Premium
Foreign Banks in Poor Countries: Theory and Evidence
Author(s) -
DETRAGIACHE ENRICA,
TRESSEL THIERRY,
GUPTA POONAM
Publication year - 2008
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.2008.01392.x
Subject(s) - loan , business , financial system , developing country , portfolio , monetary economics , bank credit , sample (material) , welfare , empirical evidence , economics , international economics , finance , economic growth , market economy , philosophy , chemistry , chromatography , epistemology
We study how foreign bank penetration affects financial sector development in poor countries. A theoretical model shows that when domestic banks are better than foreign banks at monitoring soft information customers, foreign bank entry may hurt these customers and worsen welfare. The model also predicts that credit to the private sector should be lower in countries with more foreign bank penetration, and that foreign banks should have a less risky loan portfolio. In the empirical section, we test these predictions for a sample of lower income countries and find support for the theoretical model.