Foreign Banks and Credit Stability in Central and Eastern Europe: Friends or Foes? A Panel Data Analysis

We study whether foreign and domestic banks in Central and Eastern Europe have reacted differently to business cycle conditions and host country banking crises. Our unique panel dataset comprises data of more than 300 banks for the period 1993-2000, with detailed information on bank ownership and mode of entry. Our analysis shows that during crisis periods domestic banks contracted their credit and deposit bases, whereas foreign banks - especially greenfields - did not. Also, home country conditions matter for foreign bank growth, as there is a significant and negative relationship between home country economic growth and host country credit by foreign banks.