Profitability of Foreign Banks in Central and Eastern Europe: Does the Entry Mode Matter?

42 Pages Posted: 27 Feb 2007

See all articles by Olena Havrylchyk

Olena Havrylchyk

CEPII, Centre d'Etudes Prospectives et d'Info. Internationales, Paris; Université Paris Ouest - Nanterre, La Défense - EconomiX

Emilia Magdalena Jurzyk

KU Leuven - Centre for Institutions and Economic Performance (LICOS)

Date Written: April 25, 2006

Abstract

Using data for 265 banks in Central and Eastern European Countries for the period of 1995-2003, this paper analyses the differences in profitability between domestic and for-eign banks. We show that foreign banks, especially greenfield institutions, earn higher profits than domestic banks. However, this effect is acquired rather than inherited, since there is evidence that foreign banks tend to take over less profitable institutions. Profits of foreign banks in CEECs also exceed profits of their parent banks, explaining the reasons for their entry. Further, we study benefits and costs of foreign ownership by analyzing de-terminants of profitability for domestic, takeover, and greenfield banks. Profits of foreign banks are less affected by macroeconomic conditions in their host countries. However, greenfield banks are sensitive to the situation of their parent banks. Only domestic banks enjoy higher profits in more concentrated banking markets, whereas takeover banks suffer from diseconomies of scale due to the fact that they acquired large institutions.

Keywords: foreign banks, bank profits, multinational banking, transition economies

JEL Classification: G15, G21, F36

Suggested Citation

Havrylchyk, Olena and Jurzyk, Emilia Magdalena, Profitability of Foreign Banks in Central and Eastern Europe: Does the Entry Mode Matter? (April 25, 2006). BOFIT Discussion Paper No. 5/2006. Available at SSRN: https://ssrn.com/abstract=965735 or http://dx.doi.org/10.2139/ssrn.965735

Olena Havrylchyk (Contact Author)

CEPII, Centre d'Etudes Prospectives et d'Info. Internationales, Paris ( email )

113 rue de Grenelle
Paris, F-75007
France

Université Paris Ouest - Nanterre, La Défense - EconomiX ( email )

200 Avenue de la République
Nanterre cedex, Nanterre Cedex 92000
France

Emilia Magdalena Jurzyk

KU Leuven - Centre for Institutions and Economic Performance (LICOS) ( email )

Waaistraat 6 - box 3511
Leuven, 3000
Belgium

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