Explaining Foreign Bank Entrance in Emerging Markets

21 Pages Posted: 1 Dec 2008

See all articles by Wilhelm Althammer

Wilhelm Althammer

HHL Leipzig Graduate School of Management

Rainer F. H. Haselmann

Leibniz Institute for Financial Research SAFE; Goethe University Frankfurt - Faculty of Economics and Business Administration

Date Written: November 30, 2008

Abstract

This paper provides a theoretical model that explains the empirical observation that foreign banks from industrialized countries tend to increase their involvement in emerging markets during periods characterized by instabilities. In this model, domestic banks have more 'soft' information about their borrowers while a superior screening technology allows foreign banks to obtain more 'hard' information about their borrowers' investment projects. The presented model offers a surprising implication. Contrary to all expectations, foreign banks take over market shares from their domestic counterparts if the economic conditions in the host country deteriorate. Apparently, in times of economic instability 'hard' information becomes relatively more valuable than 'soft' information. Thus, under adverse economic conditions foreign banks have a comparative advantage over domestic banks.

Keywords: foreign banks, integration of banking markets, transition economies, financial stability

JEL Classification: G15, G21, G24, G32

Suggested Citation

Althammer, Wilhelm and Haselmann, Rainer F. H., Explaining Foreign Bank Entrance in Emerging Markets (November 30, 2008). Available at SSRN: https://ssrn.com/abstract=1309167 or http://dx.doi.org/10.2139/ssrn.1309167

Wilhelm Althammer

HHL Leipzig Graduate School of Management ( email )

Jahnallee 59
D-04109 Leipzig
Germany

HOME PAGE: http://www.hhl.de

Rainer F. H. Haselmann (Contact Author)

Leibniz Institute for Financial Research SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

Goethe University Frankfurt - Faculty of Economics and Business Administration ( email )

Mertonstrasse 17-25
Frankfurt am Main, D-60325
Germany

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