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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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Suggested Citation

  • 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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    More about this item

    Keywords

    Banking system; Competition; FDI; Financial markets;
    All these keywords.

    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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