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.
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