XXV Edition

1-2 December 2016"

Stability of Banking Sectors in Cesee Countries. Is Foreign Capital Like a Mother Hen?

Iwanicz-Drozdowska Małgorzata, Warsaw School of Economics
Smaga Paweł, Warsaw School of Economics and National Bank of Poland
Witkowski Bartosz, Warsaw School of Economics

We investigate whether foreign ownership in the banking sector is a key determinant of its stability in Central, Eastern and South-Eastern European (CESEE) countries, as there is no consensus in the current literature on emerging markets. To this end, we introduce a financial strength index (FSI) as a proxy for financial stability. Binary regressions for both pooled and panel data are used to model bank- and country-level data for 20 CESEE countries from 1995 to 2014. We find that there is no significant direct link between the share of foreign-owned banks and stability in CESEE banking sectors, which is, instead, dependent on banks’ credit policies, banks’ balance sheet structures, and the growth of the banking sector, irrespective of the type of ownership. We argue that it is economic development that drives financial stability in CESEE countries, increases the penetration of foreign banks and encourages them to expand through the pursuit of aggressive credit policies. Such policies, rather than the share of foreign capital per se, may, in turn, have negative impacts on financial stability.

Area: Financial Stability

Keywords: financial stability, foreign capital, CESEE, global financial crisis, subsidiary

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