Emerging banks in foreign markets

As the recent financial crisis exemplified, the allocation of credit is a central determinant of economic growth. Entry by foreign banks into emerging markets could be beneficial if those banks are superiorly managed and extend loans to all borrower types, triggering a decrease in lending rates ("performance hypothesis"). Foreign banks however are often accused of "cherry picking" the best borrowers, and in general, of lending more to large transparent firms at the expense of small and medium sized enterprises (SMEs), implying a different portfolio composition ("portfolio composition hypothesis"). In a recent TILEC discussion paper, TILEC-AFM chairholder Hans Degryse and co-authors Olena Havrylchyk (CEPII Paris), Emilia Jurzyk (IMF), and Sylwester Kozak (National Bank of Poland) use a unique data set containing bank-specific information to explore this issue. The authors investigate the impact of the mode of foreign entry (greenfield or takeover) on banks' portfolio allocation to borrowers with different degrees of informational transparency, as well as by maturities and currencies. Their results are broadly in line with the portfolio composition hypothesis, showing that information about borrowers' type determines bank credit allocation.