How Do Foreign Banks Affect Private Credit Flows? A Global and Emerging Markets Perspective

This study examines how foreign banks affect private credit flows in 135 nations, including 57 emerging markets for 1995-2013. Employing different econometric techniques, I find both higher share of foreign banks and foreign assets to significantly reduce credit flows. Such decline in credit is highest in nations with more than 50 percent foreign banks. The findings support the view that foreign banks face informational asymmetries that hamper them from lending to the more informationally opaque firms. The results call for strengthening accounting standards, disclosure rules in host markets and for prospective foreign banks to modify their credit risk evaluation methods.