Foreign Bank Activity and Economic Growth: Assessing the Direct Link and Volatility Effects*

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Foreign Bank Activity and Economic

Growth: Assessing the Direct Link and

Volatility Effects*

August 2007

Keywords: foreign bank activity, economic growth, credit growth, volatility

Author

Supervisor

R.J.J. Hartsuiker

Dr. D.J. Bezemer

s1576720

Faculty of Economics

De Kap 127, 7891 LR

Landleven 5, 9747 AD

Klazienaveen, The Netherlands

Groningen, The Netherlands

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A. Data Appendix

Real GDP per capita: a country’s GDP divided by the size of its population measured in

international $ and based on in 2000 constant prices (PPP converted). Source: RGDPCH from

Penn World Tables Version 6.2 (RGDPCH is a chain index obtained by first applying the

component growth rates between each pair of consecutive years, t-l and t, to the current price

component shares in year t-1 to obtain the per capita domestic currency (DA) growth rate for

each year. This DA growth rate for each year t is then applied backwards and forwards from

2000, and summed to the constant price net foreign balance to obtain the Chain GDP series).

Foreign bank asset share: the share of banking sector assets held by foreign banks in a

country. Source: Bank Ownership and Performance Dataset by Micco et al. (2005).

Banking sector concentration: the asset share of the three largest banks. Source: Bank

Ownership and Performance Dataset by Micco et al. (2005).

Overhead costs: the accounting value of a bank’s overhead costs as a share of its total assets

(calculated as the average for all country banks in a given year). Source: Bank Ownership and

Performance Dataset by Micco et al. (2005).

Profit before tax: the accounting value of a bank’s profit before taxes as a share of its total

assets (calculated as the average for all country banks in a given year). Source: Bank

Ownership and Performance Dataset by Micco et al. (2005).

Net interest margin: the accounting value of a bank’s net interest revenue as a share of its

interest-bearing (total earning) assets (calculated as the average for all country banks in a

given year). Source: Bank Ownership and Performance Dataset by Micco et al. (2005).

Credit volume: domestic credit to the private sector as a ratio to GDP. Source: World Bank

World Development Indicators 2006.

Inflation: rate at which prices increase measured by the GDP deflator (GDP deflator is a

price index measuring changes in prices of all new, domestically produced, final goods and

services in an economy. It is also known as the “GDP implicit price deflator.” It is expressed

as a ratio of nominal GDP to real GDP and it is used as a measure of general inflation in the

domestic economy). Source: World Bank World Development Indicators 2006.

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are based on in 2000 constant prices measured in international $). Source: KG from Penn

World Tables Version 6.2.

Trade openness: net exports as a ratio to GDP (shares are based on in 2000 constant prices

measured in international $). Source: OPENK from Penn World Tables Version 6.2.

Number of telephone mainlines per 1,000 people: proxy for public capital stock (telephone

mainlines are telephone lines connecting a customer's equipment to the public switched

telephone network). Source: World Bank World Development Indicators 2006.

Political risk: an index compiled out of 12 components (weight in terms of maximum number

of points is given between brackets): government stability (12), socioeconomic conditions

(12), investment profile (12), internal conflict (12), external conflict (12), corruption (6),

military in politics (6), religion in politics (6), law and order (6), ethnic tensions (6),

democratic accountability (6) and bureaucratic quality (4). Source: ICRG Researchers Dataset

from Political Risk Services.

GDP volatility: the standard deviation of four quarterly GDP data series per country

measured in mln. LCU (local currency units). This means that volatility is measured on a

yearly basis. Source: IMF International Financial Statistics.

Financial sector development: credit to the private sector as a ratio to GDP. Source: World

Bank World Development Indicators 2006.

Money and quasi-money: M2 as a ratio to GDP. Source: World Bank World Development

Indicators 2006.

Exchange rate volatility (terms of trade shocks): the absolute value of the change in the

real effective exchange rate (the real effective exchange rate is a measure of country

competitiveness). It is presented in index form

1

. Source: Economist Intelligence Unit (EIU)

World Data Series

Population: number of inhabitants (× 1,000). Source: POPUL from Penn World Tables

Version 6.2.

