Strategies of Foreign Banks in Transition Economies

Abstract

This paper examines the strategies of foreign banks in transition economies. An extreme high share of foreign banks characterizes theses banking markets. I outline different strategies of foreign banks, model their entry decision and provide an empirical analysis by estimating loan supply functions. The main finding is that foreign banks compete with domestic banks in the same market segments. Furthermore, foreign banks tend to follow long-term strategies and thus contribute to credit market stabilization. Contrary to conclusions in the general banking literature, foreign banking behavior is independent of the macroeconomic conditions prevailing in the foreign banks' country of origin.

Keywords: foreign banks, integration of banking markets, transition economies

JEL Classification: C23, F36, G15, G21, P34