Ebook Do Reforms In Transition Economies Affect Foreign Bank Entry?
The growing presence of foreign-owned financial institutions during the 1990s is one of the most striking structural changes in the financial systems of the countries in transition. Currently, on average 60 per cent of the total number of banks is in foreign hands. In some Central Eastern European (CEE), South Eastern European (SEE) and Baltic countries, the share of foreign bank assets relative to total assets of the banking system is even more than 75% (Bol et al., 2002). This ‘takeover’ has occurred within a period of less than ten years. Given the high and growing share of foreign bank ownership, there is a growing need for studies on the reasons for foreign bank entry in transition economies.
The existing literature on foreign bank entry mainly deals with Western European countries, or with the US (Buch, 2000). There are only a few studies focusing on transition economies, but they only consider one country, or a small group of countries (e.g. Galac and Kraft, 2000, for Croatia, and Konopielko, 1999, for the Czech Republic, Hungary and Poland).
In this paper we examine the reasons for foreign bank entry in transition economies. The goal of this paper is to test whether reforms and political freedom in a group of transition economies have positively contributed to foreign bank entry. We also examine via which channels reforms affect foreign bank entry. In our view, these issues are of utmost importance for policymakers in transition economies who are aiming to attract foreign banks. It may seem obvious that reforms have an important effect on foreign bank entry.
However, to the best of our knowledge, there are no empirical papers available that have explicitly addressed this issue. We find strong evidence for the importance of reforms for foreign bank entry. Also political freedom seems to be important, although in some of the regressions political freedom does not significantly affect foreign bank entry. Moreover, the estimates suggest that reforms affect foreign bank entry by enhancing the efficiency of the financial sector, by changing the structure of the financial sector, and by stimulating domestic investments.
The paper is organized as follows. Section 2 gives an overview of the literature on determinants of foreign bank entry. Section 3 discusses the data set. Section 4 contains the estimation results for the determinants of foreign bank entry. Section 5 concludes.
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