Foreign bank activity has increased dramatically in recent years as barriers to foreign bank entry and activity have largely broken down. In many countries foreign banks are responsible for a large fraction of bank lending (Clarke, Cull, Peria, and Sanchez 2003). Foreign banks are particularly active in the syndicated loan markets. In our sample of twenty four European countries, a foreign bank acts as the lead arranger in about one third of all deals and participates as lead arranger together with domestic banks in another forty percent of all deals. Consequently less than one third of all deals are domestically arranged without at least one foreign lead arranger. Moreover, foreign bank underwriting of syndicated loans is found throughout the European markets, in small countries as well as the largest countries with the most sophisticated domestic financial systems. Our objective is to gain an understanding of why the share of foreign banks in syndicated loan markets is so high. Our motivation is that the standard explanations in the literature for foreign bank activity are not always consistent with the levels and patterns of foreign bank participation in syndicated loan markets.

The syndicated loan market provides a good laboratory to examine foreign banking activity because it is large and has many cross border features. In this market firms can go to either domestic or foreign banks (or a consortium of both) that will syndicate a loan to buyers in any market. We will use detailed data on syndicated loans, including interest rates, from Dealscan. We match the loan data with information about the borrowing firms from Amadeus. Thus, our data set includes detailed information on lenders and borrowers throughout Europe for the period 1995 - 2007. Furthermore, by focusing on Europe, we have a sample of many countries with both large and small financial markets.