Sovereign creditworthiness and bank foreign ownership. An empirical investigation of the European banking sector

This paper documents that sovereign creditworthiness could be a new dimension that explains foreign ownership in the banking sector. We employ consolidated financial results of the European Union (EU) member states over the period 2007–2021 and show that better sovereign credit ratings lead to an increase in foreign investments in the host country’s banking sector, as they may be linked with greater financial stability. Additional data on cross-country regulatory and supervisory practices show that this effect is mitigated in countries with tighter restrictions on banking activities and more independent supervisors. Results are robust to a wide range of cross-country banking, macroeconomic, and institutional conditions, and to alternative estimation methods that account for endogeneity. These findings bring new insights to the policy debate on banks’ foreign ownership and document new channels that may influence supervisors’ strategies regarding banking foreign direct investments.