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Acquisition versus greenfield - the impact of the mode of foreign bank entry on information and bank lending rates

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Author Info
Sophie Claeys () (Department of Financial Economics and CERISE, Ghent University, W. Wilsonplein 5D, B-9000 Ghent, Belgium.)
Christa Hainz () (Department of Economics, University of Munich, Akademiestr. 1/III, 80799 Munich, Germany.)

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Abstract

Policy makers often decide to liberalize foreign bank entry but at the same time restrict the mode of entry. We study how different entry modes affect the interest rate for loans in a model in which domestic banks possess private information about their incumbent clients but foreign banks have better screening skills. Our model predicts that competition is stronger if market entry occurs through a greenfield investment and therefore domestic banks' interest rates are lower. We find empirical support for our results for a sample of banks from 10 transition countries of Eastern Europe for the period 1995-2003. JEL Classification: G21, D4, L31.

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Paper provided by European Central Bank in its series Working Paper Series with number 653.

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Length: 51 pages
Date of creation: Jul 2006
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Handle: RePEc:ecb:ecbwps:20060653

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Related research
Keywords: Banking; Foreign Entry; Mode of Entry; Interest Rate; Asymmetric Information.;

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This paper has been announced in the following NEP Reports: References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Maria Lehner & Monika Schnitzer, 2006. "Entry of Foreign Banks and their Impact on Host Countries," Discussion Papers 152, SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich. [Downloadable!]
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  2. Besanko, David & Thakor, Anjan V, 1987. "Collateral and Rationing: Sorting Equilibria in Monopolistic and Competitive Credit Markets," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 28(3), pages 671-89, October. [Downloadable!] (restricted)
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  4. Majnoni, Giovanni & Shankar, Rashmi & Varhegyi, Eva, 2003. "The dynamics of foreign bank ownership - evidence from Hungary," Policy Research Working Paper Series 3114, The World Bank. [Downloadable!]
  5. Martinez Peria, Maria Soledad & Mody, Ashoka, 2004. "How Foreign Participation and Market Concentration Impact Bank Spreads: Evidence from Latin America," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(3), pages 511-37, June.
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  6. Padilla, A Jorge & Pagano, Marco, 1997. "Endogenous Communication among Lenders and Entrepreneurial Incentives," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 10(1), pages 205-36.
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  7. Laurent Weill, 2003. "Banking efficiency in transition economies," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 11(3), pages 569-592, 09. [Downloadable!] (restricted)
  8. Loretta J. Mester, 1997. "What's the point of credit scoring?," Business Review, Federal Reserve Bank of Philadelphia, issue Sep, pages 3-16. [Downloadable!]
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  10. Clarke, George R. G. & Cull, Robert & Martinez Peria, Maria Soledad, 2001. "Does foreign bank penetration reduce access to credit in developing countries"evidence from asking borrowers," Policy Research Working Paper Series 2716, The World Bank. [Downloadable!]
  11. Sharpe, Steven A, 1990. " Asymmetric Information, Bank Lending, and Implicit Contracts: A Stylized Model of Customer Relationships," Journal of Finance, American Finance Association, vol. 45(4), pages 1069-87, September. [Downloadable!] (restricted)
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  12. Demirguc-Kunt, Asli & Huizinga, Harry, 1998. "Determinants of commercial bank interest margins and profitability : some international evidence," Policy Research Working Paper Series 1900, The World Bank. [Downloadable!]
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  13. Atif Mian, 2006. "Distance Constraints: The Limits of Foreign Lending in Poor Economies," Journal of Finance, American Finance Association, vol. 61(3), pages 1465-1505, 06. [Downloadable!] (restricted)
  14. Dell'Ariccia, Giovanni & Marquez, Robert, 2004. "Information and bank credit allocation," Journal of Financial Economics, Elsevier, vol. 72(1), pages 185-214, April. [Downloadable!] (restricted)
