Foreign Bank Entry, Performance of Domestic Banks, and Sequence of Financial Liberalization
The openness or internationalization of financial services is a complex issue because it is closely related to structural reforms in the domestic financial sector with some perceived implications for macroeconomic stability. The authors investigate the impact of foreign bank entry on the performance of domestic banks and how this relationship is affected by the sequence of financial liberalization. Their data set is constructed from the BANKSCOPE database, including 30 industrial and developing countries, and covering the period from 1995 to 2002. The authors 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 the 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 that liberalized their stock market first. In these countries, both profit and cost indicators are negatively related to the share of foreign banks. Countries that liberalized their capital account first seem to have benefited less from foreign bank entry compared with the other two sets of countries.
Summary: | The openness or internationalization of
financial services is a complex issue because it is closely
related to structural reforms in the domestic financial
sector with some perceived implications for macroeconomic
stability. The authors investigate the impact of foreign
bank entry on the performance of domestic banks and how this
relationship is affected by the sequence of financial
liberalization. Their data set is constructed from the
BANKSCOPE database, including 30 industrial and developing
countries, and covering the period from 1995 to 2002. The
authors 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 the 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 that liberalized their stock
market first. In these countries, both profit and cost
indicators are negatively related to the share of foreign
banks. Countries that liberalized their capital account
first seem to have benefited less from foreign bank entry
compared with the other two sets of countries. |
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