From Reputation amidst Uncertainty to Commitment under Stress: More than a Decade of Foreign-Owned Banking in Transition Economies

The banking landscape in the European transition economies (TEs) provides an excellent laboratory for evaluating the net benefit of foreign bank penetration in emerging market economies. The speed and depth of foreign bank entry into these countries is without historical precedent; high growth rates in retail lending, fuelled in some cases by foreign-exchange (FX)-denominated loans, preceded the global financial crisis in many TEs. The hybrid organisational form created by foreign banks acquiring controlling shares of formerly state-owned domestic banks during the bank privatisation process is a crucial ingredient to any analysis. A selective review of the empirical literature on banking in TEs indicates that parent banks treat greenfield subsidiaries as parts of an international portfolio, whereas they make a long-term commitment to their hybrids. In about half of the 10 countries considered in this article, some risk of contagion via the banking channel is identified from a structural analysis. Nonetheless, preliminary evidence suggests that the parent foreign banks maintained their commitment to the region in the midst of the recessions brought on by the global financial crisis.