FDI in the Banking Sector

39 Pages Posted: 23 Jul 2010

See all articles by Beatriz de Blas

Beatriz de Blas

Universidad Autónoma de Madrid

Katheryn Niles Russ

University of California, Davis; National Bureau of Economic Research

Multiple version iconThere are 2 versions of this paper

Date Written: April 1, 2008

Abstract

When countries open their financial sectors, foreign-owned banks appear to bring superior efficiency to their host markets but also charge higher markups on borrowed funds than their domestically owned rivals, with unknown impacts on interest rates and welfare. Using heterogeneous, imperfectly competitive lenders, our model illustrates that FDI can cause markups (the net interest margins commonly used to proxy lending-to-deposit rate spreads) to increase at the same time efficiency gains and local competition keep the interest rates that banks charge borrowers from rising. Competition from arms-length foreign loans, however, both squeezes markups and lowers interest rates. Both scenarios yield large welfare gains compared with financial autarky, except in countries with inferior domestic technologies or restricted entry by domestic banks.

Keywords: multinational bank, heterogeneous firms, endogenous markup, net interest margin

JEL Classification: F12, F23, F32, F36, F40, G15, G21

Suggested Citation

de Blas, Beatriz and Russ, Katheryn Niles, FDI in the Banking Sector (April 1, 2008). Available at SSRN: https://ssrn.com/abstract=1647347 or http://dx.doi.org/10.2139/ssrn.1647347

Beatriz de Blas

Universidad Autónoma de Madrid ( email )

Campus Cantoblanco
C/Kelsen, 1
Madrid, Madrid 28049
Spain

Katheryn Niles Russ (Contact Author)

University of California, Davis ( email )

One Shields Avenue
Apt 153
Davis, CA 95616
United States

National Bureau of Economic Research ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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