Entry of Foreign Banks and their Impact on Host Countries

Abstract

Foreign bank entry is frequently associated with spillover e¤ects for local banks and increasing competition in the local banking market. We study the impact of these e¤ects on host countries. In particular, we ask how these e¤ects interact and how they depend on the competitive environment of the host banking market. An increasing number of banks is more likely to have positive welfare e¤ects the more competitive the market environment, whereas spillovers are less likely to have positive welfare e¤ects the stronger competition. Hence, competitive e¤ects seem to reinforce each other, while spillovers and competition tend to weaken each other.

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