1_{The index rises if domestic costs or prices increase faster than foreign costs or prices. Thus, a larger index}

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Table A1: Sample Specification – Direct Effect

Argentina Czech Republic Jamaica Nicaragua Sudan

Armenia Denmark Japan Nigeria Sweden

Australia Dominican

Republic Jordan Norway Switzerland

Austria Ecuador Kazakhstan Oman Tanzania

Azerbaijan Egypt, Arab Rep. Kenya Pakistan Thailand

Bahamas, The El Salvador Korea, Rep. Panama Trinidad and Tobago

Bahrain Estonia Kuwait Papua New Guinea Tunisia

Bangladesh Ethiopia Latvia Paraguay Turkey

Belarus Finland Lebanon Peru Uganda

Belgium France Lithuania Philippines Ukraine

Bolivia Germany Luxembourg Poland United Arab

Emirates

Botswana Ghana Madagascar Portugal United Kingdom

Brazil Greece Malawi Romania Uruguay

Bulgaria Guatemala Malaysia Russian Federation United States

Burkina Faso Honduras Mali Saudi Arabia Venezuela, RB

Cameroon Hong Kong, China Malta Senegal Vietnam

Canada Hungary Mexico Sierra Leone Yemen, Rep.

Chile Iceland Moldova Singapore Zambia

Colombia India Morocco Slovak Republic Zimbabwe

Costa Rica Indonesia Mozambique Slovenia

Cote d'Ivoire Ireland Namibia South Africa

Croatia Israel Netherlands Spain

Cyprus Italy New Zealand Sri Lanka

Source: author’s table

Based on the World Bank Income Classification, the sample includes 76 developing countries (24 upper middle income countries, 29 lower middle income countries and 23 low income countries) and 35 developed countries (24 OECD-countries and 11 non-OECD countries).

Table A2: Sample Specification – Volatility Effect

Argentina Colombia Indonesia Malta Romania

Armenia Cyprus Israel Mexico Russian Federation

Australia Czech Republic Japan Morocco Slovak Republic

Belarus Denmark Jordan Namibia Slovenia

Botswana Ecuador Kazakhstan New Zealand South Africa

Brazil Estonia Korea, Rep. Norway Switzerland

Bulgaria Hong Kong, China Latvia Peru Thailand

Canada Hungary Lithuania Philippines Turkey

Chile Iceland Malaysia Poland United States

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B. Descriptive Statistics and Correlations

Table B1: Descriptive Statistics – Direct Effect

Variable Mean Standard

Deviation Min Max

Log difference of GDP per capita 0.020603 0.044441 -0.183664 0.450530 Initial GDP per capita (in logs) 8.818385 1.103109 6.186147 10.78361 Foreign bank asset share (in 1+ logs) 0.202066 0.185622 0.000000 0.688235 Credit volume (in logs) 3.601381 1.001885 0.473585 9.665341 Trade openness (in logs) 4.281311 0.574986 2.837323 5.949470 Inflation rate (deviation of the rate from 1, in logs) -0.107691 0.209330 -2.055888 0.210900 Political risk (in logs) 3.287037 0.478843 1.365241 4.288174 Government expenditure level to GDP (in logs) 2.940278 0.405667 1.383791 4.092510 Main telephone lines per 1,000 people (in logs) 4.634968 1.640957 0.525639 6.686254 Net interest margin (deviation of the rate from 1, in logs) -0.039020 0.028142 -0.192593 0.091226 Overhead costs (deviation of the rate from 1, in logs) -0.037802 0.026717 -0.274043 -0.001218 Before tax profit (deviation of the rate from 1, in logs) -0.015607 0.026734 -0.182322 0.407089

Table B2: Descriptive Statistics – Volatility Effect

Variable Mean Standard

Deviation Min Max

GDP volatility (in logs) 9.253952 3.159467 2.259079 17.06171 Foreign bank asset share 0.255210 0.243729 0.000000 0.922222 Banking sector concentration 0.589798 0.183584 0.167564 0.986828 Financial sector development 67.25331 52.76093 6.938994 235.1112