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  16. 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. [Downloadable!] (restricted)
  17. Mariassunta Giannetti & Steven Ongena, 2005. "Financial integration and entrepreneurial activity - evidence from foreign bank entry in emerging markets," Working Paper Series 498, European Central Bank. [Downloadable!]
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  18. Broecker, Thorsten, 1990. "Credit-Worthiness Tests and Interbank Competition," Econometrica, Econometric Society, vol. 58(2), pages 429-52, March. [Downloadable!] (restricted)
  19. Giovanni Dell'Ariccia & Ezra Friedman & Robert Marquez, 1999. "Adverse Selection as a Barrier to Entry in the Banking Industry," RAND Journal of Economics, The RAND Corporation, vol. 30(3), pages 515-534, Autumn. [Downloadable!] (restricted)
  20. Havrylchyk, Olena & Jurzyk, Emilia, 2006. "Profitability of foreign banks in Central and Eastern Europe: Does the entry mode matter?," BOFIT Discussion Papers 5/2006, Bank of Finland, Institute for Economies in Transition. [Downloadable!]
  21. Djankov, Simeon & McLiesh, Caralee & Shleifer, Andrei, 2007. "Private credit in 129 countries," Journal of Financial Economics, Elsevier, vol. 84(2), pages 299-329, May. [Downloadable!] (restricted)
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  22. Laeven, Luc & Majnoni, Giovanni, 2005. "Does judicial efficiency lower the cost of credit?," Journal of Banking & Finance, Elsevier, vol. 29(7), pages 1791-1812, July. [Downloadable!] (restricted)
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  23. Ralph de Haas & Ilko Naaborg, 2005. "Does Foreign Bank Entry Reduce Small Firms' Access to Credit? Evidence from European Transition Economies," DNB Working Papers 050, Netherlands Central Bank, Research Department. [Downloadable!]
  24. Rajan, Raghuram G, 1992. " Insiders and Outsiders: The Choice between Informed and Arm's-Length Debt," Journal of Finance, American Finance Association, vol. 47(4), pages 1367-400, September. [Downloadable!] (restricted)
  25. Thierry Tressel & Enrica Detragiache & Poonam Gupta, 2006. "Foreign Banks in Poor Countries: Theory and Evidence," IMF Working Papers 06/18, International Monetary Fund. [Downloadable!]
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  26. Rajdeep Sengupta, 2006. "Foreign entry and bank competition," Working Papers 2006-043, Federal Reserve Bank of St. Louis. [Downloadable!]
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  27. Bonin, John P. & Hasan, Iftekhar & Wachtel, Paul, 2005. "Privatization matters: Bank efficiency in transition countries," Journal of Banking & Finance, Elsevier, vol. 29(8-9), pages 2155-2178, August. [Downloadable!] (restricted)
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  28. Jan Bouckaert & Hans Degryse, 2006. "Entry and Strategic Information Display in Credit Markets," Economic Journal, Royal Economic Society, vol. 116(513), pages 702-720, 07. [Downloadable!] (restricted)
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  29. Haselmann, Rainer & Pistor, Katharina & Vig, Vikrant, 2006. "How Law Affects Lending," MPRA Paper 157, University Library of Munich, Germany. [Downloadable!]
  30. von Thadden, Ernst-Ludwig, 2004. "Asymmetric information, bank lending and implicit contracts: the winner's curse," Finance Research Letters, Elsevier, vol. 1(1), pages 11-23, March. [Downloadable!] (restricted)
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  31. Ross Levine, 2003. "Denying Foreign Bank Entry: Implications For Bank Interest Margins," Working Papers Central Bank of Chile 222, Central Bank of Chile. [Downloadable!]
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Steven Globerman & Daniel Shapiro, 2009. "Economic and strategic considerations surrounding Chinese FDI in the United States," Asia Pacific Journal of Management, Springer, vol. 26(1), pages 163-183, March. [Downloadable!] (restricted)
  2. Claudia M. Buch & Gayle L. DeLong, 2008. "Banking Globalization: International Consolidation and Mergers in Banking," IAW Discussion Papers 38, Institut für Angewandte Wirtschaftsforschung (IAW). [Downloadable!]
  3. Lehner, Maria, 2008. "Entry Mode Choice of Multinational Banks," Discussion Papers in Economics 8222, University of Munich, Department of Economics. [Downloadable!]
  4. Lehner, Maria & Schnitzer, Monika, 2006. "Entry of Foreign Banks and their Impact on Host Countries," Discussion Papers in Economics 1208, University of Munich, Department of Economics. [Downloadable!]
    Other versions:
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