Are Foreign Banks Any Good for Ukrainian Firms?

Abstract: Ukraine is an emerging economy that has been steadily increasing its foreign banks presence in recent years and is likely to experience a new wave of entries as the world recovers from the financial crisis. To have realistic expectations about the future, it is important to know how foreign banks affected the Ukrainian economy in the past. We use a micro-level panel of 25,160 firm-year observations and the data on the location of over 21,000 bank offices to study foreign banks’ effect on firms’ credit access and growth in 2002-2007. We also examine whether the impact on firms of an exogenous shock in the form of the Orange Revolution differed depending on foreign banks presence. Our findings suggest that foreign banks presence have on average been associated with a lower cost of capital, an accelerated debt growth and sales growth for all Ukrainian firms. Although foreign banks might favor large firms with a high collateral value, small firms seem to benefit, too, by receiving lower credit rates. Foreign banks’ behavior has not been found to differ from domestic banks’ behavior under the conditions of a political shock.