Entry of foreign banks and their impact on host countries

Foreign bank entry is frequently associated with spillover effects for local banks and increasing competition in the local banking market. We study the impact of these effects on host countries, particularly, how these effects interact and how they depend on the competitive environment of the host banking market. An increase in the number of banks is more likely to have positive welfare effects the more competitive the market environment, whereas spillovers are less likely to have positive welfare effects the stronger bank competition. Hence, competitive effects seem to reinforce each other, while spillovers and competition tend to weaken each other. Joumal of Comparative Economics 36 (3) (2008) 430-452. University of Munich, Akademiestr. 1/III, 80799 Munich, Germany; CEPR, London, UK. (C) 2008 Association for Comparative Economic Studies. Published by Elsevier Inc. All rights reserved.