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FDI in the Banking Sector

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  • Beatriz de Blas
  • Katheryn Russ

    (Department of Economics, University of California Davis)

Abstract

It is a well known quandry that when countries open their financial sectors, foreign-owned banks appear to bring superior efficiency to their host markets but also charge higher markups on borrowed funds than their domestically owned rivals, with unknown impacts on interest rates and welfare. Using heterogeneous, imperfectly competitive lenders, the model illustrates that FDI can cause markups (the net interest margins commonly used to proxy lending-to-deposit rate spreads) to increase at the same time efficiency gains and local competition keep the interest rates that banks charge borrowers from rising. Competition from arms-length foreign loans, however, both squeezes markups and lowers interest rates. We show that allowing foreign participation is not always a welfare-improving substitute for increasing competition and technical efficiency among domestic banks.

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Bibliographic Info

Paper provided by University of California, Davis, Department of Economics in its series Working Papers with number 108.

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Length: 39
Date of creation: 18 May 2010
Date of revision:
Handle: RePEc:cda:wpaper:10-8

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Related research

Keywords: multinational bank; heterogeneity; endogenous markup; foreign direct investment;

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References

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Citations

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Cited by:
  1. Friederike Niepmann, 2012. "Banking across borders," Staff Reports 576, Federal Reserve Bank of New York.
  2. Franziska Bremus & Claudia M. Buch, 2013. "Granularity in Banking and Growth: Does Financial Openness Matter?," Discussion Papers of DIW Berlin 1346, DIW Berlin, German Institute for Economic Research.
  3. Beatriz de Blas & Katheryn Russ, 2010. "FDI in the Banking Sector," Working Papers 108, University of California, Davis, Department of Economics.
  4. Franziska Bremus, 2011. "Financial Integration and Macroeconomic Stability: What Role for Large Banks?," Discussion Papers of DIW Berlin 1178, DIW Berlin, German Institute for Economic Research.
  5. Franziska Bremus, 2013. "Cross-Border Banking, Bank Market Structures and Market Power: Theory and Cross-Country Evidence," Discussion Papers of DIW Berlin 1344, DIW Berlin, German Institute for Economic Research.

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