The Effect of Foreign Entry on Argentina's Domestic Banking Sector

31 Pages Posted: 20 Apr 2016

See all articles by Robert Cull

Robert Cull

World Bank - Development Research Group (DECRG)

George R. G. Clarke

Texas A&M International University - A.R. Sanchez Jr., School of Business

Andrea Molinari

University of Sussex

Date Written: August 1, 1999

Abstract

Foreign banks entering Argentina's domestic banking sector in the mid-1990s did not merely follow their clients abroad. They exerted competitive pressure on domestic Argentine banks, especially those focused on mortgage lending or manufacturing. Overhead, profitability, and interest margins were affected least in domestic banks focused on consumer lending, an area in which foreign investors showed little interest.

Clarke, Cull, D'Amato, and Molinari analyze how foreign entry affected domestic banks in Argentina during an especially intense period of entry in the mid-1990s. Their results are consistent with the hypothesis that foreign banks enter areas where they have a competitive advantage, putting pressure on the domestic banks already focused on that type of lending. They find that domestic banks with loan portfolios concentrated in manufacturing - an area to which foreign banks have traditionally devoted much of their lending - tended to have lower net margins and lower before - tax profits than other domestic banks. The informational advantages local banks enjoyed probably helped ensure that foreign banks would not drive them from the market.

Domestic banks with greater consumer lending - an area in which foreign banks have not been heavily involved - had higher net margins and greater before - tax profits. Domestic banks that focused on mortgage lending - an area foreign banks entered aggressively in the mid-1990s - experienced falling net margins and increasing overhead. There were many domestic bank failures in the mid-1990s, but the banks that failed were not heavily concentrated in the types of lending favored by foreign banks.

This paper - a product of Regulation and Competition Policy and Finance, Development Research Group - is part of a larger effort in the group to investigate the determinants of structural change in developing countries' banking sectors. The authors may be contacted at gclarke@worldbank.org, rcull@worldbank.org, amolinari@worldbank.org, or investig.monetar@bcra.gov.ar (attention: Laura D'Amato).

Suggested Citation

Cull, Robert and Clarke, George and Molinari, Andrea, The Effect of Foreign Entry on Argentina's Domestic Banking Sector (August 1, 1999). World Bank Policy Research Working Paper No. 2158. Available at SSRN: https://ssrn.com/abstract=620681

Robert Cull (Contact Author)

World Bank - Development Research Group (DECRG) ( email )

1818 H. Street, N.W.
MSN3-311
Washington, DC 20433
United States
202-473-6365 (Phone)
202-522-1155 (Fax)

HOME PAGE: http://econ.worldbank.org/staff/rcull

George Clarke

Texas A&M International University - A.R. Sanchez Jr., School of Business ( email )

5201 University Blvd.
Laredo, TX 78041-1900
United States

Andrea Molinari

University of Sussex ( email )

Sussex House
Falmer
Brighton, Sussex BNI 9RH
United Kingdom

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