Foreign Banks in Poor Countries: Theory and Evidence

Costly information, entry, and credit access

“…More recent research focusing on the specific impact of foreign participation in domestic equity markets and foreign bank entry also reaches differing conclusions. For example, Bekaert, Harvey, and Lundblad [10] and Henry [36] find positive correlations between equity market liberalization and economic performance, whereas Detragiache, Tressel, and Gupta [24] and Gormley [32] find foreign bank entry to be negatively related to overall domestic credit. 2 The comparative advantage of entering lenders-a higher cost of screening but lower marginal cost of fundsfinds substantial support in both the theoretical and empirical literatures on foreign lender entry into LDCs (e.g., see Mian [42,43], Micco, Panizza, and Yañez [44], Stein [52]).…”

“…However, by assuming that incumbent lenders have perfect information about borrower types, neither of these papers is able to shed light on why segmented markets might induce declines in credit access. 3 While this possibility is explored in Detragiache, Gupta, and Tressel [24], this paper differs in that it can capture both cases where all firms benefit from entry and cases where some firms do not.…”

Lending to uncreditworthy borrowers

“…Recent studies suggest that the entry of outside lenders into credit markets can lead to "cream-skimming,"whereby outside lenders obtain a safer loan portfolio on entry, leaving inside lenders with the riskier clients (see Detragiache et al, 2008, and references therein). Detragiache et al, (2008) From an information perspective, cream-skimming appear counterintuitive.…”

Foreigners vs. Natives: Bank Lending Technologies and Loan Pricing

“…3 See also Detragiache, Gupta and Tressel (2008), Gormley (2014), andSengupta (2007). 4 Using a variety of techniques and samples, several studies document that foreign banks tend to shy away from smaller, more opaque borrowers (see, among others, Beck and Martínez Pería (2010) ;Berger, Klapper, Martínez Pería and Zaidi (2008) ;Berger, Klapper and Udell (2001) ;Clarke, Cull, Martínez Pería and Sanchez (2005); De Haas, Ferreira and Taci (2010) ;Detragiache, et al (2008); Gormley (2010);Mian (2006)).…”

“…4 Using a variety of techniques and samples, several studies document that foreign banks tend to shy away from smaller, more opaque borrowers (see, among others, Beck and Martínez Pería (2010) ;Berger, Klapper, Martínez Pería and Zaidi (2008) ;Berger, Klapper and Udell (2001) ;Clarke, Cull, Martínez Pería and Sanchez (2005); De Haas, Ferreira and Taci (2010) ;Detragiache, et al (2008); Gormley (2010);Mian (2006)). Others find that foreign banks are at least as likely to lend to small firms as domestic banks (see, among others, Berger, Rosen and Udell (2007) ;Clarke, et al (2005); Giannetti and Ongena (2009) ;Giannetti and Ongena (2012)) using transaction-based lending, consistent with survey evidence in De la Torre, Martínez Pería and Schmukler (2010) and Beck, Demirgüç-Kunt and Martínez Pería (2011).…”