Foreign bank entry, bank efficiency and market power in Central and Eastern European Countries1

Authors


  • 1

    The authors thank Michael Beenstock, Jakob de Haan, Richard Ericson, Michael Koetter, Dirk Krueger, Isabel Schnabel (the editor), Elmer Sterken, two anonymous referees and participants of the EERC Research Workshop for useful comments and suggestions. They are grateful to Emilia Jurzyk and Iman Van Lelyveld for kindly sharing their data. Richard Gigengack has kindly agreed to proofread this manuscript. The work on this paper was supported by an individual grant No. RO7-1181 from the Economics Education and Research consortium, Inc. (EERC), with funds provided by the Eurasia foundation (with funding from the US Agency for International Development), the World Bank Institution, the Global Development Network and the Government of Sweden. The usual disclaimer applies.

Abstract

This article analyses the implications of the recently observed sharp expansion of foreign banks in the Central and Eastern European Countries (CEECs) as measured by equity ownership. We show that the mode of foreign entry has a pivotal impact on the post-entry performance of banks in CEECs. Foreign greenfield banks are characterized by superior cost efficiency, compared with domestic and foreign-acquired banks. The efficiency of foreign-acquired banks deteriorates in the initial year of acquisition, but improves thereafter. Banks acquired by foreigners have less market power relative to domestic and foreign greenfield banks. Overall, the CEEC banking sectors have benefited from the increased foreign bank participation, both in terms of higher efficiency and more competition.

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