The effects of foreign ownership on competition in the banking industry: The key role of financial reforms

Abstract

This study examines the impact of foreign ownership on bank competition and discusses whether the relation changes with various proxies of financial reform. We contribute to the extant literature by using the bank-level ratio of foreign ownership and applying five individual sub-indices of financial reforms from 50 countries. Within the emerging Asia and Middle East and North Africa (MENA) countries, our findings show that a higher ratio of foreign ownership in a bank can enhance competition, whereas a liberalization policy on banking supervision instead mitigates this positive relation between foreign ownership and competition. Conversely, the liberalization on bank privatization in Latin America and Sub-Saharan Africa (SSA) countries significantly increases competition. Thus, financial reforms do matter to the foreign ownership-bank competition nexus.