FDI in the Banking Sector
39 Pages Posted: 23 Jul 2010
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FDI in the Banking Sector
All Banks Great, Small, and Global: Loan Pricing and Foreign Competition
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: Suggested Citation