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All banks great, small, and global: Loan pricing and foreign competition

Beatriz de Blas () and Katheryn Russ ()

International Review of Economics & Finance, 2013, vol. 26, issue C, 4-24

Abstract: 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 remain 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. Although both types of liberalization can increase the cost-efficiency of lending in the liberalizing country, the distinction arises because opening toward cross-border lending increases competitive pressures (contestability) in the credit market, while takeovers do not. Both policies can increase aggregate output and generate permanent current account imbalances.

Keywords: Financial liberalization; Imperfect competition; Heterogeneous banks; Markups (search for similar items in EconPapers)
JEL-codes: E44 F12 G15 G21 (search for similar items in EconPapers)
Date: 2013
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Working Paper: All Banks Great, Small, and Global: Loan pricing and foreign competition (2010) Downloads
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