Modes of foreign bank entry and effects on lending rates: Theory and evidence

Sophie Claeys and Christa Hainz

Journal of Comparative Economics, 2014, vol. 42, issue 1, 160-177

Abstract: Policy makers who decide to liberalize foreign bank entry frequently put limitations on the mode of entry. We study how different entry modes affect the lending rates of foreign and domestic banks. In our model, the mode of entry determines whether a foreign bank inherits a customer base. This, in turn, affects how information is distributed between foreign and domestic banks. We show that this distribution of information about incumbent customers leads to stronger competition if foreign entry occurs through a greenfield investment. As a result, domestic bank lending rates are lower after greenfield entry. We find empirical support for this prediction for a sample of banks from 10 Eastern European countries for the period 1995–2003.

Keywords: Banking; Foreign entry; Mode of entry; Interest rate; Asymmetric information (search for similar items in EconPapers)
JEL-codes: D4 G21 L31 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (25)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jcecon:v:42:y:2014:i:1:p:160-177

DOI: 10.1016/j.jce.2013.01.009

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