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The effect of potential foreign entry in the banking sector

Author

Listed:
  • 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.

Suggested Citation

  • Jie Mao & Ben Li, 2009. "The effect of potential foreign entry in the banking sector," Economics Bulletin, AccessEcon, vol. 29(1), pages 141-149.
    • Handle: RePEc:ebl:ecbull:eb-08g20011
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    References listed on IDEAS

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    Cited by:

    1. Feldmann, Horst, 2012. "Banking deregulation around the world, 1970s to 2000s: The impact on unemployment," International Review of Economics & Finance, Elsevier, vol. 24(C), pages 26-42.

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    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services

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