A horserace or boost in market power? Banking sector competition after foreign bank exits

Abstract

Recently, massive foreign bank exits have begun to be observed around the world. What is the effect of such trend on the market power of the domestic banks and on competition between them? How do the M&As and bank liquidations affect the banking sector competition? Finally, do the financial crises, and the resultant change in the banking structure increase the power of domestic institutions? We test these questions on a sample of 226 foreign banks' withdrawals, which occurred between 1996 and 2014 in 54 countries. We find that the impact of bank exits on the market power of other banks is non-linear, shaped like a U-curve. We document that the largest increase in market power is when a divested bank accounts for around 10% of market share. After this threshold, the effect diminishes, and banking sector competition increases. In addition, we find that financial crises create opportunities for banks that are probably financially stronger to increase their market power; however, in normal times, all banks participate in a horserace.