Foreign Banks and Foreign Currency Lending in Emerging Europe

Based on survey data from 193 banks in 20 countries we provide the first bank-level analysis of the relationship between bank ownership, bank-funding and foreign currency (FX) lending in Emerging Europe. Our results contradict the widespread view that foreign-owned banks have been driving FX lending to retail clients throughout Eastern Europe as a result of easier access to cross-border wholesale funding. First, our cross-sectional analysis shows that foreign banks do lend more in FX to corporate clients but not to households. Moreover, we find no evidence that wholesale funding had a strong causal effect on FX lending for foreign or domestic banks. The correlation between wholesale funding and FX lending at the bank level is weak, and if anything, wholesale funding seems to be a result rather than a determinant of FX lending. Panel estimations show that foreign acquisition of a domestic bank does lead to faster growth in FX lending to households. However, this effect is driven by faster growth in household lending per se, and not by a redirecting of household credit from domestic to foreign currency. At the country level our results suggest that FX lending is driven by long-term macroeconomic stability rather than contemporaneous monetary conditions. For both domestic and foreign banks the proportion of FX lending depends on a country's inflation history, distance to EU accession, and level of deposit "euroisation". Both types of banks let their share of FX lending converge to the country mean during our sample period. Finally, we find no evidence that easier access to foreign funding let foreign banks expand their FX lending faster or stimulated domestic banks to expand their FX lending faster. [http://ideas.repec.org/p/ebd/wpaper/122.html http://ideas.repec.org/p/ebd/wpaper/122.html]