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

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  • de Blas, Beatriz
  • Russ, Katheryn Niles

Abstract

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.

Suggested Citation

  • de Blas, Beatriz & Russ, Katheryn Niles, 2013. "All banks great, small, and global: Loan pricing and foreign competition," International Review of Economics & Finance, Elsevier, vol. 26(C), pages 4-24.
  • Handle: RePEc:eee:reveco:v:26:y:2013:i:c:p:4-24
    DOI: 10.1016/j.iref.2012.08.005
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    Keywords

    Financial liberalization; Imperfect competition; Heterogeneous banks; Markups;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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