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The Impact of Foreign Bank Penetration on the Transmission of Monetary Policy in Emerging Economies

Economic Research Institute (5432) 2009.01.19 3434

This paper examines the main implications of recently increasing foreign bank penetration on the transmission of monetary policy in emerging economies. By investigating the loan granting and deposit taking behavior of a total of 1273 banks in the emerging economies of Asia, Latin America, and Eastern and Central Europe during the period from 1996 to 2003, using the pooled OLS and panel VAR estimation, we find consistent evidence that, first, there exists a bank lending channel as an important transmission channel of monetary policy in the banking sector of the emerging economies, and second, foreign banks are less sensitive to monetary shocks in the host country, as they change their loans and deposits by less than domestic private banks do. We explore possible reasons for this asymmetric behavior and sensitivity to monetary policy shocks between domestic banks and foreign banks by investigating the home-country effect and different entry modes of foreign banks—.M&As and greenfield subsidiaries—.and suggest foreign banks’ access to the internal capital market for the reason. The paper also derives important policy implications of increasing foreign bank penetration in emerging economies in recent years.

K EYWORDS : foreign bank penetration; bank lending channel; monetary policy