## _wp09270 — 1.   Definition of Variables

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### Research question and theoretical hypotheses
- Credit allocation is an important determinant of economic growth.
- The paper tests theoretical predictions on how different modes of foreign bank entry affect credit allocation:
  - Performance hypothesis: foreign banks, if efficiently managed and superior, overcome cross-border informational disadvantages, extend loans to all borrower types, and charge lower lending rates.
  - Portfolio composition hypothesis: foreign banks may “cherry pick” best borrowers, lending more to large transparent firms at the expense of small and medium sized enterprises (SMEs), altering portfolio composition.
  - Additional hypotheses:
    - Foreign banks may have shorter-term objectives in host countries, making them less likely to extend long-term loans.
    - Foreign banks may increase supply of loans in foreign currency, potentially harming host-country financial stability if borrowers do not hedge currency risk.

### Data and empirical scope
- Unique bank-specific dataset on the Polish banking industry providing quarterly information on portfolio composition, loan maturity, currency, and loan rates.
- Sample period: 1996–2006.
- Ownership context: share of foreign investors in Polish banks amounts to 74 percent.
- Quarterly bank-level panel from the National Bank of Poland covering 110 Polish banks between December 1996 and December 2006.
- Variables: balance sheet and income statement items, interest income, amount of granted loans, nonperforming loans for two borrower types (private firms and individual entrepreneurs).
- Borrower classification:
  - "Private firm": owned by private investors (>50% private share), subject to commercial law or civil law with >9 workers, full bookkeeping (labelled also as transparent borrowers).
  - "Individual entrepreneurs (entrepreneurs)": small firms employing up to 9 workers, subject to civil law, simplified accounting (labelled as opaque borrowers).
- Treatment of banks:
  - Banks treated as two before domestic mergers and as one afterwards.
  - First four quarters of operations for greenfield and takeover banks deleted from estimations.
- Key macro controls used: Inflation, Real interest rate (3 month WIBOR and Fisher equation), GDP (real quarterly growth).

### Modes of foreign entry distinguished
- Greenfield banks:
  - Enter via greenfield investment.
  - Advantages: not burdened with nonperforming loans and inefficient organizational structures.
  - Disadvantages: disadvantaged in access to borrower information.
- Takeover banks:
  - Acquire an existing domestic institution.
  - Advantages: inherit relationships with incumbent firms.
  - Disadvantages: may face difficulties improving credit standards or risk management due to acquired nonperforming loans and non-transparent organizational structure.

### Portfolio composition — headline statistics
- At end-2006, the share of foreign investors in Polish banking constituted 74 percent.
- Average portfolio shares (by ownership type):
  - Foreign banks: loans to transparent borrowers constitute 54 percent of total portfolio.
  - Domestic banks: loans to transparent borrowers constitute 31 percent of total portfolio.
  - Greenfield banks extended almost 67% of their loans to private firms (about 25 percentage points more than takeover banks and about twice as much as domestic banks).
  - Domestic private banks devote 15% of their portfolio to entrepreneurs (one and a half times more than other banks).
- Time dynamics:
  - Greenfield banks over time start lending more to entrepreneurs and decrease the share of loans to private firms (convergence in borrower type allocations after 2001).
- Loan maturity (mean shares by ownership):
  - Greenfield: 53 percent short-term (up to 1 year).
  - Takeover: 36 percent short-term.
  - Domestic private: 41 percent short-term.
  - Public banks extend more long-term loans than any other type.
- Currency composition:
  - In 2006 Polish banks extended 23 percent of their loans in foreign currency.
  - Foreign banks, particularly greenfield institutions, give more loans in foreign currency than domestic banks (persistent over sample period).
- Lending rates (average by ownership):
  - Greenfield banks: 14.7 percent on average for all borrowers.
  - Private domestic banks: 21.7 percent on average for all borrowers.
  - Takeover banks: lower than domestic banks but higher than greenfield institutions.
- Lending rates by borrower type:
  - Lending rates to private firms are on average 2.3 percentage points lower than to entrepreneurs (difference statistically significant).

