Foreign Bank Case Study

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1.0 INTRODUCTION Many countries have implemented financial liberalization policies and opened their doors to foreign banks. Many restrictions on entries of foreign financial institution have been removed due to globalization. The penetration of foreign banks keeps on increasing gradually since early 1990. For example the average share of total assets held by foreign bank in Latin America and Asia increased from 26% in 1997 to reach a peak of 38% in 2002. (Nam Jeon, Maria Pia and Ji Wu, 2011). The increasing presence of foreign banks has raised issues about the consequences of their presence for domestic banking market. There are 2 opposing views on assessing the impact of foreign bank penetration on the domestic banking sector in emerging…show more content…
The functions of domestic banks and foreign bank differ significantly in developing countries and developed countries. This is possibly because different rules and regulation in each country, different customer base, different banks procedures and different tax regimes. According to his findings, foreign banks in developing countries usually have higher profit, interest margin and tax payment than domestic banks. Whereas in developed countries the scenario is totally different. Domestic banks in developed countries have higher interest margin, profit and tax payment compared to the foreign banks. The common argument is penetration of foreign banks into domestic market will national banking more competitive and further enhance the efficiency of domestic banks. The researcher found that the increasing of foreign banks reduce the profitability and overhead expenses in domestically owned banks - so the general effect of foreign bank entry may be positive. Interestingly, another finding is the number of foreign entrants’ matters more than their market share, suggesting that they affect local bank competition more on entry rather than after gaining a substantial market…show more content…
The study done by Claessens and Van Horen(2012) reconcile this difference by showing that a number factors importantly effect the relative performance of foreign bank. Using data from large number of developing countries over 1999 till 2006 this study find strong evidence that the level of development in the home country, quality of regulation in the host country, size and monopoly power of the bank and cultural regulatory distance between home and host country are important determinants of the profitability of a foreign bank. They found that when parent bank is located in high income countries, foreign bank outperform the domestic banks. However when the parent bank is located in a developing country, a foreign bank perform significantly worse than a domestic bank. This suggest that technical and regulatory advance of foreign banks from high income countries make it easier for this banks to make profitable investment than for foreign banks from developing countries. Then they found that host country characteristics matter for the relative performance of foreign banks. Their results indicates that foreign bank perform worse in countries with high quality regulations, A possible explanation is that under these condition it is harder for banks to gain market share and increase profits. They found that foreign bank perform better if they have bigger market

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