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Better the Devil that You Know: Evidence on Entry Costs Faced by Foreign Banks

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  • Arturo Galindo
  • Alejandro Micco
  • César Manuel Serra

Abstract

Institutional and legal differences between countries increase entry costs and reduce the ability of banks to expand abroad. We use bilateral foreign banking data for 176 countries to estimate a gravity model in which bilateral cross-border banking activity is explained, in addition to standard variables, by legal and institutional differences. We find that foreign banking is negatively affected by absolute differences in the legal setup and in basic institutions between source and host countries. Differences in the legal origin, for example, reduce bilateral participation in the banking system by nearly 11 percent. Additionally we do not find strong evidence suggesting asymmetries in adapting to better or worse institutional/legal environments.

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Bibliographic Info

Paper provided by Inter-American Development Bank in its series IDB Publications with number 6500.

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Date of creation: Jan 2003
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Handle: RePEc:idb:brikps:6500

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Keywords: Financial Sector; WP-477;

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  1. Brealey, R. A. & Kaplanis, E. C., 1996. "The determination of foreign banking location," Journal of International Money and Finance, Elsevier, Elsevier, vol. 15(4), pages 577-597, August.
  2. Jennifer S. Crystal & B. Gerard Dages & Linda S. Goldberg, 2001. "Does foreign ownership contribute to sounder banks in emerging markets? the Latin American experience," Staff Reports, Federal Reserve Bank of New York 137, Federal Reserve Bank of New York.
  3. Daron Acemoglu & Simon Johnson & James A. Robinson, 2000. "The Colonial Origins of Comparative Development: An Empirical Investigation," NBER Working Papers, National Bureau of Economic Research, Inc 7771, National Bureau of Economic Research, Inc.
  4. Linda S. Goldberg, 2002. "When Is U.S. Bank Lending to Emerging Markets Volatile?," NBER Chapters, National Bureau of Economic Research, Inc, in: Preventing Currency Crises in Emerging Markets, pages 171-196 National Bureau of Economic Research, Inc.
  5. Dario Focarelli & Alberto F. Pozzolo, 2000. "The determinants of cross-border bank shareholdings: an analysis with bank-level data from OECD countries," Proceedings, Federal Reserve Bank of Chicago 696, Federal Reserve Bank of Chicago.
  6. Grosse, Robert & Goldberg, Lawrence G., 1991. "Foreign bank activity in the United States: An analysis by country of origin," Journal of Banking & Finance, Elsevier, Elsevier, vol. 15(6), pages 1093-1112, December.
  7. Maria Soledad Martinez Peria, 2001. "Do Depositors Punish Banks for Bad Behavior? Market Discipline, Deposit Insurance, and Banking Crises," Journal of Finance, American Finance Association, American Finance Association, vol. 56(3), pages 1029-1051, 06.
  8. Martinez Peria, Maria Soledad & Schmukler, Sergio L., 1999. "Do depositors punish banks for"bad"behavior? : market discipline in Argentina, Chile, and Mexico," Policy Research Working Paper Series, The World Bank 2058, The World Bank.
  9. Claessens, Stijn & Demirguc-Kunt, Asl[iota] & Huizinga, Harry, 2001. "How does foreign entry affect domestic banking markets?," Journal of Banking & Finance, Elsevier, Elsevier, vol. 25(5), pages 891-911, May.
  10. La Porta, Rafael & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1997. " Legal Determinants of External Finance," Journal of Finance, American Finance Association, American Finance Association, vol. 52(3), pages 1131-50, July.
  11. Moshirian, Fariborz, 2001. "International investment in financial services," Journal of Banking & Finance, Elsevier, Elsevier, vol. 25(2), pages 317-337, February.
  12. Williams, Barry, 1998. "Factors affecting the performance of foreign-owned banks in Australia: A cross-sectional study," Journal of Banking & Finance, Elsevier, Elsevier, vol. 22(2), pages 197-219, February.
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