Foreign bank entry and net interest margins: evidence from Southeast Europe

Abstract This paper investigates the impact of foreign bank entry, home and host country conditions on net interest margins (NIMs), using a newly collected panel dataset with ownership information for 265 banks operating in nine Southeast European countries over the period 1995-2011. We do not find evidence of foreign bank entry having a beneficial effect for host countries in terms of reducing the cost of financial intermediation in the long run, as foreign banks change their behaviour over time. We show that foreign banks have initially lower NIMs compared to domestic banks, however this effect weakens the larger the foreign presence and the more established foreign banks become. We find that differentials in homehost country regulation and supervision have an effect on bank behaviour, with foreign banks coming from countries with stricter regulation having higher NIMs in host countries