Banking Competition
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Banking Competition in Developing Countries: Does Foreign Bank Entry Improv e Credit Access? Todd A. Gormley * First Version: July 1, 2005 This Version: February 20, 2007 Abstract This paper uses the entry of foreign banks into India during the 1990s—analyzin g variation in both the timing of the new foreign banks’ entries and in their location— to estimate the eff ect of foreign bank en try on domestic credi t access. In contrast to the belief that foreign bank entry should improve credit access for all firms, the estimates indicate that foreign banks financed only a small set of very profitable firms upon entry, and that on average, firms were eight percentage points less likely to have a loan after a foreign bank entry because of a systematic drop in domestic bank loans. Similar estimates are obtained using the location of pre-existing foreign firms as an instrument for forei gn bank locations. This evi dence is consistent with the exacerbation of information asymmetries upon foreign bank entry. Keywords: Foreign Banks, Asymmetric Information, India. JEL Classification: D82, G14, G21, O16, O20. * John M. Olin School of Business, Washington University in St. Louis, Finance Department:, Campus Box #1133, One Brookings Drive, St. Louis, MO 63130. Telephone: (314) 935-6 339, Fax: (314) 935-6359, E- mail: [email protected] . I thank Daron Acemoglu, Abhijit Banerje e, Esther Duflo, and Simon Johnson for th eir guidance and encouragement. I am also grateful to Shawn Cole, Abhiman Das, Michael F aulkender, Radha Gopalan, David Matsa, Guy Michaels, Gerard Padro-i-Miquel, Todd Milbourn, Anjan Thakor, Bilal H. Zia and seminar participants at the Olin School of Business -- Washington University, New York Federal Reserve Bank, Federal Reserve Board of Governors, Kelley School of Business -- Indiana University, and Fuqua School of Business -- Duke University for their many useful commen ts throughout the course of t his project. The Prowess data used in this paper was provided by the IMF th rough their visiting scholars pro gram. The analysis and conclusions in this paper, however, are my own and do not necessar ily represent those of the IMF or IMF Policy. All remaining errors and omissions are also my own.
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