Home–Host Distance in Governance Quality, Foreign Banks’ Lending, and Emerging Host Markets’ Resilience

Abstract

In this study, we investigate how governance quality determines the lending behavior of foreign-owned banks in emerging host markets. We do this by employing a dataset that includes foreign banks from 45 developed markets operating in 58 emerging markets. We incorporate direct measures of governance quality as well as home–host country distance in governance quality. Additionally, we investigate foreign banks’ lending behavior during the 2008-2009 financial crisis (GFC). We document that more micro-oriented governance dimensions, such as business regulatory quality and corruption control, play a role for foreign banks. Furthermore, we show that home–host distance in governance quality shapes lending behaviors to a greater extent than the quality in host markets itself. We also show that governance quality proximity between home and host markets fostered emerging economies’ resilience during the GFC to a greater extent than quality as a standalone.