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All Banks Great, Small, and Global: Loan pricing and foreign competition

  • Beatriz de Blas
  • Katheryn Niles Russ

Can allowing foreign participation in the banking sector increase real output, despite the imperfectly competitive nature of the industry? 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 are 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. Both policies can increase aggregate output and generate permanent current account imbalances.

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File URL: http://www.nber.org/papers/w16029.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16029.

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Date of creation: May 2010
Publication status: published as 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:nbr:nberwo:16029
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