IMPLICATIONS FOR BANK INTEREST MARGINS

This paper examines the impact of policies toward foreign bank entry on commercial bank net interest margins. Do countries that impede the entry of foreign banks induce a bigger gap between the interest expense paid to depositors and the interest income received from borrowers after controlling for bank-specific characteristics, mac-roeconomic conditions, and the structure of the economy’s banking industry? In exploring this issue, the paper provides information on the efficiency effects of regulatory restrictions on foreign bank entry. The paper goes farther, however, and assesses whether there is something special about foreign banks. Regulatory restrictions on foreign bank entry may be highly correlated with regulatory restric-tions on domestic bank entry. If this is the case, then information on foreign banks may simply proxy for entry restrictions in general, rather than providing information on foreign banks in particular. To exam-ine the independent impact of restrictions on foreign bank entry, I simultaneously control for restrictions on domestic bank entry. The paper also distinguishes between impediments to foreign bank entry and the fraction of the domestic banking industry owned by for-eign banks. Some researchers focus on the degree of foreign bank own-ership (Clarke, Cull, and Martínez Pería, 2001). Others, however, argue that openness to foreign banks is crucial because it makes the domestic market contestable (Demirgüç-Kunt, Levine, and Min, 1998; Claessens, Demirgüç-Kunt, and Huizinga, 2001). From this perspective, the ke