### Empirical specifications (overview)
- Portfolio share model:
  - Dependent variable: share of loans (by borrower type, maturity, or currency) in bank i at time t (log-odds).
  - Key regressors: ownership dummies (State-owned, Takeover, Greenfield), bank characteristics (ROA, Capitalization, Costs, NPL), macro variables (Inflation, Real interest rate, GDP), size, market structure (Herfindahl, Market share), seasonal dummies. All explanatory variables lagged by one period.
  - Estimation: pooled OLS with clustered SEs (logit form of shares).
- Lending rate model:
  - Dependent variable: lending rate of bank i at time t (ratio of interest income to total loans), estimated for all borrowers and separately for private firms and entrepreneurs.
  - Controls include portfolio composition variables (share private, share entrepreneur, FX loans, short-term loans, long-term loans), bank characteristics, market structure, macro variables.
- Estimation choices:
  - Pooled estimation with clustered errors chosen over panel-fixed/random effects due to concerns about time-invariant coefficients and inconsistency.
  - Robustness checks: Beck & Katz panel-corrected SEs, fixed-effect vector decomposition (Pluemper & Troeger), panel unit root tests (series found stationary).

### Key empirical findings — portfolio allocation
- Borrower type allocation:
  - Greenfield banks:
    - Devote almost 25 percent less of their portfolio to entrepreneurs.
    - Lend over 90 percent more to private firms than domestic private banks (benchmark).
  - Takeover dummy: not statistically significant for borrower-type composition (takeover banks similar to domestic private banks).
  - Convergence over time: differences between greenfield and domestic private banks diminish after 2001; the gap in loans to entrepreneurs disappears after 2001.
  - Bank size: larger banks prefer private firms; small banks lend more to entrepreneurs.
  - NPLs: an increase in NPL for a borrower type reduces the bank’s share of loans to that borrower type.
- Loan maturity allocation:
  - Greenfield banks:
    - Have over 73 percent more short-term loans (up to 1 year) than domestic private banks.
    - Have over 26 percent less long-term loans (over 5 years) than domestic private banks.
  - These differences are stable over time; little convergence on maturity composition.
  - Macroeconomic effects: low inflation and low real interest rates contribute to higher share of long-term loans.
  - Healthier banks (higher profit, lower NPL, higher capitalization) lend less short-term and more long-term.
- Foreign currency loans:
  - Greenfield banks exhibit significantly higher share of loans in foreign currency (coefficients highly significant).
  - Inclusion of interbank liabilities with nonresident banks (proxy for foreign funding) is positive and significant: banks with higher share of funding from nonresident banks lend more in foreign currency.
  - Bank size positively associated with FX lending; falling inflation and interest rates reduced attractiveness of FX loans.

### Key empirical findings — lending rates
- Average bank lending rate:
  - Baseline (no portfolio controls): greenfield banks charge 0.9 percent less per quarter (or 3.6 percent on an annual basis) than domestic private banks; takeover banks not significantly different from domestic banks.
  - Splitting greenfield/takeover before vs after 2001: the greenfield effect on lower rates disappears over time (convergence).
  - When portfolio composition (share private, share entrepreneur) is included, the impact of ownership/mode of entry on average lending rates disappears: average lending rates between banks are no longer statistically different (omitted-variable bias in prior specifications).
  - Dynamic models yield similar conclusion: no evidence of convergence in performance once composition is controlled for.
- Lending rates by borrower type:
  - Estimating separately for private firms (transparent) and entrepreneurs (opaque) removes the composition effect.
  - Once controlling for borrower homogeneity:
    - Mode of entry and foreign ownership do not have significant effects on lending rates to either private firms or entrepreneurs.
    - Including FX loan share: higher share of FX loans has negative impact on lending rates (cheaper FX lending), but this does not change the null result on ownership effects.
    - Controlling for maturity (short-term, long-term) does not materially change results: maturity not significant determinant of lending rates in these specifications.
  - State-owned banks: when controlling for loan currency, state-owned banks offer lower lending rates; annualized difference amounts to 2.8 percent (statistically and economically significant).
- Time dynamics for lending rates:
  - Splitting ownership by entry before vs after 2001, or by bank age, produces no evidence that longer presence leads to differential lending rates by foreign ownership.
  - Conclusion: no persistent performance advantage of foreign banks in lending rates after accounting for portfolio composition.

