All Banks Great, Small, and Global: Loan pricing and foreign competition
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.
The authors thank participants in a number of seminars and conference panels for helpful comments, particularly Joshua Aizenman, Andy Bernard, Claudia Buch, Silvio Contessi, Linda Goldberg, Federico Mandelman, Monika Schnitzer, Viktors Stebunovs, and Diego Valderrama. An early version of this project circulated under the title
"FDI in the Banking Sector." Beatriz de Blas gratefully acknowledges financial support from SEJ2005-05831 and ECO2008-04073 projects of the Spanish MEC, CCG08-UAM/HUM-4438.The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
de Blas, Beatriz & Russ, Katheryn Niles, 2013. "All banks great, small, and global: Loan pricing and foreign competition," International Review of Economics & Finance, Elsevier, vol. 26(C), pages 4-24. citation courtesy of