SHORT-TERM EFFECTS OF FOREIGN BANK ENTRY
ON BANK PERFORMANCE
IN SELECTED CEE COUNTRIES
Janek Uiboupin
January 2005
Working Papers of Eesti Pank
No 4, 2005
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This paper analyses the short-term impact of foreign bank entry on bank performance in ten Central and Eastern European countries. A panel of 319 banks was analysed
over the period 1995-2001. The Arellano-Bond dynamic panel estimation technique
was used. The results indicate that foreign bank entry is associated with lower beforetax
profits, non-interest income, interest income on interest earning assets and loan
loss provisions. Foreign bank entry tends to increase the overhead costs of local banks
in the short-run. The results generally indicate that foreign bank entry enhances
competition on the market. The role the development of the banking sector plays in
regard to the effects of foreign bank entry was analysed. Research results show that in
more developed banking markets, foreign bank entry is associated less with
decreasing incomes and loan loss provisions than in less developed banking markets.
In more developed markets, the overhead costs of banks are less likely to increase.
The results show that banks with a higher market share react less to foreign banks
entering the market.
JEL Code: E44, G21
Key words: Foreign bank entry, financial development, domestic banking
Author's e-mail address: Janek.Uiboupin@mtk.ut.ee
The views expressed are those of the author and do not necessarily represent the official views of Eesti Pank.
Contents
- Introduction
- 1. Literature Overview
- 2. Hypotheses
- 3. Description of Data
- 4. Empirical Model
- 5. Estimation Results and Discussion
- Conclusions
- References
- Appendix 1. Description of variables
- Appendix 2. Foreign bank share in total number of banks
- Appendix 3. Summary of estimations with fixed effects
- Appendix 4. Largest banks in CEE countries and their ownership
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