### Impacts on domestic banks
- Portfolio shares of domestic banks:
  - Domestic banks increased the share of entrepreneurs in their portfolios in the wake of foreign bank entry.
  - This effect is significant in the period after 2001 and for the share of loans granted by greenfield banks.
- Nonperforming loans of domestic banks:
  - Entry of greenfield banks decreased the quality of loan portfolios of domestic banks (increase in NPLs) for both transparent and opaque clients in the later period (large positive coefficients for Share greenfield* after 2001).
  - Entry of takeover banks tended to decrease NPLs of domestic banks (improvement in portfolio quality), particularly for private firms, consistent with positive spillovers (adoption of transaction-based lending techniques, better risk management).
  - Interpretation: greenfield entry appears to cherry-pick best borrowers, pushing domestic banks toward higher-risk lending and deteriorating their portfolio quality; takeover entry yields beneficial spillovers to domestic banks in transparent segments.

### Synthesis of hypotheses tested
- Performance hypothesis:
  - Rejected in lending-rate tests once portfolio composition is controlled for: no significant differences in lending rates by ownership mode for homogeneous borrower samples.
- Portfolio composition hypothesis:
  - Strongly supported: greenfield banks lend more to transparent firms, more short-term, and more in foreign currency; portfolio composition differences explain lower average lending rates of greenfield banks in baseline regressions.

### Policy implications and crisis relevance
- Mode of foreign entry matters:
  - Greenfield banks specialize early on in lending to transparent borrowers, in FX, and at shorter maturities; takeover banks are similar to domestic private banks.
  - Convergence over time in borrower-type allocation: greenfield banks started to lend more to opaque borrowers after 2001, reflecting acquisition of soft-information capabilities or adoption of hard-information technologies for SMEs.
  - No evidence that foreign ownership (or mode of entry) yields lower lending rates conditional on borrower type; average lower rates of greenfield banks are driven by portfolio composition.
- Crisis-relevant risks:
  - Foreign banks’ higher share of foreign currency loans can increase borrower and bank vulnerability to local currency depreciation and FX-related credit risk.
  - Foreign banks’ shorter loan maturities allow them to restrict credit more quickly in stress (protecting parent balance sheets) but can impose credit constraints on borrowers and amplify cyclical credit contraction.
- Domestic-bank sector effects:
  - Greenfield entry can deteriorate domestic banks’ portfolio quality by inducing them to serve higher-risk SME borrowers.
  - Takeover entry can improve domestic banks’ portfolio quality in transparent segments via spillovers in lending and risk-management techniques.

*Source: _wp09270 — excerpts from the provided PDF content.*

### 1.   Definition of Variables ...........................................................................................

### _wp09270 - 1.   Definition of Variables ...........................................................................................

### Research question and theoretical hypotheses
- Credit allocation is an important determinant of economic growth.
- The paper tests theoretical predictions on how different modes of foreign bank entry affect credit allocation:
  - Performance hypothesis: foreign banks, if efficiently managed and superior, overcome cross-border informational disadvantages, extend loans to all borrower types, and charge lower lending rates.
  - Portfolio composition hypothesis: foreign banks may “cherry pick” best borrowers, lending more to large transparent firms at the expense of small and medium sized enterprises (SMEs), altering portfolio composition.
  - Additional hypotheses:
    - Foreign banks may have shorter-term objectives in host countries, making them less likely to extend long-term loans.
    - Foreign banks may increase supply of loans in foreign currency, potentially harming host-country financial stability if borrowers do not hedge currency risk.

### Data and empirical scope
- Unique bank-specific dataset on the Polish banking industry providing quarterly information on portfolio composition, loan maturity, currency, and loan rates.
- Sample period: 1996–2006.
- Ownership context: share of foreign investors in Polish banks amounts to 74 percent.
- The dataset includes banks of all types of ownership and modes of entry (greenfield and takeover).

### Modes of foreign entry distinguished
- Greenfield banks: foreign banks entering via greenfield investment.
  - Advantages: not burdened with nonperforming loans and inefficient organizational structures.
  - Disadvantages: disadvantaged in access to borrower information.
- Takeover banks: foreign banks that acquire an existing domestic institution.
  - Advantages: inherit relationships with incumbent firms.
  - Disadvantages: may face difficulties improving credit standards or risk management due to acquired nonperforming loans and non-transparent organizational structure.

