The Impact of Credit by Multinational Banks in Developing and Transition Economies on Total Credit Supply

Financial market recommendations for less industrialized economies, particularly in the wake of the recent financial crises, have included a push for more international financial competition. The entry of multinational banks (MNBs) into developing economies is supposed to create more market discipline for domestic banks, thus making them more efficient, and enhancing financial stability. Using data from the BIS and the IMF, we look at the impact of MNBs on credit supply and on financial stability in less industrialized economies. MNBs focus their activities predominantly on serving MNCs, and on providing services that domestic banks cannot offer to domestic corporations, and high net worth individual. This increased competition in certain low risk market segments entices domestic banks to lower their credit exposure in the early stages of international financial competition. However, as MNBs continue to operate and to grow their market shares in less industrialized economies, domestic banks become more confident with the new competitive situation, eventually increasing their loans, especially to the enterprise sector. Both consequences of increased international financial competition - early credit crunches, and later credit growth - can have real implications in the form of lowered business investment or financial instabilities, unless adequate regulatory and supervisory structures are installed.