Trade openness 88.91543 52.74560 18.05000 299.2000

Political risk 26.84236 11.38312 6.750000 56.16667

Money growth 59.48686 41.04830 10.40524 240.4783

Terms of trade shocks -0.388342 9.533529 -66.06070 29.16400

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Table B2: Bivariate Correlations (Common Sample) – Direct Effect

Log differ-ence of GDP per capita Initial GDP per capita (in logs) Foreign bank asset share (in 1+ logs) Credit volume (in logs) Trade open-ness (in logs) Infla-tion rate (devia-tion of the rate from 1, in logs) Politi-cal risk (in logs) Govern ment expendi ture level to GDP (in logs) Main telepho ne lines per 1,000 people (in logs) Net interest margin (devia-tion of the rate from 1, in logs) Over-head costs (devia-tion of the rate from 1, in logs) Before tax profit (devia-tion of the rate from 1, in logs) Log difference of GDP per capita 1 0.0302 -0.0151 0.0016 0.1121 0.0479 -0.0770 0.1148 0.0874 0.0739 0.1500 -0.0749 Initial GDP per capita (in logs) 1 -0.0764 0.7532 0.3033 0.2289 -0.7096 -0.1804 0.9337 0.5460 0.5181 0.2695 Foreign bank asset share (in 1+ logs) 1 -0.1182 0.2503 0.1013 -0.0142 0.1164 -0.0922 -0.1874 -0.1964 -0.1633 Credit volume (in logs) 1 0.2845 0.3370 -0.5978 -0.2360 0.6908 0.5890 0.6255 0.3416 Trade openness (in logs) 1 0.1134 -0.2751 0.0035 0.3152 0.1789 0.2729 0.0123 Inflation rate (deviation of the rate from 1, in logs) 1 -0.2744 -0.0053 0.1574 0.3586 0.3800 0.0725 Political risk (in logs) 1 0.1014 -0.6621 -0.4207 -0.4726 -0.1465 Government expenditure level to GDP (in logs) 1 -0.0664 -0.1069 -0.1150 -0.0240 Main telephone lines per 1,000 people (in logs) 1 0.4834 0.4373 0.2664 Net interest margin (deviation of the rate from 1, in logs) 1 0.7323 0.5769 Overhead costs (deviation of the rate from 1, in logs) 1 0.2096 Before tax profit (deviation of the rate from 1, in logs) 1

Table B2: Variance Inflation Factors – Direct Effect

Variable VIF Variable VIF

Initial GDP per capita (in logs) 11.35 Government expenditure level to GDP (in logs) 1.19 Foreign bank asset share (in 1+ logs) 1.21 Main telephone lines per 1,000 people (in logs) 9.02 Credit volume (in logs) 2.83 Net interest margin (deviation of the rate from 1, in logs) 1.75 Trade openness (in logs) 1.24 Overhead costs (deviation of the rate from 1, in logs) 1.97 Inflation rate (deviation of the rate from 1, in logs) 1.29 Before tax profit (deviation of the rate from 1, in logs) 1.18 Political risk (in logs) 2.12

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Table B3: Bivariate Correlations (Common Sample) – Volatility Effect

GDP volatility (in logs) Foreign bank asset share Banking sector concen-tration Financial sector develop-ment Trade

openness Political risk Money growth Terms of trade shocks GDP volatility (in logs) 1 -0.3718 -0.5448 -0.0797 -0.2290 0.3385 -0.2225 -0.1011 Foreign bank asset share 1 0.3604 -0.1726 0.3184 -0.1058 0.0173 0.0321 Banking sector concentration 1 -0.1117 0.4168 -0.1330 0.1185 0.0673 Financial sector development 1 0.1995 -0.4354 0.7164 -0.0920

Trade openness 1 -0.1384 0.5270 0.0589

Political risk 1 -0.3472 -0.1054

Money growth 1 -0.0225

Terms of trade shocks 1

Table B4: Variance Inflation Factors – Volatility Effect

Variable VIF

Foreign bank asset share 1.28 Banking sector concentration 1.37 Financial sector development 2.73

Trade openness 1.87

Political risk 1.36

Money growth 3.02

Terms of trade shocks 1.04

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C. Foreign Bank Asset Shares

