Dollarization, Foreign Ownership, and Competition in the Banking Industry in Latin America

We estimate the correlation of foreign bank penetration and dollarization with competition in the banking industry in sixteen Latin American countries during the period 1995-2008. We apply Boone's methodology to compute the intensity of competition. Our results suggest that in countries with an initial low level of competition, foreign ownership tends to foster rivalry among banks, whereas the opposite is true in countries with an initial high level of competition. The adoption of dollarization or a currency board, which reduces transaction costs and facilitates financial integration, has a positive correlation with competition. This is the case for Ecuador, El Salvador, and Argentina.