Better the Devil that You Know: Evidence on Entry Costs Faced by Foreign Banks

Arturo Galindo, Alejandro Micco () and César Manuel Serra

No 4313, Research Department Publications from Inter-American Development Bank, Research Department

Abstract: Institutional and legal differences between countries increase entry costs and reduce the ability of banks to expand abroad. We use bilateral foreign banking data for 176 countries to estimate a gravity model in which bilateral cross-border banking activity is explained, in addition to standard variables, by legal and institutional differences. We find that foreign banking is negatively affected by absolute differences in the legal setup and in basic institutions between source and host countries. Differences in the legal origin, for example, reduce bilateral participation in the banking system by nearly 11 percent. Additionally we do not find strong evidence suggesting asymmetries in adapting to “better” or “worse” institutional/legal environments.

Date: 2003-01
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Working Paper: Better the Devil that You Know: Evidence on Entry Costs Faced by Foreign Banks (2003)
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