Foreign entry into banking sectors in developing and transition economies: impact on bank efficiency, competition and lending behaviour

Zhu, Minyan (2009). Foreign entry into banking sectors in developing and transition economies: impact on bank efficiency, competition and lending behaviour. University of Birmingham. Ph.D.

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Abstract

The effects of foreign bank entry on three important aspects of host-country banking industries i.e., bank efficiency, bank competition and bank lending to non-financial sectors are examined in Central and East European and Latin American countries.

A cross-country comparison of banks’ managerial cost efficiencies is presented using bank level panel data for the period of 2001-2006. Firstly Stochastic Frontier Approach (SFA) is applied controlling for relevant environmental effects applying the one-step approach based on Battese and Coelli(1995)[15]. One innovation of this research is to control for self-selection bias after Heckman(1979)[84] while controlling for environmental effects. This self-selection may be induced by the endogeneity of the location choice from foreign banks. Data Envelopment Analysis (DEA) is also applied using the ’’New Cost Efficiency Measurement Scheme” in Tone(2002)[131]. Moreover, in this DEA framework, SEA is combined with DEA to control for both environmental effects and statistical noise by combining the methods of Fried \(\textit{et αl}\).(2002)[72] and Cooper \(\textit{et αl}\).(2007)[61]. Impacts of environmental factors are found to be statistically significant under both approaches. The estimated net (managerial) cost efficiencies using both approaches suggest that foreign banks are on average more managerially cost efficient than domestic banks.

Both the Panzar-Rosse (PR) [113] revenue test approach and the Bresnahan(1982) [36] markup test approach are used to provide a complete picture of the state of competition within selected banking systems. Using bank-level panel data for the period 1992-2006, I construct different panel datasets and adopt the PR approach to obtain estimates of competition showing that the selected banks are on average monopolistic competitors. This result is robust to changes in sample sizes and variations in the underlying empirical model. Chow tests for structural breaks of the \(\textit{H}\) statistics over time reveal that competition in the banking sector seems to have declined after 1999. Also, the markup test developed by Bresnahan(1982)[36] is performed on a balanced panel of country-level data over the period 1995-2006. The results obtained suggest a short-run disequilibrium characterised by negative profit on average in the sample period. Moreover, when introducing some variations (dummy variables) into the empirical model, the results provide evidence that foreign bank ownership is positively associated with competition.

The average effects of foreign bank entry and bank market power/competition on credit availability to non-financial sector firms are investigated using both firm and industrylevel panel data from 1998 to 2006 in selected countries. The effects are also examined by interacting foreign dank entry and bank market power with firm characteristics especially firm size. Various market power indicators are included using market structure indicators. Bank competition measured by \(\textit{H}\) statistic adopting the PR approach is also applied. The results suggest higher level of lending to firms on average, including small-medium sized enterprises (SMEs) and new firms with the increase in foreign bank participation and the decrease (increase) in bank market power (competition). There is also evidence suggesting these effects become less significant with the decrease in firm size.

Type of Work:

Thesis (Doctorates > Ph.D.)

Award Type:

Doctorates > Ph.D.

Supervisor(s):