Literature Review

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  • Topic: Bank, Financial services, Commercial bank
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  • Published : December 25, 2012
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LITERATURE REVIEW

(Bank Efficiency amid Foreign Entry: Evidence from the Central American Region Prepared by Torsten Wezel) A wave of foreign bank entry hit the Central American region comprising of 5 countries the Dominican Republic and state of Panama. This region was an attraction for the foreign banks especially from the United States, United Kingdom and Columbia and these foreign banks acquired the major financial institutions with large deposit base and customers as to capture a large market without the hassle of starting operations from a scratch. This helped them get a strong foothold in the region and reduced the investment risk since the banks were also being supported by the parent banks this gave them a higher interest spread than the local rivals resulting in high profitability. The main factors which resulted in this vast financial thickening were the attractive margins which were due to former low market penetration. The scale of foreign bank investment fluctuate from country to country , with very low level of foreign investment in Guatemala and Dominican republic to very high level of foreign bank investment level in El Salvador where nearly 95 per cent of the total ban assets were owned by the foreign banks. This wave of foreign bank entry has had its consequences, altering the market structure and the efficiency of the banks with increased competition resulting in lower margins but with their superior technology and foreign exposure the foreign banks have maintained high efficiency and profit levels .Further by evaluating and accessing the efficiency levels both the foreign banks and their local banks this research has targeted certain aspects of study (1) are the foreign banks i.e. the global banks and the banks that were acquired, more efficient than their local counterparts.(2) what was the affect of these takeovers on the acquired banks and the overall banking sector.(3) what were the estimated efficiency change because of the change in environment for these foreign banks. We can conclude that according to the study and analysis it is clear that the regional and local banks were outdid by the foreign banks in some markets where as on average the local banks achieved greater efficiency levels. Among the group of foreign banks they were only the acquired banks which tried to match the local banks but their efficiency also dipped during the first year of the takeover.

Foreign Banks in Poor Countries: By Poonam Gupta
A number of empirical studies have investigated various implications of the increased globalization of banking in general, and of growing foreign bank presence in developing countries in particular. The evidence is drawn both from cross-country samples and individual country studies. Based on cross-country studies, foreign-owned banks have been found to have lower operating costs and higher profitability than private domestic banks, while state-owned banks have higher costs and lower profitability than the other two categories (Mian, 2003; Micco, Panizza, and Yañez, 2004). Foreign bank entry in developing countries also appears to lower interest margins and profitability, suggesting an increase in competition (Claessens, Demirgüç-Kunt, and Huizinga, 2001; Gelos and Roldós, 2004; Micco, Panizza and Yañez, 2004; Martinez-Peria and Mody, 2004). A recent study of eight Latin American countries, however, finds the opposite to be true (Levy-Yeyati and Micco, 2003). Turning to the effects of foreign bank entry on access to credit, surveys of entrepreneurs indicate that firms are less credit-constrained in countries with more foreign bank participation (Clarke et a., 2004). On the other hand, a study of lending behavior in four Latin American countries concludes that foreign banks lend less to SMEs than domestic banks on average, although this is not true for foreign banks that have a large presence in the country (Clarke et al., 2005). In Eastern Europe, Giannetti and Ongena (2005) find...
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