Table C1: Foreign Bank Participation in Developing Countries 1995-2002

1995 1996 1997 1998 1999 2000 2001 2002

DEVELOPING COUNTRIES 18.1% 18.5% 21.2% 22.6% 24.5% 28.9% 30.5% 32.7% East Asia & Pacific 15.0% 14.5% 15.1% 14.6% 12.6% 8.2% 7.7% 11.7%

Cambodia 8.5% 8.3% 7.9% China 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.1% 0.2% Indonesia 4.4% 4.7% 5.8% 6,0% 3,0% 5.7% 4.1% 3.9% Korea, Rep. 2.1% 2.1% 2.2% 5,0% 4.7% 7.6% 4.9% 9.2% Malaysia 24.9% 24.9% 25.0% 26.0% 23.1% 25.4% 22.7% 22.8% Mongolia 0.0% 7.1% 11.3% 45.3%

Papua New Guinea 71.7% 67.0% 70.3% 63.9% 63.1%

Philippines 7.9% 8.2% 8.5% 8.3% 8.6% 9.4% 9.8% 8.3%

Thailand 7.2% 6.9% 7.1% 6.5% 10.2% 9.0% 7.3% 6.7%

Vietnam 1.4% 1.8% 1.7% 1.0% 0.8% 1.0% 1.0% 0.9%

Europe & Central Asia 13.0% 13.3% 14.7% 18.2% 21.1% 28.4% 32.7% 35.7%

Albania 10.9% 15.6% 19.7%

Armenia 17.6% 24.6% 34.9% 49.3% 60.1% 59.1%

Azerbaijan 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Belarus 0.0% 0.0% 0.0% 7.2% 4.3% 3.8% 8.4% 9.5%

Bosnia and Herzegovina 5.3% 6.5% 7.4% 12.4% 34.0% 46.1% 45.1% Bulgaria 8.2% 10.3% 10.3% 19.5% 30.9% 70.1% 55.5% 51.7% Croatia 9.8% 13.6% 14.1% 14.6% 15.8% 19.1% 20.6% 42.1% Czech Republic 14.2% 10.6% 13.7% 17.3% 31.0% 48.9% 61.4% 58.7% Estonia 80.7% 78.9% 72.1% 74.0% 73.5% 73.1% 73.0% 72.7% Georgia 10.6% 7.7% 6.4% 4.8% 20.0% 35.8% 36.2% Hungary 22.4% 23.1% 42.1% 62.9% 67.8% 63.5% 63.3% 58.7% Kazakhstan 12.6% 10.6% 15.8% 18.7% 18.6% 11.7% 12.6% 20.0% Kyrgyz Republic 30.3% 33.3% 20.8% Latvia 17.8% 30.4% 32.7% 35.3% 37.0% 37.6% 38.6% 38.8% Lithuania 18.9% 28.4% 35.5% 36.9% 41.8% 62.5% 92.2% 91.3% Macedonia, FYR 28.4% 27.1% 25.8% 23.3% 23.6% 47.8% 43.8% 41.8% Moldova 1.6% 1.8% 1.8% 2.5% 7.9% 18.8% 18.3% Poland 3.7% 8.4% 13.8% 27.1% 34.1% 37.8% 50.7% 49.3% Romania 0.0% 0.2% 0.5% 12.9% 17.2% 25.9% 27.0% 26.5% Russian Federation 2.0% 1.4% 2.7% 2.1% 4.5% 11.5% 13.7% 15.6%

Serbia and Montenegro 0.0% 0.0% 0.0%

Slovak Republic 8.7% 11.9% 18.0% 20.4% 21.5% 54.6% 56.6% 81.5%

Slovenia 6.8% 6.5% 6.4% 6.5% 6.1% 10.3% 14.3% 25.8%

Turkey 0.4% 0.3% 0.3% 0.4% 0.5% 0.9% 1.8% 1.8%

Ukraine 0.0% 0.0% 0.0% 0.0% 2.3% 5.8% 6.2% 6.8%

Uzbekistan 0.0% 0.0% 0.0% 0.6% 0.6% 0.8%

Latin America & Caribbean 19.3% 19.4% 24.3% 25.0% 25.4% 29.6% 30.2% 33.2%

Antigua and Barbuda 0.0% 0.0% 0.0%

Argentina 25.6% 28.1% 36.7% 40.0% 39.6% 47.8% 44.2% 37.5% Bolivia 42.7% 40.5% 39.7% 44.4% 44.2% 40.9% 39.4% 39.4%

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Table C1: Foreign Bank Participation in Developing Countries 1995-2002 (cont.)

