March 21, 2018

Foreign banks and domestic markets

In recent decades the banking sector has become more international. This internationalization of banks has occurred, amongst others, through the set up of foreign affiliates. The entry of a foreign bank into a new market can bring along benefits as well as costs for the host country. On the one hand, the entry of a foreign bank enhances competition. This could improve the efficiency of the domestic banking system. Moreover, foreign banks can contribute to an improvement of the availability and the quality of financial services. In addition, foreign banks can enhance the access of the host country to international capital markets. On the other hand, domestic banks will have to compete with large international banks. In order to become competitive, domestic banks might have to make investments and adapt their business model, which could in turn entail increased risk-taking. Most of the existing research differentiates the effects for developed and developing countries, as the entry of foreign banks affects those country groups differently. This is due to the fact that the market conditions for foreign banks may differ, e.g. state-owned banks might still play a more important role in developing countries. Moreover, many papers are focusing on specific national markets and analyze the consequences of the entry of foreign banks to one specific country.

Published papers

Agénor, P.-R. (2003). Benefits and costs of international financial integration: Theory and facts. The World Economy 26(8): 1089-1118.

Avdjiev, S., R.N. McCauley and H.S. Shin (2016). Breaking free of the triple coincidence in international finance. Journal of Economic Policy. 31(87): 409-451.

Barajas, A., R. Steiner, and N. Salazar (2000). The impact of liberalization and foreign investment in Colombia’s financial sector. Journal of Development Economics. 63(1): 157–196.

Baskaya, Y., J. di Giovanni, S. Kalemli-Özcan, J. L. Peydro, and M. F. Ulu (2017). Capital Flows and the International Credit Channel. Journal of International Economics 108(1): 15-22.

Bilir, K., D. Chor, K. Manova (2019). Host-Country Financial Development and Multinational Activity. European Economic Review 115: 192-220.

Brei, M., and von Peter, G. (2018). The Distance Effect in Banking and Trade. Journal of International Money and Finance 81(C): 116-137.

Bremus, F. M. (2015). Cross-border banking, bank market structures and market power: Theory and cross-country evidence. Journal of Banking & Finance. 50(1): 242–259.

Claessens, S., A. Demirgüc-Kunt, and H. Huizinga (2001). How does foreign entry affect domestic banking markets? Journal of Banking and Finance 25(5): 891–911.

Claessens, S., and N. van Horen (2014). Foreign banks: Trends and impact. Journal of Money, Credit and Banking 46(1): 295-326.

Clarke, G., R. Cull, M. S. Martínez Peria, and S. M. Sanchez (2003). Foreign bank entry: Experience, implications for developing economies, and agenda for further research. The World Bank Research Observer 18(1): 25-59.

De Blas, B., and K.N. Russ (2013). All banks great, small, and global: Loan pricing and foreign competition. International Review of Economics & Finance 26(C): 4-24.

De Haas, R., and I. van Lelyveld (2004). Foreign bank penetration and private sector credit in Central and Eastern Europe. Journal of Emerging Market Finance 3(2): 125-151.

Detragiache, E., P. Gupta, and T. Tressel (2008). Foreign banks in poor countries: Theory and evidence. The Journal of Finance 3 63(5): 2123-2160.

Giannetti, M., and S. Ongena (2009). Financial integration and firm performance: Evidence from foreign bank entry in emerging marketsReview of Finance 13(2): 181-223.

Giannetti, M., and S. Ongena (2012). “Lending by example”: Direct and indirect effects of foreign banks in emerging markets. Journal of International Economics86(1): 167-180.

Gormley, T.A. (2010). The impact of foreign bank entry in emerging markets: Evidence from India. Journal of Financial Intermediation 19(1): 26-51.

Guimarãesa, P. (2002). How does foreign entry affect the domestic banking market? The Brazilian case. Latin American Business Review 3(4): 121-140.

Hermes, N., and R. Lensink (2004). The short-term effects of foreign bank entry on domestic bank behavior: Does economic development matter? Journal of Banking and Finance 28(3): 553–568.

Hermes, N., and R. Lensink (2004). Foreign bank presence, domestic bank performance and financial development. Journal of Emerging Market Finance3(2): 207-229.

