FOREIGN BANKS IN TRANSITION ECONOMIES: TRENDS AND IMPACT ON SYSTEMIC STABILITY.

Our paper investigates foreign banks impact on financial stability in transition countries during the boom-bust cycles, especially their contribution to the evolution and realization of systemic risk.The purpose of this study is to carry out theoretical pros and cons of foreign banks presence in post-soviet countries based on empirical evidence from their activity and risk profiles under different economic conditions and regulatory regimes. A comprehensive retrospective study of global bank capital entries into transition economies, reasons of foreign capital outflows and the dynamics of banks key financial indicators was carried out, as well as a comparative analysis of foreign versus local bank groups due to systemic financial sustainability. The results of this study indicatethat foreign banks appeared more solvent during economic crises in transition countriesin comparison with local private banks, despite great financial losses and required capitalization. The differences in default levels and response to the crisis among foreign and local banks were found. Instead of cross-border contagion channel strengthening, foreign banks presence, higher customer loyalty and capital support from parent institutions reduced deposit outflows and smoothed the potential impact of financial instability during the crises. On the contrary, the need of modern early warning monitoring system of foreign banking still exists because of possible rise of concentration and potential non-financial risks related to geopolitical motives and strengthening of compliance requirements. Main findings of empirical analysis contribute to a deeper understanding of the ownership influence on the systemic risk formation in theCEE and post-soviet banking sectors during the previous booms and crises. Grounded on the empirical data analysis, important patterns in cross-border funding and systemic risk channels were found. It allows to forecast properlyfuture benefits and risks of foreign bank presence in transition countries for regulatory and business purposes. [ABSTRACT FROM AUTHOR]