### Main empirical findings
- Greenfield banks:
  - Devote a higher share of their portfolios to transparent borrowers.
  - Lend more at shorter maturity.
  - Lend more in foreign currency.
- Convergence patterns:
  - Significant convergence between foreign and domestic banks in terms of groups of borrowers they lend to.
  - No convergence observed in terms of maturity and currency denomination of lending.
  - Possible reason for the lack of convergence in maturity and currency: foreign banks’ refinancing possibilities.
- Impact on domestic banks:
  - Both modes of foreign bank entry had a detrimental impact on the loan portfolio quality of domestic banks.
- Cost of credit and portfolio composition:
  - Findings support the “portfolio composition” hypothesis.
  - Contradict studies that attribute lower lending rates of greenfield banks to superior performance alone.
  - Lower observed lending rates for foreign banks may stem from their higher share of transparent borrowers, who face lower cost of credit.
  - Evidence suggests that earlier findings of convergence in interest rates across ownership types can be attributed to portfolio composition changes over time, as greenfield banks start lending less to transparent borrowers.

### Broader implications and mechanisms
- Portfolio composition effects extend beyond borrower type to collateral requirements, maturity, and currency denomination.
- Increasing popularity of foreign-currency loans in some emerging economies driven by perceived lower costs; borrowers may take on foreign exchange and interest rate risk.
- Foreign banks are better placed to supply foreign-currency loans because of access to international capital markets and parent financing.
- Shorter maturities and “hot” money aspects:
  - Foreign bank lending may involve more short-term loans to mitigate asymmetric information problems.
  - Such flows can be readily retracted during crises.

### Policy-relevant considerations
- The effect of bank ownership on the cost of credit matters for economic growth because prohibitive lending rates can damage output and development.
- Important to distinguish whether foreign banks charge lower rates to all borrowers or primarily to large transparent firms while SMEs continue to face credit constraints.
- Given that SMEs often represent the majority of firms and a significant share of employment, differential access to finance has important implications for development and growth.

*Source: _wp09270 - 1.   Definition of Variables (excerpts from the provided PDF content).*

### Section III where we present our data and summary statistics. Sections IV and V describe our

### Section III: Data and Summary Statistics

### Data and sample
- Quarterly bank-level panel from the National Bank of Poland covering 110 Polish banks between December 1996 and December 2006.
- Variables include balance sheet and income statement items, interest income, amount of granted loans, and nonperforming loans for two borrower types: private firms and individual entrepreneurs.
- Borrower classification:
  - "Private firm": owned by private investors (>50% private share), subject to commercial law or civil law with >9 workers, full bookkeeping (labelled also as transparent borrowers).
  - "Individual entrepreneurs (entrepreneurs)": small firms employing up to 9 workers, subject to civil law, simplified accounting (labelled as opaque borrowers).
- Treatment of banks:
  - Banks treated as two before domestic mergers and as one afterwards.
  - First four quarters of operations for greenfield and takeover banks deleted from estimations.
- Key macro controls used: Inflation, Real interest rate (3 month WIBOR and Fisher equation), GDP (real quarterly growth).

*Italic: Source — IMF working paper content unit.*  

### Portfolio composition — headline summary statistics
- At end-2006, the share of foreign investors in Polish banking constituted 74 percent.
- Average portfolio shares (by ownership type, as reported):
  - Foreign banks: loans to transparent borrowers constitute 54 percent of total portfolio.
  - Domestic banks: loans to transparent borrowers constitute 31 percent of total portfolio.
  - Greenfield banks extended almost 67% of their loans to private firms (about 25 percentage points more than takeover banks and about twice as much as domestic banks).
  - Domestic private banks devote 15% of their portfolio to entrepreneurs (one and a half times more than other banks).
- Time dynamics in portfolios:
  - Greenfield banks over time start lending more to entrepreneurs and decrease the share of loans to private firms in their portfolio (convergence in borrower type allocations after 2001).
- Bank lending maturity (mean shares by ownership):
  - Greenfield: 53 percent short-term (up to 1 year).
  - Takeover: 36 percent short-term.
  - Domestic private: 41 percent short-term.
  - Public banks extend more long-term loans than any other type.
- Currency composition:
  - In 2006 Polish banks extended 23 percent of their loans in foreign currency.
  - Foreign banks, particularly greenfield institutions, give more loans in foreign currency than domestic banks (persistent over sample period).
- Lending rates (average by ownership):
  - Greenfield banks: 14.7 percent on average for all borrowers.
  - Private domestic banks: 21.7 percent on average for all borrowers.
  - Takeover banks: lower than domestic banks but higher than greenfield institutions.
- Lending rates by borrower type:
  - Lending rates to private firms are on average 2.3 percentage points lower than to entrepreneurs (difference statistically significant).