1995 1996 1997 1998 1999 2000 2001 2002 Brazil 9.0% 9.7% 14.4% 15.1% 17.3% 26.4% 30.4% 27.9% Chile 31.0% 35.3% 36.0% 37.6% 38.8% 38.4% 40.0% 44.8% Colombia 6.3% 10.9% 15.9% 18.0% 16.4% 25.8% 21.1% 17.4% Costa Rica 0.0% 0.2% 0.6% 5.1% 5.0% 18.0% 18.4% 18.8% Dominican Republic 11.1% 10.8% 9.9% 2.0% 17.5% 16.2% 17.7% 17.5% Ecuador 26.0% 27.4% 28.2% 0.0% 0.0% 0.0% El Salvador 1.0% 1.8% 2.9% 8.3% 8.3% 13.6% 13.5% 14.2% Guatemala 6.0% 5.6% 6.1% 6.3% 7.0% 8.4% 8.6% 8.1% Guyana 0.0% 0.0% 24.7% 27.5% 26.7% 23.5% 23.6% 23.1% Haiti 0.0% 0.0% Honduras 2.3% 2.1% 2.1% 1.5% 1.5% 4.4% 5.0% 5.8% Jamaica 24.3% 21.2% 32.9% 35.8% 21.9% 18.9% 19.3% 50.3% Mexico 2.3% 4.3% 7.2% 7.5% 9.9% 28.5% 30.0% 61.9% Nicaragua 0.7% 1.4% 3.0% 3.9% 3.8% 5.1% 4.3% 4.4% Panama 59.7% 54.9% 51.5% 50.8% 48.4% 64.9% 64.2% 58.1% Paraguay 69.3% 56.2% 73.9% 76.8% 77.2% 79.9% 81.7% 83.3% Peru 51.7% 59.9% 63.1% 66.1% 64.8% 66.1% 66.7% 86.4%

Trinidad and Tobago 14.0% 13.5% 16.2% 17.1% 17.7% 11.2% 10.4% 10.4% Uruguay 24.3% 14.2% 18.1% 24.4% 30.6% 91.8% 95.5% 94.5% Venezuela, RB 4.8% 17.4% 29.1% 33.7% 34.3% 20.7% 30.2% 26.6% Middle East & North Africa 11.9% 12.3% 12.5% 12.8% 12.8% 14.4% 15.9% 18.8%

Algeria 59.0% 67.5% 60.0%

Egypt, Arab Rep. 4.0% 6.0% 6.1% 6.1% 6.2% 6.9% 6.4% 7.1%

Iran, Islamic Rep. 0.0% 0.0%

Jordan 12.8% 12.4% 12.9% 12.8% 12.8% 13.5% 13.7% 13.3% Lebanon 29.6% 29.4% 29.4% 31.5% 31.2% 30.5% 28.9% 28.0% Libya 0.0% 0.0% Morocco 18.6% 19.3% 19.5% 19.8% 20.4% 16.9% 17.3% 16.4% Oman 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 8.0% 8.7% Tunisia 10.8% 11.0% 11.5% 11.7% 11.9% 12.1% 14.9% 14.8% Yemen, Rep. 7.3% 7.8% 8.2% 8.0% 7.3% 5.0% 2.0% 2.4% South Asia 8.6% 9.4% 9.7% 9.3% 9.4% 12.0% 10.9% 10.4% Bangladesh 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% India 0.9% 1.1% 1.3% 1.3% 1.3% 1.7% 1.4% 0.5% Nepal 38.9% 41.7% 42.0% 39.4% 40.0% 52.8% 46.7% 45.4% Pakistan 1.4% 1.5% 2.3% 2.4% 2.4% 3.4% 4.3% 6.0% Sri Lanka 2.2% 2.5% 3.1% 3.2% 3.3% 2.3% 2.4% 0.3% Sub-Saharan Africa 30.2% 28.7% 32.4% 33.1% 37.4% 45.3% 45.3% 45.0% Angola 38.1% 43.0% Benin 49.4% 48.2% 46.0% 46.0% 51.8% 53.1% Botswana 79.6% 79.5% 79.7% 80.7% 83.0% 84.2% 84.7% 84.0% Burkina Faso 44.4% 43.8% 24.4% 29.4% 30.4% Burundi 39.2% 37.3% 37.6% 37.2% 36.4% 16.2% 23.6% 21.5% Cameroon 65.4% 64.0% 63.9% 54.9% 56.7% 59.0%

