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Explaining foreign bank entrance in emerging markets

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  • Althammer, Wilhelm
  • Haselmann, Rainer

Abstract

This paper provides a theoretical framework that can explain the empirical observation that foreign banks from industrialized countries tend to increase their involvement in emerging markets in periods of market instability. In this model, domestic banks have (through past lending operations) more soft information on their borrowers available compared to foreign banks. Foreign banks, however, have a superior screening technology that allows them to obtain more hard information about their borrowers’ investment projects. The model has an important implication: Foreign banks increase their market share when credit market conditions deteriorate. The rationale for this finding is that the comparative advantage of the domestic bank loses value in unstable credit market conditions. Thus, the advantage of having a screening technology becomes more important and allows the foreign bank to increase market share. In times of crisis hard information on projects is relatively more important than soft information on the borrower’s history.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Comparative Economics.

Volume (Year): 39 (2011)
Issue (Month): 4 ()
Pages: 486-498

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Handle: RePEc:eee:jcecon:v:39:y:2011:i:4:p:486-498

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Web page: http://www.elsevier.com/locate/inca/622864

Related research

Keywords: Foreign banks; Market entrance of foreign banks; Transition economies;

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References

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Cited by:
  1. Degryse, Hans & Havrylchyk, Olena & Jurzyk, Emilia & Kozak, Sylwester, 2012. "Foreign bank entry, credit allocation and lending rates in emerging markets: Empirical evidence from Poland," Journal of Banking & Finance, Elsevier, vol. 36(11), pages 2949-2959.

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