This paper presents recent trends in bank ownership across countries and summarizes the evidence regarding the implications of bank ownership structure for bank performance and competition, financial stability, and access to finance. The evidence reviewed suggests that foreign-owned banks are more efficient than domestic banks in developing countries, promote competition in host banking sectors, and help stabilize credit when host countries face idiosyncratic shocks. But there are tradeoffs, since foreign-owned banks can transmit external shocks and might not always expand access to credit. The record on the impact of government bank ownership suggests few benefits, especially for developing countries.

The authors may be contacted at rcull@worldbank.org. This paper presents recent trends in government and foreign bank ownership across countries and summarizes the evidence regarding the implications of bank ownership structure for bank performance and competition, financial stability, and access to finance. The evidence reviewed suggests that foreign-owned banks tend to be more efficient than domestic banks in developing countries, promote competition in host banking sectors, and help stabilize credit when host countries face idiosyncratic shocks. But there are trade-offs, since foreign-owned banks can also transmit external shocks and might not always contribute to expanding access to credit. The record on the impact of government bank ownership suggests few benefits, especially for developing countries.

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Sovereign rating-an assessment of the relative likelihood of a country defaulting on its fi nancial obligations-is important not only because better ratings facilitate external borrowing at favourable rates of interest, but also for the impetus it gives to the development of domestic fi nancial markets in an emerging economy. Assessing the role of various macroeconomic factors infl uencing India's sovereign rating, our preliminary analysis indicated that while upgrading India's sovereign rating since 2003-04 both Standard andPoor's and Moody's apparently taken, high GDP growth, rising foreign reserves, declining fi scal defi cit and rising exports into account, but the economic rational for downgrading the rating between 1998 and 2002 is not very convincing. The econometric analysis, using an ordered probit model, did not fi nd strong statistical support for several relevant macroeconomic indicators in the determination of India's sovereign ratings. Could a major part of the explanation have come from some other sources, such as qualitative social and political considerations? India's relatively low sovereign ratings compared to its peers raises questions about rating agencies appropriately accounting for India's excellent economic performance in recent years; its formidable record of serving all external liabilities on time; and factors related to political stability and the social fabric of unity amidst diversity. Had these factors been taken into account appropriately, perhaps India's rating would have been better refl ective of reality.

IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

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