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Table C1: Foreign Bank Participation in Developing Countries 1995-2002 (cont.)

1995 1996 1997 1998 1999 2000 2001 2002 Cote d'Ivoire 20.3% 19.7% 20.0% 23.8% 53.6% 58.3% 62.8% 61.8% Ethiopia 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Ghana 28.4% 29.9% 53.8% 53.9% 57.6% 64.7% 52.1% 52.8% Kenya 26.6% 27.6% 27.6% 29.4% 28.6% 31.6% 34.4% 36.0% Lesotho 84.9% 86.1% 86.3% Madagascar 42.3% 63.3% 62.1% 61.4% 62.0% Malawi 8.9% 8.2% 8.1% 8.9% 33.7% 27.5% 27.9% Mali 41.1% 41.3% 40.6% 40.3% 40.8% 57.6% 49.9% 48.9% Mauritius 9.5% 19.7% 22.5% 32.8% 42.4% 24.6% 25.3% 24.7% Mozambique 22.0% 38.4% 40.6% 44.8% 60.0% 72.2% 72.5% Namibia 45.2% 42.6% 35.5% 33.8% 35.3% 47.4% 68.6% 66.9% Niger 51.0% 51.1% 43.7% Nigeria 10.1% 10.1% 10.1% 9.5% 12.5% 15.0% 10.5% 11.2% Rwanda 22.4% 22.8% 21.1% 23.7% Senegal 43.1% 42.5% 42.6% 42.8% 42.3% 40.9% 39.1% Seychelles 12.6% 13.1% 13.6% 13.8% Sierra Leone 0.0% 0.0% 0.0% 31.6% 32.2% 29.5% South Africa 0.3% 0.2% 0.2% 0.2% 0.2% 11.4% 10.4% 10.8% Sudan 0.0% 0.0% 0.0% 3.0% 2.9% 4.7% Swaziland 79.1% 74.7% 71.1% Tanzania 26.0% 31.5% 31.5% 34.6% 63.5% 64.3% 64.3% Uganda 39.7% 38.5% 36.3% 69.8% 76.0% 53.8% 53.9% 55.4% Zambia 55.2% 52.9% 93.6% 57.2% 61.1% 69.7% 68.4% 66.6% Zimbabwe 45.8% 46.9% 49.8% 47.3% 58.2% 51.5% 33.8% 33.3%

Source: Micco et al. (2005, 2006)

