Credit risk of subsidiaries of foreign banks in CEE countries: Impacts of the parent bank and home country economic environment

• Published in: The North American journal of economics and finance 2018-11, Vol.46, p.49-69
• Main Authors: Škrabić Perić, Blanka, Rimac Smiljanić, Ana, Aljinović, Zdravka
• Format: Article
• Language: English
• Subjects: Central and Eastern European countries; Credit risk; Dynamic panel data; Foreign banks
• ISSN: 1062-9408; 1879-0860
• DOI: 10.1016/j.najef.2018.03.009

In this study, using dynamic panel data, we investigated the influences of the home country economic environment and parent bank condition on the credit risk of foreign banks in Central and Eastern European (CEE) countries. We concentrated on the international transmission of credit risk through the internal capital market of multinational banks. Our theoretical assumptions follow studies that document how the parent bank condition and home country macroeconomic environment affect lending in subsidiaries in CEE countries. However, our results go one step further. We provide evidence that these relationships are reflected in subsidiaries’ credit risk in CEE countries. Our results suggest that the size and profitability of the parent bank have negative influences, while the liquidity and credit risk of the parent bank have positive influences on the subsidiaries’ credit risk. Moreover, the GDP growth in the parent bank’s country has a negative effect on the credit risk of the subsidiary, while the lending rate and liquidity in the parent bank country cause growth in the credit risk. These results indicate a new channel of international risk transfer from parent bank countries to host countries through foreign-owned banks.