All Banks Great, Small, and Global: Loan pricing and foreign competition

Beatriz de Blas, Katheryn Niles Russ

NBER Working Paper No. 16029
Issued in May 2010
NBER Program(s):   ITI

Can allowing foreign participation in the banking sector increase real output, despite the imperfectly competitive nature of the industry? Using a new model of heterogeneous, imperfectly competitive lenders and a simple search process, we show how endogenous markups (the net interest margin commonly used to proxy lending-to-deposit rate spreads) can increase with FDI while the rates banks charge to borrowers are largely unchanged or actually fall. We contrast the competitive effects from cross-border bank takeovers with those of cross-border lending by banks located overseas, which in most cases reduces markups and interest rates. Both policies can increase aggregate output and generate permanent current account imbalances.

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This paper was revised on December 5, 2011

Acknowledgments

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