How Does Foreign Entry Affect the Domestic Banking Market?

Abstract

No AccessPolicy Research Working Papers25 Jun 2013How Does Foreign Entry Affect the Domestic Banking Market?Authors/Editors: Asli Demirgüç-Kunt, Harry Huizinga, Stijn ClaessensAsli Demirgüç-Kunt, Harry Huizinga, Stijn Claessenshttps://doi.org/10.1596/1813-9450-1918SectionsAboutPDF (0.1 MB) ToolsAdd to favoritesDownload CitationsTrack Citations ShareFacebookTwitterLinked In Abstract:June 1998 Does the entry of foreign banks make domestic banks more competitive? This study shows that, in developing countries, increasing the number (even more than the share) of foreign banks reduces both profits and overhead expenses of domestic banks. Banking markets are becoming increasingly international through financial liberalization and general economic integration. Using bank-level data for 80 countries for 1988-95, Claessens, Demirgüç-Kunt, and Huizinga examine the extent of foreign ownership in national banking markets. They compare net interest margins, overhead, taxes paid, and profitability of foreign and domestic banks. The comparative functions of foreign banks and domestic banks is very different in developing and industrial countries, possibly because of a different customer base, different bank procedures, and different regulatory and tax regimes: ° In developing countries foreign banks tend to have greater profits, higher interest margins, and higher tax payments than do domestic banks. ° In industrial countries it is the domestic banks that have greater profits, higher interest margins, and higher tax payments. It is common to read, in the literature on foreign banking, that the entry of foreign banks can make national banking markets more competitive, thereby forcing domestic banks to operate more efficiently. Claessens, Demirgüç-Kunt, and Huizinga show that increasing the foreign share of bank ownership does indeed reduce profitability and overhead expenses in domestically owned banks-so the general effect of foreign bank entry may be positive. Interestingly, the number of foreign entrants matters more than their market share, suggesting that they affect local bank competition more on entry rather than after gaining a substantial market share. These effects hold even when controlling for the fact that foreign banks may be attracted to markets with certain characteristics, such as low banking costs. This paper-a joint product of the East Asia and Pacific Region and the Development Research Group-is part of a larger effort in the Bank to study the effects of increasing global integration of financial services. The authors may be contacted at cclaessens @worldbank.org, [email protected], or [email protected] Previous bookNext book FiguresreferencesRecommendeddetailsCited byDETERMINANTS OF CORPORATE PROFITABILITY OF COMPANIES FROM CONSTRUCTION AND REAL ESTATE INDUSTRIES IN SELECTED EUROPEAN COUNTRIESActa academica karviniensia, Vol.20, No.2Inclusión de los servicios financieros en los Tratados Preferenciales de Comercio y distribución de créditoRevista Vértice Universitario21 June 2019The Geneva Papers on Risk and Insurance - Issues and Practice, Vol.43, No.3Macroeconomic determinants of interest rate spreads in GhanaAfrican Journal of Economic and Management Studies, Vol.8, No.1Do consolidation and foreign ownership affect bank risk taking in an emerging economy? An empirical investigationManagerial Finance, Vol.41, No.9Banks' capital buffer, risk and performance in the Canadian banking system: Impact of business cycles and regulatory changesJournal of Banking & Finance, Vol.37, No.9Impact of financial liberalization and foreign bank entry on Islamic banking performanceInternational Journal of Islamic and Middle Eastern Finance and Management, Vol.6, No.1The persistence of bank profitJournal of Banking & Finance, Vol.35, No.11The Transformation of China from an Emerging Economy to a Global Powerhouse25 May 2009Internationalisation and firm performance: Evidence from estimates of efficiency in banking in Namibia and TanzaniaJournal of International Development, Vol.20, No.7Designing financial regulatory policies that work for Latin America: the role of markets and institutionsJournal of Financial Stability, Vol.1, No.2Banking in the Balkans: the structure of banking sectors in Southeast EuropeEconomic Systems, Vol.28, No.2A Cross-Country Analysis of the Bank Supervisory Framework and Bank PerformanceFinancial Markets, Institutions and Instruments, Vol.12, No.2Operating performance of banks among Asian economies: An international and time series comparisonJournal of Banking & Finance, Vol.27, No.3Foreign Direct Investment in the Banking Sector: Experiences and Lessons from CEECsThe macroeconomic impact of bank capital requirements in emerging economies: Past evidence to assess the futureJournal of Banking & Finance, Vol.26, No.5Governance and Restructuring of Commercial BanksForeign versus domestic banks in Germany and the US: a tale of two markets?Journal of Multinational Financial Management, Vol.11, No.4-5T