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Profitability of Foreign and Domestic Banks in Central and Eastern Europe : Does the Mode of Entry Matter?

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  • Olena Havrylchyk
  • Emilia Jurzyk

Abstract

Using data for 265 banks in the Central and Eastern European Countries for the period of 1995-2003, this paper analyses the differences in profitability between domestic and foreign banks. We show that foreign banks, especially greenfield institutions, earn higher profits than domestic banks. However, this effect is acquired, rather than inherited, since there is evidence that foreign banks tend to take over less profitable institutions. Profits of foreign banks in the CEEC also exceed profits of their parent banks, explaining the reasons for their entry. Further, we study benefits and costs of foreign ownership by analyzing determinants of profitability for domestic, takeover, and greenfield banks. Profits of foreign banks are less affected by macroeconomic conditions in their host countries. However, greenfield banks are sensitive to the situation of their parent banks. Only domestic banks enjoy higher profits in more concentrated banking markets, whereas takeover banks suffer from diseconomies of scale due to the fact that they acquired large institutions.
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  • Olena Havrylchyk & Emilia Jurzyk, 2005. "Profitability of Foreign and Domestic Banks in Central and Eastern Europe : Does the Mode of Entry Matter?," Working Papers 2005-21, CEPII research center.
  • Handle: RePEc:cii:cepidt:2005-21
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    Cited by:

    1. Alin-Marius Andrie? & Bogdan Capraru & Florentina Ie?an-Muntean & Iulian Ihnatov, 2016. "The Impact of International Financial Crisis on Bank Performance in Eastern and Central European Countries," EuroEconomica, Danubius University of Galati, issue 1(35), pages 111-126, may.
    2. Claessens, Stijn & van Horen, Neeltje, 2012. "Being a foreigner among domestic banks: Asset or liability?," Journal of Banking & Finance, Elsevier, vol. 36(5), pages 1276-1290.
    3. Claeys, Sophie & Hainz, Christa, 2006. "Acquisition versus greenfield: The impact of the mode of foreign bank entry on information and bank lending rates," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 182, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
    4. Ji Wu & Hosung Lim & Bang Nam Jeon, 2016. "The Impact of Foreign Banks on Monetary Policy Transmission During the Global Financial Crisis of 2008–2009: Evidence from Korea," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 52(7), pages 1574-1586, July.
    5. David Delia & Draganescu Marius & Paiusan Luminita & Feies Claudiu, 2014. "Trends Regarding The Evolution Of The Romanian Banking System In Relation To The Ones Belonging To Central And Eastern European Countries," Annals - Economy Series, Constantin Brancusi University, Faculty of Economics, vol. 4, pages 27-32, August.
    6. repec:ers:ijebaa:v:iv:y:2016:i:4:p: is not listed on IDEAS
    7. Jeon, Bang Nam & Olivero, María Pía & Wu, Ji, 2013. "Multinational banking and the international transmission of financial shocks: Evidence from foreign bank subsidiaries," Journal of Banking & Finance, Elsevier, vol. 37(3), pages 952-972.
    8. Driton Balaj, 2015. "A Comparison of Financial Performance of Domestic and Foreign Banks in Kosovo by Using DuPont Model," Acta Universitatis Danubius. OEconomica, Danubius University of Galati, issue 11(6), pages 71-86, December.
    9. Bang Nam Jeon & Maria Pia Olivero & Ji Wu, 2013. "Multinational Banking and Financial Contagion: Evidence from Foreign Bank Subsidiaries," Working Papers 052013, Hong Kong Institute for Monetary Research.
    10. David Liebeg & Markus Schwaiger, 2007. "Determinants of Bank Interest Margins in Central and Eastern Europe," Financial Stability Report, Oesterreichische Nationalbank (Austrian Central Bank), issue 14, pages 68-84.
    11. Ngoc-Anh Vo Thi & Dev Vencappa, 2008. "Does the Entry Mode of Foreign Banks Matter for Bank Efficiency? Evidence from the Czech Republic,Hungary, and Poland," William Davidson Institute Working Papers Series wp925, William Davidson Institute at the University of Michigan.
    12. Jeon, Bang Nam & Wu, Ji, 2014. "The role of foreign banks in monetary policy transmission: Evidence from Asia during the crisis of 2008–9," Pacific-Basin Finance Journal, Elsevier, vol. 29(C), pages 96-120.
    13. Claeys, Sophie & Hainz, Christa, 2014. "Modes of foreign bank entry and effects on lending rates: Theory and evidence," Journal of Comparative Economics, Elsevier, vol. 42(1), pages 160-177.

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    Keywords

    Banking system; Competition; FDI; Financial markets;

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration

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