Foreign Entry and Bank Competition

Abstract

Foreign entry and bank competition are modeled as the interaction between asymmetrically informed principals: the entrant uses collateral as a screening device to contest the incumbent's informational advantage. Both better information ex ante and stronger legal protection ex post are shown to facilitate the entry of low-cost outside competitors into credit markets. The entrant's success in gaining borrowers of higher quality by o¤ering cheaper loans increases with its e¢ ciency (cost) advantage. This paper accounts for evidence suggesting that foreign banks tend to lend more to large …rms thereby neglecting small and medium enterprises. The results also explain why this observed "bias" is stronger in emerging markets.

Determinants of cross‐border bank acquisitions in transition economies1

“…However, domestic banks have better information about their country and customers. As pointed out by Sengupta (2007), banks gain knowledge about pay-off-relevant borrower attributes during the course of a lending relationship. Consequently, relationships emerge as a prime source of an incumbent bank's comparative advantage over potential foreign entrants.…”

“…Consequently, relationships emerge as a prime source of an incumbent bank's comparative advantage over potential foreign entrants. Sengupta (2007) uses a model in which he distinguishes between an entrant bank (uninformed lender) that faces observationally identical borrowers, who can be one of two types (high-or low-risk), and an incumbent (informed lender) that can distinguish between these borrower types. He shows that stronger legal protection can facilitate the entry of low-cost foreign banks.…”

“…successfully sort borrowers. Sengupta (2007) shows that the magnitude of this cost advantage depends on the legal and institutional features of the host country.…”

Do Firms Adjust Their Timely Loss Recognition in Response to Changes in the Banking Industry?

“…This may be particularly true when foreign banks are from developed countries where financial statements are commonly used to screen and monitor borrowers (Bushman and Piotroski [2006]). Second, foreign banks' tendency to "cream-skim" the larger, more profitable firms in developing countries (Dell'Arricia and Marquez [2004], Gormley [2007], Sengupta [2007], Detragiache, Gupta, and Tressal [2008]) may increase domestic lenders' emphasis on conservative financial statements. Because cream-skimming by foreign banks lowers the average quality of borrowers seeking domestic bank loans, domestic banks' incentive to screen and monitor loans more intensely, which could include looking for conservative financial statements, might increase (Gormley [2007]).…”

Foreign Banks in India: Liabilities or Assets?

“…As well, we include the ratio of secured loans to total loans. Empirical evidence appears to suggest that foreign banks typically tend to extend credit to large, transparent (and hence, collateralised) firms (Sengupta, 2007). Finally, we explore the impact of foreign bank presence on bank lending rate.…”