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All banks great, small, and global: Loan pricing and foreign competition

  • de Blas, Beatriz
  • Russ, Katheryn Niles

Using a new model of heterogeneous, imperfectly competitive lenders and a simple search process, we show how endogenous markups (the net interest margin commonly used to proxy lending-to-deposit rate spreads) can increase with FDI while the rates banks charge to borrowers remain largely unchanged or actually fall. We contrast the competitive effects from cross-border bank takeovers with those of cross-border lending by banks located overseas, which in most cases reduces markups and interest rates. Although both types of liberalization can increase the cost-efficiency of lending in the liberalizing country, the distinction arises because opening toward cross-border lending increases competitive pressures (contestability) in the credit market, while takeovers do not. Both policies can increase aggregate output and generate permanent current account imbalances.

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Article provided by Elsevier in its journal International Review of Economics & Finance.

Volume (Year): 26 (2013)
Issue (Month): C ()
Pages: 4-24

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Handle: RePEc:eee:reveco:v:26:y:2013:i:c:p:4-24
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