The Role of Foreign Banks in Emerging Markets - World Bank

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The Role of Foreign Banks in Emerging Markets - World Bank

The Role of Foreign Banks

in Emerging Markets

Donald J. Mathieson and Jorge Roldos

International Monetary Fund

May 2001


D ependent V ariable

Table 2. Entry of Foreign Banks (Annual Data) 1

Foreign

Participation

(FP)

Foreign Control

(50 Percent Ownership)

(F50)

C oefficient

0 9.742 10.518 11.660

(4.520) (4.636) (5.319)

1 0.396 0.527 0.485

(0.163) (0.167) (0.191)

2 0.170 0.169 0.178

(0.112) (0.115) (0.132)

3 0.871 1.061 1.016

(0.502) (0.515) (0.590)

4 9.160 11.125 9.932

(4.099) (4.205) (4.824)

5 -0.006 -0.009 -0.009

(0.004) (0.004) (0.005)

6 1.589 1.448 1.444

(0.726) (0.744) (0.854)

7 (A sia) 2 -10.417 -15.104 -14.864

(4.949) (5.076) (5.82)

8 (Central Europe) 3 24.086 22.998 36.889

(6.406) (6.571) (7.538)

Foreign Control

(40 Percent Ownership)

(F40)

R 2 .721 .746 .768

2

R − .609 .644 .676

1/ Standard errors in parentheses

2/ Equal to one for each Asian country in both 1994 and 1999; zero otherwise.

3/ Equal to one for each Central European country in 1999; zero otherwise.


(1) F i = 0 + 1 (ROED – ROEF)

+ 2 (CID – CIF) + 3 (NPLD – NPLF)

+ 4 CRISIS

+ 5 INFL + 6 GDPCH + regional dummies

GDPCH =

average real rate of growth of GDP in previous three years

Where,

F i =

measures of foreign control and participation

(F50= proportion of total bank assets held in banks where foreign owners hold

more than 50 percent of the banks’ equity)

(F40= proportion of total bank assets held in banks whose foreign owners

hold more than 40 percent of the banks’ equity.)

(FP= scale of foreign participation—proportion of banks system assets owned

by foreigners)

ROED =

ROEF =

CID =

CIF =

NPLD =

NPLF =

CRISIS =

INFL =

average rate of return on equity of banks owned by domestic residents

in previous three years

average rate of return on equity of banks owned by foreign residents in

previous three years

average ratio of operating costs to net income of banks owned by

domestic residents in previous three years

average ratio of operating costs to net income of banks owned by

foreign residents in previous three years

average ratio of nonperforming loans to total assets of banks owned by

domestic residents in previous three years

average ratio of nonperforming loans to total assets of banks owned by

foreign residents in previous three years

existence of a banking crisis in the preceding three year period

average rate of inflation in previous three years


Table 3. Bank Performance Indicators in Selected Emerging Markets (1996-98)

Return on Equity

Cost-to-Income Ratio

Problem Loans/Total Loans

Foreign banks 1 Domestic banks Foreign banks Domestic banks Foreign banks Domestic banks

Central Europe

Czech Republic 14.4 -1.6 70.9 40.5 18.8 28.5

Hungary 16.1 -26.0 62.4 113.0 10.6 15.1

Poland 24.1 -0.1 50.9 59.9 11.1 9.2

Total 19.3 -5.0 59.9 62.1 13.7 17.1

Turkey 68.3 29.8 39.0 48.2 6.1 4.1

Latin America

Argentina 5.8 -0.7 73.4 76.9 5.7 17.3

Brazil 10.4 5.2 73.3 68.8 7.5 7.6

Chile 10.9 14.9 59.8 64.4 1.9 1.5

Colombia 2.7 1.7 70.6 69.1 5.4 6.8

Mexico -14.3 -2.1 112.3 78.5 4.1 8.7

Peru 14.9 10.8 64.8 80.5 6.0 13.2

Venezuela 40.6 38.2 56.3 64.6 3.9 4.1

Total 6.3 4.7 77.9 71.2 6.1 8.5

Total excluding Brazil and Mexico 9.9 7.5 67.5 71.9 4.5 10.4

Asia

Korea -44.2 -20.0 53.7 69.2 15.1 8.6

Malaysia 16.4 7.8 34.7 42.6 6.8 8.4

Thailand -66.1 -20.2 128.9 72.0 46.2 36.5

Total -35.7 -14.3 63.8 64.2 19.2 13.8

Source: IMF staff estimates based on data from Fitch IBCA's BankScope Database.

1

Foreign banks are those where foreign institutions own more than 50 percent of total equity (see Table 1).

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