4/2005 Janek Uiboupin. Short-term effects of foreign bank entry on bank performance in selected CEE countries

Working Papers of Eesti Pank. No 4, 2005

This paper analyses the short-term impact of foreign bank entry on bank performance in ten Central and Eastern European countries. A panel of 319 banks was analysed over the period 1995-2001. The Arellano-Bond dynamic panel estimation technique was used. The results indicate that foreign bank entry is associated with lower beforetax profits, non-interest income, interest income on interest earning assets and loan loss provisions. Foreign bank entry tends to increase the overhead costs of local banks in the short-run. The results generally indicate that foreign bank entry enhances competition on the market. The role the development of the banking sector plays in regard to the effects of foreign bank entry was analysed. Research results show that in more developed banking markets, foreign bank entry is associated less with decreasing incomes and loan loss provisions than in less developed banking markets. In more developed markets, the overhead costs of banks are less likely to increase. The results show that banks with a higher market share react less to foreign banks entering the market.
JEL Code: E44, G21
Key words: Foreign bank entry, financial development, domestic banking

Author's e-mail address: Janek.Uiboupin [at] mtk.ut.ee

The views expressed are those of the author and do not necessarily represent the official views of Eesti Pank.

Contents

Introduction
1. Literature Overview
2. Hypotheses
3. Description of Data
4. Empirical Model
5. Estimation Results and Discussion
Conclusions
References
Appendix 1. Description of variables
Appendix 2. Foreign bank share in total number of banks
Appendix 3. Summary of estimations with fixed effects
Appendix 4. Largest banks in CEE countries and their ownership

Short-Term Effects of Foreign Bank Entry on Bank Performance in Selected CEE Countries, Working Papers of Eesti Pank No 4, 2005 (PDF*)

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