Jeon, B.N., M.P. Olivero, and J. Wu (2011). Do foreign banks increase competition? Evidence from emerging Asian and Latin American banking markets. Journal of Banking and Finance 35(4): 856-875.

Jordà, Ò., Schularick, M., Taylor, A. M., and Ward, F. (2019). Global financial cycles and risk premiums. IMF Economic Review 67(1): 109-150.

Kleymenova, A., A.K. Rose, and T. Wieladek (2016). Does Government Intervention Affect Banking Globalization? Journal of The Japanese and International Economies 40: 43-58.

Lee, C.C., M.F. Hsieh, and H.W. Dai (2012). How does foreign bank ownership in the banking sector affect domestic bank behaviour? A dynamic panel data analysis. Bulletin of Economic Research 64(1): 86-108.

Lehner, M., and M. Schnitzer (2008). Entry of foreign banks and their impact on host countries. Journal of Comparative Economics 36(3): 430-452.

Lensink, R., and J. de Haan (2002). Do reforms in transition economies affect foreign bank entry? International Review of Finance 3(3): 213-232.

Lensink, R., A. Meesters, and I. Naaborg (2008). Bank efficiency and foreign ownership: Do good institutions matter? Journal of Banking & Finance 32(5): 834-844.

Lensink, R., and I. Naaborg (2007). Does foreign ownership foster bank performance? Applied Financial Economics 17(11): 881-885.

Levy Yeyatia, E., and A. Micco (2007). Concentration and foreign penetration in Latin American banking sectors: Impact on competition and risk. Journal of Banking and Finance 31(6): 1633-1647.

Maggiori, M., B. Neiman, and J. Schreger (2020). International Currencies and Capital Allocation. Journal of Political Economy 128(6).

Martínez Pería, M. S., and A. Mody (2004). How foreign participation and market concentration impact bank spreads: Evidence from Latin America. Journal of Money, Credit and Banking 36(3): 511-537.

Mathieson, D. J., and J. Roldos (2001). Foreign banks in emerging markets. In Open Doors: Foreign participation in financial systems in developing countries: 15-55. R. E. Litan, P. Masson, M. Pomerleano (ed.).

McGuire, P., and G. v. Peter (2016). The Resilience of Banks’ International Operations. BIS Quarterly Review March 2016.

Unite, A.A., and M.J. Sullivan (2003). The effect of foreign entry and ownership structure on the Philippine domestic banking market. Journal of Banking and Finance 27(12): 2323–2345.

Zajc, P. (2004). The effect of foreign bank entry on domestic banks in Central and Eastern Europe. In Financial markets in Central and Eastern Europe: Stability and efficiency: 189-205. M. Balling, F. Lierman, and A. Mullineux (ed.).

Working and discussion papers

Adrian, T., and P. Xie (2020). The Non-U.S. Bank Demand for U.S. Dollar Assets. CEPR Discussion Paper No. DP14437.

Ananchotikul, N., and D. Seneviratne (2015). Monetary policy transmission in emerging Asia : The role of banks and the effects of financial globalization. IMF Working Paper No. 15/207.

Andries, A.M., Andreas M Fischer, Pinar Yesin (2016). The impact of international swap lines on stock returns of banks in emerging markets. CEPR Discussion Paper 11167.

Avdjiev, S., U. Aysun, and R. Hepp (2018). What drives local lending by global banks? BIS Working Papers No. 746.

Bayraktar, N., and Y. Wang (2004). Foreign bank entry, performance of domestic banks, and sequence of financial liberalization. World Bank Policy Research Working Paper 3416.

Beck, R., A. Coppola, A. Lewis, M. Maggiori, M. Schmitz, and J. Schreger (2023). The Geography of Capital Allocation in the Euro Area. The Global Capital Allocation Project.

Belton, D., L. Gambacorta, S. Kokas, and R. Minetti (2020). Foreign Banks, Liquidity Shocks, and Credit Stability. CEPR Discussion Paper No. 14504.

Bertay, A. C., A. Demirguc-Kunt, and H. Huizinga (2018). Are international banks different? Evidence on bank performance and strategy. CEPR Discussion Paper No. 12505.

Bordo, M., and J. Harold (2015). Capital flows and domestic and international order: Trilemmas from macroeconomics to political economy and international relations. NBER Working Paper No. 21017.

