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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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  • Claeys, Sophie

    ()
    (Research Department, Central Bank of Sweden)

  • Hainz, Christa

    ()
    (Department of Economics, University of Munich)

Abstract

Policy makers often decide to liberalize foreign bank entry but put limitations on the mode of entry. We study how different entry modes affect the lending rate set by foreign and domestic banks. Our model captures two essential features of banking competition in emerging markets: Domestic banks possess private information about their incumbent clients and foreign banks have better screening skills. Our model predicts that competition is stronger if foreign entry occurs through a greenfield investment and domestic banks' interest rates are thus lower. We find empirical support for this differential competition effect for a sample of banks from ten Eastern European countries for the period 1995-2003.

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Bibliographic Info

Paper provided by Sveriges Riksbank (Central Bank of Sweden) in its series Working Paper Series with number 210.

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Length: 70 pages
Date of creation: 01 Jun 2007
Date of revision:
Handle: RePEc:hhs:rbnkwp:0210

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

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