### Empirical specifications (overview)
- Portfolio share model (log-odds logit form, pooled OLS with clustered SEs):
  - Dependent variable: share of loans (by borrower type, maturity, or currency) in bank i at time t (log-odds).
  - Key regressors: ownership dummies (State-owned, Takeover, Greenfield), bank characteristics (ROA, Capitalization, Costs, NPL), macro variables (Inflation, Real interest rate, GDP), size, market structure (Herfindahl, Market share), seasonal dummies. All explanatory variables lagged by one period.
- Lending rate model:
  - Dependent variable: lending rate of bank i at time t (ratio of interest income to total loans), estimated for all borrowers and separately for private firms and entrepreneurs.
  - Controls include portfolio composition variables (share private, share entrepreneur, FX loans, short-term loans, long-term loans), bank characteristics, market structure, macro variables.
- Estimation choices:
  - Pooled estimation with clustered errors chosen over panel-fixed/random effects due to concerns about time-invariant coefficients and inconsistency.
  - Robustness checks: Beck & Katz panel-corrected SEs, fixed-effect vector decomposition (Pluemper & Troeger), panel unit root tests (series found stationary).

### Key empirical findings — portfolio allocation
- Borrower type allocation (Table 3 summary results):
  - Greenfield banks:
    - Devote almost 25 percent less of their portfolio to entrepreneurs (column 3).
    - Lend over 90 percent more to private firms (column 1) than domestic private banks (benchmark).
  - Takeover dummy: not statistically significant for borrower-type composition (i.e., takeover banks similar to domestic private banks).
  - Convergence over time: differences between greenfield and domestic private banks diminish after 2001; the gap in loans to entrepreneurs disappears after 2001.
  - Bank size: larger banks prefer private firms; small banks lend more to entrepreneurs.
  - NPLs: an increase in NPL for a borrower type reduces the bank’s share of loans to that borrower type.
- Loan maturity allocation (Table 4 summary results):
  - Greenfield banks:
    - Have over 73 percent more short-term loans (up to 1 year) than domestic private banks.
    - Have over 26 percent less long-term loans (over 5 years) than domestic private banks.
  - These differences are stable over time; little convergence on maturity composition.
  - Macroeconomic effects: low inflation and low real interest rates contribute to higher share of long-term loans.
  - Healthier banks (higher profit, lower NPL, higher capitalization) lend less short-term and more long-term.
- Foreign currency loans (Table 5 summary results):
  - Greenfield banks exhibit significantly higher share of loans in foreign currency (coefficients highly significant).
  - Inclusion of interbank liabilities with nonresident banks (proxy for foreign funding) is positive and significant: banks with higher share of funding from nonresident banks lend more in foreign currency.
  - Bank size positively associated with FX lending; falling inflation and interest rates reduced attractiveness of FX loans.

