Re-examining the impact of foreign bank participation on interest margins in emerging markets

Over the past two decades, emerging markets have witnessed a considerable increase in foreign bank participation, with the anticipation that foreign entry would lower financial intermediation costs. We re-examine the impact of foreign participation on bank interest margins using data on 11 Central and Eastern European countries (CEECs), where the increase in foreign bank participation was the strongest. Using the modified dealership model of Maudos and Fernandez de Guevara (2004) as a baseline specification, we show that augmenting the model by proxies for direct and indirect impact of foreign bank participation does not produce a significant outcome. We explain our results by the fact that the dealership model fully accounts for the mechanisms through which foreign bank presence is hypothesized to affect interest margins in theoretical models on international banking. We call for re-examination of some of the previous findings showing a significant own effect of foreign bank participation on interest margins in emerging markets within the framework of the dealership model.