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FDI in the Banking Sector

Author

Listed:
  • Beatriz de Blas
  • Katheryn Russ

    (Department of Economics, University of California Davis)

Abstract

It is a well known quandry that when countries open their financial sectors, foreign-owned banks appear to bring superior efficiency to their host markets but also charge higher markups on borrowed funds than their domestically owned rivals, with unknown impacts on interest rates and welfare. Using heterogeneous, imperfectly competitive lenders, the model illustrates that FDI can cause markups (the net interest margins commonly used to proxy lending-to-deposit rate spreads) to increase at the same time efficiency gains and local competition keep the interest rates that banks charge borrowers from rising. Competition from arms-length foreign loans, however, both squeezes markups and lowers interest rates. We show that allowing foreign participation is not always a welfare-improving substitute for increasing competition and technical efficiency among domestic banks.

Suggested Citation

  • Beatriz de Blas & Katheryn Russ, 2010. "FDI in the Banking Sector," Working Papers 108, University of California, Davis, Department of Economics.
  • Handle: RePEc:cda:wpaper:10-8
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    File URL: http://wp.econ.ucdavis.edu/10-8.pdf
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Bremus, Franziska & Buch, Claudia M., 2017. "Granularity in banking and growth: Does financial openness matter?," Journal of Banking & Finance, Elsevier, vol. 77(C), pages 300-316.
    2. Niepmann, Friederike, 2015. "Banking across borders," Journal of International Economics, Elsevier, vol. 96(2), pages 244-265.
    3. Kerl, Cornelia & Niepmann, Friederike, 2014. "What determines the composition of international bank flows?," Staff Reports 681, Federal Reserve Bank of New York.
    4. Bremus, Franziska M., 2015. "Cross-border banking, bank market structures and market power: Theory and cross-country evidence," Journal of Banking & Finance, Elsevier, vol. 50(C), pages 242-259.
    5. Franziska Bremus, 2011. "Financial Integration and Macroeconomic Stability: What Role for Large Banks?," Discussion Papers of DIW Berlin 1178, DIW Berlin, German Institute for Economic Research.

    More about this item

    Keywords

    multinational bank; heterogeneity; endogenous markup; foreign direct investment;

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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