Denying Foreign Bank Entry: Implications for Bank Interest Margins. Working Paper 222

Abstract: This paper examines the impact of restricting foreign bank entry on bank net interest margins while controlling for (a) impediments to domestic bank entry, (b) the degree of foreign bank ownership of the domestic banking industry, (c) an array of bank-specific characteristics, (c) banking sector concentration, and (d) various country traits. Using data on almost 1200 banks across 47 countries, the results suggest that restricting foreign bank entry boosts bank net interest margins. Also, restricting foreign bank entry is special in that restricting domestic bank entry does not help explain bank margins and the degree of foreign bank ownership also enters insignificantly. In extensions of the core result, I argue that the strong impact of regulatory impediments to foreign bank entry on bank margins may reflect deeper, historical approaches to openness and competition