Table C2: Foreign Bank Participation in Developed Countries 1995-2002

₁₉₉₅ ₁₉₉₆ ₁₉₉₇ ₁₉₉₈ ₁₉₉₉ ₂₀₀₀ ₂₀₀₁ ₂₀₀₂ DEVELOPED COUNTRIES 18.5% 19.5% 19.4% 20.6% 22.0% 29.0% 29.3% 29.7% Andorra 27.9% 29.1% 27.7% 28.5% 26.3% 46.3% 46.8% 48.3% Australia 6.1% 6.6% 6.7% 6.9% 6.6% 6.2% 7.6% 7.4% Austria 4.9% 5.0% 6.3% 36.8% 36.7% 29.4% 26.8% 23.9% Bahamas, The 85.0% 82.6% 72.8% 43.2% 39.0% 92.0% 96.7% 96.1% Bahrain 66.8% 71.0% 67.4% 67.9% 64.0% 60.3% 61.7% 63.0% Belgium 20.2% 19.4% 17.5% 31.4% 30.2% 26.3% 20.4% 29.5% Bermuda 9.3% 8.4% 7.7% 8.4% 8.1% 5.3% 0.0% 0.0% Canada 7.2% 7.3% 7.2% 6.7% 6.1% 7.8% 8.1% 8.2% Cayman Islands 48.2% 57.5% 40.5% 62.3% 62.0% 92.1% 92.8% 94.4% Cyprus 28.3% 44.2% 44.5% 46.2% 47.3% 49.7% 48.6% 48.1% Denmark 1.5% 1.6% 1.7% 1.5% 1.6% 22.0% 20.1% 21.2% Finland 0.0% 0.0% 24.4% 24.8% 24.5% 79.9% 91.9% 92.3% France 6.2% 6.2% 6.2% 8.0% 7.8% 4.4% 4.2% 3.6% Germany 4.7% 5.3% 4.8% 5.0% 4.9% 4.7% 3.4% 3.3% Greece 2.4% 2.9% 3.2% 3.1% 9.6% 10.5% 7.5% 12.8%

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Table C2: Foreign Bank Participation in Developed Countries 1995-2002 (cont.)

1995 1996 1997 1998 1999 2000 2001 2002

Hong Kong, China 60.7% 59.3% 51.7% 50.2% 51.8% 58.9% 66.2% 65.3%

Iceland 0.0% 0.0% 0.0% 0.0% 5.2% 6.5% 0.0% 0.0% Ireland 21.8% 27.7% 32.5% 34.2% 36.2% 33.0% 30.7% 31.5% Israel 0.4% 0.5% 14.1% 18.4% 18.3% 19.0% 18.7% 19.2% Italy 2.4% 3.7% 4.7% 5.6% 5.1% 3.9% 7.3% 3.7% Japan 0.2% 0.2% 0.2% 0.2% 0.2% 0.1% 0.0% 0.0% Kuwait 3.9% 3.7% 3.5% 3.6% 3.5% 3.3% 3.1% 3.6% Liechtenstein 0.0% 0.0% 0.0% 0.0% 0.2% 1.8% 3.1% 8.6% Luxembourg 75.5% 76.5% 74.3% 74.3% 73.6% 85.7% 89.0% 84.9% Macao, China 42.4% 46.4% 48.5% 50.6% 62.5% 61.1% 67.6% 66.1% Malta 8.3% 8.3% 8.7% 8.9% 51.2% 56.4% 55.5% 56.8% Monaco 60.0% 63.6% 62.3% 58.6% 61.3% 89.4% 95.1% 94.8% Netherlands 7.6% 10.6% 9.3% 3.4% 2.8% 5.0% 4.6% 3.3% Netherlands Antilles 6.5% 6.6% 6.2% New Zealand 99.0% 79.9% 73.0% 77.0% 79.1% 73.4% 74.0% 78.4% Norway 5.2% 4.5% 7.6% 7.8% 4.9% 26.1% 19.6% 19.3% Portugal 13.3% 28.4% 26.0% 24.9% 24.6% 30.6% 23.5% 23.5% Qatar 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% San Marino 58.1% 59.1% 58.7% Saudi Arabia 21.8% 22.7% 23.0% 23.3% 29.8% 22.8% 21.8% 21.8% Singapore 2.6% 2.7% 1.5% 1.5% 1.4% 46.6% 48.3% 40.6% Slovenia 6.8% 6.5% 6.4% 6.5% 6.1% 10.3% 14.3% 25.8% Spain 5.7% 5.7% 5.4% 5.9% 4.9% 6.5% 5.0% 5.3% Sweden 3.8% 3.6% 9.4% 13.1% 10.6% 14.4% 17.3% 13.3% Switzerland 2.1% 2.0% 2.1% 2.1% 2.1% 3.0% 5.7% 5.3% Taiwan 0.0% 0.0% 0.0% 0.1% 0.1% 0.1% 4.4% 4.7%

