Ilko Naaborg

How Important are Foreign Banks in the Financial Development of European Transition Countries

This article analyses the development of the banking sector in European transition countries. We find that, although bank assets increased during the 1990s, credit to the private sector remained relatively low. Foreign-owned banks have become major players in the financial system of these countries. However, foreign bank presence and financial development in general vary considerably among the transition economies. Foreign-owned banks have, in general, higher profitability levels than domestic banks. Furthermore, it appears that foreign and domestic bank performance tend to converge.

Does foreign ownership foster bank performance

We examine the effect of a rise in foreign ownership on banks’ interest revenues and profitability using panel data of banks worldwide. We determine the exact yearly foreign ownership for each bank and construct a continuous foreign ownership variable. Estimating with the system generalized methods of moments (GMM) technique we find that a rise in foreign ownership negatively affects bank performance, providing evidence for the home field advantage theory.

Banking in transition economies: does foreign ownership enhance profitability?

This paper studies the relationship between foreign ownership and bank performance. A cross-section of 216 banks in transition economies in Central and Eastern Europe and Central Asia is used. In the analyses a continuous foreign ownership variable is applied. The results are checked by using a foreign ownership dummy variable. A negative relationship is found between foreign ownership and banks’ interest revenues and profitability, although overhead costs are negatively related to foreign bank ownership as well. The results are independent of countries’ GDP per capita and concentration in the banking sector. Evidence is presented for the existence of a home field advantage for domestic banks.

Internal Capital Markets in Multinational Banks: Implications for European Transition Economies

We use focused interviews with bank managers to analyse how multinational banks use internal capital markets to control their subsidiaries. It is found that foreign bank affiliates are strongly influenced by the capital allocation and credit steering mechanisms of the parent bank. Parent banks generally set credit growth targets, which may then be supported by book capital and debt funding. This passive approach establishes a minimum amount of local book capital and is driven by regulatory considerations. In addition, some banks have started to use semi-active economic capital models. By charging subsidiaries for the use of economic capital, parent banks introduce a constraint at the individual loan level. This bottom-up approach determines the pace at which subsidiaries are able to meet their credit growth targets. Our findings suggest that the credit growth of subsidiaries may critically depend on the financial position of the parent bank.

A Comparative Study of Banks’ balance sheets in the European Union and European Transition Countries, 1995–2003

The banking sector in the new European Union Member States (NMS)1 has changed dramatically since the transition from centrally planned to market-based economies.2 In 1993, the ratio of average banking assets to gross domestic product (GDP) was 53 per cent, and this had increased to 72 per cent by 2000. However the banking sector in NMS is, however, still relatively small compared to the former European Union 15 (EU-15), for which the same ratio was 140 per cent in 2000. In NMS the level of bank intermediation is also low. In 2000, the ratio of private sector credit to GDP was less than 40 per cent, whereas in the euro area it was 100 per cent. A third distinguishing feature of NMS banks is that foreign investors now dominate ownership. In 1995, 8 per cent of banking assets were in foreign hands, and by 2002 this had increased to 88 per cent.3 In contrast, banks in the former EU-15 are mainly domestically owned or are traded on national stock markets.