The Influence of Foreign Bank Ownership on the Banking System in the Czech Republic

• Thesis title in Czech: Vliv zahraničního vlastnictví bank na bankovní systém v České republice
• Thesis title in English: The Influence of Foreign Bank Ownership on the Banking System in the Czech Republic
• English key words: Banking, Czech banking system, shock transmissions, cyclicality, lending behaviour, bank subsidiaries
• Academic year of topic announcement: 2016/2017
• Thesis type: Bachelor's thesis
• Thesis language: angličtina
• Department: Institute of Economic Studies (23-IES)
• Supervisor: Mgr. Petr Polák, M.Sc., Ph.D.
• Author: hidden - assigned by the advisor
• Date of registration: 28.04.2017
• Date of assignment: 28.04.2017
• Date and time of defence: 11.06.2018 09:00
• Venue of defence: Opletalova - Opletalova 26, O206, Opletalova - místn. č. 206
• Date of electronic submission: 10.05.2018
• Date of proceeded defence: 11.06.2018
• Opponents: PhDr. Hana Hejlová, Ph.D.

References

Behr, P., Foos, D. and Norden, L. (2015) Cyclicality of SME Lending and Government Involvement in Banks.

Bertay, A.C., Demirgüç-Kunt, A. and Huizinga, H. (2012) Bank Ownership and Credit Over the Business Cycle: Is Lending by State Banks Less Procyclical?

Claessens, S. and Horen, N. van (2012) Foreign Banks: Trends, Impact and Financial Stability.

Giannetti, M. and Ongena, S. (2010) ‘Lending by Example’: Direct and Indirect Effects of Foreign Banks in Emerging Markets

Haas, R. de and Lelyveld, I. van (2003) Foreign Banks and Credit Stability in Central and Eastern Europe: A Panel Data Analysis. Netherlands Central Bank.

Schnabl, P. (2012) ‘The International Transmission of Bank Liquidity Shocks: Evidence from an Emerging Market’, The Journal of Finance, 67(3), pp. 897–932.

Weill, L. (2003) Banking Efficiency in Transition Economies: The Role of Foreign Ownership.

Preliminary scope of work in English

Research question and motivation
Like in most other central European countries, the vast majority of banking institutions in the Czech Republic are owned by large foreign banks. This has to be taken into account when analyzing the stability and development of the local banking industry since, indeed, the activities of foreign banks’ subsidiaries follow different patterns than the locally-owned banks. Their reactions to various economic impulses are likely to vary as well.
A frequently discussed topic is the transmissions of international shocks. Studies have shown the presence of certain similarities in the performance of financially linked banks located in different countries. This would imply that countries with a high market share controlled by foreign banks (such as the Czech Republic) are vulnerable, and volatility spillovers are a serious threat to them. Thus, one of the intentions of this thesis is to model and analyze the relationship between the performance of foreign banks in the Czech Republic and the economic conditions in their home countries. Furthermore, the channels through which the shocks might be transmitted are going to be studied.
The other major issue of this thesis is whether operations of subsidiaries follow the business cycle of the host country. Large global banks have the possibility to allocate resources among the countries in which they operate, which would suggest that the presence of many foreign banks in a country is rather pro-cyclical. On the other hand, during the periods of slow economic activity, foreign banks might be backed by their parent institutions, which results in their independence of the host country’s business cycles. This ambiguity is going to be investigated in detail, too.

Contribution
The thesis investigates whether the structure of the banking system in the Czech Republic (with a large number of foreign banks) leads to the pro-cyclical influence of the banks´ operations. Furthermore, the thesis analyzes whether international shocks can be transmitted to the Czech Republic through foreign banks. If so, important transmission channels are going to be identified. The period of economic crisis is studied in detail in order to determine whether there are any considerable differences between crisis times and other periods.
The results of these analyses help evaluate the banking structure in the Czech Republic and determine its advantages and drawbacks. Such information may help policymakers in determining whether to favour the presence of foreign banks in the country or not.

Methodology
The Czech National Bank internal database provides high-quality data and thus a very relevant framework for the analysis. Financial statements of the banks operating in the Czech Republic are readily available and reported by the CNB on a monthly basis. Nevertheless, due to the fact that these need to be connected with the home country´s GDP development, which is reported quarterly, the quarterly data are used.

Using econometric models, the following main hypotheses are tested.
1) The home country’s economic conditions influence the lending behaviour of foreign banks in the Czech Republic and economic shocks can thus be transmitted in this way
2) The lending behaviour of foreign banks in the Czech Republic is pro-cyclical
3) The health state of the parent banks influences lending behaviour of foreign banks in the Czech Republic

Based on the outcome of econometric analysis, the following issues are going to be also investigated: Which types of lending products are most sensitive to the development of the situation in the home country? What matters more to the lending behaviour of foreign banks: The economic situation in the home country, or the host country? Does the parent bank assert a bigger impact on its Czech subsidiary during a crisis?

Outline
1) Introduction
2) Description of the Current State of Research
3) Research Methodology and Data Description
4) Research Hypotheses Formulation
5) Outcome Interpretation
6) Conclusion