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The asset quality of bank portfolios--and not domestic versus foreign ownership per se--is the decisive factor behind the growth and volatility of bank credit, observe New York Fed authors B. Gerard Dages, Linda Goldberg, and Daniel Kinney, who examined the 1990s lending patterns of domestic and foreign banks in Argentina and Mexico. "The Argentine and Mexican experiences with foreign bank participation are broadly instructive for other emerging markets contemplating an expanded role for foreign banks in their local economies," the authors conclude.
While most economists agree that strong domestic financial systems are important in attaining overall economic development and stabilization, the authors note that foreign banks role in achieving this goal is still controversial. The authors determine that foreign bank participation indeed plays a key role, although bank portfolio health is the overriding factor.
Dages, Goldberg, and Kinney also find that:
Foreign banks in Argentina and Mexico exhibited stronger and less volatile loan growth than domestic banks.
Diversity of bank ownership has contributed to greater credit stability in periods of crisis and financial system weakness.