Bronzini, R. and A. D’Ignazio (2016). Bank Internationalization and Firm Exports: Evidence from Matched Firm-Bank Data. Bank of Italy Temi di Discussione (Working Paper) No. 1055.

Camanho, N., H. Hau, and H. Rey (2018). Global Portfolio Rebalancing and Exchange Rates. NBER Working Paper No. 24320.

Cardenas, J., J. P. Graf, and P. O’Dogherty (2003). Foreign banks entry in emerging market economies: a host country perspective. CGFS Working Group on FDI in the financial sector.

Claessens, S., O. Hassib, and N. v. Horen (2017). The role of foreign banks in trade. Bank of England Staff Working Paper 656.

Clarke, G. R., R. Cull, L. D’Amato, and A. Molinari (1999). The effect of foreign entry on Argentina’s domestic banking sector. World Bank Policy Research Working Paper 2158.

Clayton, C., Dos Santos, A., Maggiori, M., and Schreger, J.(2023). Internationalizing Like China. CEPR Discussion Paper No. DP17781.

Cerutti, E. M., and M. Obstfeld (2018). China’s Bond Market and Global Financial Markets. IMF Working Paper No. 18/253.

Cetorelli, N., Linda S. Goldberg (2016). Organizational Complexity and Balance Sheet Management in Global Banks. NBER Working Paper No. 22169.

Doidge, C., G. Andrew Karolyi, and R. M. Stulz (2020). Is Financial Globalization in Reverse After the 2008 Global Financial Crisis? Evidence from Corporate Valuations. NBER Working Paper No. 27022.

D’Avino, C. (2016). Foreign Branches of US Global Banks: Geography, Balance Sheet Structure and Contagion. FIW Working Paper 172.

Eyraud L., D. Singh, and B. Sutton (2017). Benefits of Global and Regional Financial Integration in Latin America. IMF Working Paper No. 17/1.

Faia, E., and G. Ottaviano (2017). Global Banking: Risk Taking and Competition. CEPR Working Paper 11940.

Hermes, N., and R. Lensink (2001). The impact of foreign bank entry on domestic banking markets: A note. Research Report 01E62, University of Groningen, Research Institute SOM (Systems, Organisations and Management).

Hofmann, B., H. S. Shin, and M. Villamizar-Villegas (2019). FX intervention and domestic credit: Evidence from high-frequency micro data. BIS Working Papers No. 774.

Horn, S., C. M. Reinhart, C. Trebesch (2019). China’s Overseas Lending. CEPR Working Paper No. DP13867.

Huang, W., Ranaldo, A., Schrimpf, A., and Somogyi, F. (2023). Constrained liquidity provision in currency markets. BIS Working Paper No. 1073.

Karolyi, G., J. Sedunov, and A. Taboada (2017). Cross-Border Bank Flows and Systemic Risk. Available at SSRN:

Krogstrup, S., and C. Tille (2018). Foreign Currency Bank Funding and Global Factors. CEPR Discussion Paper DP12933.

Kwan, S., E.T.C. Wong, and C-H. Hui (2015). The international transmission of shocks: Foreign bank branches in Hong Kong during crises. HKIMR Working Paper No.02/2015.

Obstfeld, M., and Zhou, H. (2023).  The Global Dollar Cycle. CEPR Discussion Paper No. 17940.

Razin, A., E. Sadka (2019). Welfare State, Inequality, and Globalization: Role of International-capital-flow Direction. CEPR Discussion Papers No. 13684.

Reinhardt, D., and R. Sowerbutts (2015). Regulatory arbitrage in action: evidence from banking flows and macroprudential policy. Bank of England Staff Working Paper No. 546.

Saffie, F., L. Varela, and K-M, Yi. (2020). The Micro and Macro Dynamics of Capital Flows. CEPR Discussion Paper DP14893.

Shen, L.S. (2019). Global vs. Local Banking:Firm Financing in a Globalized Financial System. Available here.

Shim, I., and K. Shin (2018). Financial stress in lender countries and capital outflows from emerging market economies. BIS Working Papers No. 745.

Van Rijckeghem, C., and B. Weder di Mauro (2014). Deglobalization of banking: The world is getting smaller. CEPR Discussion Paper No. 10139.