United Arab Emirates 3.5% 3.4% 3.3% 3.1% 3.1% 2.8% 2.7% 2.5%

United Kingdom 6.8% 7.0% 7.0% 8.3% 8.8% 8.2% 7.2% 6.5%

United States 3.5% 3.7% 3.1% 2.8% 3.7% 3.5% 3.9% 3.9%

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D. Estimation Output Tables

Table D1: Direct Link Regression Results – GMM System Estimator

Dependent variable: log difference of GDP per capita

(1) (2) (3)

Initial GDP per capita (in logs) -0.0086 _(0.012) ** -0.0082 _(0.015) ** -0.0097 _(0.005) *** Foreign bank asset share (in 1+ logs) _(0.002)0.1023 *** _(0.000)0.1400 *** _(0.052)0.0615 * Credit volume (in logs) -0.0004 _(0.876) -0.0011 _(0.671) -0.0011 _(0.655) Credit volume*foreign bank asset share -0.0297 _(0.001) *** -0.0387 _(0.000) *** -0.0212 _(0.013) ** Trade openness (in logs) _(0.001)0.0096 *** _(0.013)0.0070 ** _(0.001)0.0092 *** Inflation rate (deviation of the rate from 1, in logs) a) 0.0043

(0.696) -0.0039 (0.645) (0.027) 0.0185 ** Political risk (in logs) _(0.667)0.0013 _(0.115)0.0048 _(0.897)0.0004 Government expenditure level to GDP (in logs) _(0.023)0.0082 ** _(0.032)0.0078 ** _(0.040)0.0075 ** Main telephone lines per 1,000 people (in logs) _(0.006)0.0082 *** _(0.001)0.0093 *** _(0.001)0.0107 ***

Banking sector indicators

Net interest margin (deviation of the rate from 1, in logs) a) 0.2305

(0.020) **

Overhead costs (deviation of the rate from 1, in logs) a) 0.4321

(0.000) *** Profit before tax (deviation of the rate from 1, in logs) a) -0.1666

(0.014) **

Number of countries 111 111 111

Observations 801 803 803

Specification tests (p-values)

Sargan test 1.000 1.000 1.000

Second-order serial correlation test (AR2) b) _0.498 _0.637 _0.213

The numbers given in parenthesis are p-values of the estimated coefficients. * (**,***) denotes statistical significance at 10% (5%, 1%) level. The null hypothesis of the Sargan test is that the instruments are not correlated with the residuals (this indicates that the moment conditions hold). The null hypothesis of the second-order serial correlation test is that the errors in the first-difference regression exhibit no second-second-order serial correlation.

a) These variables are inverted by definition

b) To be able to test for second-order serial correlation I included an AR1 and AR2 term in both equations. In this case Eviews, the econometric package used, transforms the linear specification into a non-linear

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Table D2: Volatility Effect Regression Results – Fixed Effects OLS

Dependent variable: GDP volatility (in logs)

(1) (2) (3)

Foreign bank asset share _(0.232)0.0002 _(0.331)0.1410 _(0.580)0.3038 Banking sector concentration 6.33E-05 _(0.850) _(0.520)0.3106 _(0.509)0.3224 Financial sector development -7.10E-07 _(0.569) _(0.286)0.0012 _(0.450)0.0010 Trade openness -8.31E-07 _(0.689) _(0.006)0.0053 *** _(0.006)0.0054 *** Political risk -1.09E-06 _(0.829) _(0.000)0.0271 *** _(0.000)0.0274 *** Terms of trade shocks -1.11E-06 _(0.541) -0.0046 _(0.041) ** -0.0045 _(0.046) ** Money growth -1.85E-06 _(0.412) -0.0017 _(0.594) -0.0018 _(0.585) Constant _(0.000)0.0021 *** _(0.000)7.9154 *** _(0.000)7.9060 *** Foreign bank asset share*developing country -0.1805 _(0.759)

AR1 _(0.069)0.1112 * _(0.068)0.1118 * R² 0.9976 0.9990 0.9990 Adjusted R² 0.9971 0.9987 0.9987 Durbin-Watson 2.8926 2.2210 2.2299 Number of countries 45 45 45 Observations (unbalanced) 289 244 244