The Presence of Multinational Banks and the Supply and Quality of Credit in Emerging Economies

Barriers to entry for multinational banks (MNBs) have been reduced in many countries. This paper studies the effect of the presence of MNBs on the supply and quality of credit in emerging economies. This study uses data from the Bank for International Settlements and the International Monetary Fund. The results indicate that the credit supply declines in response to increased competition from MNBs. However, the adverse effect of MNBs on the credit supply is less pronounced when the presence of MNBs is larger. The paper also provides some tentative results on the effect of MNBs on the quality of loans. The results suggest that banks shift their portfolios away from loans as a result of increased international financial competition, thereby reducing default risk, which is also reflected in a negative relationship between MNB presence and the chance of a banking crisis occurring.