Clarke, Cull, D'Amato, and Molinari analyze how foreign entry affected domestic banks in Argentina during an especially intense period of entry in the mid-1990s.
Their results are consistent with the hypothesis that foreign banks enter areas where they have a competitive advantage, putting pressure on the domestic banks already focused on that type of lending.
They find that domestic banks with loan portfolios concentrated in manufacturing - an area to which foreign banks have traditionally devoted much of their lending - tended to have lower net margins and lower before-tax profits than other domestic banks. The informational advantages local banks enjoyed probably helped ensure that foreign banks would not drive them from the market.
Domestic banks with greater consumer lending - an area in which foreign banks have not been heavily involved - had higher net margins and greater before-tax profits.
Domestic banks that focused on mortgage lending - an area foreign banks entered aggressively in the mid-1990s - experienced falling net margins and increasing overhead.
There were many domestic bank failures in the mid-1990s, but the banks that failed were not heavily concentrated in the types of lending favored by foreign banks.
This paper - a product of Regulation and Competition Policy and Finance, Development Research Group - is part of a larger effort in the group to investigate the determinants of structural change in developing countries' banking sectors. Copies of the paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Paulina Sintim-Aboagye, room MC3-422, telephone 202-473-8526, fax 202-522-1155, Internet address psintimaboagye@worldbank.org. The authors may be contacted at gclarke@worldbank.org, rcull@worldbank.org, amolinari@worldbank.org, or investig.monetar@bcra.gov.ar (attention: Laura D'Amato). August 1999. (30 pages)
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