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Journal of International Financial Markets,
Institutions and Money 11 (2001) 53 – 63
www.elsevier.com/locate/econbase

Foreign bank penetration of newly opened
markets in the Nordic countries
Lars Engwall a,1, Rolf Marquardt b,2, Torben Pedersen c,3,
Adrian E. Tschoegl d,*
Department of Business Studies, Uppsala Uni6ersity, S -751 20 Uppsala, Sweden b
Swedish Bankers Association, PO Box 7603, S -103 94 Stockholm, Sweden c
Department of International Economics and Management, Copenhagen Business School, Howitzs6ej 60, DK -1366 Copenhagen, Denmark
d
Department of Management SHDH 2000, The Wharton School, Uni6ersity of Pennsyl6ania, Philadelphia, PA 19104 -6370, USA
a

Received 12 March 1999; accepted 1 January 2000

Abstract
The opening to foreign banks in the Nordic countries provides us with an opportunity to study the evolution of the foreign bank sector in situations where the sector had a definite start date. Despite low survival rates for individual foreign banks, on balance the foreign bank sector gained market share (in terms of the assets of the banking system) over time. Our results for the role of time, links to the home market and problems facing domestic competitors were strongly in accordance with expectations in the cases of Denmark, mixed or indeterminate for Finland and Norway, and strongly opposite in the case of Sweden. Lastly, our results are broadly consistent with the Stiglitz – Weiss argument that the foreign banks bought entry by accepting worse lending risks. © 2001 Elsevier Science B.V. All rights reserved.

JEL classification: F2; G2; N2
Keywords: Foreign banks; Nordic countries; Market share

* Corresponding author. Tel.: + 1 215 898 0619; fax: + 1 215 898 0401. E -mail addresses: lars.engwall@fek.uu.se (L. Engwall), rolf.marquardt@bankforeningen.se (R. Marquardt), tp.int@cbs.dk (T. Pedersen), tschoegl@alum.mit.edu (A.E. Tschoegl). 1

Tel.: + 46-18-4711381; fax: + 46-18-4716810.
2
Tel.: + 46-8-4534448; fax: + 46-8-7969395.
3
Tel.: + 45-38-152515; fax: + 45-38-152500.
1042-4431/01/$ - see front matter © 2001 Elsevier Science B.V. All rights reserved. PII: S 1 0 4 2 - 4 4 3 1 ( 0 0 ) 0 0 0 3 5 - 4

54

L. Engwall et al. / Int. Fin. Markets, Inst. and Money 11 (2001) 53–63

1. Introduction
In 1971 Denmark deregulated its domestic banking markets and the entry of foreign banks. Only one foreign bank entered initially and the number of foreign banks grew slowly over time. Finland opened next (1978) but no foreign banks entered until four years later when further deregulation made entry attractive. Norway (1984) and Sweden (1985) opened more than a decade after Denmark and a number of banks all entered at once. Today, after falling from its peaks, the number of foreign banks and their share of each country’s banking system assets are recovering. In Finland, Norway and Sweden, especially when acquisitions of domestic banks are involved, the number and market share represent a new peak. The opportunities for the foreign banks did not develop slowly with the evolution of an economy or a technology but suddenly (though with forewarning) when governments removed their barriers. In all four countries, opening to foreign banks accompanied a more general deregulation that resulted in competitive turbulence. The authorities welcomed the foreign banks for the competition and new capabilities they brought to the domestic market. However, the authorities were also concerned about the effect of the entrants on monetary policy, credit control and the soundness of the existing domestic banks.

The foreign entrants were particularly able to take advantage of the openings. They were offshoots of their parent banks: large, internationally well-known organizations. As such the entrants were not subject to many of the hurdles facing totally new firms. However, they were still subject to the liability of foreignness and the need to establish relationships with clients.

Our objective is to...
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