Foreign bank entry and bank competition: Cross-country heterogeneity

Abstract

This study investigates the impact of foreign bank entry on bank competition in the host countries. Using data for 148 countries over 1987–2015, I find that although on average an increase in the number of foreign banks is associated with more competition in the host country, competition increases in developed but decreases in developing countries. Stringent capital requirements, higher market entry barriers, and effective credit information sharing can mitigate the impact of foreign bank entry, while better supervision and external governance strengthen the link between foreign bank presence and competition. The findings justify the regulations on bank capital adequacy and call for an effective credit information sharing mechanism.