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Foreign Bank Presence, Domestic Bank Performance and Financial Development

Department of Financial Mangement, Faculty of Management and Organisation, University of Groningen, P.O. Box 800, 9700 AV, Groningen, The Netherlands, c.l.m.hermes{at}bdk.rug.nl

Robert Lensink

Faculty of Economics, University of Groningen, Groningen, The Netherlands, and external CREDIT fellow, University of Nottingham, United Kingdom

This article analyses the relationship between foreign bank presence and the performance of the domestic banking sector and takes into account the role of the level of development of the financial sector of the recipient country. We use data of 982 banks in 48 countries for 1990-96. We find support for the hypothesis that financial development does matter. In particular, we show that foreign bank presence is associated with higher costs and margins of domestic banks at low levels of financial development while it is associated with falling costs and margins of domestic banks at higher levels of financial development.

Key Words: Foreign banking • domestic financial sector • financial development • economic development

Journal of Emerging Market Finance, Vol. 3, No. 2, 207-229 (2004)
DOI: 10.1177/097265270400300206


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