-border credit to non-banks – that is provided by foreign banks, a measure that is not possible to construct using the standard ownership datasets. The results suggest that cross-border credit did exacerbate the credit cycle, but that foreign banks did not necessarily have a destabilising effect since their local operations (ie local lending funded in the local currency) were a source of stability. In short, what matters is the type of bank claim rather than bank ownership.