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The impact of foreign bank entry on domestic banking markets: a note

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  • Hermes, Niels
  • Lensink, Robert

    (Groningen University)

Abstract

Claessens, et al. (2001) empirically investigate the impact of foreign bank entry on domestic banking markets. They show that foreign bank entry reduces income, profits and costs of domestic banks. They conclude that foreign entry improves the functioning of national banking markets through increased market competition and improved efficiency of domestic banks. We redo their analysis using data of domestic banks in LDCs only and generally find opposite results: foreign entry leads to increases of income, profits and costs. This suggests that foreign bank entry may have a different impact on domestic banking markets in developed and developing countries. Moreover, we find evidence for an inverted U-shaped relationship between foreign bank entry and domestic bank performance, indicating that for banks in these countries competition and efficiency effects only take place after the extent of foreign bank entry has reached a certain minimum level.

Suggested Citation

  • Hermes, Niels & Lensink, Robert, 2001. "The impact of foreign bank entry on domestic banking markets: a note," Research Report 01E62, University of Groningen, Research Institute SOM (Systems, Organisations and Management).
    • Handle: RePEc:gro:rugsom:01e62
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    File URL: http://irs.ub.rug.nl/ppn/237350815
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    Cited by:

    1. Driton Balaj, 2010. "The Impact of Foreign Banks Presence on the Performance of Domestic Banks in Kosovo during the Period 2001-2007," Acta Universitatis Danubius. OEconomica, Danubius University of Galati, issue 4(4), pages 87-103, December.
    2. Wu, Ji & Chen, Minghua & Jeon, Bang Nam & Wang, Rui, 2017. "Does foreign bank penetration affect the risk of domestic banks? Evidence from emerging economies," Journal of Financial Stability, Elsevier, vol. 31(C), pages 45-61.
    3. Shusen Qi & Steven Ongena, 2019. "Will Money Talk? Firm Bribery and Credit Access," Financial Management, Financial Management Association International, vol. 48(1), pages 117-157, March.

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