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The effect of potential foreign entry in the banking sector

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  • Jie Mao

    ()
    (School of Economics and Management, Tsinghua University)

  • Ben Li

    ()
    (Department of Economics, University of Colorado at Boulder)

Abstract

The existing literature ignores the effects of potential foreign entry on domestic banks in the process of financial liberalization. Empirical investigation of these effects is rare in practice due to the difficulties in observation and identification. Upon accession to the WTO, the China government committed to an opening timetable for the local-currency transactions. This timetable s an ideal setting to examine whether the potential entry of foreign banks has pro-competitive effects on the domestic banking market. Our empirical results show that domestic banks lower their interest margins in response to potential competition, and accordingly their before-tax profits decline. This signifies that efficiency gains in the banking sector also arise from potential foreign entry.

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Bibliographic Info

Article provided by AccessEcon in its journal Economics Bulletin.

Volume (Year): 29 (2009)
Issue (Month): 1 ()
Pages: 141-149

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Handle: RePEc:ebl:ecbull:eb-08g20011

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  1. Coccorese, Paolo, 2008. "Bank competition and regional differences," Economics Letters, Elsevier, vol. 101(1), pages 13-16, October.
  2. Ilko Naaborg & Bert Scholtens & Jakob de Haan & Hanneke Bol & Ralph de Haas, 2004. "How Important are Foreign Banks in the Financial Development of European Transition Countries?," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 3(2), pages 99-123, August.
  3. Mats A. Bergman & Niklas Rudholm, 2003. "The Relative Importance of Actual and Potential Competition: Empirical Evidence From the Pharmaceuticals Market," Journal of Industrial Economics, Wiley Blackwell, vol. 51(4), pages 455-467, December.
  4. Austan Goolsbee & Chad Syverson, 2004. "How Do Incumbents Respond to the Threat of Entry? Evidence from the Major Airlines," Working Papers 04-04, NET Institute, revised Dec 2004.
  5. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
  6. Wall, Howard J., 2004. "Entrepreneurship and the deregulation of banking," Economics Letters, Elsevier, vol. 82(3), pages 333-339, March.
  7. Claessens, Stijn & Demirguc-Kunt, Asl[iota] & Huizinga, Harry, 2001. "How does foreign entry affect domestic banking markets?," Journal of Banking & Finance, Elsevier, vol. 25(5), pages 891-911, May.
  8. Xu, Lei & Lin, Chien-Ting, 2007. "Can Chinese banks compete after accession to WTO?," Journal of Asian Economics, Elsevier, vol. 18(6), pages 883-903, December.
  9. Freeman, Donald G., 2002. "Did state bank branching deregulation produce large growth effects?," Economics Letters, Elsevier, vol. 75(3), pages 383-389, May.
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