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Foreign Bank Entry

Ignacio Hernandez's picture

In their paper "Foreign Bank Entry, Performance of Domestic Banks and the Sequence of Financial Liberalization", PGP's Nihal Bayraktar and Yan Wang investigate the effects of banking sector openness and the sequence of financial liberalization on the efficiency and competitiveness of domestic banks, using country-level data for 30 countries.


The openness or internationalization of financial services is a complex issue as it is closely related to structural reforms in domestic financial sector with some perceived implications to macroeconomic stability. This paper attempts to investigate firstly the impact of foreign bank entry on the performance of domestic banks, and secondly how this relationship is affected by the sequence of financial liberalization. 


Our data set is constructed from the BANKSCOPE database including 30 developed and developing countries and covering the period from 1995 to 2002. We apply panel data regressions by pooling all countries together, and by grouping countries according to the sequence of their financial liberalization.


One observation based on descriptive analysis is that the degree of openness to foreign bank entry varies a great deal which is not correlated with average income levels or with GDP growth.


Second, the sequence of financial liberalization matters for the performance of domestic banking sector: After controlling for macroeconomic variables and grouping countries by their sequence of liberalization, foreign bank entry has significantly improved domestic bank competitiveness in countries which liberalized their stock market first. In these countries, both profit and cost indicators are negatively related to the share of foreign banks. Countries which liberalized their capital account first seem to have benefited less from foreign bank entry as compared to the other two sets of countries.