Credit to Private Sector, Interest Spread and Volatility in Credit-Flows: Do Bank Ownership and Deposits Matter?

With bank-level data from 81 developing countries, the paper shows that increased foreign bank presence is associated with increased reliance on non-deposit based funding, which leads to higher interest rate spreads, less credit to the private sector, and higher volatility in bank loans. Foreign bank entry significantly reduces domestic banks ’ share of deposits while foreign banks typically allocate less of their assets and deposits to lending. As domestic banks lose their deposit base, they rely on non-deposit based funding, but its higher costs and uncertainty force domestic banks to reduce their lending activities