### Key empirical findings — lending rates
- Average bank lending rate (Table 6):
  - Baseline (no portfolio controls): greenfield banks charge 0.9 percent less per quarter (or 3.6 percent on an annual basis) than domestic private banks; takeover banks not significantly different from domestic banks.
  - When splitting greenfield/takeover before vs after 2001: the greenfield effect on lower rates disappears over time (convergence).
  - When portfolio composition (share private, share entrepreneur) is included, the impact of ownership/mode of entry on average lending rates disappears: average lending rates between banks are no longer statistically different (omitted-variable bias in prior specifications).
  - Dynamic models yield similar conclusion: no evidence of convergence in performance once composition is controlled for.
- Lending rates by borrower type (Tables 7a and 7b):
  - Estimating separately for private firms (transparent) and entrepreneurs (opaque) removes the composition effect.
  - Once controlling for borrower homogeneity:
    - Mode of entry and foreign ownership do not have significant effects on lending rates to either private firms or entrepreneurs.
    - Including FX loan share: higher share of FX loans has negative impact on lending rates (cheaper FX lending), but this does not change the null result on ownership effects.
    - Controlling for maturity (short-term, long-term) does not materially change results: maturity not significant determinant of lending rates in these specifications.
  - State-owned banks: when controlling for loan currency, state-owned banks offer lower lending rates; annualized difference amounts to 2.8 percent (statistically and economically significant).
- Time dynamics for lending rates (Tables 8a and 8b):
  - Splitting ownership by entry before vs after 2001, or by bank age, produces no evidence that longer presence leads to differential lending rates by foreign ownership.
  - Conclusion: no persistent performance advantage of foreign banks in lending rates after accounting for portfolio composition.

### Impacts on domestic banks (Tables 9 and 10)
- Portfolio shares of domestic banks (Table 9):
  - Domestic banks increased the share of entrepreneurs in their portfolios in the wake of foreign bank entry.
  - This effect is significant in the period after 2001 and for the share of loans granted by greenfield banks (consistent with Dell’Ariccia and Marquez, 2004): domestic banks refocus to opaque clients where they have comparative advantage.
- Nonperforming loans of domestic banks (Table 10):
  - Entry of greenfield banks decreased the quality of loan portfolios of domestic banks (increase in NPLs) for both transparent and opaque clients in the later period (notably large positive coefficients for Share greenfield* after 2001).
  - Entry of takeover banks tended to decrease NPLs of domestic banks (improvement in portfolio quality), particularly for private firms, consistent with positive spillovers (adoption of transaction-based lending techniques, better risk management).
  - Interpretation: greenfield entry appears to cherry-pick best borrowers, pushing domestic banks toward higher-risk lending and deteriorating their portfolio quality; takeover entry yields beneficial spillovers to domestic banks in transparent segments.

### Synthesis of hypotheses tested
- Performance hypothesis (foreign banks operate more efficiently and pass on gains uniformly across borrowers):
  - Rejected in lending-rate tests once portfolio composition is controlled for: no significant differences in lending rates by ownership mode for homogeneous borrower samples.
- Portfolio composition hypothesis (foreign banks have comparative advantage in hard-information lending and thus bias portfolios to transparent borrowers):
  - Strongly supported: greenfield banks lend more to transparent firms, more short-term, and more in foreign currency; portfolio composition differences explain lower average lending rates of greenfield banks in baseline regressions.

### Policy implications and crisis relevance (conclusions)
- Main empirical regularities:
  - Mode of foreign entry matters: greenfield banks specialize early on in lending to transparent borrowers, in FX, and at shorter maturities; takeover banks are similar to domestic private banks.
  - Convergence over time in borrower-type allocation: greenfield banks started to lend more to opaque borrowers after 2001, reflecting acquisition of soft-information capabilities or adoption of hard-information technologies for SMEs.
  - No evidence that foreign ownership (or mode of entry) yields lower lending rates conditional on borrower type; average lower rates of greenfield banks are driven by portfolio composition.
- Policy-relevant risks in crisis context:
  - Foreign banks’ higher share of foreign currency loans can increase borrower and bank vulnerability to local currency depreciation and FX-related credit risk.
  - Foreign banks’ shorter loan maturities allow them to restrict credit more quickly in stress (protecting parent balance sheets) but can impose credit constraints on borrowers and amplify cyclical credit contraction.
- Domestic-bank sector effects:
  - Greenfield entry can deteriorate domestic banks’ portfolio quality by inducing them to serve higher-risk SME borrowers.
  - Takeover entry can improve domestic banks’ portfolio quality in transparent segments via spillovers in lending and risk-management techniques.

*Italic: Source — IMF working paper content unit.*

### References

### References

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*Source: _wp09270 - References*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2009/_wp09270.pdf_